By Sangeeta Lakhi &
Sulakshna Sinha

In continuation of our first
article, we mentioned that SME listing provides benefits to companies and investors, such as providing an exit route to private equity investors as well as liquidity to the ESOP holding employees. Listing pre-supposes good corporate governance, which results in sustainability and helps generate an independent valuation of the company.

In this article, let us tell you about the requirements to list on the SME platform and the disclosures to be so made.

Listing requirement for SMEs on SME Exchanges

A company desiring to list on the SME platform must first and foremost be a limited company and have a post issue paid-up capital of not more than Rs.25,000,000, although companies with post issue paid-up capital between Rs.100,000,000 and Rs.250,000,000 have an option to list either on the main board or on the SME platform.

To induce companies to list on the SME platform, the BSE SME and NSE Emerge have relaxed the listing requirements, compared to that of a main board IPO. The essential eligibility criteria for companies desiring to list of the SME platform is captured in the following table:


In addition to the above essential criteria, these companies must have a website, dematerialised trading and there should be no change in the promoters holding in the preceding one year. These companies must make disclosures as to any regulatory or disciplinary action, defaults, litigation, and whether they have been declared sick.

Disclosures to be made at the time of filing for listing

Other than the eligibility criteria, the SEBI treats an SME IPO on the same footing as a main board IPO. SME IPOs must comply with the ICDR Regulations and the offer document must contain information material to the company, such as business, risks involved, industry, objects of the offering, management, financial information, litigation and such other information. The shares of an SME company must trade in a minimum lot size of Rs.100,000 and such companies must appoint a market maker.

Trading norms in SME Stock Exchanges

SME IPOs typically involve applications in excess of Rs.100,000 which is quite high when compared to Rs.14,000 – Rs.15,000 for mainboard IPOs. This high entry barrier is not just limited to initial allotment of shares, but is also applicable during subsequent trading in these shares.

In other words, an investor cannot buy or sell in fractions of lot size, which makes these stocks highly illiquid. This is different from mainboard IPOs where the concept of lot size is limited to primary market only and subsequent trading can happen in multiples of one share.

Unlike IPOs on the mainboard exchanges where market regulator SEBI plays an active role right from vetting prospectus to giving observations, SME IPOs are mostly managed by stock exchanges.

SMEs are usually very early in their life stages when they hit the primary markets. This means that investors get a chance to pick potential multi baggers fairly early in SME IPOs but this seeming advantage comes with the inherent downside of losing money in offers where fundamentals aren’t strong or business deteriorates in future.

While the SME IPOs enjoy certain relaxations, we must not forget that these companies will want to migrate to the main board in 2 years. At that time they may want to raise further capital and the SME prospectus will form a base for such fund raise. These companies must ensure that their disclosure, diligence and prospectus is no less compliant than a main board IPO and the lawyers and merchant bankers must assist the companies in such objective.

Sangeeta Lakhi is Partner and Sulakshna Sinha, Head of Department – Domestic Capital Market, Rajani Associates.


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