Fundraising for Small & Medium Companies - What is SME IPO, its Eligibility Criteria & Listing Process in India

Fundraising for Small & Medium Companies - What is SME IPO, its Eligibility Criteria & Listing Process in India. Small and Medium enterprises often find it hard to raise capital after they exhaust their private sources or reach the maximum debt limits. Listing on a stock exchange’s exclusive SME portal is a potential solution for funding crunch, offering a host of other advantages. By offering their equity in the form of an Initial Public Offer, small and medium enterprises can access funds from the capital market. In this post, Compliance Calendar delineates the process of listing for small and medium enterprises (SMEs) on recognised stock exchanges in India. 
Top Reasons for Listing your Small or Medium Business on a Stock Exchange :

Easier listing process - With only 50 minimum allottees required, easier terms and conditions, the process of listing your small and medium medium business has been made relatively simple as compared to regular listing on the stock exchange.

Guaranteed full subscription - The SEBI regulations require a merchant banker to underwrite 100% of the issue, ensuring that the issue by the SME becomes fully subscribed.

Provides a fair valuation to your company - Listing on a stock exchange can provide potential based valuations by informed investors.

Access to larger pool of investors and funding - Listing on a recognised stock exchange allows small businesses to access a new class of investors in the primary market, thereby tapping into larger sources of funding.

Contributing to India’s growth story - Getting listed allows a small company to spread its wings, grow to a larger size while also conserving value. Their profitability, economic value and services invariably add to India’s growth story for small and medium businesses.

Regulations and Regulator for Market Listing of SMEs 
The market regulator, SEBI in 2010 set up a trading platform specifically for operating as a trading terminal for small and medium enterprises on recognised stock exchanges. For this, Chapter XB was inserted in the SEBI (Issue of Capital and Disclosure Requirements) ICDR Regulations, 2009. 
What is an SME Exchange? 
SEBI regulations define an SME Exchange as a trading platform of a recognised stock exchange having nationwide trading terminals, that have been permitted by the Board to list the specified securities and includes a stock exchange granted recognition for this purpose but does not include the Main Board. Both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have SME exchange portals. 
The SME IPO allows privately owned small and medium enterprises to sell their shares to the public. They do this by getting listed at the BSE SME or the NSE Emerge platform. 
Applicability of Listing regulations to SMEs 
Under the Regulation 106M of the ICDR Regulations, two categories of companies can issue specified securities:

An issuer whose post-value face value capital is less than10 crores, or
An issuer whose post-value face value capital is more than10 crores and upto 25 crores.

Eligibility Criteria for SMEs

Minimum post issue capital - Companies with a minimum post issue capital of 1 crore and a maximum of 25 crores are eligible for issuing an SME IPO in India.

Incorporation - The company must be incorporated under the Companies Act, 2013 or its erstwhile predecessor, the Companies Act, 1956.

Track record - The SME should have a track record of minimum of three years if it was formed by converting partnership or proprietorship or LLP firm.

Underwriting - The issue shall be 100% underwritten and the merchant bankers shall underwrite 15% on their own account.

Minimum application size - The minimum application and trading lot size shall not be less than1 lac per application.

Minimum allotment - No allotment shall be made if the number of prospective allottees is less than 50.

Other criteria required

The SME should have a valid website.

The SME is required to enter into a contract with the depositories and also undertake to agree to issuing shares in dematerialised forms.

The company's promoters must remain the same for at least one year after filing the IPO.

Additional criteria specified by BSE for listing on its SME Exchange

Net worth of at least1 crore for proceeding two full financial years

Net tangible assets of at least 3 crores in the last financial year

The track record of the applicant company seeking listing should be at least three years, including operations for at least 1 year and audited financial results for 1 full financial year.

The company should have operating profit for at least two out of the preceding three financial years.

The leverage ratio should not be more than 3:1, however some relaxations are permitted for finance companies

There must be no pending default in payment of interest, interest or principal amounts by the company, promoters, and subsidiary companies.

Emerge Platform for SME listing by NSE 
The National Stock Exchange operates its SME listing portal called Emerge. The Emerge Platform specifies the following criterion for listing SMEs :

The issuing company should be incorporated under the companies act 1956 or the 2013 act

The post paid of capital should not be more than than 25 crores

Track record of at least 3 years is required

The company should not be undergoing any insolvency or winding up proceedings under any court or tribunal.

The following disclosures are also required in the offer document by Emerge, NSE:

Material regulatory or disciplinary action by a stock exchange or regulatory authority in the last one year against promoters, group companies of the applicant company

Default in respect of payment of interest, principal to debenture bond, FD holders, banks, et cetera, by the applicant or promoters

Litigation record, nature of litigation and status of litigation of any pending matters involving the applicant, promoters, promoting companies and group companies

The status of any criminal cases filed or investigation being undertaken by any of its directors.

Listing Process for Small and Medium Companies on Stock Exchanges in India 
Planning stage - Appointing Intermediaries 
In this stage, the issuing SME appoints merchant bankers in an advisory capacity. The company should also appoint underwriters. The underwriters are responsible for drafting IPO related documents, fixing selling price of the shares and agreeing to buy shares in case of a shortfall in meeting minimum purchase requirements. 
Under Regulation 106O, the issuer making a public issue of specified securities can file a copy of the offer document with SEBI through a merchant banker. This can be done simultaneously while filing a prospectus with the SME exchange.
Preparatory stage - Due Diligence, Documentation and structuring the IPO 
In this stage, the intermediary appointed conducts the due diligence for the company, such as matching details in financial documents and verifying information.   
Underwriting requirement

As per Regulation 106P, the entire issue made by SME has to be 100% underwritten. In addition to this, the merchant bankers have to underwrite at least 15% of the issue size on their own account.

The issuing company has to appoint underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993 and the merchant banker may enter into an agreement with nominated investor indicating therein the number of specified securities which they agree to subscribe at issue price in case of under-subscription.

The underwriting document must also be disclosed in the offer document.

Merchant bankers are also required to file an undertaking with SEBI that the issue is 100% underwritten, along with the list of underwriters and nominated investors indicating the extent of underwriting or subscription commitment.

If other underwriters fail to fulfil their underwriting obligations or other nominated investors fail to subscribe to unsubscribed portions, the merchant banker shall fulfil the underwriting obligations.

Application stage 
The first step in the application procedure is to submit the draft Red Herring Prospectus (DRHP) or the draft prospectus to SEBI. The offer document is also required to be displayed on the websites of SEBI, the issuer SME, the merchant banker and the SME exchange where specified securities are to be listed. Undertaking from the Merchant Banker that all the changes have been incorporated
in the RHP as confirmed at the time of DRHP (along with detailed Comparison) is to be submitted. 
Review stage 
After submission of the draft prospectus with Sebi, SEBI reviews the prospectus to ensure compliance with its internal regulations. In the meanwhile, BSE/NSE also verify the documents and process the same. The exchange officials may also visit the company premises and promoters may be called for an interview with the listing advisory committee.
On the basis of this committee’s recommendation, an in-principle approval may be given to the issuing company. 
Filing of Red Herring Prospectus/Prospectus 
The Merchant Banker files these documents with the Registrar of Companies (ROC)indicating the opening and closing dates of the issue. On approval from the ROC, the merchant bankers intimate the exchange about the opening dates. 
Process flow of various stages in the listing process for SMEs

Company files Draft Red Herring Prospectus/ Draft Prospectus with the Stock Exchange

Exchange uploads the draft prospectus on the Website of the Exchange

Company has to file an application on NEAPS (NSE Electronic Application Processing System) or BEFS (BSE Electronic Filing System) and attach the relevant documents as per the Checklist specified by the Exchange

Exchange does preliminary check & verifies the application and seeks replies to queries ( if any)

Exchange issues in-principle approval to the Company

Company has an intention to open the Issue, within 12 months, post Exchange approval in case of SME Issue

One day prior, to the issue open, the company has to submit the 1% security deposit to Designated Stock Exchange (DSE)

One day prior, to the issue open, the company allocates the shares to the Anchor investor (if any)

Issue can be open for minimum of 3 days and maximum of 10 days

Issue Close (T Day – Working day)

On T+1 working day the Company submits the documents as per the checklist of the Exchange

On T+1 working day basis of allotment is carried out at DSE

On T+2 working day, the company submits the Listing Documents to the Exchange.

On T+2 working day company submit Credit Confirmation from the Depository i.e. dematerialised shares to the allottee’s account & Exchange will issue a circular to the Market for listing of shares with effect from T+3 working day

On T+3 working day Company gets listed on the Exchange

Public Offering 
The IPO opens and closes as per the schedule detailed. Once the IPO closes, the company submits documents as per the checklist to the Exchange for finalisation on the basis of the allotment. 
Post Listing 
The stock exchange finalises the basis of the allotment and issued notice regarding trading and listing. 
Compliances Required 
Form A and Form H by Merchant Bankers 
The merchant banker submits a due diligence certificate as per Form A of Schedule VI (Format of Due Diligence Certificate), including additional confirmations as required under Form H of Schedule VI along with offer documents. 
Checklist of Documents required to be submitted to the Stock Exchanges

Listing Agreement, duly executed on non- judicial stamp paper of Rs.100/-

Resolution passed by the Board of Directors for allotment of securities.

Shareholding pattern of Issuer (preissue, issue and post issue) in format given as per Regulation 31 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Post issue shareholding pattern in PDF form without PAN

All Advertisements published relating to IPO

Confirmation from the Issuer and Confirmation from the Merchant Banker(s)

List - of allottees for all categories (in excel format)

Lock-in confirmation from Depository/RTA

Confirmation from Statutory Auditors/ Practicing Chartered Accountant/ Practicing Company Secretary

Initial Listing Fees and Annual Listing Fees as applicable plus taxes

How can retail investors purchase equity in small and medium? 
Retail investors can apply for SME IPO in India by submitting an online application from their stock, broker, agent, bank or third-party applications. Brokers now offer UPI based online IPO applications and banks offer both UPI as well as ASBA IPO applications. 
Migration from the SME exchange to the Main Board Exchange 
As of Dec 6, 2023, as per the BSE SME platform data, out of 467 listed companies, 181 have migrated to the mainboard exchange. When the paid up capital of the listed SME exceeds 10 crores but is less than 25 crores, the company can opt for voluntary migration from the specific SME exchange to being listed on the main board of the stock exchanges. 
If the post-issue paid-up capital exceeds 25 crores, it is mandatory for the SME to shift to the main board exchange. Migration from the SME platform to the main board requires certain prerequisites, such as -

Completing a minimum of 3 years of listing on the SME exchange\minimum net worth of 15 crores

Market capitalisation of at least 25 crores

Positive EBITDA in any two out of three financial years

The SME should also have a minimum of 250 public shareholders and promoters should hold at least 20% equity share capital.

It's crucial for SMEs to ensure compliance with all regulatory requirements throughout the IPO listing process in India to maintain transparency and investor confidence. Connect with our experienced legal and stock market professionals at Compliance Calendar to navigate through the complexities of your SME’s IPO process effectively.

Small and Medium enterprises often find it hard to raise capital after they exhaust their private sources or reach the maximum debt limits. Listing on a stock exchange’s exclusive SME portal is a potential solution for funding crunch, offering a host of other advantages. By offering their equity in the form of an Initial Public Offer, small and medium enterprises can access funds from the capital market. In this post, Compliance Calendar delineates the process of listing for small and medium enterprises (SMEs) on recognised stock exchanges in India.

Top Reasons for Listing your Small or Medium Business on a Stock Exchange :

Easier listing process - With only 50 minimum allottees required, easier terms and conditions, the process of listing your small and medium medium business has been made relatively simple as compared to regular listing on the stock exchange.
Guaranteed full subscription - The SEBI regulations require a merchant banker to underwrite 100% of the issue, ensuring that the issue by the SME becomes fully subscribed.
Provides a fair valuation to your company - Listing on a stock exchange can provide potential based valuations by informed investors.
Access to larger pool of investors and funding - Listing on a recognised stock exchange allows small businesses to access a new class of investors in the primary market, thereby tapping into larger sources of funding.
Contributing to India’s growth story - Getting listed allows a small company to spread its wings, grow to a larger size while also conserving value. Their profitability, economic value and services invariably add to India’s growth story for small and medium businesses.

Regulations and Regulator for Market Listing of SMEs

The market regulator, SEBI in 2010 set up a trading platform specifically for operating as a trading terminal for small and medium enterprises on recognised stock exchanges. For this, Chapter XB was inserted in the SEBI (Issue of Capital and Disclosure Requirements) ICDR Regulations, 2009.

What is an SME Exchange?

SEBI regulations define an SME Exchange as a trading platform of a recognised stock exchange having nationwide trading terminals, that have been permitted by the Board to list the specified securities and includes a stock exchange granted recognition for this purpose but does not include the Main Board. Both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have SME exchange portals.

The SME IPO allows privately owned small and medium enterprises to sell their shares to the public. They do this by getting listed at the BSE SME or the NSE Emerge platform.

Applicability of Listing regulations to SMEs

Under the Regulation 106M of the ICDR Regulations, two categories of companies can issue specified securities:

An issuer whose post-value face value capital is less than10 crores, or
An issuer whose post-value face value capital is more than10 crores and upto 25 crores.

Eligibility Criteria for SMEs

Minimum post issue capital - Companies with a minimum post issue capital of 1 crore and a maximum of 25 crores are eligible for issuing an SME IPO in India.
Incorporation - The company must be incorporated under the Companies Act, 2013 or its erstwhile predecessor, the Companies Act, 1956.
Track record - The SME should have a track record of minimum of three years if it was formed by converting partnership or proprietorship or LLP firm.
Underwriting - The issue shall be 100% underwritten and the merchant bankers shall underwrite 15% on their own account.
Minimum application size - The minimum application and trading lot size shall not be less than1 lac per application.
Minimum allotment - No allotment shall be made if the number of prospective allottees is less than 50.

Other criteria required

The SME should have a valid website.
The SME is required to enter into a contract with the depositories and also undertake to agree to issuing shares in dematerialised forms.
The company's promoters must remain the same for at least one year after filing the IPO.

Additional criteria specified by BSE for listing on its SME Exchange

Net worth of at least1 crore for proceeding two full financial years
Net tangible assets of at least 3 crores in the last financial year
The track record of the applicant company seeking listing should be at least three years, including operations for at least 1 year and audited financial results for 1 full financial year.
The company should have operating profit for at least two out of the preceding three financial years.
The leverage ratio should not be more than 3:1, however some relaxations are permitted for finance companies
There must be no pending default in payment of interest, interest or principal amounts by the company, promoters, and subsidiary companies.

Emerge Platform for SME listing by NSE

The National Stock Exchange operates its SME listing portal called Emerge. The Emerge Platform specifies the following criterion for listing SMEs :

The issuing company should be incorporated under the companies act 1956 or the 2013 act
The post paid of capital should not be more than than 25 crores
Track record of at least 3 years is required
The company should not be undergoing any insolvency or winding up proceedings under any court or tribunal.

The following disclosures are also required in the offer document by Emerge, NSE:

Material regulatory or disciplinary action by a stock exchange or regulatory authority in the last one year against promoters, group companies of the applicant company
Default in respect of payment of interest, principal to debenture bond, FD holders, banks, et cetera, by the applicant or promoters
Litigation record, nature of litigation and status of litigation of any pending matters involving the applicant, promoters, promoting companies and group companies
The status of any criminal cases filed or investigation being undertaken by any of its directors.

Listing Process for Small and Medium Companies on Stock Exchanges in India

Planning stage - Appointing Intermediaries

In this stage, the issuing SME appoints merchant bankers in an advisory capacity. The company should also appoint underwriters. The underwriters are responsible for drafting IPO related documents, fixing selling price of the shares and agreeing to buy shares in case of a shortfall in meeting minimum purchase requirements.

Under Regulation 106O, the issuer making a public issue of specified securities can file a copy of the offer document with SEBI through a merchant banker. This can be done simultaneously while filing a prospectus with the SME exchange.

Preparatory stage - Due Diligence, Documentation and structuring the IPO

In this stage, the intermediary appointed conducts the due diligence for the company, such as matching details in financial documents and verifying information.

Underwriting requirement

As per Regulation 106P, the entire issue made by SME has to be 100% underwritten. In addition to this, the merchant bankers have to underwrite at least 15% of the issue size on their own account.
The issuing company has to appoint underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993 and the merchant banker may enter into an agreement with nominated investor indicating therein the number of specified securities which they agree to subscribe at issue price in case of under-subscription.
The underwriting document must also be disclosed in the offer document.
Merchant bankers are also required to file an undertaking with SEBI that the issue is 100% underwritten, along with the list of underwriters and nominated investors indicating the extent of underwriting or subscription commitment.
If other underwriters fail to fulfil their underwriting obligations or other nominated investors fail to subscribe to unsubscribed portions, the merchant banker shall fulfil the underwriting obligations.

Application stage

The first step in the application procedure is to submit the draft Red Herring Prospectus (DRHP) or the draft prospectus to SEBI. The offer document is also required to be displayed on the websites of SEBI, the issuer SME, the merchant banker and the SME exchange where specified securities are to be listed. Undertaking from the Merchant Banker that all the changes have been incorporated

in the RHP as confirmed at the time of DRHP (along with detailed Comparison) is to be submitted.

Review stage

After submission of the draft prospectus with Sebi, SEBI reviews the prospectus to ensure compliance with its internal regulations. In the meanwhile, BSE/NSE also verify the documents and process the same. The exchange officials may also visit the company premises and promoters may be called for an interview with the listing advisory committee.

On the basis of this committee’s recommendation, an in-principle approval may be given to the issuing company.

Filing of Red Herring Prospectus/Prospectus

The Merchant Banker files these documents with the Registrar of Companies (ROC)indicating the opening and closing dates of the issue. On approval from the ROC, the merchant bankers intimate the exchange about the opening dates.

Process flow of various stages in the listing process for SMEs

Company files Draft Red Herring Prospectus/ Draft Prospectus with the Stock Exchange
Exchange uploads the draft prospectus on the Website of the Exchange
Company has to file an application on NEAPS (NSE Electronic Application Processing System) or BEFS (BSE Electronic Filing System) and attach the relevant documents as per the Checklist specified by the Exchange
Exchange does preliminary check & verifies the application and seeks replies to queries ( if any)
Exchange issues in-principle approval to the Company
Company has an intention to open the Issue, within 12 months, post Exchange approval in case of SME Issue
One day prior, to the issue open, the company has to submit the 1% security deposit to Designated Stock Exchange (DSE)
One day prior, to the issue open, the company allocates the shares to the Anchor investor (if any)
Issue can be open for minimum of 3 days and maximum of 10 days
Issue Close (T Day – Working day)
On T+1 working day the Company submits the documents as per the checklist of the Exchange
On T+1 working day basis of allotment is carried out at DSE
On T+2 working day, the company submits the Listing Documents to the Exchange.
On T+2 working day company submit Credit Confirmation from the Depository i.e. dematerialised shares to the allottee’s account & Exchange will issue a circular to the Market for listing of shares with effect from T+3 working day
On T+3 working day Company gets listed on the Exchange

Public Offering

The IPO opens and closes as per the schedule detailed. Once the IPO closes, the company submits documents as per the checklist to the Exchange for finalisation on the basis of the allotment.

Post Listing

The stock exchange finalises the basis of the allotment and issued notice regarding trading and listing.

Compliances Required

Form A and Form H by Merchant Bankers

The merchant banker submits a due diligence certificate as per Form A of Schedule VI (Format of Due Diligence Certificate), including additional confirmations as required under Form H of Schedule VI along with offer documents.

Checklist of Documents required to be submitted to the Stock Exchanges

Listing Agreement, duly executed on non- judicial stamp paper of Rs.100/-
Resolution passed by the Board of Directors for allotment of securities.
Shareholding pattern of Issuer (preissue, issue and post issue) in format given as per Regulation 31 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Post issue shareholding pattern in PDF form without PAN
All Advertisements published relating to IPO
Confirmation from the Issuer and Confirmation from the Merchant Banker(s)
List - of allottees for all categories (in excel format)
Lock-in confirmation from Depository/RTA
Confirmation from Statutory Auditors/ Practicing Chartered Accountant/ Practicing Company Secretary
Initial Listing Fees and Annual Listing Fees as applicable plus taxes

How can retail investors purchase equity in small and medium?

Retail investors can apply for SME IPO in India by submitting an online application from their stock, broker, agent, bank or third-party applications. Brokers now offer UPI based online IPO applications and banks offer both UPI as well as ASBA IPO applications.

Migration from the SME exchange to the Main Board Exchange

As of Dec 6, 2023, as per the BSE SME platform data, out of 467 listed companies, 181 have migrated to the mainboard exchange. When the paid up capital of the listed SME exceeds 10 crores but is less than 25 crores, the company can opt for voluntary migration from the specific SME exchange to being listed on the main board of the stock exchanges.

If the post-issue paid-up capital exceeds 25 crores, it is mandatory for the SME to shift to the main board exchange. Migration from the SME platform to the main board requires certain prerequisites, such as -

Completing a minimum of 3 years of listing on the SME exchange\minimum net worth of 15 crores
Market capitalisation of at least 25 crores
Positive EBITDA in any two out of three financial years
The SME should also have a minimum of 250 public shareholders and promoters should hold at least 20% equity share capital.