SME IPO Challenges

Listing on exchange is no doubt a cheerful moment for any small and medium size enterprise (SME) but at the same time, it is challenging too. The SME IPO provides access to capital market to help SMEs to scale and expand operations however, despite numerous listing benefits, SME entrepreneurs desirous to get listed their shares on any SME Platform faces many challenges during the IPO process or even later.

Planning an SME IPO requires a lot of paperwork, preparing and submitting offer documents, obtaining exchange approval, submitting audited financial reports, and due diligence checks. All these IPO activities must be done by complying with specified regulatory standards and norms which put regulatory and compliance challenges for SMEs.

Do you want to list your SME, if yes you must be aware of the critical challenges while launching your SME IPO. SME IPO process requires careful planning for a successful listing.

1. Regulatory challenges

The IPO listing process has certain rules and regulations to be adhere with. Any SME entrepreneur intends to go public via IPO offer must satisfy all the regulatory standards specified by SEBI, BSE, and NSE.

Although the market regulator SEBI has relaxed regulations for SME IPOs compared to mainline IPOs to reduce overall regulatory compliance cost for small business owners. For instance, SME owners need to check their IPO issue eligibility criteria specified in relation to the maximum post-issue paid-up capital, operating history, profitability criteria, positive net worth, and a lot.

Check SME IPO Eligibility Criteria

Also, any SME that found in regulatory misconduct or non-disciplinary action in the last 3 years is not eligible to list their shares on exchange. During the entire process of IPO launch, SMEs must comply with all the regulatory norms and due diligence process like preparation and filing of DRHP and RHP documents to the relevant exchange, getting in-principal approval, and more.

2. Compliance challenges

SME companies going public needs to comply with certain disclosure norms and standards. Although SMEs may already have internal accounting compliance in place but for those who are issuing shares to public must adhere to exchange regulations.

In this respect, SMEs must have required resources to meet all compliance obligations pertaining to financial reporting, necessary disclosures, and corporate governance standards. Even post-listing, listed SMEs have to submit their half-yearly financial statements, annual reports, audit reports, compliance reports, shareholder structure, and other event based disclosures are mandatory.

Once a company becomes a listed SME, it comes under the direct supervision of SEBI and stock exchange. Not just adherence with exchange norms but also companies have to comply with other regulations like Companies Act.

The compliance norms maintains organizational discipline and transparency in the internal business functioning. Non-compliance with regulatory standards can lead to severe penalties and halt brand reputation.

3. Financial challenges

Despite the fact that direct listing on mainboard platform i.e., BSE and NSE is a costly affair than listing on SME platforms, many small and medium size owners cannot afford the expense of listing on low-cost SME exchange (BSE SME or NSE Emerge).

Launching a SME IPO itself has financial constraints as many expenditures are associated with it. The issuer company incurs cost on underwriting fees, merchant banker fees, market maker fees, auditor fees, legal expenses, initial listing fee, annual listing fee, and ongoing compliance expenditures. They also incur expenses on preparing documentations, marketing and advertising, promotional activities, roadshows, travelling, etc.

SMEs intend to go public must carefully examine whether they have sufficient fund and financial resources available to manage the cost or not.

4. Volatile Market

Market is volatile in nature and timing an IPO is of huge importance. When an IPO is launched at an extremely volatile market scenario, it have a direct impact on public demand, investors’ sentiments, IPO subscription, and ultimately affects the success of an IPO.

Therefore, proper market analysis must be done to navigate market fluctuation challenges. Even after securities get listed on exchange, market fluctuations affect SMEs share prices significantly. Thus, SMEs need to be well-prepared for the market ups and downs.

5. Investors Demand for the IPO

Unlike mainstream companies, SMEs going public face challenges to found and attract investors demand to participate in the IPO. And, if the IPO do not get good response from investors, it can result in lower valuations.

Even post SMEs listing, many companies struggle to gain investors interest due to small market capitalization. And, lack of investors demand increases liquidity challenges for SMEs.

Therefore, listed SMEs have to maintain sound relationship with investors by providing them regular updates, disclosures, and through open communication.

6. Other challenges

There are many other challenges encountered by SMEs in the process of conducting IPO.

Merchant bankers play a significant role in an IPO. From preparing groundwork to hiring IPO intermediaries, due diligence compliance check, preparing offer documents (DRHP and RHP), underwriting, marketing the issue, conducting roadshows and market making arrangements, all are done by merchant bankers. Thus, merchant banker assist the issuer company throughout the IPO issue process and selecting the right merchant banker is the key to successful IPO listing. However, it seems quite challenging for SMEs to find the right merchant banker for the IPO launch.

Wrapping it up

SME IPOs are gaining traction in India with more and more SME entrepreneurs are going public to raise funds. However, the process of SME IPO present significant challenges like compliance with necessary regulatory norms, procedures, and exchange rules & regulations.

In addition, attracting investors demand, financial challenges or having inadequate funds to manage the IPO cost or expenses, etc. are the other critical challenges encountered by SMEs.

To overcome all these barriers, SMEs are advised to seek professional experts’ assistance who oversee the entire issue process and ensure regulatory compliance to list the IPO successfully.