SME IPO Advisory

Under Regulation 229 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations), a company seeking listing on an SME exchange must have a post-issue paid-up capital not exceeding Rs 25 crore. The company must have been incorporated for at least two years and must have distributable profits in two of the preceding three financial years, or must have a net tangible asset value of at least Rs 3 crore in each of the preceding three years per Regulation 229(2). Track record requirements include a minimum of three years of operations under the same management, and the company must have a positive net worth. NSE Emerge additionally requires that the applicant company must not have been referred to NCLT or wound up proceedings under the Insolvency and Bankruptcy Code 2016.

Under Regulation 253 of the SEBI ICDR Regulations 2018, an SME IPO must result in at least 50 allottees post-issue, which is considerably lower than the 1,000-allottee minimum for a mainboard IPO. The minimum application and trading lot size for SME IPOs is Rs 1,00,000 (one lakh rupees) per Regulation 244(1)(c), making SME IPOs accessible only to a narrower investor base compared to mainboard issues. The issue must be underwritten 100%, with the merchant banker underwriting at least 15% of the total issue size on its own books as per Regulation 246(1). Allocation methodology follows a proportionate basis for Non-Institutional Investors and Retail Individual Investors, with no separate QIB category unless the issue exceeds a threshold.

The Draft Red Herring Prospectus (DRHP) for an SME IPO must include audited financial statements for the last three financial years prepared under Indian Accounting Standards (Ind AS) as notified under the Companies (Indian Accounting Standards) Rules 2015, or IGAAP if the company is below the Ind AS threshold. An accountant's report as specified in Schedule VI of the SEBI ICDR Regulations 2018 must be included, certified by the statutory auditor who must be a peer-reviewed CA firm empanelled with the Institute of Chartered Accountants of India. If the last audited financials are more than six months old at the date of filing, limited-reviewed stub period financials must be included under Regulation 26(4). A certificate on the statement of tax benefits available to the company and its shareholders under applicable provisions of the Income Tax Act 1961 must also be included.

Post-listing, an SME company must comply with the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR), albeit with relaxed requirements under Regulation 15(2), which exempts SME-listed companies from several provisions applicable to mainboard companies, including mandatory formation of a nomination and remuneration committee and a stakeholders' relationship committee. Half-yearly financial results (not quarterly) must be submitted to the stock exchange under Regulation 33(3)(b) within 60 days of the half-year end. Continuous disclosures of material events under Regulation 30, insider trading compliance under the SEBI (Prohibition of Insider Trading) Regulations 2015, and annual report submission within 21 days of the AGM under Regulation 34 remain fully applicable. Migration to the mainboard is compulsory once paid-up capital exceeds Rs 25 crore, triggering full LODR compliance.

Under Regulation 7(1)(e) of the SEBI ICDR Regulations 2018, proceeds from an SME IPO may be utilised for general corporate purposes, but the amount so allocated cannot exceed 25% of the total amount raised in the issue. All utilisation of IPO proceeds must be in accordance with the objects of the issue as stated in the prospectus, and any deviation requires prior approval of shareholders by a special resolution and disclosure to the stock exchange under Regulation 32(4) of the SEBI LODR Regulations 2015. The company must appoint a monitoring agency (typically a scheduled commercial bank or a public financial institution) if the issue size exceeds Rs 100 crore under Regulation 41 of the SEBI ICDR Regulations 2018. Quarterly monitoring reports on fund utilisation must be submitted to the audit committee and the stock exchange.