An IPO, or Initial Public Offering, is a company’s initial selling of shares to the public to raise capital for expansion. Main Board IPOs and SME IPOs are the two main types of IPOs, characterised mostly by the size of the offering. Main Board IPOs usually have bigger issue sizes than SME IPOs, which are launched by small and medium-sized businesses.
Differences between the two include paid-up capital, the minimum number of allottees, IPO prospectus inspection, underwriting, minimum application size, and market making.
In the latter part of September 2023, as domestic indices grappled with a sustained downturn fueled by a mix of weak global cues, concerns about rising inflation, surging crude oil prices, and an elevated 10-year Treasury yield, an intriguing phenomenon unfolded in the financial markets. Surprisingly, the primary market remained exceptionally active, witnessing the launch of 14 Mainboard IPOs alongside numerous SME IPOs during the month. Notably, the majority of these IPOs not only attracted enthusiastic investor interest but also delivered impressive returns, defying the prevailing bearish sentiment.
While many are familiar with IPOs, their associated timelines, and technical jargon, a lesser-known distinction exists within the realm of IPOs that categorizes them into two distinct types: Mainboard and SME IPOs. Let’s delve into these differences to gain a clearer understanding.
A Main Board IPO, also known as a standard IPO, is the procedure by which firms having at least Rs 10 crore in post-issue paid-up capital make their shares accessible to the public for the first time. These firms go public on both the BSE and NSE marketplaces, and the securities they issue are listed for trade. Mainline or mainstream firms, defined by their size, choose mainboard IPOs, resulting in larger-sized IPO offerings.
An SME IPO refers to the initial public offering or debut share sale conducted by a small and medium-sized enterprise. For a company to launch an SME IPO, its post-issue paid-up capital must not surpass Rs 25 crore. In India, there are two dedicated SME platforms, namely BSE SME and NSE SME, where small and medium enterprises can list their shares for trading.
What are the differences between Main Board IPO and SME IPO?
- Issue Eligibility Norms: Main Board IPOs adhere to stringent and complex eligibility norms set by the Securities and Exchange Board of India (SEBI). On the other hand, SME IPOs offer a more accessible route with relaxed eligibility norms, albeit with certain conditions. This flexibility allows smaller enterprises to enter the public market with greater ease.
- Post-Issue Paid-Up Capital: Companies opting for a Main Board IPO must have a minimum post-issue paid-up capital of Rs 10 crore. In contrast, SME IPOs have a lower entry barrier, requiring a post-issue paid-up capital ranging from Rs 1 crore to Rs 25 crore. This enables small and medium-sized enterprises to tap into the capital market without the need for a substantial capital base.
- Listing Exchange: Main Board IPOs find their place on the established BSE and NSE exchanges, providing exposure to a wider investor base. SME IPOs, however, are listed on specialized platforms such as BSE SME or NSE Emerge, designed to cater specifically to the needs of smaller enterprises.
- Number of Allottees: While Main Board IPOs must attract a minimum of 1,000 subscribers or allottees, SME IPOs have a more manageable requirement of at least 50 allottees. This distinction recognizes the differing scales of operations and investor outreach strategies for companies of varying sizes.
- Minimum Application/Trading Lot Size: Main Board IPOs typically feature a minimum application or trading lot size ranging from Rs. 10,000 to Rs. 15,000. In contrast, SME IPOs impose a higher minimum application size, often exceeding Rs. 100,000. This emphasizes the need for a more substantial commitment from investors participating in SME IPOs.
- IPO Underwriting: Main Board IPOs operate on a non-mandatory underwriting model, with 50% allocation to Qualified Institutional Bidders (QIBs). In contrast, SME IPOs mandate 100% underwriting, with 15% underwriting from the merchant banker’s account. This ensures a higher level of financial backing for SMEs entering the public market.
- IPO Offer Documents: The IPO offer document, typically in the form of a Draft Red Herring Prospectus (DRHP), is submitted to SEBI for vetting in Main Board IPOs. In SME IPOs, the DRHP and Prospectus are reviewed by the stock exchange itself, and SEBI observation is not a mandatory requirement.
- IPO Timeframe: Main Board IPOs often take around 6 months or more to complete the public offer process. In contrast, SME IPOs are known for a shorter timeline, typically taking 3 to 4 months to bring a company to the public domain. This quicker turnaround can be advantageous for smaller companies with urgent capital requirements.
- Market Making: Unlike mainboard IPOs, SME IPOs require mandatory market-making after the issue to ensure liquidity. This commitment to market-making further supports the trading activity of SME stocks in the secondary market.
- Reporting: Main Board IPO issuing entities are required to audit their quarterly financial statements. SMEs, however, are obligated to audit their half-yearly financial statements, striking a balance between regulatory compliance and operational feasibility.
Companies opting for a Mainboard IPO are typically larger, well-established corporations with substantial market capitalization. They boast a proven track record and often hold leadership positions in their industries. In contrast, SME IPOs are tailored for smaller companies, frequently in the growth or early expansion stage, characterized by a smaller market capitalization compared to Mainboard-listed companies. Mainboard IPOs typically feature more complex eligibility criteria, while SME IPOs tend to have more relaxed requirements.
Concerning post-issue paid-up capital, a Mainboard IPO necessitates a minimum of Rs 10 crore, while the SME IPO allows for a range from Rs 1 crore to a maximum of Rs 25 crore. For Mainboard IPOs, a minimum of 1000 allottees is required, while SME IPOs typically have a lower minimum requirement, usually set at 50 allottees.
Check: Code Of IPO Allotment
Investments in SME IPOs typically require applications of over Rs 1 lakh, a considerably higher amount compared to the Rs 14,000-15,000 required for Mainboard IPOs. Furthermore, investors in SME IPOs cannot trade in fractional lot sizes, contributing to the illiquidity of these stocks. This differs from Mainboard IPOs, where the concept of lot size is confined to the primary market, allowing subsequent trading to occur in multiples of just one share.
SME IPOs are required to have full underwriting, a stipulation that does not apply to their Mainboard IPO counterparts. In contrast to IPOs on the Mainboard exchanges, where the market regulator SEBI actively participates in the process, from reviewing prospectuses to providing observations, SME IPOs are predominantly managed by the stock exchanges themselves.
Also Read: How to Identify Good IPO Investments
Despite factors like the absence of SEBI involvement, higher investment thresholds, and the inability to trade in fractional lot sizes, the SME IPO segment has garnered significant interest from investors in recent years. With this comprehensive understanding of the distinctions between Mainboard and SME IPOs, you can make more informed investment choices.