Looking at the immense growth of SME IPOs with strong subscription figures, growing levels of investor participation, and stunning returns, more and more SME promoters are now looking to take their SMEs public. However, it is not as easy as it seems, not only regulatory compliance but also many factors affect SME IPO success. A successful SME IPO requires promoters to follow a well-thought-out approach.
Are you looking to bring your SME IPO on the BSE or NSE SME Exchange? If yes, here are the proven strategies entrepreneurs must follow to successfully list your SME IPO.
1. A successful SME IPO requires Extensive Preparation
No surprise, planning for an SME IPO requires extensive preparation. Promoters who want to go public to raise funds need a lot of groundwork to get ready for SME IPO and successfully launch the issue in the primary market.
- Be ready with all the required documents and audited financial statements.
- Make sure that financial statements are accurate and present a true picture of your business.
- Show key financial metrics such as revenue and profitability growing consistently.
- Your financial results must meet the SME exchange’s eligibility criteria.
- Your SME must have a unique value proposition for competitive positioning.
2. Build and Maintain Data Room
Data is the key. The main requirements to take SMEs to the public to raise funds require SME entrepreneurs to be ready with all the documents. So before going public, build a strong data room where you have the complete set of documents for regulatory approval.
An indicative list of documents required for SME IPO are as follows:
- Material business agreements with suppliers and customers.
- Partnership Contracts.
- Property paper whether owned by the owner or office space on lease or rent.
- Memorandum of Association.
- Article of Association.
- Certificate of Incorporation.
- Name change certificate, if applicable.
- KYC documents of promoters and directors – PAN Card, passport, address proof, etc.
- Litigation history or lawsuits against the company or promoters with pending litigation.
- Intellectual Property Rights (IPR) – Copyright, Patent, Trademark, etc.
- Shareholder and board resolution approving the IPO relevant matters.
- Audited financial statements for the last 5 years along with interim results.
- Market research and industry reports.
- Management and employee contracts.
- Board composition and committee charters – Audit Committee, Compensation Committee, etc.
3. Engage Professionals Advisors to Seek Assistance
Many intermediaries are involved in the SME IPO issue process, from merchant bankers to legal counsel, statutory auditors, financial advisors, registrar, and more.
Merchant banker or investment firms plays a vital role in successful SME IPO because they guide SME promoters from the preparation phase to the final listing on the exchange. They conduct due diligence assessments, assist SMEs in regulatory compliance, prepare IPO offer documents and prospectus, and help promoters hire other intermediaries. So, you must do background checks and analyze the lead manager’s experience and performance of past SME issues to hire the right merchant banker. Know More
SME IPO Lead Manager Performance Report
Financial advisors, investment bankers, and legal counsel delve into industry forecasts, financial projections, business valuation, and process validation. So, getting expert assistance from professionals helps to bring your SME IPO at ease and significantly increases the chance of IPO success.
4. Implement Robust Corporate Governance
Effective governance practices ensure that the SME is operating in the best interests of stakeholders, customers, the public, investors, and others.
- Establish the right team of board of directors with minimum independent members to bring diversified experience and knowledge and add value to your company.
- Have a sound internal control mechanism in place.
- Establish robust governance practices to maintain transparency and accountability in all business operations.
5. Develop a Solid Business Growth Plan
For SMEs preparing for IPO, founders must be ready with an incredible business growth story. What investors look for before subscribing to an SME IPO is business growth traction, and to convince them, you must outline the following:
- Articulate a solid growth plan with impressive future growth strategic initiatives.
- Showcase to investors how you will use the IPO proceeds to drive value and growth.
- Make sure that your growth plan is achievable in terms of numbers.
Your growth plan must show conviction in future growth prospectus to attract maximum investors visible in a high level of subscription and profitable listing on SME Exchange.
6. Be Compliant with Legal and Regulatory Framework
SEBI and SME exchanges impose various legal and regulatory requirements for launching an SME IPO on the board. Here is a checklist of a few essential compliance requirements for SME IPO:
- Submission of audited Annual Reports.
- Certificate of Incorporation, Memorandum of Association, and Article of Association.
- Compliance with industry-specific laws and regulations.
- Submitting due diligence report.
- Be transparent in disclosing material business risks and litigation history.
- Conduct a comprehensive due diligence check for regulatory compliance and identifying risks.
Even after IPO listing, SMEs are subject to various ongoing compliance requirements such as submission of half-yearly and annual financial results, shareholding patterns, reporting material events and corporate announcements, and more. So, as a promoter, you must be aware of all the regulatory requirements and ensure full compliance with them. Also, keep a regular check on changes in applicable regulations.
Explore the Regulatory Framework for SME IPO (Link)
7. Realistic Valuation and IPO Pricing
Pricing an IPO is a big decision and considerably affects SME IPO success. The SME IPO issuer company in consultation with the lead manager and financial advisors values their business. Various methods are available to value your company - discounted cash flow (DCF) method, earnings multiple method, net assets method, and more. Whatever method you choose for business valuation, the most important thing is correct and realistic valuation so that your SME neither gets undervalued nor overvalued.
The business value must reflect the true worth of your company and future growth prospectus. Big investors - Qualified Institutional Investors (QIIs) and Non-Institutional Investors (NIIs) check for valuation metrics (price-to-earnings ratio, price-to-book value) before applying for the SME IPO. If the prices are too high, investors will not be interested in bidding for the IPO, while if you undervalue your business, you will dilute more equity stake to raise the required funds. So, make sure to have a realistic and justified valuation to fix the right price.
8. Going Public at the Right Time
Market entry for SME IPO is a crucial factor for IPO success. Before promoters take SMEs public, they must assess market conditions and investors' sentiments. Not only the market scanning, but also industry-specific challenges & risks, and macroeconomic factors are to be analyzed to examine investors' sentiments towards the public issue. Market analysis helps SME owners to choose the right time to go public.
Why market scanning is important? (Link)
9. Foster Investor Engagement
Institutional investors serve as a catalyst for IPO success. Because when the IPO gets subscribed heavily by institutional investors, it encourages retail participation. During the SME IPO process, SME entrepreneurs conduct roadshows and meet with investors to educate them about their business performance and growth potential. As a promoter, you must take all necessary steps to attract more and more investors to bid on an IPO.
Building sound relationships with investors is crucial for a successful IPO through regular communication and providing timely updates about business performance and milestones achieved.
10. Manage Liquidity Post Listing
SME promoters should not only be concerned about profitable listing but also managing liquidity post listing is important to stabilize share prices.
- Must ensure to maintain adequate float of shares in the secondary market after the SME get listed on exchange.
- Have the right market banker for market-making arrangements to maintain liquidity. SEBI mandates it for all SME issues to have market making arrangements for at least 3 years post IPO listing.
