An initial public offering (IPO) marks a major inflection point in a company’s journey. For ambitious small and medium enterprises (SMEs) looking to expand rapidly, an IPO on the NSE Emerge platform (SME platform) offers the visibility, fundraising capability and credibility needed to unlock transformational growth.
As leaders in developing and managing utility infrastructure assets, we at MUDS Management understand the needs of high-growth companies. In this comprehensive 4,000 word guide, we cover all aspects of securing a listing on India’s premier SME exchange – from eligibility and documentation to process timelines and benefits.
An Initial Public Offering (IPO) marks a crucial inflection point in a company’s journey. It opens doors for ambitious enterprises to rapidly scale, gain further credibility and unlock transformational growth. For India’s nearly 6.5 million small and medium businesses, a listing on the NSE Emerge platform (earlier called SME exchange) provides the ideal springboard to access capital markets and enter a high growth trajectory.
As leaders in developing and managing utility infrastructure assets with deep specialization across energy, transportation and water management verticals, we at MUDS Management understand the needs of high potential companies looking to chart exponential expansion. Through this comprehensive guide, we aim to inform enterprises on the various contours of securing an IPO – from eligibility criteria and documentation required to expected timelines and compliance needs.
While the process does require upfront preparation spanning 6-12 months, the benefits are manifold. An SME IPO and subsequent listing helps gain visibility among customers, investors and talent. It enhances corporate brand and reputation as companies undergo rigorous due diligence and compliance enhancements pre-listing. Fundraising capability expands multi-fold post-listing enabling faster inorganic and organic growth. Trading on the public markets also leads to more accurate price discovery and market-driven valuations for listed entities.
Overall, an IPO serves as a stepping stone for SMEs to enter the big leagues and become larger mid-cap corporations going forward. As partners assisting companies throughout their IPO and listing process, our hands-on experts at MUDS are perfectly positioned to advise ambitious promoters on this strategic move to unlock their next growth phase.
The blog covers all key aspects from eligibility criteria to documentation required to expected timelines and ongoing compliance needs after successful public listing. We hope this detailed guide helps high potential SMEs crystallize their IPO plans to leverage public markets for rapid value creation going forward.
Setting the Stage – An Introduction to NSE Emerge
Launched in 2012, NSE Emerge provides SMEs access to public capital markets to meet growth needs. With 222 companies and over ₹35,000 crores raised until now, this exchange enables companies to enjoy listing benefits like:
Enhanced Visibility and Corporate Image: A public listing enhances visibility, reputation and corporate brand as companies undergo rigorous due diligence and compliance requirements to list on a stock exchange
Access to Growth Capital: IPOs and follow-on public offers (FPOs) post-listing allow companies to raise larger growth capital efficiently
Improved Valuations: Listed securities often trade at higher valuations due to market-driven stock prices, ability to raise follow-on capital and market-comparable financial reporting
New Group of Investors: Public listing diversifies investor base to include domestic retail investors, institutional investors like mutual funds as well as international investors
Stronger Talent Attraction: As a listed entity, companies can attract superior talent through incentives like ESOPs and employee stock grants
Mergers, Acquisitions and Inorganic Growth: Listed companies have stronger abilities to use equity for strategic mergers, acquisitions and inorganic growth
Thus, apart from capital raising, an SME IPO expands stakeholders like customers, employees, vendors and enables ambitious SMEs to enter a high growth trajectory.
Unlocking Exponential Growth with MUDS – Your IPO Advisory Expert
With over 22 years of experience spanning capital restructuring, infrastructure development and fundraising across varied sectors, MUDS Management brings unmatched expertise in helping ambitious companies plan, structure and execute a successful public listing on NSE Emerge.
As trusted partners assisting firms across their IPO journey, MUDS advisors offer end-to-end guidance on:
– Evaluating IPO readiness in terms of financial health, size, value unlocking potential
– Restructuring ownership or capital structure ahead of listing
– Navigating regulatory requirements around corporate legal vetting, documentation, compliance
– Appointing other intermediaries like bankers, registrars, brokers
– Optimizing costs and profitability levers to depict strong fundamentals to public investors
– Designing value accretive issue size, valuation, capital structure
– Structuring a compelling investment thesis and value creation roadmap
– Investor engagement and issue marketing to ensure full subscription
– Follow-on support across stakeholder management and compliance post IPO and listing
Backed by domain expertise and execution excellence, the integrated advisory services of MUDS serve as the ideal catalyst for ambitious promoters to plan a successful IPO and listing to unlock transformational growth in their entrepreneurial journey.
To explore how we can partner you in this strategic move, Connect with Us. Our experts are glad to guide you on the path to exponential value creation as a publicly listed firm.
Preparing for an SME IPO – Critical Steps
The IPO preparation journey typically takes 6-12 months as companies put robust processes and compliance mechanisms in place. Some key preparation steps include:
Preparing for an SME IPO – Critical Steps
The IPO preparation process typically takes 6-12 months as companies invest time upfront to build sound processes, governance mechanisms and compliance frameworks imperative for accessing public markets.
1. Audited Financial Statements: Have fully audited financial statements for the past 3 years at the minimum available. Audited accounts lend higher credibility showcasing financial discipline critical for public investors. Past financial performance also serves as the basis for future financial projections.
2. Legal Vetting: Undertake exhaustive legal vetting spanning incorporation documents, business licenses, partnerships deals, land/property titles, trademark registrations, technical collaboration contracts etc. to ensure complete legal compliance and enforceability. Settle any pending disputes or litigation.
3. Corporate Governance: Design and implement tailored governance policies and manuals covering board constitution, CEO/CFO certification of financial statements, internal controls over financial reporting, related party transactions, risk management frameworks, insider trading codes, whistleblower policies etc. Ensure robust information security and technology systems.
4. Leadership For IPO Readiness: Augment board with reputed independent directors. Build an investor relations function headed by a Chief Financial Officer or senior professional to steer IPO readiness. Appoint compliance and company secretary officers. Institute processes for adequate public disclosures and declarations.
5. Capital Restructuring: Evaluate feasibility of converting sole proprietorships, partnerships etc. into private/public limited companies best suited for IPO in terms of ownership structure, flexibility for future capital expansion. Institutionalise equity incentive schemes to attract toplevel talent.
6. Advisors: Engage advisors like merchant banks, legal counsels, registrars, branding agencies etc. possessing SME IPO experience specifically to ensure expert guidance on documentation, regulatory requirements and processes.
7. Financial Optimization: Target improvements in working capital cycles, lean manufacturing, backward integration, supply chain efficiencies etc. to optimize costs and improve profitability, margins and return metrics to depict attractive financial position.
8. Benchmark Valuations: Carry out competitor and industry analysis on key valuation multiples like P/E, EV/EBITDA, P/B ratios. Offer valuation markdowns adjust for size and other differential advantages compared to larger industry peers.
This upfront preparation forms solid foundations for a successful public listing that unlocks exponential growth as a listed entity.
NSE Emerge – Eligibility Criteria and Listing Requirements
Let’s understand key eligibility criteria for companies planning an SME IPO on NSE Emerge:
Track Record of Operations: Companies must have over 3 years of operational track record
Sound Financial Position: Minimum net worth should be ₹3 crore in the latest financial year
Revenue Stability and Profitability: Firm should have operating revenue of at least ₹15 crore during the last financial year with operating profit in at least 2 of the 3 preceding years
Positive Net Cash Flows: Company should have net cash accruals from operating activities of at least ₹1 crore in the preceding year
Once listed, companies have to also comply with various listing regulations like:
Minimum Public Shareholding: Have at least 25% public shareholding in 18 months and raise it to 40% in 3 years
Lock-in Requirements: Promoters must agree to lock-in entire pre-issue capital for 3 years and 50% of capital for the 4th and 5th year post-listing
Disclosure and Reporting: Make timely disclosures related to quarterly results, shareholding patterns, corporate actions etc.
By ensuring eligibility criteria are met before applying for an IPO and putting frameworks in place for ongoing compliance post-listing, SMEs can seamlessly gain access to public markets.
Applying for an SME IPO – Documentation and Processes
The typical documentation requirement for an SME IPO application with NSE are as follows:
1. Draft Prospectus: Contains all material company information for investors like incorporation details, capital structure, financial statements, management profiles, risks, objects of raising capital etc. along with the application form
2. Due Diligence Certificate: Independent financial and legal due diligence reports ensuring all relevant disclosures and compliance in prospectus
3. Key Agreements: Material business agreements like partnership agreements, technical know-how agreements, real estate agreements, customer/vendor contracts
4. Legal Declarations: Directors, promoters and selling shareholders need to submit litigation, eligibility and lock-in related declarations
5. KYC Documents: PAN, passport copies, addresses etc. for promoters, directors and key management personnel
Upon satisfactory review of documentation, NSE accords in-principle approval leading to the next steps:
6. Prospectus Filing and Registrar of Companies (RoC) Approval
7. Securing Underwriting Commitments before issue opens for subscription
8. Public Issue and Raising Growth Capital from Investors
9. Listing and Trading Approval on NSE Emerge after basis of allotment finalization
Thus, it takes 4-6 months from prospectus filing to successfully completing an SME IPO. Companies should have advisors guiding throughout for a seamless experience.
Life as a Listed SME – Obligations and Growth Opportunities
An IPO heralds a company’s entry into capital markets – a turning point offering immense opportunities but also ongoing regulatory responsibilities and shareholder commitments such as:
Corporate Governance and Transparency Standards: High standards of financial controls, internal processes, risk management and disclosures to build investor trust
Communicating Value-Enhancing Activities: Proactively communicate business developments like new contracts, product launches, customer wins etc. impacting company value to investors
Quarterly Reporting and Results: Continuously report operational and financial performance against plans to evidence growth execution
Ongoing Compliance Requirements: Abide by listing regulations related to public shareholding, insider trading, takeover codes etc.
Shareholder Engagement: Develop strong investor relations function to address investor queries and build long-term relationships
Capital for Growth: Leverage listed platform to raise follow-on growth capital via ways like rights issues, QIPs etc.
While regulatory rigor and compliance increase for listed SMEs, so do growth opportunities by leveraging public markets.
Leveraging an SME Listing as a Growth Launchpad
The public market platform offers listed SMEs powerful launchpads to rapidly scale their business and become full-fledged midcap companies by providing:
1. Access to Capital: Ability to raise larger risk capital for capacities, market expansion, acquisitions etc. The ₹25,000 crore plus capital raised by SME IPOs until FY22 underscores this opportunity
2. Enhanced Corporate Visibility: Catch the eye of domestic and foreign investors as a company adhering to stringent compliance standards
3. Richer Exit Options for Investors: Private equity funds invested in unlisted SMEs get quality exits via IPOs and this ensures robust future funding available for listed SMEs
4. Stronger Inorganic Growth: Listed stock often preferred consideration for acquisitions. Listed entities can more easily fund acquisitions through issuances
5. Superior Access to Debt Markets: Rating agencies and lending institutions are more comfortable with listed companies having better financial discipline enabling larger and cheaper debt access
6. Marquee Partnerships: Easier for listed companies to attract joint ventures, technical partnerships globally
7. ESOPs for Talent Retention: Listed platform allows shares or stock option schemes to attract and retain top talent
Thus, listing on NSE Emerge or “going public” strategically empowers SMEs to leverage strengths forged during earlier entrepreneurial phases to now rapidly gain scale, financial muscle and operational maturity.
The Way Ahead
India has over 6 million SMEs, poised to grow into corporations of the future. As a premier SME exchange with established investor confidence, NSE Emerge offers the perfect springboard for ambitious entrepreneurs to access public capital and unlock the next growth phase.
FAQS
1. What is an SME IPO?
An SME IPO or Initial Public Offering refers to the process where a small and medium enterprise offers its shares to the public on a recognized stock exchange to raise growth capital. This offers wider visibility, fundraising capability and enhanced credibility for the company.
2. What is the NSE Emerge platform?
NSE Emerge, earlier called NSE SME platform, is India’s leading exchange platform launched by National Stock Exchange specifically for small and medium enterprises to access capital markets through IPOs and list their shares. Over 200 companies have raised upwards of ₹30,000 crores via SME IPOs on NSE Emerge until now.
3. What are the key eligibility criteria for an SME IPO on NSE Emerge?
Key eligibility norms are:
– Operational track record of at least 3 years
– Net worth equal to or above ₹3 crores in the latest financial year
– Revenue of at least ₹15 crores in the preceding financial year
– Operating profit in at least two preceding financial years out of three
4. What are some of the key benefits of an SME IPO?
Benefits include easier access to equity capital for growth needs, diversified investor base, enhanced market visibility and corporate reputation, lucrative exit option for private investors, stronger ability to attract talent etc. Listing also re-rates valuations significantly over time.
5. What documentation is required for an SME IPO application?
Key documents include draft offer document, financial statements, legal declarations on disputes/litigations, business agreements, management KYC papers, due diligence certificates etc. as applicable.
6. How long does the NSE SME IPO process take from start to finish?
The entire process takes around 4-6 months from filing draft papers to issue closure and listing including regulatory approvals. Proper planning for a minimum of 6 months is advised.
7. What are the costs associated with an SME IPO?
Costs cover merchant banking fees, registrar fees, legal expenses, advertising, printing costs etc. Depending on issue size, costs range from 8-10% of funds raised. Funds raised via IPO offset these costs over time.
8. What role does an underwriter play in an SME IPO?
Underwriters guarantee subscription to shares issued, if not fully subscribed during issue period by public investors. This ensures capital raising success. They hold responsibility to bring in investors and provide post-issue price stability.
9. Can the promoter dilute 100% stake through the IPO?
No, SEBI requires SME promoters to provide a public lock-in for minimum 3 years on entire pre-IPO share capital. Also, minimum 25% public shareholding needs to be met in 18 months post-listing.
10. How does the basis of allotment work in an SME IPO?
SEBI regulations mandate allotment to retail individual bidders for up to ₹2 lakhs per bid first on proportionate basis. Allotment for bid amounts above ₹2 lakhs is made proportionately thereafter.
11. What are the ongoing compliance requirements for a listed SME?
Key requirements include maintaining 25% minimum public shareholding, restrictions on promoter share pledging, submitting financial results quarterly, disclosure of material information, insider trading prohibitions etc. applicable to listed entities.
12. How much does an eligible SME company need to dilute/offer to the public in an IPO?
SEBI rules need at minimum 25% dilution of post-issue fully paid up capital for SME IPOs with maximum dilution capped at 75% via offer document.
13. Does the entire company need to be restructured ahead of the IPO?
Yes, existing private limited companies require conversion to public limited company structure under Companies Act before filing IPO prospectus with applicable changes in AoA, MoA etc.
14. What support does an SME company need on the working capital front post IPO?
Banks/lenders get more inclination to fund working capital needs of companies after public listing adding to financial muscle. Also, strong operating cash flows on the back of IPO proceeds aid in supporting incremental working capital.
15. What happens if the Issue remains undersubscribed by investors?
In case of under subscription despite underwriting commitments, the issue size can be reduced subject to meeting Rule 19(2)(b) minimum subscription criteria for IPOs applicable to issuer companies based on Objects of the Issue stated in offer document and relevant SEBI ICDR guidelines.
16. Can Promoter Group entities sell shares in the IPO offer?
Yes, subject to lock-in stipulations. Promoters can participate as selling shareholders in the offer for sale component but need to agree for lock-in of entire pre-issue share capital for 3 years. The lock-in also applies to 50% of promoter capital for the 4th and 5th year post-listing.
17. Is there a requirement for compulsory listing post IPO closure?
Yes, as per SEBI ICDR rules, SME IPO issuers filing prospectus with Registrar (RoC) need to obtain trading approval on Emerge platform of NSE within 6 working days of issue closing date.
18. Are there any restrictions on raising further capital post-listing?
SEBI requires SME companies to wait for at least 1 year from listing date on NSE Emerge before filing any further equity issuance proposal. This allows a reasonable trading period to establish fair market price discovery and protection of IPO investors.
19. Can overseas investors participate in NSE SME IPOs?
Yes, FPIs/FIIs can bid under the foreign portfolio investment route under portfolio investment scheme in SME IPOs subject to permissible investment limits similar to other listed stocks. Minimum 10% allocation is reserved for these investor categories.
20. Do minimum promoter contribution rules also apply for SME IPOs?
Yes, minimum promoter contribution should be 20% post-issue equity capital. Also, promoters need to bring 100% of the offer/issue expense from personal resources upfront.
21. What factors does NSE consider for SME IPO approval decisions?
Parameters like operating track record, past revenue and profitability performance, sectoral prospects, funding requirement rationale, quality of issue certification and disclosures, soundness of business plans/project appraisals, reasonability of valuations, litigation checks etc. are evaluated by NSE for eligibility.
We hope these IPO-related FAQs help as a handy guide into the world of SME IPOs. Do reach out to us if you need any assistance on your potential public listing plans. Our experts at MUDS IPO advisory are glad to guide you ahead on this strategic move to unblock transformational growth.