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Which sme ipo is best?

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Answer # 1 #

Without a doubt, the success of SME IPOs is not a fluke and needs closer attention and study. Nevertheless, it is in times like this when investors tend to go overboard and end up getting into something they regret later. It is, therefore, important to understand the potential downside of SME IPOs before taking the plunge and how they differ from mainboard IPOs. For starters, there are several commonalities including ASBA applications between the two categories. Here are some key points regarding the differences between mainboard and SME IPOs:

SMEs are usually very early in their lifestages when they hit the primary markets and thus, there are several risks in SME IPO investing. While it means that investors get a chance to pick potential multibaggers fairly early in SME IPOs, this seeming advantage comes with the inherent downside of losing money where fundamentals aren’t strong or business deteriorates in future. Needless to say, this is a risky combination and represents a double-edged sword.

Read Also: How to identify good IPOs

SME IPO investing typically involves applications in excess of INR100,000 which is quite high when compared to INR14,000-15,000 for mainboard IPOs. This high entry barrier is not just limited to initial allotment of shares but is also applicable during subsequent trading in these shares. For example, an SME IPO with a bid lot of 2,000 shares will retain this lot size and investors can only trade in the multiples of this lot size.

In other words, an investor cannot buy or sell in fractions of lot size which makes these stocks highly illiquid. This is different from mainboard IPOs where the concept of lot size is limited to primary market only and subsequent trading can happen in multiples of one share.

Unlike IPOs on the mainboard exchanges where market regulator SEBI plays an active role right from vetting prospectus to give observations, SME IPOs are mostly managed by stock exchanges. As such, draft prospectus of an SME IPO candidate is not examined by SEBI.

The sole responsibility of examining and approving the IPO is on the relevant stock exchange. “The Equity Shares offered in the Issue have not been recommended or approved by SEBI, nor does SEBI guarantee the accuracy or adequacy of this Prospectus,” is a common line one can find in the filings of SME.

SME IPO hopefuls are required to show profitability in at least two of the immediately preceding three financial years with each year being a period of at least 12 months. If this condition is not met, the company’s net-worth shall be at least INR3 crore. The requirement for mainboard aspirants is stringent and SEBI needs companies to have a minimum of INR15 crore in average pre-tax operating profit in at least three years of the immediately preceding five years.

SEBI requires mainboard IPO companies to have a net worth of at least INR1 crore in each of the preceding three full years but the requirement for SMEs is INR1 crore as per the latest audited financial results.

SME IPOs are required to be 100% underwritten which is not the case with their mainboard counterparts. This is another factor which makes SME IPO investing risky.

Above mentioned points make it amply clear that SME IPO investing have a number of risks and are only meant for investors with high risk appetite. Nevertheless, SME IPOs aim to allot at least 50% of the shares to retail investors. In case of healthy demand (as it is these days), more allotment may be made.

This is a radically different scenario from mainboard IPOs where retail investors get maximum 35% in the case of companies with profitable track record. On main exchanges, companies with profitability of less than three years in the last five years are considered risky and retail investors exposure is limited to just 10% in such cases.

All in all, SME IPOs tend to not only entail a higher element of risks in absence of stringent disclosures and profitability requirements but also present a real possibility of investors getting stuck with illiquid stocks. The double whammy in case of SME IPOs is that investors can get trapped with high amount of capital if sentiments change post listing. If not more, we are talking about at least INR100,000.

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Answer # 2 #

SMEs or Small and Medium Enterprises are businesses that have their assets, revenues, assets, or number of employees lower than a specific cut-off level. The criteria of what is categorised as an SME depends on the country and the industry. Governments from all over the world have realised the vital role SMEs plan in their economy. It is the same for India too, where SMEs are significant contributors to the economy. In India, SMEs employ almost half the workforce. But due to various factors, SMEs show poor productivity in India. The biggest challenge an SME faces is access to capital, and finance is also the primary reason for it going out of business.

SMEs or Small and Medium Enterprises are businesses that have their assets, revenues, assets, or number of employees lower than a specific cut-off level. The criteria of what is categorised as an SME depends on the country and the industry. Governments from all over the world have realised the vital role SMEs plan in their economy. It is the same for India too, where SMEs are significant contributors to the economy. In India, SMEs employ almost half the workforce. But due to various factors, SMEs show poor productivity in India. The biggest challenge an SME faces is access to capital, and finance is also the primary reason for it going out of business.

A company has to announce an Initial Public Offer (IPO) at an SME platform during an exchange before the stocks can get listed and be traded or exchanged. SME-IPO is an extremely popular way for a company to gather funds from various investors and be listed. The SME-IPO investors have earned huge returns.

These are some of the criteria for SME IPO in India –

If small and medium enterprises want to raise money from the public they will have to file for an IPO either on the SME platform of BSE or Emerge platform of NSE.

SEBI is about to extend leniency to startups so that they can enlist on the SME platform and state their requirements of net worth and profitability. The principle that dictated this step was a desire to provide more opportunities to modest startups that are unable to list on the main board.

Numerous startups need capital for growth. While major startups have multiple options like taking the aid of private equity investors to get more funds, the small ones have fewer options available. In this case, a platform created with such companies in mind would help both these companies as well as the investors immensely.

While the companies listed on the SME platform are becoming more influential, they are attracting more investors. Another reason for an increase in the number of investors who invest in SMEs is the rapidly multiplying number of SME stocks and increased returns. With such support from the exchange board and the investors, the Indian market seems to be good for SME-IPOs. In India, such SMEs are important for the growth of the nation, and increased employment opportunities.

How to apply for SME-IPOs from Angel One?

You can now apply for SME IPOs (i.e. IPOs of small and medium enterprises) within the limit of ₹ 2 Lakhs through UPI under the retail category via our applications.

Please refer to the below link for list of approved UPI application for SME IPO-

https://www.npci.org.in/what-we-do/ipo/live-partners

Also, please note that direct selling of allotted shares under the SME category is allowed from our online application.

If the client wants to sell SME shares, he needs to sell a lot.

Clients can sell only on the exchange where the SME shares are listed, client cannot sell BSE listed lot on NSE and NSE listed lot in BSE.

What’s in it for startups?

Now that we have understood what is SME-IPO meaning, let us look at the benefits it has. All over the world, the IPO market has been taken by a storm, thanks to the new class of social media, mobile technology and e-commerce companies making their debut. But, the scenario is slightly different in the Indian market. Although companies like Snapdeal, Paytm and Flipkart have been selling their products in India, they choose to list overseas. Seeing this trend, SEBI felt that interested companies would completely ignore Indian investors. So, a platform for startups has been set up, the Institutional Trading Platform. A variety of different start-ups can now list and trade shares through The Institutional Trading Platform, without going through the IPO process

SEBI has approved a set of regulations for SME IPO listing that differs from a mainstream listing. Here are the key conditions that SMEs need to fulfil to complete the listing process.

Appointment of merchant banker: The requirement to appoint a merchant banker is the same for SMEs. SMEs need an SME IPO consultant to guide them with the listing process.

Compliance and due diligence: The next step involves ensuring all data, financial facts, and accounts reflect the company’s truth. It confirms that there is no discrepancy in data that can impact the company’s story.

Filing Red Herring prospectus: Like a mainstream IPO, SMEs must also file a red herring draft prospectus. It contains comprehensive information on the operations and the prospects of the company. The RHP serves as a guide for prospective investors.

Verification and feedback: All data and documents submitted during the prospectus filing undergo verification to eliminate chances of discrepancies and misinformation. Site verification is done at this stage as well.

In-principle approval: The SME is given an in-principle consent subject to fulfilling additional conditions. The company needs to satisfy all criteria before opening the public offer.

Opening the issue: After completing due diligence and receiving approval, the offer begins for investors to bid. The public offer remains open for a few days before closing.

Listing and trading of shares: It takes about a week to complete the listing process on the bourses. Once the scrips are listed and allotted, investors can start trading them in the secondary market.

From appointing a merchant banker to listing IPO shares, the process is long-drawn-out and involves extensive paperwork. As an investor, it benefits you to understand how the IPO share listing process work. The lot size and the issue price are decided based on an initial evaluation of market trends and investors’ interest. After listing, the stocks trade like regular shares, and their value fluctuates based on market demands.

FAQs

SME IPO, akin to other IPO offerings, carry an element of risk in them. Whether an SME IPO is a good investment or not for you, will ultimately depend on the company’s fundamentals, the market environment, and your risk appetite.

SME IPOs are considered risky. Since these companies are new and small in size, they are subjected to higher market risks. Also, instead of SEBI, it is the stock exchange that vets their valuation. SME IPOs are suitable for investors with a high-risk appetite.

Yes, you can sell your SME IPO shares after they have been listed if you are a retail investor. Other investors are usually subjected to lock-in periods.

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