IPO Eligibility: Mainboard vs. SME

Embarking on the journey of taking a company public through an Initial Public Offering (IPO) is a pivotal decision. However, the path to IPOs is not uniform, as businesses must choose between two distinct avenues: Mainboard and SME IPOs. Understanding the eligibility requirements for each is paramount. In this comprehensive guide, we explore the divergent criteria that define Mainboard and SME IPOs, helping businesses decipher which path aligns best with their aspirations and dimensions.

Mainboard IPO Requirements: 

When a company decides to take the monumental step of going public through a Mainboard IPO, it enters the realm of established businesses with a significant financial footprint, boasting a minimum paid-up capital of Rs 10 crores. Mainboard IPOs are a standard offering listed and traded on the prominent stock exchange platforms of NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). However, the journey to Mainboard IPOs involves navigating a set of stringent eligibility criteria meticulously laid out by SEBI (Securities and Exchange Board of India) through the ICDR Regulations of 2018.

SEBI IPO Eligibility Criteria: 

SEBI has delineated two distinct routes that companies can follow to qualify as issuers of IPOs, each with its unique set of prerequisites.

1. Profitability Route (Entry Norm I): Under the Profitability Route, companies must fulfill a specific set of profit-related standards to qualify for an IPO. These conditions encompass:

• Tangible Assets: The company should possess net tangible assets amounting to a minimum of Rs 3 crores for each of the three preceding years.
• Asset Composition: For fresh issues (excluding Offer for Sale – OFS), no more than 50% of the aforementioned Rs 3 crores in tangible assets should comprise cash or cash equivalents.
• Operating Profit: The company should exhibit an average operating profit (before tax) of at least Rs 15 crore in any of the three years out of the last five years.
• Name Change: In cases of a name change, a prerequisite is that 50% of the revenue generated in the previous year should stem from the business conducted under the new name.
• Issue Size: The issue size should not exceed five times the net worth of the company before the issue (pre-issue).

2. QIB Route (Entry Norm II): The QIB (Qualified Institutional Buyers) Route is an alternative pathway thoughtfully crafted by SEBI for legitimate companies that might fall short of meeting the stringent profitability parameters of the Profitability Route. Companies opting for an IPO through the QIB Route must adhere to the following requisites:

• Book-Building Process: The IPO must be conducted through the book-building process.
• QIB Allocation: A minimum of 75% of the net offering should be allocated to qualified institutional buyers.
• Refund Assurance: In the event the minimum allotment requirement is not met, the IPO subscription money must be refunded.

SEBI Requirements for Key Stakeholders: 

In addition to the financial criteria, SEBI places a strong emphasis on the integrity and track record of the key stakeholders involved in the IPO process:

• Disciplinary Clean Slate: There should be no disciplinary actions against the company founders, promoters, directors, or selling shareholders.
• Market Access: Promoters, directors, founders, investors, and the issuing company should not be barred from accessing the capital markets. An IPO application is only admissible once the debarment period has elapsed.
• Affiliation Check: Promoters, directors, founders, and investors must not be affiliated with another company that is excluded from capital market access.
• Default-Free: All stakeholders must maintain a clean record without any instances of default.
• Fugitive Offenders: The promoters should not be classified as fugitive offenders as defined in the Fugitive Economic Offenders Act of 2018.
• Equity Ownership: Post-IPO, promoters should individually or collectively own at least 20% of the equity.

NSE IPO Eligibility Criteria: 

In addition to the IPO stipulations set forth by SEBI (Securities and Exchange Board of India), the NSE (National Stock Exchange) imposes its own set of eligibility criteria that an issuing company must satisfy. These additional criteria are designed to ensure the company’s suitability for listing on the NSE platform and uphold market integrity.

1. Industry Experience:

• At least one promoter of the company should possess a minimum of 3 years of relevant industry experience. This criterion emphasizes the importance of industry knowledge and expertise within the leadership of the issuing company.

2. Annual Reports Submission:

• The issuing company is required to submit its annual reports for the preceding three fiscal years to the NSE. This stipulation provides insight into the company’s financial performance and stability over a significant period.

3. Positive Net Worth:

• The company must exhibit a positive net worth. However, it’s important to note that this requirement applies specifically to companies with an issue size of less than Rs 500 Crores. A positive net worth underlines the company’s financial health.

4. Minimum Post-Issue Equity:

• The post-issue paid-up equity of the company should exceed Rs 10 Crores. This criterion ensures that the company has a substantial equity base.

5. Market Capitalization:

• The issuing company’s market capitalization should surpass Rs 25 Crores. This measure is indicative of the company’s market presence and overall valuation.

6. Legal Compliance Certification:

• The company is obligated to provide the NSE with a certificate confirming specific legal aspects:
• No pending proceedings against the issuer under the Insolvency and Bankruptcy Law.
• The company has not been subject to a winding-up petition from the NCLT (National Company Law Tribunal).

BSE IPO Eligibility: 

When considering listing on the BSE (Bombay Stock Exchange), companies must adhere to specific eligibility criteria that revolve around financial thresholds. It’s noteworthy that the equity and market capitalization requirements for BSE IPOs mirror those of the NSE (National Stock Exchange), ensuring consistency in the expectations for issuers.

Key BSE IPO Eligibility Criteria:

1. Minimum Paid-up Capital:

• The issuing company is required to maintain a minimum paid-up capital of Rs 10 Crores after the IPO. This financial threshold signifies the company’s capital adequacy.

2. Minimum Issue Size:

• The minimum issue size, or the total value of shares offered to the public, should be Rs 10 Crores. This stipulation establishes a baseline for the scale of the offering.

3. Minimum Market Capitalization:

• The issuing company should have a minimum market capitalization of Rs 25 Crores. Market capitalization reflects the company’s valuation and standing in the market.

BSE Main Board IPO Checklists: 

To successfully navigate the process of listing on the BSE’s Main Board, companies are required to follow a structured checklist and submit the necessary documents and information at various stages of the IPO journey. These stages include:

• In Principle Approval Stage: This initial stage involves obtaining approval in principle for the IPO. Companies need to provide the requisite documents and information to initiate the listing process.
• Issue Opening Stage: Once approval in principle is granted, the IPO enters the issue opening stage. Companies must fulfill the necessary requirements to proceed with the offering.
• Basis of Allotment Stage: At this stage, the basis for share allotment to investors is determined. Proper documentation and information submission are essential to ensure transparency in the allotment process.
• Listing & Trading Approval Stage: The final stage involves obtaining approval for listing and trading of the company’s shares on the BSE. Compliance with all listing requirements and document submission is crucial to achieve this milestone.

Additional IPO Requirements: 

Beyond the financial and market capitalization thresholds, several other prerequisites and regulatory obligations must be met by companies contemplating an IPO. These requirements are pivotal in ensuring transparency, accountability, and the smooth execution of the offering process:

1. Consent for BSE Name Usage:

• The issuing company must seek prior consent from the BSE (Bombay Stock Exchange) to use the name of the exchange in its prospectus or offer-for-sale documents. This consent signifies the company’s acknowledgment and adherence to BSE guidelines.

2. Designated Stock Exchange Selection:

• The issuing company is required to file an application with one or more stock exchanges and designate one of them as the Designated Stock Exchange. This selection establishes the primary exchange for listing and trading the company’s shares.

3. Depository Arrangement:

• The issuer should have a formal arrangement with a depository, such as CDSL (Central Depository Services Limited) and NSDL (National Securities Depository Limited), to facilitate the dematerialization of shares before and after the IPO. Dematerialization streamlines the trading and settlement of securities in electronic form.

4. Dematerialization of Promoter’s Shares:

• Before filing the offer document, the promoter’s shares should be held in dematerialized (demat) form. Dematerialization eliminates the need for physical share certificates and ensures efficient and secure shareholding management.

5. Partly Paid-up Shares Resolution:

• Any partly paid-up shares should either be fully paid up or forfeited before the filing of the offer document. Resolving the status of partly paid-up shares eliminates ambiguity and aligns with IPO regulations.

6. Deposit with Designated Stock Exchange:

• The issuing company is mandated to deposit 1% of the issue amount with the designated stock exchange before commencing the IPO. This deposit serves as a financial commitment and assurance to the exchange.

SME IPO Eligibility Requirements: 

SME IPOs, tailored for small and medium-sized enterprises (SMEs), offer these burgeoning companies an opportunity to access public funds and fuel their growth. Recognizing the distinct characteristics of SMEs, both the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange) have established dedicated SME IPO platforms: NSE Emerge and BSE SME, respectively. These platforms streamline the listing and trading of SMEs, enabling them to raise capital from the general public. While SME IPOs share similarities with regular IPOs, SEBI (Securities and Exchange Board of India) has relaxed certain norms to accommodate the unique needs and profiles of SMEs.

Key SME IPO Eligibility Criteria:

1. Post-Issue Paid-Up Capital Limit:

• For SME IPOs, the post-issue paid-up capital of the company must not exceed Rs 25 Crores. This threshold distinguishes SMEs from larger corporations and acknowledges their specific financial scale.

2. Directors/Promoters/Investors Requirements:

• Similar to regular IPOs, directors, promoters, and investors associated with the SME must not have a history of defaults, offenses, or disqualifications from accessing capital markets. This requirement ensures the integrity of those involved in the IPO process.

Additional Eligibility Criteria by Exchanges:

BSE SME IPO Eligibility:

• SMEs seeking to list on the BSE SME platform must fulfill the following criteria:
• Incorporation under the Companies Act, 1956.
• Positive net worth.
• Net tangible assets of at least Rs 1.5 Crores.
• A track record of operations for at least three years. Alternatively, the company should have received funding from recognized financial institutions or governments and demonstrated a positive net profit (pre-depreciation and taxes) in any of the last three years.
• A functioning website.
• Agreements with both Indian depositories, CDSL and NSDL.
• Facilitation of trading in Demat form.
• Maintenance of the list of promoters without changes in the preceding year from the date of applying to BSE for listing.
• Submission of a certificate stating the absence of involvement in any Board for Industrial and Financial Reconstruction (BIFR) matter and the absence of winding-up petitions against the company.

NSE SME IPO Eligibility:

• Companies aspiring to list on the NSE Emerge platform must meet the following eligibility criteria:
• Incorporation under the Companies Act 1956/2013 in India.
• Promoters collectively holding a minimum of 20% of the share capital post-issue.
• At least one promoter possessing a minimum of three years of industry-specific experience.
• Operating profit and positive net worth in at least two out of the last three fiscal years.
• Absence of pending Board for Industrial and Financial Reconstruction (BIFR), insolvency, or bankruptcy proceedings against the company or promoters.
• No receipt of winding-up petitions from NCLT/Court.
• A clean regulatory and disciplinary record with no significant actions taken by any stock exchange or regulatory agency in the past three years.

FAQS:

1. What is the fundamental difference between Mainboard and SME IPOs in India?

A- Mainboard IPOs are typically launched by large, established companies with a paid-up capital of at least Rs 10 Crores, adhering to comprehensive SEBI regulations. SME IPOs, on the other hand, cater to small and medium-sized enterprises with a post-issue paid-up capital not exceeding Rs 25 Crores, featuring relaxed eligibility norms and platforms like NSE Emerge and BSE SME.

2. Are there specific eligibility criteria for directors and promoters in both Mainboard and SME IPOs?

A- Yes, directors and promoters involved in both Mainboard and SME IPOs must not have a history of defaults, offenses, or disqualifications from accessing capital markets to ensure the integrity of the offering.

3. What is the minimum track record required for SME IPOs on the NSE Emerge platform?

A- SMEs seeking to list on NSE Emerge should have a track record of operations for at least three years, among other criteria.

4. How does the BSE SME platform define the eligibility of SMEs for IPOs?

A- For BSE SME IPOs, SMEs must meet criteria such as a positive net worth, net tangible assets of at least Rs 1.5 Crores, a track record of operations, and more. Additionally, SMEs should facilitate trading in Demat form.

5. Is there a specific post-issue paid-up capital limit for SME IPOs?

A- Yes, the post-issue paid-up capital of SMEs issuing IPOs should not exceed Rs 25 Crores, distinguishing them from larger corporations.

Conclusion:

These tailored eligibility requirements ensure that companies entering the public arena do so with the necessary qualifications and safeguards in place. While Mainboard IPOs adhere to strict norms, SME IPOs offer flexibility to SMEs without compromising investor interests. Ultimately, the choice between Mainboard and SME IPOs depends on a company’s profile, size, and objectives, allowing a diverse array of enterprises to access the capital market and fuel their growth aspirations.