The Next Big Investment Wave! - SME IPOs

Small and Medium Enterprises are the backbone of India’s economy and they are instrumental in driving innovation, creation of jobs and economic growth. Reports reveal that this sector provides employment to more than 70 million people. SME sector contributes about 30% to GDP apart from contributing 45% to the total manufacturing output and 40% to the exports. However, these businesses face a number of challenges to gain access to the required capital which is a major hindrance to their path to growth.  

In order to address this problem, the Indian capital market provides a useful solution - SME IPOs. SMEs have the opportunity to tap into the public market directly in order to raise the necessary capital and this is achieved by listing their shares on the stock exchanges. This provides a number of advantages and gives a big boost to their financial resources. 

The Rise of SME IPOs in India

SME IPOs or Initial Public Offerings pave the way for small and medium-sized enterprises to raise capital and this is done by issuing shares to the public. Businesses get access to required funding to expand their business operations, make investments in research and development, and also enter the global market which goes a long way in reaching heights of success. 

The SME IPOs India 2025 with their reduced requirements associated with investment as well as turnover are making it easier for enterprises that are smaller in size or are just expanding to become eligible for listing on the stock exchange. This kind of approach enables smaller enterprises that are associated with lower revenue to access public funding. 

SEBI has enabled specific platforms particularly designed for the SME IPOs in India - NSE Emerge and BSE SME Platform. These platforms cater to the capital-raising needs of the enterprises that are smaller in size and offer a supportive environment vis-a-vis the main stock exchanges where the large corporations are listed. The regulatory requirements are reduced and the processes are simplified which makes it easier for smaller enterprises to access the capital market. Additionally, Small business IPOs help bring liquidity and monetization opportunities to existing shareholders.

Why Should SMEs Consider IPOs?

• Access to capital through the public markets. The capital can be used by the company for expansion of business.

• A public listing paves the way for increased visibility and also increases market reputation and enhancement of the SME brand. This also gives a boost to the stakeholder trust.

• Banks and financial institutions tend to prefer lending to listed entities at much better terms and conditions. 

Key Sectors Driving SME IPO Growth in 2025

• Digital transformation is happening at a very rapid pace across the different industries. The technology-based SMEs are drawing the attention of the investors because of their potential to multiply returns with asset-light models and impact of intangibles. These companies have the ability to adapt to the changing market demands and grow at a faster pace, while aligning with consumer preferences/feedback, which makes them extremely appealing to the investors. 

• The manufacturing sector contributes a lot to the GDP as well as employment. The government of India has been promoting domestic manufacturing actively and this helps SMEs to thrive in the market. This sector attracts investment because manufacturing companies focus on stable growth, efficiency, innovation as well as sustainability of earnings and cash flows, bringing resilience during periods of economic fluctuations. 

• The SMEs in the healthcare sector are all set for expansion in a significant manner with the advancement of technology and with people becoming more conscious about their health. The healthcare SMEs that are the most preferred ones for investment purposes are associated with telemedicine, pharmaceuticals and also diagnostics. 

• The consumer goods SMEs attract the investors because of their potential for steady returns. These companies are appealing as they benefit from rising urbanization and increase of income levels of Indian consumers, while also being quick to adapt to the changing behaviour of customers like the shift to online shopping / e-commerce. 

• Investors are also shifting their focus to renewable energy SMEs. The government is constantly supporting renewable energy initiatives and is encouraging various sustainable practices. Thus it is clear that this sector is expected to see exponential growth in years to come.   

How to Evaluate an SME IPO Before Investing?

• Financial health is something that needs to be evaluated when considering an SME IPO. It becomes important for the investors to check for consistent growth over the past years. A company with a consistent revenue and profit track record has higher chances of being financially stable and resilient. Additionally, low debt-to-equity ratio and double-digit Return on Capital Employed (ROCE) indicates healthy financial status of the company.

• The company should have a growth-oriented business model that enables business expansion and should be at an advantageous position when it comes to dealing with competition in the market. 

• Investors should carefully analyse the demand for the products or the services of the company. It should be analysed  whether the company is in a position to achieve the growth by being agile and innovative in its strategy execution. 

• The track record of the promoters and corporate governance practices need to be considered. Experienced promoters managing companies with robust internal control frameworks, can deal with the challenges proficiently and that helps to build the confidence of the investors. 

• Potential of an upcoming IPO can be assessed by performing a peer-check, which is comparing the performance of the different companies in the same sector, and especially the relative valuation levels normally reflected in P/E, P/B ratios. 

SEBI Guidelines & Regulations for SME IPOs

SEBI SME guidelines include a number of measures to protect the investors and also enhance the market integrity. 

• The company’s post-issue paid-up capital, i.e., face value, should not be more than ₹25 crores.

• The company must have a track record of at least three years. If the company has not been operational for three years, it must have been funded by banks, financial institutions, central or state government, or be a part of a group company listed on either the main board or SME board of the exchange for at least two years.

• Minimum Operating profit from operations of INR 1 Crore, for at least any 2 out of 3 financial years and a positive net worth.

• The offer for sale by SME promoters has been capped by SEBI to 20% of their shareholding. Also, Individual shareholders can sell up to a maximum of 50% of their holdings. Phased lock-in periods have also been implemented which imply that half of the excess holdings will be unlocked after a period of one year and the remaining half shall be unlocked after a period of two years.

• A 21-day public review period has been mandated for draft red herring prospectus. A cap has been allocated on the amount for general corporate purposes (GCP) which is 15% of the total amount that has been raised or ₹10 crore, whichever is lower. 

• SME issues will not be permitted to use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties, whether directly or indirectly.

• The allocation process for Non-Institutional Investors in SME IPOs shall now follow the same methodology as that in mainboard IPOs. 

Final Note

If you are an SME owner, Is the SME IPO right for you? Well, you could raise money from the public without the need to pay any kind of interest. The net value of the company increases when it goes public. The visibility increases and the brand gets promoted. An easy exit opportunity is there for existing shareholders. Business operations can be expanded. 

If you are an Investor, SME IPO could be an alternative to traditional investments, however, you should always contact a SEBI Registered Investment Advisor. They will not only help you evaluate SME IPOs, by providing professional advice on the pros and cons of the opportunity, but also ensure alignment with your risk provide, suitability and long term financial goals.