An initial public offering (IPO) is not just a company’s first step into the public markets; it is a leap into the financial world, opening up new avenues for capital and expansion. There are two main types: mainboard IPOs and SME IPOs, each of which operates at different levels of the corporate hierarchy.
The segmentation is pretty clear, mainboard IPOs are the big leagues, with substantial issue sizes, while SME IPOs cater to the more modest ambitions of small and medium-sized enterprises.
But size is not the only variable, there is a whole spectrum of differences involving paid-up capital limits, allotment minimums, IPO prospectus scrutiny process, underwriting commitments, application sizes and even market-making dynamics.
What is a Mainboard IPO?
Imagine: a privately owned entity that was earlier accessible only to select investors is now offering a share to the general public through an IPO on major exchanges like NSE or BSE. To qualify, these companies require post-issue paid-up capital of at least ₹10 crore, no small feat.
Often, a premium is charged to existing private investors, effectively monetizing the transition from private to public. It’s a grand unveiling, unveiling a new era of public trading, maximizing investment returns in the process.
Eligibility Criteria for Mainboard IPOs
The Securities and Exchange Board of India (SEBI), the gatekeeper of India’s financial markets, has laid down the exact eligibility criteria:
Profitability Route (Entry Norm I):
- The company must show net tangible assets of at least ₹3 crore in the last three years, and importantly, not more than 50% of it must be lying idle in the form of cash or cash equivalents.
- Must have a strong operating profit (pre-tax) of ₹15 crore in any three of the last five financial years.
- For companies rebranding themselves, revenues generated under the new name must be at least 50% of the previous year’s total.
- The issue size cannot be more than five times the pre-issue net worth, a limit to keep ambitions in check.
QIB Route (Entry Norm II):
- The book-building process is mandatory for this route.
- 75% of the net offering should be reserved for qualified institutional buyers (QIBs).
- If the minimum allocation is not met, the entire subscription amount is refunded, and no questions are asked.
- Founders, promoters, directors or any selling shareholder should not be involved in disciplinary proceedings.
- Promoters and directors must maintain an unblemished record and must not be connected to companies barred from accessing capital markets.
Diving into SME IPOs
SME IPO is a gateway for small and medium-sized enterprises to enter public investment. The post-issue paid-up capital for these IPOs is limited to ₹25 crore, which makes them accessible and formidable.
In India, such stocks find their home on platforms such as BSE SME and NSE Emerge, which provide launchpads specifically designed for small companies.
Eligibility Criteria for SME IPOs
For an SME to tread this path, certain conditions must be met:
- Incorporation: It must be a legally recognized entity under the Companies Act of 1956 or 2013, no exceptions.
- Post-Issue Paid-Up Capital: The upper limit stands firm at ₹25 crores.
- Net Tangible Assets: A minimum valuation of ₹1.5 crores in net tangible assets is essential.
- Track Record: A three-year operational history is a must, though this can be a combined record if the company has subsumed a proprietorship, partnership, or LLP.
- Operating Profit: Profitability isn’t optional; the entity must have a positive operating profit (EBIDT) for at least two of the latest three financial years.
- Leverage Ratio: Ideally, this should not exceed 3:1, although exceptions might be made for finance companies operating under different dynamics.
- Regulatory Compliance: Any shadow of regulatory action like a suspension of trading against promoters or their companies could be a deal-breaker. Full compliance with stock exchange norms is non-negotiable.
The Bottom Line
Mainboard IPOs and SME IPOs serve distinct market niches, each crafted to address different scales of financial ambition and operational scale. Mainboard IPOs suit the capital-intensive needs of larger companies, while SME IPOs are the lifeline for smaller businesses aspiring to grow.
Investors need to decode these nuances to align their portfolio choices with their risk appetite and financial objectives.
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