Right Time To Bring An IPO - Key Eligibility Criteria

Taking a company public through an Initial Public Offering (IPO) is a transformative journey. Listing does not only assist fund raise but also symbolizes growth, visibility and transparency. A company can plan for IPO on Mainboard, BSE SME, or NSE Emerge Platform but the timing and preparation play a pivotal role in an IPO's success.

For small and medium enterprises (SMEs), IPOs have become an increasingly popular strategy for raising funds and achieving long-term growth. But are SME IPOs good for businesses? What is the pre IPO process? What are the benefits and risks associated with SME IPO? Execution and planning for IPOs is linked with choosing the best IPO advisors, Merchant Bankers and other intermediaries who play an important role in the success of the IPO.

When a company can bring IPO? 

On fulfilment of certain IPO criteria and IPO guidelines as laid down by SEBI/NSE Emerge or BSE SME, a company can plan for IPO. But it is to be kept in mind that mere fulfilment of eligibility criteria does not alone guarantee an IPO, other factors also need to be considered.

1. Eligibility Criteria for Going Public

To launch an IPO, businesses must meet specific eligibility criteria, which differ based on the platform chosen—Mainboard IPO, BSE SME IPO, or NSE SME IPO. For small and medium enterprises (SMEs), platforms like the NSE SME Exchange and BSE SME Platform offer eligibility criteria tailored to their size and growth stage. 

These platforms support medium and smaller companies seeking to scale their operations and enhance visibility in the public market. The objects of Issue for bringing IPO can range from expansion, innovation, or debt reduction. 

However, potential investors often ask, are SME IPOs safe? While SME IPOs offer significant advantages, such as targeted investor pools and regulatory support, they also come with certain risks, including lower liquidity compared to Mainboard IPOs. 

Market conditions, sector demand, and the company's financial stability are crucial factors that both companies and investors must evaluate to ensure the success of an SME IPO.

Here are the eligibility criteria for IPO in brief. 

• It shall be a private limited company or a public company.
• Business shall be profitable for last 2 out of 3 financial years.
• Net worth of the business Rs 3 crores as at the end of last financial year.
• The Net tangible assets of the business shall be more than 3 crores (Net worth less intangible assets i.e. deferred tax asset, software, goodwill etc.)
• Debt equity ratio of the Company less than 3.
• Free Cash Flow to Equity (FCFE) of the company shall be positive for at least 2 out of last 3 FY.
• No material regulatory/disciplinary action by a stock exchange or regulatory authority in the past 3 years.
• Company should not have been referred to the BIFR (Board for Industrial and Financial Reconstruction) or No proceedings shall have been admitted under Insolvency and Bankruptcy Code against the company or the promoters.
• Name of the company shall not be changed in the last one year preceding to the application for IPO.
• Company's application shall not have been returned by the exchange in the last 6 complete months.

 

For detailed IPO eligibility refer https://www.ipoplatform.com/resources/detailed-eligibility-assessment

 

2. When is the Right Time to bring IPO?

As discussed earlier, launching an IPO is not just about meeting eligibility criteria; it’s about aligning internal readiness with favourable external conditions. A company with strong financial performance, scalable operations, and robust compliance systems is well-positioned for listing. For SMEs, platforms like the BSE SME and NSE SME Platform offer unique opportunities to grow and gain visibility.

By carefully considering factors like market sentiment, investor trends, and regulatory preparedness, businesses can time their IPO to maximize valuation and achieve their growth goals. Whether targeting the Mainboard or an SME IPO, proper planning, expert execution and timing remain the cornerstones of a successful public offering.

Listing and going public is a one-time decision for any business, especially for small and medium enterprises (SMEs). Timing of IPO is crucial, as it directly impacts the company’s valuation, investor interest, and overall success. Below are the key factors to consider when determining the best time to go public, explained in detail:

 

1. Stable Financial Performance

Companies with consistent revenue growth, profitability, and strong cash flow are far more attractive to potential investors. A financial robust company is often preferred by Investors. A solid financial foundation shows the business is reliable and capable of delivering returns.

• Revenue Growth: A steady growth in revenues over several years’ highlights market demand for the company’s products or services.
• Profitability: While profitability isn’t always mandatory, especially for high-growth companies, a clear path to profitability reassures investors. SMEs must demonstrate positive earnings before interest, depreciation, and tax (EBITDA) in at least two of the last three financial years. However as per a recent SEBI Consultation Paper, SEBI has proposed to introduce profitability benchmark also.
• Audited Financial Statements: Transparent and error-free financial reports are essential. Investors and regulatory bodies, such as SEBI, prioritize companies that adhere to strict financial reporting standards.

Building confidence through strong financial performance is especially important for NSE SME IPO or BSE SME IPO aspirants, as these platforms cater to growth-stage companies.

2. Scalability and Market Demand

Business Scalability is a key attribute investors look for. Companies that can grow their operations without significant proportional cost increases have a competitive edge. Demonstrating scalability highlights the company’s potential to expand and sustain profitability.

• Scalability in Operations: Businesses must showcase their ability to increase production, expand into new markets, or serve a larger customer base without substantial infrastructure or resource costs.
• High-Demand Industries: Sectors such as technology, renewable energy, e-commerce, and healthcare often attract heightened investor interest. Timing your IPO during a boom period for your industry can significantly increase valuation. For instance, companies in the renewable energy sector, solar sector might gain momentum when environmental sustainability is a global focus.

SMEs must align their growth plans with investor expectations, particularly when listing on platforms like the SME Exchange.

3. Market Conditions

External market conditions can greatly influence the success of an IPO. Understanding and analysing market sentiment helps companies to choose the optimal time for public listing.

• Bull Markets: A rising stock market, or “bull market,” often fosters greater investor enthusiasm. In such periods, IPO valuations tend to be higher, as there is increased liquidity and willingness to invest.
• Sector Sentiment: Favourable conditions within the company’s specific sector can also boost IPO performance. For instance, the IT industry during a tech boom or the pharmaceutical sector during increased healthcare investment are opportune moments to go public.
• Economic Stability: Broader macroeconomic indicators, such as low inflation and stable interest rates, play a role in influencing investor confidence.

By carefully analysing market trends and sentiment, businesses can position their IPO to attract maximum investor interest and achieve optimal pricing.

4. Legal and Regulatory Readiness

A good corporate governance structure is a positive for IPO process. Companies planning to launch an IPO must establish robust systems to ensure compliance.

• SEBI Regulations: SEBI mandates adherence to strict norms for financial disclosures, governance, and operations. Companies must prepare documents such as the Draft Red Herring Prospectus (DRHP) and ensure all legal and financial compliances are in place.
• Internal Systems: Businesses need efficient internal financial reporting systems to manage regulatory filings and investor communication.
• Transparency and Governance: Public companies are expected to follow high standards of corporate governance, including the composition of the board and regular financial disclosures.

Meeting these requirements demonstrates operational maturity, increasing investor confidence.

5. IPO Eligibility

• Mainboard IPOs: Large companies targeting Mainboard listings must demonstrate strong market potential and scalability. These IPOs usually cater to institutional and retail investors seeking high-value opportunities. Eligibility criteria for mainboard IPO is different than SME IPO. A mainboard listing lists a company on NSE and BSE both.
• SME IPOs: Smaller businesses aiming for the BSE SME IPO or NSE SME IPO need to establish profitability and a solid business model. Having a net worth of ₹1 crore and net tangible assets of ₹3 crores, as required by the SME platforms, ensures the company meets basic eligibility.

6. Strategy of utilization of Funds- Furthermore, businesses with a clear strategy for utilizing IPO proceeds—such as entering new markets, launching innovative products, or reducing debt. Using IPO Funds for business growth and expansion is more likely to attract investor interest.

3. Role of IPO Advisors and Consultants

The Role of Advisors and Consultants in the IPO Journey

Initial Public Offering (IPO) journey is a transformative step and a one-time journey for any business. Whether targeting the Mainboard IPO or SME IPO on BSE SME Platform or NSE SME Exchange, the IPO process is complex and requires meticulous planning. IPO Advisors play an important role in the IPO process and handhold the promoters in the entire IPO journey. Right from the planning stage, IPO Readiness and until the listing, their association makes seamless execution of IPOs. These are some of the functions of IPO Advisor. 

1. IPO Planning

• Selecting the Right IPO Platform: For larger companies, the Mainboard IPO offers access to a broader investor base and higher liquidity. Conversely, small and medium enterprises can benefit from the SME IPO on platforms like the BSE SME Board or NSE SME Exchange, which cater to growth-stage companies. Advisors assess factors like company size, revenue, and investor interest to determine the best fit.
• Valuation Analysis: Determining the appropriate valuation is critical to attract investors while maximizing capital raised. Advisors conduct in-depth financial analysis, benchmarking against industry peers, and market trends to establish a compelling valuation.
• Timing the IPO: Market conditions play a vital role in IPO success. Consultants analyse external factors like bull market trends, investor sentiment, and sector-specific demand to recommend the ideal time for going public.

2. Regulatory Compliance

Navigating the regulatory landscape is one of the most challenging aspects of an IPO. Compliance with guidelines from SEBI (Securities and Exchange Board of India) and stock exchanges is mandatory. Advisors and consultants ensure that companies meet these requirements seamlessly.

• SEBI and Exchange-Specific Regulations: Advisors help businesses adhere to the regulations prescribed by SEBI and stock exchanges like the NSE SME Platform and BSE SME Board. This includes compliance with listing eligibility criteria, financial disclosures, and corporate governance norms.
• Preparation of Key Documents: The Draft Red Herring Prospectus (DRHP) is a critical document submitted to SEBI and stock exchanges. It provides comprehensive details about the company, its financials, and the IPO objectives. Advisors play a crucial role in preparing and reviewing this document to ensure accuracy and compliance.
• Audit Readiness: Consultants facilitate internal audits, ensuring that financial statements are accurate and meet the requirements of SEBI and stock exchanges. They assist in IPO process of Restated financials and Peer Review Audit by tying up with professionals. By streamlining regulatory processes, advisors minimize delays and ensure that companies meet all necessary conditions for a successful listing.

3. Marketing and Investor Relations

Creating a compelling narrative and effectively communicating it to potential investors is essential for generating interest and ensuring a well-subscribed IPO. Advisors and consultants lead efforts in crafting marketing strategies and fostering investor relations.

• Investor Presentations: Advisors develop impactful presentations that highlight the company’s strengths, growth potential, and future plans. These presentations are tailored to resonate with institutional investors, retail investors, and high-net-worth individuals (HNIs).
• Roadshows: Roadshows are a cornerstone of IPO marketing. Consultants organize these events to showcase the company to potential investors across multiple cities or online platforms. Roadshows not only generate buzz but also provide opportunities for direct engagement with key stakeholders.
• Publicity Campaigns: Advisors collaborate with PR teams to run targeted marketing campaigns, leveraging both traditional media and digital platforms. This ensures the IPO gains visibility among the right audience.

Strong marketing and investor relations efforts ensure that the IPO receives widespread attention and garners the interest needed for a successful subscription.

4. Additional Contributions of Advisors

Apart from the core areas of planning, compliance, and marketing, advisors contribute in several other critical ways:

• Post-IPO Support: Advisors often assist companies in transitioning to the public market, ensuring they meet ongoing compliance requirements and maintain strong investor relations.
• Liaison with Intermediaries: Advisors act as a bridge between the company and other IPO intermediaries, such as merchant bankers, registrars, and stock exchanges.
• Risk Mitigation: Identifying potential risks, such as unfavourable market conditions or regulatory challenges, and implementing strategies to mitigate them.

4. Why a company should go public -Benefits of SME IPO

Listing on the BSE SME Platform or NSE SME Exchange offers transformative advantages for small and medium enterprises. From accessing growth capital and enhancing credibility to providing liquidity and instilling market discipline, the benefits far outweigh the challenges.

While liquidity concerns may arise, the targeted investor base and focused trading mechanisms on SME platforms create opportunities for both companies and investors to thrive. For SMEs, going public is not just a financial decision but a strategic step toward achieving sustained growth and success in competitive markets.

For small and medium enterprises (SMEs), going public on platforms like the BSE SME Platform or NSE SME Exchange opens the door to numerous opportunities that can significantly enhance their growth trajectory. While SMEs differ from larger corporations listed on the Mainboard, the advantages of an SME IPO make it an appealing option for many businesses. Below are the detailed benefits of listing, explained with additional insights and keywords:

1. Access to Capital

One of the main benefit of listing is to facilitate fund raise while listing on the stock exchange.  Objects of Offer in the offer documents lists the purpose for which the funds would be utilized. The funds can be utilised for below purposes as stated in the DRHP.

• Business Expansion: Entering new markets, scaling operations, or enhancing production capabilities becomes feasible with the infusion of funds from an IPO. For instance, tech-focused SMEs can use the capital to invest in research and development, while manufacturing firms may expand their production capacity.
• Debt Reduction: IPO proceeds allow businesses to pay off existing debts, improving their balance sheet and reducing interest costs. This, in turn, strengthens financial stability and enhances investor confidence.
• New Product Development: The funds can also be allocated toward innovation and the launch of new products or services, enabling SMEs to stay competitive in dynamic markets.

By utilizing IPO proceeds strategically, companies can accelerate growth and position themselves as market leaders within their industries.

2. Improved Credibility and Visibility

A public listing inherently enhances a company’s credibility in the eyes of stakeholders, including customers, suppliers, and investors. Being listed on recognized platforms like the BSE SME Board or NSE SME Platform demonstrates a commitment to transparency and governance, which boosts trust.

• Enhanced Brand Visibility: The publicity surrounding an IPO and the regular disclosures required of public companies increase brand awareness. SMEs can leverage this visibility to attract more business opportunities and partnerships.
• Trust Among Stakeholders: Suppliers and customers often view listed companies as more reliable and stable, which can result in stronger relationships and more favourable terms.

This improved reputation helps SMEs build long-term value, making them attractive to both investors and business partners.

3. Liquidity for Investors and Employees

Going public provides an exit opportunity for early-stage investors and enables employees to benefit from equity participation.

• Early Investor Liquidity: An IPO creates a mechanism for venture capitalists, angel investors, or private equity firms to realize returns on their investment. This liquidity is particularly appealing for long-term investors seeking to exit after the company achieves significant growth.
• Employee Stock Options (ESOPs): By offering ESOPs, SMEs can attract and retain top talent. These stock options motivate employees to contribute to the company’s growth, aligning their interests with the organization’s success.

While potential investors may question, are SME IPOs liquid, the liquidity on SME platforms, although lower than on the Mainboard, is often sufficient due to the focused investor base.

4. Market Discipline and Governance

Publicly listed companies must comply with stringent regulatory and governance standards, particularly those laid out by SEBI and the stock exchanges.

• Regulatory Requirements: Regular disclosures, including quarterly financial results and annual reports.
• Stronger Governance Standards: Companies listed on the NSE SME Exchange or BSE SME Board must adhere to stricter board composition and corporate governance guidelines, ensuring accountability at all levels.
• Operational Efficiency: The discipline imposed by public listing often leads to more efficient decision-making processes, as management teams are held accountable by investors and regulatory bodies.

This market discipline not only enhances investor trust but also promotes long-term sustainability and growth for SMEs.

By educating potential investors about the specific benefits and opportunities of SME IPOs, companies can build confidence and drive participation in their public offerings.

5. Challenges and Risks of SME IPOs

While the benefits are significant, SMEs face unique challenges in launching an IPO:

• Market Liquidity: Compared to Mainboard IPOs, SME IPOs may have fewer buyers.
• Investor Perception: SMEs must demonstrate stability and scalability to attract investor confidence.
• Regulatory Complexity: Navigating SEBI guidelines and exchange rules requires expert guidance.

Conclusion

Taking a company public through an IPO is a one-time decision, especially for small and medium enterprises (SMEs) seeking to raise capital, expand their operations, and enhance visibility. While an SME IPO offers several benefits, such as access to growth capital, increased credibility, and liquidity for investors and employees, it also presents challenges like market liquidity, investor perception, and regulatory complexity.

For an SME to successfully launch an IPO, it is essential to meet the eligibility criteria, demonstrate stable financial performance, scalability, and strong governance. The timing of the IPO, market conditions, and sector-specific trends must also be carefully considered to maximize valuation and investor interest.

Engaging with experienced IPO advisors and consultants plays a critical role in navigating the complex IPO process, from regulatory compliance and valuation analysis to marketing and investor relations. With strategic planning and expert guidance, SMEs can successfully transition to public markets, unlocking new opportunities for growth and long-term success.

In summary, while an SME IPO offers transformative benefits, careful preparation, strategic timing, and expert advisory support are essential to overcoming the inherent risks and ensuring a successful listing. Whether through the BSE SME Platform or the NSE SME Exchange, going public is a powerful tool for SMEs aiming to scale their business and enhance their market presence.