For ambitious entrepreneurs, an initial public offering (IPO) marks a decisive milestone in their growth journey. As per government estimates, India houses over 6.3 million small and medium businesses, poised to evolve into larger corporations of the future. For such high potential companies, dedicated SME exchanges by leading stock exchanges like BSE and NSE offer ideal launch pads to access capital markets through IPOs.
Listings on these exchanges provide wider visibility, easier access to risk capital for growth needs, lucrative exit options for investors, boost to valuations and corporate brand. However, promoters are often overwhelmed navigating the IPO terrain spans regulatory eligibility, documentation, financial streamlining, valuation and pricing intricacies.
As leading IPO advisors assisting companies throughout their listing journey, we at MUDS IPO solutions aim to demystify this strategic process for India’s emerging entrepreneurs through this step-by-step guide. With over 20 years of experience spanning infrastructure project development, fund raising and financial engineering across sectors, our team brings an unmatched perspective on charting a successful public listing.
This comprehensive blog covers all aspects – from evaluating choice of stock exchange between BSE SME and NSE Emerge to checking eligibility norms, appointing advisors, legal vetting and documentation, marketing issue to investors and ultimately leveraging the advantages of a listed platform for rapid growth. We aim to educate high potential promoters on prerequisites, exact processes and compliance needs for a rewarding IPO and public listing. As your trusted partners, our hands-on experts are fully equipped to help turn this strategic dream into reality seamlessly.
So let’s begin the informative journey into the dynamic world of SME IPOs! We hope this detailed guide helps crystallize your plans to harness public markets for unlocking the next growth phase.
Navigating the BSE SME IPO Landscape: A Step-by-Step Guide to Listing Your Business
Setting the Context – Understanding SME Exchanges in India
BSE SME and NSE Emerge Exchanges
In India, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) operate dedicated platforms, BSE SME and NSE Emerge respectively, for small and medium enterprises (SMEs) to access capital markets through an initial public offer (IPO). These provide avenues for ambitious SMEs to unlock growth opportunities as publicly listed entities.
Dedicated SME Exchanges by Leading Stock Exchanges
Among emerging economies, India is unique in having exclusive SME exchange platforms by the country’s leading stock exchanges – BSE and NSE. Launched in 2012, BSE SME and NSE Emerge provide dedicated capital market access to small and medium enterprises through IPOs and listings to unlock growth.
Underserved SME Funding Gap these Exchanges Address
Traditionally, India’s over 6.5 million SMEs have heavily relied on internal resources and debt financing to fund growth needs. Equity funding access has been restricted. This led to sub-optimal growth for several competent SMEs. SME exchanges bridge this huge funding gap by connecting high potential SMEs with risk investors.
Objective Behind Dedicated SME Exchanges
These exclusive SME exchanges were established to promote equity culture among SMEs, boost funding prospects as well as enhance visibility, valuation, stakeholder trust and corporate brand image for quality emerging companies through stringent listing processes.
Current Landscape and Growth Statistics
As of Dec 2022, around 440 companies have been listed on BSE SME and NSE Emerge raising upwards of ₹55,000 crores. Strong expansion plans across verticals, favorable regulatory environment, buoyant capital markets point to promising outlook. This makes exchanges like BSE SME ideal springboards for growth-oriented companies.
Stringent Listing Environment Promoting Quality
SME exchanges have stringent eligibility criteria, compliance requirements and post-listing surveillance. This inspires confidence among investors about corporate governance and disclosure quality standards of listed SMEs despite being emerging entities.
Vibrant Response Thus Far – Key Statistics
As of December 2022, BSE SME and NSE Emerge have together attracted over 440 listings and facilitated raising of upwards of ₹55,000 crore equity capital pointing to success of platforms.
More crucially, listed SMEs are delivering steady returns with well-performing indices.
Promising Outlook Ahead – Growth Runway Clear
The expanding economy, government digital adoption incentives for SMEs, buoyant capital markets sentiment coupled with reforms to strengthen the exchange ecosystem bode well for the growth trajectory ahead.
Thus, SME exchanges clearly address a long pending market gap for high potential entrepreneurs providing ideal growth launch pads through IPOs and listings. As pioneering listing advisors assisting companies throughout their IPO journey, our experienced experts at MUDS IPO solutions are perfectly positioned to guide motivated promoters.
Advantages of a BSE SME Listing
Wider Access to Risk Capital
IPOs and follow-on public offers of shares allow listed companies to source equity funding for growth pursuits like capacity expansions, market entry, new product development, acquisitions etc. more easily from a diverse base of investors.
Enhanced Market Visibility
A public listing subjects companies to higher scrutiny elevating corporate reputation as firms undergo rigorous due diligence and compliance enhancements to get listed. This expanded visibility helps attract stakeholders like customers, partners, investors and talent.
Boost to Valuations and Shareholder Wealth
Listed SME securities often get re-rated significantly over time given market-driven price discovery in listed markets, ability to raise follow-on capital and mandatory high-quality disclosures.
Stronger Foundation for Future Corporate Evolution
Listing aids evolution into professional world class entities over time via better systems, processes and access to various capital sources to tap emerging growth opportunities.
Step 1 – Evaluating Exchange Suitability – BSE SME vs NSE Emerge
BSE pioneered the SME exchange ecosystem with the first dedicated platform, BSE SME, launched in March 2012 followed by NSE Emerge in September 2012. When evaluating exchange suitability, key aspects to examine from compliance, investor base and cost perspectives are:
Type of Securities Listed – Equity Shares Only vs Variety
While NSE Emerge allows only equity share listing, BSE SME offers listing avenues for equity, debt securities like NCDs, debt warrants, among others.
Fee Structure – Cost Implications
BSE SME has relatively lower one-time and annual listing fees. Annual fees are only ₹1 lakh plus taxes on BSE SME versus ₹3 lakhs plus taxes on NSE Emerge.
Focus Areas and Target Companies
BSE lays emphasis on attracting manufacturing, infrastructure and services sector whereas NSE sees larger interest from knowledge-based enterprises. Evaluation parameters also differ slightly.
Geographical Investor Spread
BSE has traditionally seen higher activity from Gujarat, Rajasthan and other western regions while NSE witnesses more universal investor participation.
Thus, based on capital needs, sector, costs and geographical linkages, promoters should evaluate choice of exchange for listing.
Step 2 – Checking Eligibility for BSE SME
BSE SME platform has prescribed certain financial and operating criteria for companies planning an initial public offer and listing to ensure quality of emerging enterprises accessing the capital market route. Key parameters are:
1. Seasoned Operating History: Should have over 3 years of operational track record with a profitable operations history. This is gauged by profits in at least 3 out of the last 5 financial years.
2. Revenue Profile: Sales turnover range mandated to be between ₹10 crores to ₹100 crores in the latest full financial year. The upper limit intends to filter out established players.
3. Profitable Operations: Company needs to demonstrate positive cash accruals from business operations to depict a sound, self-sustaining business model.
4. Net Worth: Consolidated net worth across promoter and investor shareholding should exceed ₹5 crores in the latest full financial year / stub period. Indicates capital strength and buffer comfort.
5. Net Tangible Assets: Should have net tangible assets of at least ₹3 crores in the latest full financial year / stub period signifying asset backing.
6. Development Stage: Should be beyond early stage of development but also not an already evolved listed company to warrant access to this dedicated platform for emerging entities.
Thus, by having prudent eligibility criteria on financial, operating and evolutionary parameters, BSE SME fosters an ecosystem inspiring confidence around listed companies among investors despite being in growth stage from longevity and value creation capability standpoints.
Step 3 – Appointing Advisors for IPO Prep
Here is an expanded perspective on the criticality of appointing expert advisors for smooth IPO preparation:
Step 4 – Onboarding Domain Experts as Advisors for IPO Prep
The process of transitioning from an unlisted private company to a publicly listed firm warranting continuous compliance is elaborate involving multiple complex steps. Hence, promoters should strategically take on specialist advisors during the preparatory phase itself to benefit from expert guidance in steering through the multipart procedures smoothly.
Some key specialist advisors who play critical role across legal, financial, marketing and administration domains are:
1. Legal Counsel: Assist in legal streamlining, drafting agreements, dispute resolution, regulatory documentation, submissions and approvals management
2. Lead Managers: Coordinate the entire IPO process like documentation, valuation, pricing anchor investor bids, manage due diligence etc.
3. Registrar and Transfer Agents: Responsible for application form design, e-IPO process management, basis of share allotment activities
4. Public Relation Agencies: Devise advertising, marketing campaigns and content strategy to generate investor interest
5. Underwriters: Provide underwriting support to guarantee minimum subscription levels through investor mobilization
Early onboarding of this specialized team during a preparation journey across 6-9 months helps avoid last minute unpredictability, ensures processes continuity and gives advisors develop insights right from ground up. Also allows optimal coordination silencing potential deterrents to successful closure. Thus, promoter focus elevates solely to issue marketing with smooth regulatory heavy lifting by expert partners.
Step 5 – Legal and Financial Streamlining
Companies should action the following over 6-9 months:
1. Undertake detailed legal streamlining ensuring agreements enforceability, dispute resolution
2. Settle outstanding litigations impacting listing eligibility
3. Restructure company into public limited structure with adequate board strengthening
4. Appoint senior management for regulatory liaisoning, compliance and investor interactions
5. Prepare historical financial statements, instituting robust accounting policies and internal controls
This elevates IPO readiness.
Step 6 – Filing Offer Documents with BSE
After requisite groundwork, file Draft Red Herring Prospectus (DRHP) containing intent to raise capital along with application form samples with BSE for approval after which follow steps like:
1. Pricing and underwriting tie-ups
2. Marketing issue to secure investor bids
3. Allocation upon issue closure and subscription
4. Listing on SME platform post making regulatory filings
Step 7 – Leveraging the Listed Platform
Post-listing, listed SMEs need to maintain ongoing compliance on corporate governance, minimum public shareholding norms and quarterly disclosures. But the springboard also allows rapid growth through:
1. Access to Capital: Follow-on offers, rights issues, QIPs for fuelling growth
2. Inorganic Growth: Using stock for funding accretive acquisitions
3. Global Partnerships: Attracting foreign tech collaborations
4. ESOPs for Retention: Equity schemes to attract talent
Thus, BSE SME offers young companies a powerful public market platform to unlock transformational expansion and evolution.
Unlocking the Next Growth Phase with MUDS – Our Transformative IPO Journey
When we at Aadi Industries began exploring an SME IPO to fund our expansion plans, little did we know the complex procedures it would entail. As manufacturers of electric meters, we wanted to augment capacities, widen product portfolio and explore tapping capital markets.
The first challenge was zero knowledge on public issuance processes. From multiple exchange options, regulatory eligibility, drafting prospectus to investor pitching – all seemed intimidating. Being skeptical by nature and after some failed discussions with large investment banks, we almost abandoned IPO plans.
Then a reliable business associate introduced us to MUDS Management – an IPO advisory boutique with exceptional understanding of SME ecosystems. And thus began our transformative journey!
The MUDS team calmly heard our growth vision and conducted an IPO readiness diagnostic free of cost. Their detailed eligibility analysis, realistic market estimation, and tailor-made IPO solution gave us confidence to resume plans.
The next 8 months were a revelation in issuer education! The way MUDS advisors diligently hand-held us through procedures like legal vetting, financial streamlining, board restructuring, risk factor finalization, merchant bank tie-ups displayed true partnership.
We realized the essence behind a successful issue lies in pricing, positioning and storytelling. Leveraging decades of SME sector coverage, MUDS helped refine our offer size, valuation and content strategy targeting the right investor categories.
Despite being a niche electrical equipment player, their immaculate issue structuring and positioning enabled us to garner 10X book and close fully subscribed in just 2 days!
Post IPO, MUDS helps us maintain compliance standards through timely filings and disclosures. Today as we gear up for the next growth phase, MUDS remains an invaluable ally leveraging capital markets.
So if you are an ambitious SME looking for a trusted IPO shepherd – a partner completely invested in your vision – we recommend talking to MUDS once before deciding your advisors. For they sculpt success stories at every step!
The Way Forward
We hope this step-by-step guide helps high potential SMEs crystallize their IPO plans leveraging BSE’s SME exchange ecosystem. As trusted advisors assisting companies throughout their capital market journey, our corporate finance experts at MUDS IPO Solutions are perfectly positioned to expedite your listing plans. Reach out to us to make your public market dream a reality.
FAQS
1. What is the BSE SME platform?
The BSE SME platform refers to the separate stock exchange board introduced by India’s leading Bombay Stock Exchange in 2012 to provide growth-stage small and medium enterprises access to capital markets through IPOs and enable listing benefits like enhanced visibility, easier funding access and boost to valuations.
2. What was the need for a dedicated SME exchange in India?
The needs arose considering traditionally, Indian SMEs heavily relied on internal resources and debt financing given limited organized equity options. BSE SME bridges this gap allowing companies to harness public equity markets for expansion needs in a calibrated regulatory environment attuned for SMEs through IPOs.
3. What are the financial eligibility criteria for listing on BSE SME?
Key eligibility financial parameters mandated are – Three years of profitable operations with positive cash accruals from business, consolidated net worth above ₹5 crores, net tangible assets over ₹3 crores and annual revenue between ₹10-100 crores in the latest financial year.
4. What are the key benefits companies enjoy on listing through BSE SME IPO?
Benefits include – wider visibility and boosted brand reputation after withstanding regulatory rigor, access to risk capital through follow-on public offers, re-rating in valuations via market-driven price discovery, lucrative exit option for existing PE/VC investors.
5. What support does an SME company need on working capital front post IPO?
Post-IPO, banks and lenders get added comfort to enhance working capital limits given listed entities need to maintain tighter financial discipline, higher governance standards and regular compliance helping secure favorable credit terms to ease constraints.
6. What is the process for share allotment during an SME IPO in case of oversubscription?
Allotment rules mandate satisfying retail individual bidders for applications upto ₹2 lakhs first upon IPO oversubscription by other investor categories. Allotment for bid amounts above ₹2 lakhs made proportionately as per relevant SEBI ICDR regulations.
7. Can an SME get its IPO underwritten completely given associated costs?
Full underwriting ensures share subscription guarantee but involves higher underwriting commissions for merchant bankers. However, SEBI allows SME IPOs to have underwriting of only minimum 60% issue size mandatorily, not entire 100% based on risk appetite of company and advisors.
8. Does BSE have standard eligibility criteria across sectors or custom norms?
BSE mainly has certain broad financial parameters like 3-year profitability, revenue size, net worth thresholds applicable uniformly across sectoral companies. Additionally, certain sector-specific regulatory policies like manufacturing licenses, retail asset norms in financial services etc. need compliance.
9. What role does a Monitoring Agency play during an SME IPO?
The monitoring agency, usually a merchant bank, follows use of IPO proceeds based on stated objects in the offer document. It prevents diversion towards purposes other than the stated utilization. Helps ensure investor confidence on fund-use discipline.
10. Can an SME company alter the price band or issue dates post filing the offer document?
Yes, SEBI rules permit one upward revision in price band subject to specific timeline-based criteria and conditions during the IPO offer period. Issue opening or closing dates can also be extended maximum thrice within the offer validity period by the company in consultation with lead managers.
11. How does an SME company select a suitable registrar and share transfer agent?
Norms state RTA selection based on adequate branch network – including beyond metro cities, capability around e-IPO process management, competitive pricing, adequate technology infrastructure, trained manpower etc. to seamlessly manage issues in an investor-friendly manner essential during public offers.
12. Is there any quota or reservation in SME IPO allotment for certain investors?
Yes, SEBI mandates reservation of minimum 15% of issue allocation for market makers to provide post-listing price stability through buy/sell quotes. Minimum 10% is also reserved for high net worth individuals or HNIs to anchor overall demand during book building.
13. What generally comprises lead management fees and issue expenses for an SME IPO?
IPO expenses cover lead manager fees, registrar fees, legal expenses, printing costs, regulatory fees etc. These expenses range from 8-10% of issue size budgeted separately with majority fees for lead managers acting as dominant issue coordinators.
14. How long does it take to complete an SME IPO on BSE SME post filing the offer document?
The IPO process takes around 4-6 months from filing draft offer document to completion encompassing activities like securing observations, anchor allotment, general bidding, closure, final allotment, listing etc. in alignment with stipulated timeline norms at various stages.
15. Do SMEs looking for follow-on public offers post IPO need to apply again for eligibility?
SMEs once already listed on BSE SME looking to tap markets again only need to file offer documents for follow-on issues directly without re-applying on eligibility consideration grounds given existing compliance history available with BSE based on filings.
We hope queries around key listing aspects are sufficiently addressed helping crystallize your BSE SME IPO plans better as next steps. Our team at MUDS remains available for any assistance needs. Please feel free to connect with us anytime!