An Initial Public Offering is when a company sells its shares to the public for the first time to raise funds. These IPOs can be of two types: mainboard IPOs and SME IPOs. The main difference between the two is in the issue size—mainboard IPOs have a larger issue compared to those launched by small and medium enterprises.
Let's understand both the types and their differences in depth:
Mainboard IPO
A Mainboard IPO is when a privately held company goes public and offers shares to the general public for the first time by listing them on major stock exchanges.
To qualify as a mainboard IPO- these larger companies must have a minimum post-issue paid-up capital of Rs 10 crores. Existing private investors gain a premium on their current shareholdings.
Some of the recent examples of a mainboard IPO that occurred recently are Swiggy, Hyundai Motors, and NTPC Green Energy IPO.
SEBI has two ways for a company to qualify for an IPO:
Profitability Route:
To qualify through the profit route, a company must meet these rules:
- It should have at least Rs 3 crore in physical assets over the last three years, with no more than half of this in cash (for fresh issues).
- The company needs an average profit before tax of Rs 15 crore in any three of the last five years.
- If the company changed its name, at least 50% of last year’s revenue should come from its new business.
- The IPO size cannot be more than five times the company’s net worth before the issue.
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QIB Route:
This option is for companies that don’t meet the profit requirements:
- The IPO must use a book-building method.
- At least 75% of the IPO offer must be allocated to big institutional investors.
- If the minimum subscription isn’t met, the IPO funds must be refunded.
- No founder, director, or major shareholder should have any restrictions or bans from capital markets.
- Promoters and other key people should keep at least 20% equity after the IPO and must not have any criminal financial charges.
SME IPO
An SME IPO is the first public share offering of a small or medium-sized enterprise. The post-issue paid-up capital should not exceed Rs 25 crores for an SME IPO. Since SMEs are usually newer companies, they often find it challenging to get funding through traditional methods, like loans from financial institutions.
To support smaller companies, NSE and BSE have set up special platforms for SME IPOs—NSE Emerge and BSE SME. These platforms allow SMEs and start-ups to raise funds directly from the public.
SEBI has made the rules for SME IPOs simpler than for mainboard IPOs. SMEs must meet eligibility criteria set by NSE and BSE to list on these platforms. Some of the examples of the SME IPO are Alpex Solar Limited and TAC Infosec Limited.
Difference between Mainboard IPO and SME IPO
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Aspect
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Mainboard IPO
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SME IPO
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Offer Documents
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SEBI reviews the draft offer document before approval.
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The stock exchange reviews the draft; SEBI review isn’t needed.
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Time to Go Public
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Takes about 6 months or more to complete.
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It takes around 3 to 4 months.= to complete an SME IPO
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Underwriting
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Underwriting isn’t required if 50% of shares go to big investors (QIBs).
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It requires 100% underwriting and 15% of it should come from merchant bankers.
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Eligibility Rules
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SEBI has strict rules for who can issue a Mainboard IPO.
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Rules are more relaxed to make it easier for smaller companies to apply.
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Listing Exchange
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Listed on main stock exchanges like BSE and NSE.
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These are listed on special SME platforms like BSE SME or NSE Emerge.
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Market Making
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No need for market making after the IPO.
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Market making is required to keep liquidity.
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Minimum Investment
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It requires a minimum application amount of Rs 10,000 to Rs 15,000.
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Minimum investment is higher, starting at Rs 100,000.
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Number of Investors Needed
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Needs at least 1,000 investors.
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Needs only 50 investors.
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Capital Requirement
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Must have at least Rs 10 crore in post-issue capital.
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Post-issue capital can’t be more than Rs 25 crore.
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Reporting Frequency
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Financial reports must be filed every 3 months.
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Financial reports must be filed every 6 months.
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Conclusion
Both SME and mainboard IPOs have their advantages and disadvantages. Before investing, you must carefully assess the company, its growth potential, and its future outlook.
The differences between these two types of IPOs will help you enter the stock market with confidence and make informed decisions.
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