Can a proprietorship or partnership firm go public via SME IPO? Well, the answer is “ Yes” but it requires a change in their business structure. Partnership or proprietorship firms after converting their corporate structure to a public limited company, can raise funds from the public via offering IPO.
Let’s dive in further to know how a proprietorship/partnership firm can make a public issue of shares and list on the SME exchange.
1. Convert proprietorship/partnership to a Public Limited Company
Proprietorship/partnership firms seeking listing on SME exchange are first required to convert to a public limited company.
Why conversion is required?
Each of these business structures – partnership and proprietorship are not considered separate legal entities. However, as per the SME exchange listing criteria, companies seeking listing must be a limited company incorporated under the Companies Act.
Now, the transition from a partnership or proprietorship firm into a limited company requires two steps to follow;
- Converting proprietorship or partnership into a private limited company:
Before applying for conversion, ensure to fulfill the following requirements:
- A minimum of two directors are required (one can be a promoter) to form a private limited company.
- All the directors must obtain a Director Identification Number (DIN).
- To form a private limited company, your company must have at least two shareholders.
- The minimum authorized capital required for the conversion is Rs 1 lakh.
- Conversion of a Private Limited Company into a Public Limited Company:
Below are the prerequisites to be satisfied for the change in business form to PLC:
- The minimum paid-up capital required for conversion is Rs 5 lakh.
- The company must have at least 7 shareholders for conversion into a PLC.
- A minimum of 3 directors are necessary.
Know more on how to convert into a public limited company
Proprietorship concerns and partnership firms, following the conversion into a public limited company, can consider raising funds for growth and expansion through SME IPO.
Promoters have to file a Memorandum of Association (MoA) and Articles of Association (AoA) with the Registrar of Companies (RoC) to register the newly formed company under the Companies Act.
The conversion process may take nearly 1.5 to 2 months.
2. Conversion doesn’t mean You are ready for SME IPO. Do Pre-IPO Readiness Assessment
Launching an SME IPO requires extensive preparation, adherence to regulatory and compliance norms, good governance structure, and much more.
So, proprietorships or partnership firms after the transition to a Public Limited Company do not guarantee IPO readiness. Promoters must check key factors to assess whether it is the right time to take their company public;
- Must have fully audited financial results for the last 3 years.
- Capital restructuring may be required, as the company’s post-issue paid-up capital cannot exceed Rs 25 crore for SME IPO.
- Make sure to have an effective internal control mechanism with a clear reporting mechanism
- Maintain good corporate governance structure complying with exchange requirement
- Be ready with the required documents for disclosure to exchange
- Must have a sound strategic growth plan with clearly visible business growth
Check 10 Key factors before planning an SME IPO
3. Proprietorship/Partnership Firms must have three Years of Track Record
BSE and NSE SME exchange eligibility criteria clearly state that any company desirous of listing must have at least 3 years of operational track record.
Now, the question is how proprietary and partnership firms qualify these criteria. Are they required to operate for 3 years after being converted to a public limited company? No, combined operational history, before and after conversion, will be counted for 3 years to meet the SME exchange criteria.
Along with the 3-year condition, the applicant company seeking listing must have at least one full financial year. It means that as a company, you must be operated for 1 year and have audited financial results for 1 full financial year.
So, any proprietary and partnership firm supposed to have operated for 2 or more years, later turned into a public limited company and operated for atleast a year, satisfies the 3 years of track record criteria, and can go for SME IPO.
4. Profitability Criteria for Proprietorship and Partnership Firms
There is no difference in the profitability criteria for proprietorship, partnership firms, and LLP planning for IPO.
Any company seeking listing must be profitable in any 2 out of 3 financial years. Additionally, proprietary and registered partnership firms seeking listing on BSE SME must have operating profit for one full financial year preceding the IPO application date.
For profitability criteria, operating profit (earnings before interest, depreciation, and tax) will be considered.
5. Net Worth requirements for proprietary firms and partnership
SMEs planning to go public must have a positive net worth.
Proprietorship and partnership firms seeking listing on the BSE SME platform must have Rs 1 crore of minimum net worth in 2 preceding full financial years.
When a public limited company intends to bring IPO and is subject to conversion of proprietorship/partnership or LLP, these companies must have Rs 1 crore of net worth for 2 preceding financial years.
Ensure to fulfill the other criteria for SME listing about net tangible assets and other financial metrics.
6. Comply with Other Regulatory Requirements
Proprietorship firms and partnerships intending to get listed on the SME platform must comply with other listing requirements;
- The company must have at least 25% public shareholding.
- The company should have a fully functional website.
- No winding-up petition should be filed against the company.
- No disciplinary action should be taken against promoters or the company.
- 100% of the company’s shares must be in dematerialized form.
