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A Comprehensive Guide to Initial Public Offerings: IPO

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IPO- Initial public offering

What is IPO: Meaning and Definition

Initial Public Offering, or IPO, is a unique process to convert a private company into a public company by issuing shares. The issuance of shares for the public allows the company to gather capital and is an excellent opportunity for the public to invest and earn returns on that investment.

Initially, a private company grows with its initial investors, founders, and stakeholders. When a company has achieved a specific goal where the management realizes that they are stable enough to handle the Securities and Exchange Board of India, grow, and diversify using the general public’s money, the company decides to offer an Initial Public Offering. Through this, the shareholder in the company is offered to the public through shares.

Overview of SMEs in India

Small and Medium Enterprises (SMEs) play a crucial role in the Indian economy. According to Forbes, SMEs contribute around 30% to India’s Gross Domestic Product (GDP) and employ approximately 40% of the country’s workforce. SMEs in India are mainly focused on the manufacturing, trade, and services sector. They also act as a significant source of innovation and entrepreneurship in the economy.

Challenges faced by SMEs include limited finance, lack of skilled manpower, technology limitation, and infrastructure constraints. SMEs are embracing and using e-commerce platforms and online marketplaces to enhance their market reach and operational efficiency

  • Number of SMEs in India: The number is estimated to be at 42.50 million, registered & unregistered together.  A staggering 95% of the total industrial units in the country.
  • SME & Employment opportunity: Employs about 106 million, 40% of India’s workforce. Next only to the agricultural sector.
  • Products: produces more than 6000 products.
  • GDP Contribution: Currently around 6.11% of the manufacturing GDP and 24.63% of Service sector GDP.
  • SME Output: 45% of the total Indian manufacturing output.
  • SME Exports: 40% of the total exports.
  • Bank Lending: Accounts for 16% of bank lending.
  • Fixed Assets: Current fixed assets at INR 1,471,912.94 crore.
  • SME Growth Rate: Has maintained an average growth rate of over 10%.

Why do SMEs go Public?

  1. Easy Access to Capital

The public issuance of shares by small and medium-sized enterprises provides them with easy access to capital. It facilitates SMEs to raise funds for various objectives such as growth, expansion, new product development, acquisitions, etc. After listing, share purchases and sales are made on the stock exchange, which increases liquidity for shareholders.

  1. Increases Investor Participation

SME Listing Exchange is a transparent trading platform for SME stocks that encourages private equity participation. In India, BSE SME and NSE Emerge are the two dedicated platforms for listing SME stocks. The platform offers investors easy entry and exit options and enables SMEs to expand their investor base.

  1. Encourage SMEs Growth

SME IPO is one of the most important platforms for raising equity capital. SMEs that want to raise capital can use the funds raised for various growth prospects such as mergers and acquisitions, expansion, etc., as equity funds are not a liability as companies are not forced to service the equity funds, which makes them cost-effective.

  1. Value Creation and Strong Visibility

The value of a company is determined by several factors, and the listing is one of the most important parameters. SMEs are little-known companies, and when their shares are publicly traded, it strengthens visibility and public awareness.

Listing on the stock exchange also gives small and medium-sized enterprises the opportunity to gain a strong business outlook through media coverage. In addition, listed SMEs must adhere to listing and compliance standards and submit their financial information on a semi-annual basis, which greatly enhances credibility.

  1. Journey toward Main Board IPO

Direct listing on the BSE and NSE is a costly affair and requires extensive preparation and documentation. So, if you have been a listed SME company for the last two years, you can take a step forward by moving to the main stock exchange, provided you meet the exchange migration criteria.

In contrast to direct listing on the Main Board, this is a comparatively easier and quicker route, as the period of listing on the SME segment gives management the opportunity to transition the company into a process-oriented organization in preparation for migration to the Main Board.

  1. Healthy Balance Sheet

Going public via IPO brings equity capital to the firm without cash outflows or servicing costs. However, debt capital brings a financial burden in terms of interest obligations. Thus, a firm can utilize its equity capital to repay loan obligations, pursue diversification, and expansion, and improve its balance sheet.

  1. Employee Stock Option

A listed SME can get the advantages of Employee Stock Options (ESOPs) to attract and retain a talented workforce, compensate workers, and boost employee commitment. ESOP is a grant to provide the right to a company’s employees to buy a certain quantity of the company’s shares at a set discounted price.

  1. Easy Reporting Structure

A company listed on the SME platform has to submit half-yearly results to exchange, whereas a mainboard company needs to declare and publish results every quarter. Easy reporting makes less regulatory reporting requirements for listed SMEs.

Eligibility for IPO

SME IPO Requirements

SME IPO means an initial public offering of small and medium-sized enterprises (SMEs). Like any other company, an SME needs capital to drive its business forward. However, since SMEs do not have an extensive track record, it is usually difficult for them to raise funds from financial institutions or conduct a regular IPO.

To give SMEs and startups an equal chance to raise funds from the public, the NSE and the BSE have established separate SME IPO platforms, NSE Emerge, and BSE SME, respectively, for the listing and trading of SMEs.

SEBI relaxes IPO norms for SME IPOs compared to mainboard IPOs. The post-issue paid-up capital of the company issuing SME IPO should not exceed Rs 25 crores. The other eligibility requirements for SME IPO company directors/promoters/investors remain the same as for a regular IPO, where the said persons should not be defaulters, offenders or disqualified from accessing the capital markets.

In addition to the above criteria, SMEs must also meet other eligibility requirements prescribed by the exchanges. The criteria for SME IPO are explained in detail below.

There are two Major platforms for SME IPO listing in India

  2. BSE SME


  1. BSE SME IPO Eligibility

SMEs must meet the following criteria set by the BSE SME platform for issuing SME IPO.

  • The company should have been incorporated under the Companies Act, 1956, or Companies Act 2013 in India.
  • The company should have a positive net worth.
  • The Net Tangible Assets of the company should be Rs 1.5 crore.
  • The company should have a track record (operations) of at least three years. If not, the company should have been funded by banks/financial institutions/central government or state government and should have had a positive net profit (before depreciation and taxes) in any of the last three years.
  • The company should have a website.
  • The company should have an agreement with both Indian depositories CDSL and NSDL.
  • The company should facilitate trading in Demat form.
  • The list of promoters should not have changed in the preceding year from the date of applying to BSE for listing under the SME segment.
  • The company should submit a certificate to BSE stating that the company is currently not under any Board for Industrial and Financial Reconstruction (BIFR) matter, nor has it received any winding-up petition against the company.
  1. NSE SME IPO Eligibility

NSE Emerge platform lists the following eligibility criteria for a company to issue SME IPO:

  • The company should be incorporated under the Companies Act 1956 or Companies Act 2013 in India.
  • The company should have a track record (operations) of at least three years.
  • The promoters should individually or jointly hold at least 20% of the share capital after the issue.
  • One of the promoters should have at least three years of experience in the same industry.
  • The company should have operating profit and positive net worth in at least 2 out of 3 fiscal years.
  • There should be no pending Board for Industrial and Financial Reconstruction (BIFR), insolvency, or bankruptcy proceedings against the company or promoters.
  • The company should not have received any winding-up petition from NCLT/Court.
  • No material regulatory or disciplinary action has been taken against the applicant company by any stock exchange or regulatory agency in the last three years.

 IPO Process Steps for Companies

Step 1: Hiring an Underwriter or Investment Bank

To start the initial public offering process, the company will use the help of financial experts, like investment banks. The underwriters assure the company about the capital being raised and act as intermediaries between the company and its investors. The experts will also study the crucial financial parameters of the company and sign an underwriting agreement. The underwriting agreement will usually have the following components:

  • Details of the deal
  • Amount to be raised
  • Details of securities being issued

Step 2: Registration For IPO

  • This IPO step involves the preparation of a registration statement along with the draft prospectus, also known as the Red Herring Prospectus (RHP). Submission of RHP is mandatory, as per the Companies Act. This document comprises all the compulsory disclosures as per the SEBI and Companies Act. Here’s a look at the key components of RHP:
  • Definitions: It contains the definitions of the industry-specific terms.
  • Risk Factors: This section discloses the possibilities that could impact a company’s finances.
  • Use of Proceeds: This section discloses how the money raised by investors will be used.
  • Industry Description: This section details the working of the company in the overall industry segment. For instance, if the company belongs to the IT segment, the section will provide forecasts and predictions about the segment.
  • Business Description: This section will detail the core business activities of the company.
  • Management: This section provides information about key management personnel.
  • Financial Description: This section comprises financial statements along with the auditor’s report.
  • Legal and Other Information: This section details the litigation against the company along with miscellaneous information.

This document has to be submitted to the registrar of companies three days before the offer opens to the public for bidding. Alongside this, the submitted registration statement has to be compliant with the SEC rules. Post-submission, the company can make an application for an IPO to SEBI.

Step 3: Verification by SEBI:

The market regulator, SEBI, then verifies the disclosure of facts by the company. If the application is approved, the company can announce a date for its IPO.

Step 4: Making an Application to the Stock Exchange

The company now has to make an application to the stock exchange for floating its initial issue.

Step 5: Creating a Buzz by Roadshows

Before an IPO opens to the public, the company endeavors to create a buzz in the market through roadshows. Over a period of two weeks, the executives and staff of the company will advertise the impending IPO across the country. This is a marketing and advertising tactic to attract potential investors. The key highlights of the company are shared with various people, including business analysts and fund managers. The executives adopt various user-friendly measures, like Question-and-Answer sessions, multimedia presentations, group meetings, online virtual roadshows, and so on.

Step 6: Pricing of IPO

The company can now initiate pricing of IPO either through Fixed Price IPO or by Book Binding Offering. In the case of the Fixed Price Offering, the price of the company’s stocks is announced in advance. In the event of Book Binding Offering, a price range of 20% is announced, following which investors can place their bids within the price bracket. For the bidding process, the investors have to place their bids as per the company’s quoted Lot price, which is the minimum number of shares to be purchased. Alongside this, the company also provides IPO Floor Price, which is the minimum bid price, and IPO Cap Price, which is the highest bidding price. The booking is typically open from three to five working days and investors can avail themselves of the opportunity of revising their bids within the stipulated time. After completion of the bidding process, the company will determine the Cut-Off price, which is the final price at which the issue will be sold.

Step 7: Allotment of Shares

Once the IPO price is finalized, the company along with the underwriters will determine the number of shares to be allotted to each investor. In the case of over-subscription, partial allotments will be made. The IPO stocks are usually allotted to the bidders within 10 working days of the last bidding date.


CA Rishabh Jain ( Principal Partner )

Chartered Accountant (FCA), LLB,
Expert Domain- Management Consultancy, Internal Audit, Due Diligence & Forensic Audit.

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