Will the listing of SMEs become difficult?

Over 150+ Small and Medium Enterprises (SMEs) listed in 2023 and raised over Rs 4,200 crore. In 2024, in less than five months, nearly 100 IPOs have gone live. With the rise in the SME IPO count, regulators may have to revisit the listing process to safeguard investors' interests. The question is - Will the SEBI make changes to the listing process? In this article, we understand SMEs and then try to answer the question - will the listing become difficult?

Who are SMEs?

SMEs play a critical role in the country's economic development. They are defined based on their investment in plant and machinery or equipment, as well as annual turnover, and they contribute significantly to employment, exports, and GDP. The criteria for classifying SMEs in India were revised in June 2020 to include turnover and investment parameters.

According to the revised classification by the Government of India under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, SMEs are categorized as follows:

Micro Enterprises

Investment in plant and machinery or equipment up to Rs 1 crore
Annual Turnover: Up to Rs 5 crore

Small Enterprises

Investment in plant and machinery or equipment between Rs 1 crore and Rs 10 crore
Annual Turnover: Between Rs 5 crore and Rs 50 crore

Medium Enterprises

Investment in plant and machinery or equipment between Rs 10 crore and Rs 50 crore
Annual Turnover: Between Rs 50 crore and Rs 250 crore

Listing process of SMEs

The process of listing an SME (Small and Medium Enterprise) on a stock exchange can vary depending on the specific exchange and regulations of the country. However, here's a general breakdown of the key steps involved:

Meet listing requirements: The SME needs to meet certain criteria set by the exchange related to financial performance, track record, and corporate governance.
Due diligence: The merchant banker conducts a thorough review of the SME's financial records, business operations, and legal standing.
Merchant banker selection: The SME appoints a merchant banker who acts as a financial advisor throughout the process.
Drafting the IPO prospectus: The merchant banker works with the company to prepare a detailed document outlining the company's business plan, financials, and IPO details. This document is called a Draft Red Herring Prospectus (DRHP) or Draft Prospectus.
Submission to authorities: The DRHP is submitted to the stock exchange and relevant regulatory bodies for review and approval.
Exchange and regulatory review: The exchange and regulatory bodies will review the DRHP to ensure it meets all disclosure requirements and the company adheres to listing regulations. This may involve site visits, meetings with management, and potential revisions to the document.
In-principle approval: Once satisfied, the exchange will grant an in-principle approval for the IPO to proceed.
Marketing the IPO: With in-principle approval, the company and merchant banker can begin marketing the IPO to potential investors. It involves roadshows, presentations, and advertising to attract investor interest.
Pricing and final prospectus: The final offer price for the shares is determined based on investor demand. A final prospectus with the final pricing details is then filed.
IPO launch: The IPO opens for subscription by investors on a predetermined date. Investors can subscribe to purchase shares at the offer price.

New rules of the listing process by SEBI

According to sources, SEBI and exchanges will tighten rules for public offers of small and medium enterprises. Recently, there were complaints of misuse of a separate listing platform introduced in 2012 to enable small businesses to access the capital markets. Here are a few things that may change:

Currently, there is no minimum issue size prescribed, but companies listing on the platform are required to have a post-issue capital base of Rs 25 crore. The regulator is considering raising the minimum size of such public offers to Rs 30 crore - Rs 50 crore ($3.59 million-$5.99 million). The minimum offer size will put some checks as it will ensure only the serious companies are accessing the capital markets. It will safeguard the interests of investors.

Benefits of listing for SMEs

Here are some of the benefits of listing for SME's:

Equity Financing: Listing allows SMEs to raise capital through the sale of equity shares, which can be used for expansion, debt reduction, or other business needs without the immediate obligation to repay.

Credibility and Trust: Listing is often perceived as a mark of credibility and financial stability, as listed companies must comply with stringent regulatory requirements and disclosure norms.

Tradability: Shares of listed SMEs are traded on the stock exchange, providing liquidity to existing shareholders. It can make the company more attractive to investors who value the ability to buy and sell shares easily.

Benchmarking: SMEs can be compared with their peers on a public platform, allowing for better performance benchmarking and industry comparison.

Structured Growth: The process of listing and adhering to regulatory requirements can instill better corporate governance practices, transparency, and accountability.

Before you go

SMEs are one of the largest employers in India, providing jobs to a significant portion of the workforce. They play a crucial role in reducing unemployment and underemployment. Not only this, it contributes significantly to India's Gross Domestic Product (GDP). They are vital in fostering economic growth and development, particularly in rural and semi-urban areas.

The stricter listing regulation will only help the complete ecosystem and, in the long run, will benefit the economy and the companies. Investors should monitor for the changes in the listing process for SMEs - SEBI is expected to make changes in the second half of the year.