Sharekhan Blog

What Is SME IPO?

  • Apr 18, 2024

SME IPOs have a high potential for returns, but investors should conduct thorough research on business fundamentals, growth prospects, and valuations before investing.

Read on to learn key details about the SME IPO process, advantages, and investing considerations.

What is SME IPO?

An SME IPO or Small and Medium Enterprise Initial Public Offering allows an SME to raise capital from public investors by getting their shares listed on a stock exchange. It works similarly to how large companies raise money through IPOs. Once listed, the general public can subscribe to and trade the shares of the SME company on the exchange.

Advantages of an SME IPO

1. Access to Long Term Capital

The biggest advantage of an SME IPO is that it provides access to capital through public markets. The company can use the profits for expansion, marketing, additional working capital needs or general corporate purposes. Moreover, the capital raised is long-term in nature, unlike bank loans that need to be paid back.

2. Enhancing Company Visibility & Reputation

A public listing provides increased visibility and enhances the market reputation of an SME's brand. Institutional investors help improve corporate governance standards. SME exchange listing is also seen as a prestigious step in building stakeholder trust.

3. Rewarding Early Investors

For early investors, an SME IPO offers exit options to redeem their investments. At the same time, it allows promoters to raise capital while retaining operating control.

4. Improved Access to Debt

Becoming a publicly traded company has a positive impact on the debt-raising capability of an SME. Banks and NBFCs lend more easily to listed entities at better terms, given the enhanced transparency and market accountability.

Who Can Apply for SME IPOs?

SME IPOs open up new investment opportunities for a wide range of participants, from wealthy individuals to large institutions:

1. Retail Investors: Investors can find high-growth opportunities to diversify beyond conventional options. The relaxed application size allows even those with modest capital to participate. Retail investors can research and invest in the best SME ipo to invest in for good returns.

2. Domestic Institutions: Venture Capital funds, Mutual Funds, and PMS schemes view SME IPOs as avenues to earn superior returns on client portfolios.

3. Foreign Investors: Foreign VC funds and wealthy NRIs show keen interest, given India's entrepreneurial potential.

4. Merchant Bankers: Investment banks provide underwriting services and earn underwriting commissions and brokerage revenues.

Thus, SME IPOs offer a win-win proposition for both capital-hungry enterprises and investors seeking high-reward alternatives.

Analyzing the Potential of SME IPOs

The concept of SME IPOs first originated in the 1990s but picked up momentum in subsequent years as supportive regulations evolved. Some statistics pointing to the promise held by SME IPOs:

1. Funds Raised and Returns: As of September 2022, 393 enterprises have raised INR 7,200 crores through SME IPOs. Investors generated up to 28 times returns between 2016-2021, significantly higher than large-cap stocks.

2. Issue Oversubscriptions: The average oversubscription of SME IPOs was 29 times in 2022, indicating solid investor appetite. Many issues see bids exceeding availability even 100 times.

3. Listed Firms' Growth Trajectory: Quite a few SMEs witnessed exponential growth after public listings. The market cap of several firms rose from INR 5-10 crore to over INR 4,000 crore within 2-3 years of listing.

The numbers testify that SME exchange platforms are fast emerging into a preferred gateway for young firms to join the big league while rewarding stakeholders with wealth-creation opportunities.

Factors to Consider While Investing in SME IPOs

While SME IPOs hold tremendous potential, investors need to assess certain parameters, like any other stock investment options:

1. Business Fundamentals: Assess the company's financial track record, quality of earnings, cash flows and balance sheet strength.

2. Industry Prospects: Favorable sector dynamics and high growth potential increase wealth creation opportunities.

3. Valuations: IPO should be available at reasonable valuations compared to industry peers.

4. Use of Proceeds: Analyze if capital raised would help expand productive capacities to grow future cash flows.

5. Risk Factors: Account for any significant red flags related to overdependence on clients, pending litigations, etc. Impacting future profitability

While risk levels are undoubtedly higher, investors need to balance risk-return tradeoffs based on research objectively.

The Listing and Trading Lifecycle of SME IPOs

Like any other IPO, the public issue process for an SME IPO involves several clear-cut steps:

1. Pre-issue Activities: Advisor appointment, documentation preparation, securing necessary approvals.

2. Issue Period Activities: Conducting investor roadshows and marketing, price-band finalization, and allocation of shares.

3. After-Issue Activities: Facilitating listing and trading on the exchange, ensuring post-issue compliance.

To understand this further, let us break down the lifecycle into key phases:

1. getting merchant bankers on board

2. filing draft offer document with NSE/BSE SME IPO

3, obtaining approval to open the public offer.

4. opening of the issue for anchor investors

5.issue period for general investors up to issue closure.

6. receiving requisite subscription amounts

7. finalization and allotment of shares

8. applying for listing and trading permissions

9. debuting on exchange for trading

By providing multiple windows for entry and exit, SME exchange platforms stimulate an efficient capital market system for high-potential small companies in India.


Small businesses now have an exciting new way to grow, and investors have an opportunity to invest in these promising ventures. SME exchange platforms are gaining popularity as a way for small businesses to raise money from the public and for investors to discover high-growth companies. With the right government rules in place, SME IPOs could be a great opportunity for everyone involved.

Team Sharekhan
by Team Sharekhan

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