An SME IPO is designed specifically for small and medium-sized companies that wish to raise capital from the public. These enterprises may not meet the more stringent listing requirements of the main stock exchanges like BSE & NSE. Rather, they list on separate segments that are specifically for these businesses. The underlying reason for applying an IPO by SMEs also remains the same as the mainline IPO companies, like to grow their business, upgrade technology, or pay off debt.
In India, the exchanges offer special segments like BSE SME and NSE Emerge to help small businesses list. These segments also follow the legal rules that safeguard investors like you while offering easier listing criteria to fit the size and resources of small businesses.
Why Do Companies Opt for an SME IPO?
Access to Capital
If a small or medium-sized enterprise needs funds for product expansion, technology upgrades, or geographical growth but does not qualify for a mainboard IPO, the SME route provides opportunities to raise public money.Visibility and credibility
By listing on an SME platform, companies enhance their brand visibility. They gain credibility with customers, suppliers, and lenders because listing involves adhering to regulatory norms and audits.Potential Growth to Mainboard
In some regions, companies that initially list on an SME platform can migrate to the mainboard once they meet certain criteria. This phased approach gives them time to build a market track record.
Key Characteristics of an SME IPO
Lower Listing Requirements
SME IPOs typically have more flexible rules for listing. For example, the minimum capital requirement, track record, and disclosure norms might be less strict than those for large corporations. This approach helps smaller firms, which may not yet meet the criteria for a mainboard listing, to still raise capital.Reduced Cost of Listing
Going public on a major exchange can be expensive, especially for small businesses. SME exchanges often offer lower listing fees and streamlined procedures to ease the financial burden on companies.Higher Risk and Higher Potential Reward
Since these companies are smaller or in earlier stages of growth, they may carry higher risk. However, if they succeed, you could potentially benefit from significant returns. Thorough research is crucial before you decide to invest, as a smaller firm’s success can be more sensitive to market challenges.Lower liquidity
Trading volumes in SME IPOs tend to be lower than those in mainboard stocks, which means you might find it harder to buy or sell your shares at your desired price. If you are comfortable taking on some liquidity risk, an SME IPO could be an intriguing opportunity for you.
How to Apply for an SME IPO
Due Diligence
In equity investing, research is essential. As an investor, you should review the company’s financial statements, growth plans, and risk factors. Many SME platforms make it mandatory for companies to publish disclosures and offer investor presentations. You should go through these documents to ensure the company’s story aligns with your investment strategy.Application Process
Much like a regular IPO, you can apply through your broker or your online trading platform (if they support SME listings). You might notice a difference in the lot sizes—SME IPOs often have larger lot sizes compared to mainboard IPOs, meaning you may need to invest in a minimum number of shares that could be higher than usual.Monitor Post-Listing Performance
Following the company's listing on the SME platform, closely monitor the stock's market performance. Sometimes, SME stocks can be more volatile due to lower trading volumes and a smaller investor base.
Pros and Cons of Investing in an SME IPO
Pros
- Growth Potential: Smaller firms can sometimes grow faster than established players.
- Portfolio Diversification: You add exposure to a unique and potentially dynamic segment of the market.
- Early Entrant Advantage: If you invest at an early stage, you could benefit if the company later moves to the main board or expands rapidly.
Cons
- Higher Risk: The company’s business model might be untested or more prone to economic fluctuations.
- Lower Liquidity: Shares might not be actively traded, making it challenging to exit at the desired price.
- Limited Information: Smaller firms may not have a long track record, making thorough analysis more difficult.
Whether an SME IPO fits your portfolio ultimately will rely on your risk tolerance and investing objectives. Remember that markets can be unpredictable; SMEs listed are not an exception. Should you choose to invest in SME, it is important to stay up to date on the latest company disclosures and market news. This helps you maximise benefits and control the inherent dangers associated with investing in smaller, rapidly expanding businesses.