What is SME IPO Process in India?

Small and medium enterprise Initial Public Offer (SME IPO) is the process where an unlisted SME company sells its shares to the public for the first time and listed on the stock exchange for trading. A private SME company become a public limited company through IPO Process.

And this process of SME IPO is known as SME company ‘going public’.

To understand SME IPO process first we have to understand What is Small and Medium Scale Enterprise?

Small and medium scale enterprises (SMEs) are the enterprises where the investment in plant and machinery or equipments is between Rs. 25 lakhs to Rs. 10 crores when enterprise is a manufacturing industry and between Rs. 10 lakh to Rs. 5 Crore in case of service sector enterprise.

The SME exchange benefit to the Small and Medium Enterprises (SME) 

  • Listing provides an opportunity to the corporates to raise capital to fund new projects, diversifications and for acquisitions.
  • This mode of fund raising through issue of equity can help the companies to raise funds at efficient rate.
  • Equity financing lowers the debt burdenleading to lower financial costs.
  • Listing also provides an exit route to private equity investors and aslo provide liquidity to the ESOP-holding employees.
  • Listing also helps in generating an independent valuation of the company by the market.
  • Listing raises a company’s public profile with stake holders like customers, suppliers, investors, financial institutions and the media.
  • A listed company is typically covered in analyst reports and can be included in one or more of indices of the stock exchanges.
  • An initial listing increases the company’s ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs / GDRs / FCCBs etc., and in the process will attract a wide and varied body of institutional and professional investors.
  • Listing leads to timely disclosures because of this it protects the interest of the investors.
  • Listing provides liquidity to the shareholders of the entity. This will broaden the shareholder base.
  • Listed companies generally find that the market perception of their financial and business strength is best and enhanced it more efficiently

Tax Benefits

  • Normally, the sales of unlisted shares in short term attract the capital gain tax upto 30% and the long term capital gain tax of 10% without indexation and 20% with indexation.
  • The sale of listed securitiesin the short term attract the capital gain tax of 15% and there is no long term capital gains tax provided if STT paid on the sale proceeds. This makes it more clear that the listing of shares on SME is very attractive.
  • All Companies listed on SME Exchange can migrate to the main Board of BSE provided shareholders approval is required.

Eligibility criteria for SME IPO

SEBI Guidelines

  1. Maximum Post Issue capital should be not more than Rs.25 crores
  2. Minimum number of members for issue is 50
  3. After listing, no limit on minimum number of members required to be continued
  4. It is mandatory for 3 years to be in market.
  5. Underwriting should be 100%in which merchant bankers to underwrite 15% in own account.
  6. Minimum application and Trading Lot size of Rs.1,00,000/- or in multiples thereof

BSE Guidelines

  • Net Tangible assets of at least Rs.3 crores as per the latest audited financial statements.
  • Net worth (excluding revaluation reserves) of at least Rs.3 crores as per the latest audited financial statements.
  • It is necessary to track record of distributable profits in terms of sec. 123 of Companies Act, 2013 for minimum two years out of immediately preceding three financial years and each financial year has to be a period of mimimum of 12 months. Extraordinary income will not be a part of calculation of distributable profits.
    OR
    Net worth should be atleastRs. 5 crores.
  • The post-issue paid up capital of the company should be at least Rs.3 crores.

Other Requirements:

  • The Company should have a website
  • The company shall mandatorily facilitate trading in demat account securities and enter into an agreement with both the depositories.
  • There should be no change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment.

Certificate from the applicant company / promoting companies stating the following:

  • The Company should not been referred to the Board for Industrial and Financial Reconstruction (BIFR). But it will include cases where company is clear from BIFR.
  • There should not be any winding up petition against the company that has been accepted by a court.

Listing Process will also involve

  • It is necessary to visit to the registered office of the Company by BSE officials to verify general documents and processes followed in the Company.
  • Promoters have to attend an interview with the Listing Advisory Committee.

Migration from BSE SME Exchange to the main Board of BSE:

  • It is mandatory for the company to be traded and listed on the BSE SME Platform for atleast two years.
  • Post issue capital should be more than Rs.10 crores but upto Rs.25 crores.
  • Shareholders’ approval is required by special resolution which is passed through postal ballot – In postal ballot, the votes cast by shareholders other than promoters in favour of the proposal to migrate to Main Board should be at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal to migrate to Main Board.
  • To fulfill the eligibility criteria for migration to Main Board – The companies seeking migration to Main Board of BSE have to satisfy the eligibility criteria as given in 26 of SEBI (ICDR) Regulations, 2009 whether at the time of initial listing on SME platform or at the time of migration to Main Board. However, same will not be applicable where the company had sought listing on SME platform by following the book building process and as per the requirements prescribed in 26(2) of SEBI (ICDR) Regulations, 2009.

S.NO.

                                   Procedure

Timeline

1.

If applicable, Conversion of Company into Public Limited Company

  X

2.

Preparation of Documents for conversion and submission to ROC for approval example Alteration of Memorandum, Articles & filing of other necessary forms for appointment of directors

X+5

3.

ROC approval required for conversion

X+7

4.

Identification & appointment of Registrar & Transfer Agents & Submission of Master creation forms with NSDL, CDSL for creating connectivity

X+7

5.

Appointment of Managing Director, Whole Time Director, Independent Directors, Company Secretary & also deciding about their remuneration, sitting fees and other fees etc

X+12

6.

Constitution of committees like Audit, Shareholder Grievance, Remuneration etc. as per SEBI Listing Obligations and Disclosure Requirements Regulations

X+15

7.

Preparation of website of the Company & also hosting code of conduct on the website

X+18

8.

Signing of Tri-Partite Agreement with NSDL and CDSL and receipt of ISIN

X+18

9.

Identification & appointment of peer review auditors & getting the financials statements of last 5 years restated and for last 1 year re-audited from peer review auditors as per SEBI (ICDR) Regulations, 2009

X+18

10.

Appointment of Merchant Banker and Market Maker

X+18

11.

Preparation of Project Report and other Draft Red Herring Prospectus (DRHP) / Prospectus

X+35

12.

Filing of Draft Red Herring Prospectus (DRHP) with stock exchange and with SEBI (only for hosting)

X+35

13.

Visit to registered office of the Company by BSE officials and promoters have to interview with Listing Advisory Committee

X+55

14.

In Principle approval is required from stock exchange

X+65

15.

Filing of Draft Red Herring Prospectus (DRHP) with ROC and also getting it cleared from ROC

X+70

16.

It is necessary to filled the final Prospectus with Stock exchange and SEBI

X+75

17.

Time of opening of the Issue X+80

18.

Time of closing of the Issue

X+83
19. After Issue, Allotment of shares

X+90

20.

Filing of listed application with Stock exchange X+93

21.

Receipt of listing approval received from  Stock exchange X+95
22. Filing of corporate action form with NSDL and CDSL and demat credit of shares

X+96

23. Filing of trading application to Stock exchange

X+98

24.

Receipt of trading approval received from  Stock exchange

X+100

Disclaimer:- The article is intended for the awareness and education of the readers, if any of reader is intended to use above in any legal work, it is advisable that before placing their reliance on it they reconfirm it from the legal experts.

About Author:- CA Udit Aggarwal (FCA, LLB, BCOM) is Chartered Accountant and Legal Consultant, academically he is highly qualified and have gone through various certifications. He extensively speaks and writes on finance, taxation and legal matters. The author can be reached at info@easylegaltax.com

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