What is the Step by Step Process to Raise funds for SMEs via IPO?

An SME IPO is a process in which a Small and Medium Enterprises company goes through to issue its shares to the public for the first time. It provides an opportunity for SMEs (Small and Medium Enterprises) to raise capital for growth and expansion, and also to become a publicly-traded company. However, the process can be complex and time-consuming, and SMEs need to be aware of the steps involved in raising funds through an IPO. In this article, we will discuss the step-by-step process to raise funds for SMEs via IPO.

Step 1: Preparing for an IPO

The first step in the IPO process for SMEs is to assess whether the company is ready to go public. The SME should evaluate its financial performance, growth potential, competitive landscape, and overall business strategy. It should also ensure that its management team is capable of handling the demands of being a publicly-traded company. Engaging with advisors such as investment bankers, lawyers, and auditors can be beneficial during this stage to evaluate readiness and prepare for the IPO process.

Step 2: Eligibility and Compliance

The SME must ensure it meets the eligibility criteria set by SEBI for listing on SME platforms. These criteria include the post-issue paid-up capital and net worth limits. Additionally, the SME must comply with regulations pertaining to financial reporting, corporate governance, and other legal requirements. It is crucial to engage with professionals who specialize in regulatory compliance to ensure adherence to all necessary guidelines.

Step 3: Appointing Intermediaries

The SME must appoint various intermediaries to facilitate the IPO process. These intermediaries include merchant bankers, registrars, legal advisors, auditors, and underwriters. Merchant bankers play a significant role as they act as the lead manager and guide the SME throughout the IPO process.

Step 4: Financial Due Diligence

To prepare for the IPO, the SME needs to undergo a thorough financial due diligence process. This involves reviewing financial statements, audits, tax records, and other relevant financial documents. The SME should ensure that its financials are accurate, transparent, and compliant with accounting standards.

Step 5: Valuation and Pricing

Determining the valuation of the SME is a critical step in the IPO process. The SME needs to engage with a valuer who will assess the company’s worth and provide a fair valuation. The pricing of the IPO shares is based on this valuation and market demand. The SME and its merchant banker will work together to determine the optimal price range for the IPO.

Step 6: Drafting the Prospectus

The prospectus is a legal document that provides detailed information about the SME, its business operations, financials, risk factors, and IPO offering. The SME, along with its advisors, prepares the prospectus in compliance with SEBI regulations. The prospectus should present accurate and comprehensive information to potential investors.

Step 7:  Filing and SEBI Approval 

Once the prospectus is drafted, it needs to be filed with SEBI for review and approval. The SME must submit the necessary documents, including the draft offer document, financial statements, and other required disclosures. SEBI examines the documents to ensure compliance with regulations, protect investor interests, and maintain market integrity.

Step 8: Investor Roadshow

After receiving SEBI approval, the SME, in collaboration with its merchant banker, undertakes an investor roadshow. This involves presenting the investment proposition to potential institutional and retail investors. The roadshow aims to generate interest, build investor confidence, and secure commitments for the IPO.

Step 9: Final Pricing and Allotment

Based on the investor response and demand generated during the roadshow, the SME and its merchant banker determine the final issue price of the shares. The allotment process follows, where shares are allocated to investors based on their subscription amounts and regulatory guidelines. The SME should ensure a fair and transparent allotment process to maintain investor trust.

Step 10: Listing and Public Trading

Upon completion of the allotment process, the SME’s shares are listed on the designated stock exchanges. The company becomes publicly traded, and its shares are available for trading on the secondary market. The SME needs to fulfill ongoing compliance requirements, such as regular financial reporting, disclosures, and adherence to stock exchange regulations.

In conclusion, the process of raising funds for SMEs through an IPO in India involves several crucial steps. From assessing the company’s readiness for going public to appointing intermediaries, conducting financial due diligence, and drafting the prospectus, each step requires careful consideration and compliance with SEBI regulations. The valuation and pricing of the IPO shares play a vital role in determining the success of the offering. Additionally, engaging with investors through roadshows and finalizing the issue price and allotment are essential for a smooth IPO process. Finally, upon listing on the stock exchanges, the SME must adhere to ongoing compliance requirements.

Embarking on an IPO journey can provide SMEs with significant opportunities for growth and accessing capital from the public markets. However, it is crucial for SMEs to seek professional advice, work closely with intermediaries, and ensure compliance with all regulatory obligations. Conducting thorough due diligence, providing transparent and accurate information to investors, and maintaining investor trust throughout the process are key to a successful IPO for SMEs in India.