The SME IPO is the perfect fundraising platform for the growth and expansion of small and medium-sized enterprises. There are over 633.9 lakh MSMEs (micro, small, and medium enterprises) in India, but are they all eligible for SME IPO? No, of course not. Check if you are eligible for an SME IPO. Prepare your SME first to set the stage for an SME IPO.
In the preparation phase, SMEs prepare for the IPO. A lot of groundwork is required in this phase to clean up the company's financial books, streamline internal processes and operational aspects, align business strategic aspects of the company, create a clear corporate governance framework, and much more. It can take a few months to a year to get everything ready to qualify for an SME IPO. But once you have everything ready, you can bring the IPO for SMEs to the table.
SME IPO Readiness: Get Ready for SME IPO Checklist
Find below the key requirements to be met to become ready for SME IPO on BSE SME or NSE Emerge.
1. Conversion into Public Limited Company
The decision to go public requires to be converted into a public limited company. Regardless of whether you run a sole proprietorship, a partnership, or a private company and are preparing for an SME IPO, you must first convert your company structure into a public limited company.
How to convert from a private company to a public limited company:
- Convene a board meeting to first discuss why the conversion is necessary, what changes will be required in the Memorandum of Association (MoA) and Articles of Association (AoA), and pass a resolution to that effect.
- Conduct a general meeting to pass a special resolution for the conversion, amendments in the name clause of the Memorandum of Association by deleting the word "Private" and amendments in other clauses of the Memorandum of Association and Articles of Association applicable to a private limited company.
- Submit E-Form MGT 14 with copies of the special resolution and copies of the amended memorandum of understanding and articles of association. Form MGT 14 must be filed with the Registrar of Companies (RoC) within 30 days.
- Submit electronic Form INC 27 with a copy of the special resolution, copies of the amended memorandum of understanding and articles of association, minutes of the meeting, and details of promoters and directors to the RoC. Form INC 27 must be filed within 15 days of the special resolution.
- The Registrar of Companies will verify all documents and issue a new certificate of incorporation as a public limited company.
Detailed guide on conversion into a public limited company
Note: A sole proprietorship must first be converted into a limited liability company and can then be converted into a public limited company.
2. Be Ready with Strong Financial Books
Clear and solid financial books are the key to a successful SME IPO. First and foremost, as an SME owner, you should prepare financial statements including profit and loss accounts, cash flow statements, and balance sheets as per the applicable Indian Accounting Standards (Ind-AS). The company must have been operational for at least 3 years. (Learn more about how to calculate the minimum track record).
- Financial statements must be prepared in accordance with the applicable standards and uniform accounting policies applicable for all 3 years.
- You must provide audited restated annual reports for 3 full financial years. The presentation of restated financial statements signifies credibility, financial discipline, and transparency.
For SMEs planning to go public, the preparation of financial books is not enough, the financial statements must also meet the BSE and NSE eligibility criteria for SMEs:
- SME companies must have a positive net worth.
- Net tangible assets: to be listed on the BSE SME platform, SMEs must have a minimum net tangible assets of Rs 3 crore in the immediately preceding financial year before applying for listing.
- Bottomline Check: SMEs must have a positive operating profit (profit after tax) in 2 out of 3 full financial years. In addition, the BSE SME Exchange requires companies to have made profits in the immediately preceding financial year.
- There must be no default in payment of interest and principal on borrowed capital.
3. Capital Restructuring of your Business
The post-issue paid-up capital of an SME cannot exceed Rs 25 crore. Companies exceeding this threshold are listed on the mainboard stock exchanges BSE and NSE. SME owners planning an IPO must therefore take the necessary steps for capital restructuring.
- If required, increase the authorized share capital of the company based on the IPO issue size.
- The right mix of equity and debt in the company is equally important for a successful SME IPO. Even the BSE norms for listing of SMEs (other than financial companies) stipulate that the debt-equity ratio (leverage ratio) should not exceed 3:1. Therefore, necessary measures must be taken to keep the leverage ratio within the limits set by the stock exchange.
4. Strengthen Internal Business Processes and Corporate Governance
Do you have strong internal control systems? If not, you should put the necessary internal processes in place to qualify for an SME IPO. Sound internal operations management is a must for SMEs preparing for an IPO. As an owner, you must first have a solid understanding of your business processes, workflows, technology, and infrastructure to develop a clear idea of what is going on in your business, where your internal strengths lie, and what gaps there are.
- Seek expert advice to identify key weaknesses in internal financial management, record keeping, confidentiality, etc.
- Ensure that the business processes and infrastructure meet the requirements of a publicly listed company.
- Establish a solid IT or digital infrastructure in the company.
- Implement an appropriate corporate governance structure that complies with SEBI listing regulations for board composition, audit committees, code of conduct, etc.
- Companies that have done well with an effective internal control and governance mechanism are ready for IPO. However, SMEs that do not have an internal control system in place may find it difficult to go public.
5. Be ready with a Solid Multi-Year Strategic Plan
Running a profitable SME is not a sign of a successful listing on the SME stock exchange. Instead, as an SME entrepreneur, you need to craft a solid multi-year strategic plan for the growth and expansion of your business.
You need to establish a clear foundation for how your business will succeed. What are the tactics and strategies for business growth, how will you position yourself competitively or how will you differentiate your business from the competition, what will the operational structure look like, who are your customers, and much more.
SMEs with good growth prospects attract investors and are listed on the stock exchange at a good premium.
6. Keep a check on Important Business Documents for Disclosure
Going public is a regulated process and requires companies to submit a list of legal documents for disclosure. Below is a preliminary list of the documents you must keep ready to become an SME IPO-eligible company:
- Certificate of Incorporation: SMEs must be incorporated under the Companies Act 1956 or 2013.
- Memorandum of Association (MoA).
- Article of Association.
- Minutes of the meetings.
- Intellectual property rights: You must check the status of intellectual property (IP) rights, i.e. patents, copyrights, trademarks, if any
- Company’s material contract and agreements.
- Organizational structure of the company, including board members, directors, etc.
- Bylaws Documents.
- Business plans.
- Board resolutions.
- Regulatory and Legal Compliance.
SMEs must comply with the applicable legislation and legal framework. To this end, SME owners must be aware of the legal environment in which they operate and ensure full compliance with it.
If the company has any pending legal dispute, this must be resolved as part of the regulatory approvals. Companies must appoint a company secretary or compliance officer to seek expert advice on legal and compliance issues.
7. Have a Strong Management and Leadership Team
The success of a company depends on how strong its management is. It is therefore important to have the right team. SMEs that have a highly qualified, diversified and experienced team of managers with solid strategies can succeed. These SMEs have the potential to grow into large companies, which boosts investor confidence. They need to hire staff for other key positions, such as finance, legal or regulatory compliance, etc.
8. Additional Requirements
Here are the other requirements to become an SME IPO Ready company:
- Enter into a depository agreement with any depository agencies; CDSL or NSDL.
- Have a functional website of your company.
- There should be no winding up petition against the company.
- The SMEs should not have been referred to the NCLT.
- No regulatory action was taken against the promoters for suspension of trading activity.
- No regulatory action has been taken against the directors.
- The promoters or directors of the Company should not be directors of companies that have been delisted or suspended.
Wrapping up
The IPO of SMEs is the best platform for raising capital for small and medium-sized enterprises. Becoming an IPO-ready company requires a comprehensive process.
SME owners need to do a lot of work, such as preparing and auditing the last three years' financial statements, preparing the required disclosure documents, setting up an appropriate internal control system and corporate governance framework, assembling a suitable team, and much more.
Once all the requirements are met, you can take your company to the next level by going public.
