SME-IPO

1.What is in offer?

The SME IPO offers equity participation from investors in SMEs & by dilution of stake, a business is able to infuse funds on profit sharing basis instead of incurring fixed interest cost. Below are enumerated in detail:

a. Equity participation

Right mix of debt & capital, is one of the most important factors for growth of a business. Promoters can invest fund in initial stage of business but for next level of growth funding has to be raised from outsiders. The funding can be raised as Equity Participation from investors or Debt from financial institutions.

Up to certain level of growth of a business, debt is more beneficial but a business is tend to be risky when it is on high leverage. So by infusion of additional equity it can continue to be attractive for debt funding.

b. No fixed interest cost instead it is on profit sharing

Equity participation happens on profit sharing basis & based on bright outlook of the business so does not carry fixed cost of capital but investors tend to invest only when they feel good return is expected from their investment    

2.Who can avail

a.   Any Business House working as “Ltd Entity”

    An SME may be working in any form but for SME IPO it needs to convert into a limited entity to raise the equity capital        through the sale of shares.

b.  Annual turnover is 20 crores +

The annual turnover should be 20 crores plus to be taken positively by investors for investment. However lower turnover businesses can tap other source of funds also till they achieve this benchmark of turnover.

c.   Minimum EBDITA in the range of 10% ~ 15%

A business need not declare hefty profits to think on fund raising through Equity. A reasonable business earning sufficient to meet its obligation related to Depreciation, Interest, Taxes & Amortization of initial expenses, is considered a good business.

d.   Vintage is 3 Years +

A business run successfully for three years is considered having reasonable vintage to judge the business competence of the management, growth prospectus by viewing comparative numbers, Earning potentials & possible threats for the operation. In other words complete SWOT analysis is possible with the three years performance.

3.How much funding can be raised from SME IPO:

i. Funding can be raised from 2 crores to 25 crores or more provided the paid up capital after the issue is not above Rs. 25 crores.

ii. The funding can be above Rs. 25 crores if the shares issued at premium.

4.Who can’t approach:

         a.   SME Businesses with less vintage

A business with less vintage is not able to present its operational efficiency, competences, prospectus & prospective risks so the chances of fund raising through issuance of equity is very low so not advisable.

        b.   Businesses with Low turnover & lower EBDITA

Equity is required when a business reaches its limit or prospectus is very high. When the current operational numbers are not very promising then investors generally not prefer such proposals.

5.How to raise funds in SME IPO successfully:

Any business has to plan the desired funds according to the growth prospectus of business. In other words no opportunity is missed out due to short of capital. The Fund raising plan depends upon the funding capacity of promoters, product potentials, existing capital status (i.e. mix of equity & debt) & business risks. Below points elaborate the way in detail:-

a. Proper disclosure of all aspects of the IPO, is a key factor in contributing to the success of the IPO.Ensure that financial numbers are perfectly explained both sides of the IPO; the business side of the company and the stock market perspective of the company.

b. Selection of an investment banker is highly important for successful fund raising. Normally, investment bankers are invited to present their views on IPO positioning, capacity to line up investors, coordinates road shows, understand the pulse of market, effective management of back-end processes and due compliances of exchange and SEBI without hitches.

c. Assess the opinion and appetite for the stock well in advance by meeting with investors and research analysts prior to filing for the IPO. The planning process support to hone your story and practice responding to the types of questions investors will ask. Remember, this is the rehearsal before the actual pitch.

d. There is always a premium in the stock market for higher levels of transparency and disclosure practices. Don’t use terms like Adjusted Cash Flows, Adjusted EV or Adjusted EBITDA etc. Investors tend to assume the worst will come when they see new metrics of financials post IPO so they will avoid till they are able to duly forecast the business performance. 

e. Pricing determines the success of an IPO. Make sure there should be reasonable value which can fetch by investors post closure of IPO price. It is determined with true valuation of an entity & balancing act between issue price & fair value of stock.

6.What are the silent features

a. Considering today’s scenario of uncertainty, the equity dilution is the best source of fund raising to rationalize the business risks for all eligible business houses.

b. funding is at no interest cost, only on profit sharing

c. Beginning of unlimited source of funding by migrating to main board.

7.Demerits of SME IPO

 a. Potential loss of control compare to earlier status of absolute authority

i. By issuance of equity shares implies delegation of business risks among various investors on the pretext of profit prospectus. So when a business is not able to perform then the investors raise questions on the operational efficiency of the management & seek clarification for the inefficiencies which otherwise not asked when 100% holding lies with promoters.

ii. But such inquiries are good for business to put lid on inefficiencies & early detection of challenges results finally into appropriate action from management for control of losses.

b.  The investor community is not able to see the day to day operation so needs regular updates on financial information i.e. quarterly, half yearly & annually with different quantity of information.

The flow of information has to be maintained & not only information flow but also timely flow of information is appreciable in the eyes of investors to judge the prospectus of the business.