Small and Medium Enterprises (SMEs) are the backbone of India’s economy. They contribute significantly to GDP, generate employment, and drive innovation. But when it comes to scaling operations, one of the biggest roadblocks SMEs faces is access to capital.
That’s where SME IPOs come in — a powerful tool that helps promising small businesses raise funds and gain market visibility. However, the journey from a private business to a publicly listed company is complex and tightly regulated. And guiding SMEs through this transition is the job of a Merchant Banker.
In this blog, we’ll unpack:
- What an SME IPO is
- The regulatory framework around it
- The indispensable role played by a Merchant Banker
- Why an experienced expert is non-negotiable in this process
📌 What is an SME IPO?
An SME IPO refers to the public issue of shares by a small or medium-sized enterprise listed on platforms like NSE Emerge or BSE SME. These platforms are designed to cater to businesses that may not meet the eligibility criteria of the main board but have the potential to grow and need access to equity capital.
🧾 Regulatory Framework for SME IPO
The SME IPO process in India is governed by SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (as amended from time to time). Some key requirements include:
- ✅ Eligibility Criteria:
- Net tangible assets of at least ₹1.5 crore for the previous 3 years.
- Net worth of ₹1 crore.
- Track record of distributable profits in at least 2 out of the last 3 years.
- Minimum post-issue capital should be ₹1 crore and maximum ₹25 crore.
- The company must have a website.
- ✅ Other Regulatory Highlights:
- The issue is 100% underwritten, and Merchant Banker(s) must underwrite at least 15%.
- Minimum application size for investors: ₹1,00,000.
- No grading requirement, but Due Diligence is critical.
- Company must enter into a tripartite agreement with NSDL, CDSL, and a Registrar.
🧑💼 Role of a Merchant Banker in SME IPO
A Merchant Banker isn’t just a regulatory requirement – they are the strategic partner steering the ship.
Here’s how they add value:
- Feasibility Assessment & Pre-IPO Readiness: Before filing anything, a Merchant Banker assesses whether the company is actually ready to go public. If the business isn’t IPO-ready, they guide the promoters on what needs to be fixed. This includes reviewing:
- Financial strength
- Governance structure
- Legal compliance
- Growth potential
- Promoter integrity
- Due Diligence & Compliance
- SME IPOs require extensive documentation and validation:
- Audited financials
- Material contracts
- Litigation history
- Tax compliance
- Merchant Bankers coordinate with CAs, CSs, lawyers, and the company’s management to ensure every box is ticked. This protects not only the company but future investors too.
- SME IPOs require extensive documentation and validation:
- Drafting the DRHP & Coordination with SEBI/Exchange
- They are responsible for preparing and submitting the Draft Red Herring Prospectus (DRHP).
- This is a detailed document that outlines the company’s background, financials, risk factors, and business model.
- Post submission, they handle Q&A with the exchanges and ensure all clarifications are addressed until the final approval is received.
- Valuation & Issue Structuring
- This is where experience counts. A good Merchant Banker will:
- Help decide the right valuation band
- Structure the issue size
- Recommend appropriate timing and pricing
- Ensure alignment with current market sentiment
- Their objective is to balance promoter expectations with investor appetite.
- This is where experience counts. A good Merchant Banker will:
- Underwriting & Marketing: They not only underwrite the issue (providing confidence to the exchange and regulators) but also plan and execute the roadshows, investor meetings, and marketing strategies to generate interest in the IPO. This includes:
- Identifying anchor investors
- Preparing pitch decks
- Media handling and public relations
- Post-IPO Support
- Even after listing, Merchant Bankers provide support in:
- Monitoring use of IPO proceeds
- Ensuring compliance with listing obligations
- Assisting in migration to the main board after meeting criteria
- Even after listing, Merchant Bankers provide support in:
📍 Why You Need an Expert, Not Just a consultant
Listing an SME is not just a form-filling exercise. It’s a transformation — financial, cultural, and strategic. Only a Merchant Banker with deep market understanding, regulatory knowledge, and practical experience can handhold a company through:
- Regulatory pitfalls
- Investor queries
- Market timing decisions
- Crisis management (if any issue arises mid-way)
Several SMEs fail to get listed or see poor response due to poor documentation, over-ambitious valuations, or lack of investor trust — problems that could be avoided with the right guidance.
✅ Conclusion
SME IPOs offer a unique opportunity for small businesses to unlock their next growth phase — but success lies in execution. The Merchant Banker plays a pivotal role in shaping this journey, not just as a regulator but as a strategic advisor.
If you’re an SME promoter considering listing, choose your Merchant Banker as carefully as you’d choose a business partner — because in many ways, that’s exactly what they become.
Need help assessing your IPO readiness?
As finance and compliance professionals, we help SMEs structure their listing roadmap with practical, hands-on expertise. Let’s have a conversation.
Manoj Prem & Associates
📞 Contact Us: +91‑9873736779
📧 Email: info@manojpremassociates.com
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