Before we know about How Mainline and SME IPOs are different, let’s first understand what is An IPO.
An Initial Public Offer (IPO) is when a private company wants to raise additional funds or additional capital from the people of the country. These companies list on the stock exchange so that other investors and shareholders can trade in shares in the open market.
Private companies work very closely with investment bankers to conduct this entire transaction involving due diligence, marketing efforts, and compliance with regulatory norms before going public. These funds can be used for future business expansion, working capital, or even to help existing investors of the company exit.
Key Factors considered for a Mainline and SME IPO
There are typically two types of companies going for an IPO. The differentiation is based on the size of the capital and therefore, the platform they choose to list on decides whether it is a Mainline IPO or a Small and Medium Enterprises (SME) IPO.
Companies with a minimum paid-up capital (post-IPO) of ten crores are eligible to raise funds and list on the two main exchanges of the country – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
As against this, the companies with a minimum paid-up capital (Post-IPO) of INR 1 crore and a maximum paid-up capital of INR 25 crores are eligible for the Small and Medium Enterprises IPO. BSE SME and NSE’s Emerge platform let SME companies raise funds and list through an SME IPO format.
Are you wondering what’s the difference though? An IPO is an IPO correct?
Here are 3 main differences between an SME IPO and a mainline IPO you must know if you apply in IPOs regularly
1. Size of IPO application
Typically, applying one lot in a mainline IPO will cost you somewhere in the range of INR 10,000 to INR 15,000 whereas the SME IPO starts with a minimum investment of INR 100,000. The main reason for keeping a low-ticket size for mainline IPOs is to have higher participation from the retail investors and increase the chance of maximum subscription for the IPO. The mainline IPOs typically have a larger equity size.
2. Minimum allotment norms
For a mainline IPO to go through, the company must allot shares to at least one thousand subscribers whereas the SME IPO can issue shares to at least fifty subscribers.
3. IPO underwriting
First, let us understand what underwriting an IPO means?
Let us understand the process of IPO with a small example. A private company wants to list and raise funds through the IPO. They offer one thousand shares of INR 10 each paid up for INR 100 (i.e., INR 90 premium). The company now needs investors to subscribe to the one thousand shares, or the IPO will fail. In case of under subscription of any IPO, merchant bankers promise the company to subscribe to any shares not subscribed to. However, they charge a small commission to do so.
Back to the differences. the mainline IPO process does not compulsorily mandate a company must appoint merchant bankers or underwriters to float an IPO. However, If the IPO fails to get more than 50 percent subscription, then the Qualified Institutional Buyers (QIB) must subscribe to the remaining shares compulsorily.
The SME IPOs on the other hand must have merchant bankers or underwriters underwriting the public offer as they have a very high-ticket size for retail investors. Such bankers must underwrite 15 percent of the IPO.
In addition to the key differences above, other nuances differentiate these two types of IPOs. As smaller companies take the SME IPO route to raise capital, there are relaxed norms the regulator mandates. These relaxed rules for SMEs allow them access to the secondary market and an opportunity to raise funds.
These standards typically relate to the historical performance of the company and the review of processes of the regulator. For example, the companies opting for a mainline IPO must have a profitable record for the last three years, whereas SMEs just need to have positive cash flows for the most recent two years.
The target retail audience is also vastly different for these IPOs. As the ticket size for SME IPO is a minimum of INR 1 lakh, they typically target the institutional participation and the interest of High-Net-Worth Individuals. As against this, the mainline IPO focuses on large retail participation to meet their subscription goals.
What’s more, SEBI reviews the entire IPO process and approves the application for mainline IPOs whereas the stock exchange review and approve SME IPOs.
When you run a public company, multiple stakeholders hold you accountable, all of whom require an explanation for your performance.