SME owners who are planning to raise funds from the BSE SME exchange must first check whether they meet the exchange eligibility criteria or not. BSE SME exchange has clearly defined the SME IPO eligibility criteria pursuant to operational track record, minimum net worth, net tangible assets, profitability requirements, and other aspects.
Let’s discuss 10 key requirements for listing on the BSE SME exchange in detail;
1. SME Incorporation
To list on the BSE SME, the company must be incorporated under the Companies Act 1956.
SME owners who are running a sole proprietorship or partnership firm must first convert the business structure into a Public Limited company to be eligible to raise funds through the BSE SME platform. Know more.
2. Post Issue paid-up capital
Listing on SME exchange requires companies to have post-issue paid-up capital of not more than Rs 25 crore. Post-issue paid-up capital is the total paid-up capital of a company after the IPO is issued.
If the paid-up capital exceeds the limit of Rs 25 crore, the company has to list on the mainboard exchange.
3. Net Worth
As per the BSE SME exchange criteria, SMEs must have at least Rs 1 crore net worth for 2 preceding full financial years.
If an SME is formed through the conversion of a proprietorship or partnership or LLP firm then also the company must report the net worth of Rs 1 crore for 2 preceding full financial years.
Net worth is the sum of total assets net of total liability a company owes. Net worth will be computed as per the SEBI ICDR Regulations.
4. Net Tangible Assets
The minimum net tangible assets required is Rs 3 crore.
Yes, SMEs desirous to list on BSE SME must report net tangible assets of at least Rs 3 crore or more as per the audited financial statements of the preceding financial year.
Earlier, it was Rs 1 crore but in November 2023, BSE revised the limit to Rs 3 crore.
5. Company age or minimum Track Record
SMEs seeking to list IPO should have operational existence for at least 3 years. It means that the company must have been operating for the last 3 years or more.
If a company is formed under conversion from Sole proprietorship/ partnership / LLP to a public limited company, then the track record together before and after conversion will be counted for 3 years. Provided that the applicant company seeking listing must have audited financial statements for one full financial year.
If an SME does not have a 3-year track record, but the project for which IPO is proposed is financed by NABARD, SIDBI, Banks, or financial institutions except co-operative banks are even eligible for BSE SME IPO listing. Such companies are required to have 1 year of track record and provide 1 full financial year audited statements for listing.
6. Profitability Criteria for listing on BSE SME
Do SMEs require profits from operations to raise funds via SME IPO?
Yes, companies having a track record of 3 years but failing to meet the profitability requirements do not qualify for BSE SME IPO. This is because companies must be on a profitable operating basis to bring SME IPO.
The exchange criteria of BSE SME platform requires SME owners/promoters to meet the below conditions to satisfy profitability criteria;
- Applicant company/ proprietorship / LLP / partnership firm should have operating profit in the business.
- Out of three audited financial years, SMEs must have at least Rs 1 Crore operating profit (EBITDA) from operations for any 2 out of 3 latest financial years before the IPO application is filled.
- The applicant entity must have profits from operations for one full latest financial year preceding the IPO application date.
- The IPO issuer companies where the project is funded by NABARD, SIDBI, Banks, and other financial institutions, should have profits for one full latest financial year.
Note: Operating profit means earnings before interest, depreciation, and tax.
7. Leverage Ratio
The leverage ratio of the company is used to examine the use of debt and equity capital to finance business operations.
- As far as companies are concerned about the leverage ratio, it should not be more than 3:1. Thus, SMEs maximum debt funding in an SME can be 3 times that of equity capital used.
- Finance companies are provided with relaxation and may have a leverage ratio of more than the said limit.
- BSE SME platform not only specifies the leverage ratio but also states that the applicant company, its promoters, or promoting and subsidiary companies should not have defaulted in the timely payment of interest and/or principal.
8. Disciplinary Action
- The promoters of the company should not have been suspended from trading activities by the stock exchange.
- No regulatory action for suspension of trading activities has been taken against the companies promoted by the promoters.
- Promoters and/or directors of the SME company seeking listing should not be the promoters or director of a compulsory delisted company. It is because exchange delist companies or suspend any trading activities due to non-compliance.
- The director or promoter should not be debarred or disqualified by any other regulatory authority.
9. Name Change
If the company has changed its name in the last one year, at least 50% of the total revenue for the latest 1 full financial year must be earned from the business activities under the new name.
It means that the new business name has contributed to 50% of total revenues in the preceding 1 full financial year on a restated and consolidated basis.
10. SME IPO Offer for Sale
If promoters are selling their shareholding in the company, the following rules will be applicable:
- SME IPO via OFS is restricted to a maximum 20% of the IPO issue size.
- Selling shareholders cannot sell more than 50% of their shareholding in the company.
11. Restrictions on use of funds raised through SME IPO
- The issuer company cannot use funds raised to repay promoter loans.
- Funds to be used to meet general corporate purposes is capped at 15% or Rs 10 crore, whichever is lower.
12. Other Requirements
- The applicant company should have a functional website.
- All of the promoter’s shareholding must be in the demat form.
- Promoters minimum contribution is locked in for 3 years, and 50% of excess of minimum promoter contribution is locked in for 1 year and remaining 50% is locked for 2 years.
- Prior to listing, SME should enter into depository agreements with NSDL or CDSL to facilitate trading of shares in the dematerialized form.
- The company’s promoters should not be changed in the preceding one year from the date of the IPO application filed to the BSE SME.
- he board composition must comply with the Companies Act 2013.
- SMEs desirous of listing IPO should not have been referred to NCLT under IBC.
- No winding-up petition was filed against the company.
