Investing in small and medium-sized businesses through their initial public offerings is growing in popularity because these companies often have big growth potential and offer a chance to back new and creative ideas. However, the process for applying to invest in SME IPOs is a bit different from investing in larger companies. If you`re interested in starting to invest in SME IPOs, here`s what you need to know to help you through the steps.
What is an SME IPO?
Before starting the application process, it`s important to know what an SME IPO is. SMEs are businesses that fit into a certain size category, based on things like revenue, market value, and number of employees. An SME IPO is when a company in this category raises money by selling shares to the public for the first time, usually on specialized stock exchanges like the NSE Emerge or BSE SME platform.
SME IPOs let investors buy shares in newer or rapidly growing companies that could see big increases in value. However, these investments come with more risk than investing in larger, more established companies.
Eligibility to Apply for SME IPOs
Before you can apply for an SME IPO, you need to make sure you meet the required eligibility criteria. In India, the Securities and Exchange Board of India (SEBI) lets both retail and institutional investors take part, but there are a few important things to remember.
- Retail Investors: For retail investors, the highest amount you can bid is usually limited to ?2 lakh. This means the total value of the shares you apply for must be less than ?2 lakh.
- HNI (High Net-Worth Individuals): Investors who want to apply for SME IPOs that are above the retail limit must be classified as High Net-Worth Individuals (HNIs). Their applications usually go through a different process for allocating shares.
- Demat Account: To apply for IPO shares, you need to have a valid Demat account. This is because the shares that are given to you will be added to your Demat account.
Steps to Apply for an SME IPO
Now that you know what SME IPOs are and what you need to qualify, here`s a step-by-step guide on how to apply for an SME IPO.
Step 1: Choose Your Broker
Small and Medium Enterprises (SMEs) that go public are listed on specialized stock exchanges such as BSE SME and NSE Emerge. If you want to apply for an SME IPO, you need to have a brokerage account. Many brokers, whether they are traditional or online, offer access to SME IPOs, but you should make sure your broker specifically allows participation in IPOs listed on these smaller exchanges.
Some popular brokers that support SME IPOs include:
- Zerodha
- Angel One
- ICICI Direct
- Upstox
Step 2: Open a Demat Account
If you don`t already have one, the next thing you should do is open a Demat account. A Demat account is important because IPO shares are added to it once your application gets approved. You can choose any brokerage that provides this service to open your Demat account.
Documents required for a Demat account:
- PAN card
- Address proof (Aadhaar card, utility bill, etc.)
- Passport-size photograph
- Bank account details
Step 3: Check the IPO Details
Before you apply, check the details of the SME IPO. These details are in the red herring prospectus or offer document, which explains:
- Price Band: The price range within which you can place bids.
- Issue Size: The total number of shares being offered.
- Business Model: Understand the company`s business, financial health, and future prospects.
- Subscription Dates: Know the open and close dates for the IPO subscription.
The small business company often starts an ad campaign to inform investors, and you can also look for news on financial websites and social media to stay updated.
Step 4: Decide on the Application Type
There are two main types of applications for IPOs:
- Fixed Price Offer: Here, the price of the shares is fixed. You need to pay the full amount based on the fixed price.
- Book Building Offer: Here, you can place a bid within the price range, and the final price is set based on how much people want to buy and how much is available.
For small and medium-sized company IPOs, most offerings are either set at a fixed price or use book-building, so it`s important to find out which type it is before you place your bid.
Step 5: Apply for the IPO
You can apply for the SME IPO online or offline:
Online Application (Through Broker or Bank):
- Log in to your brokerage account or the trading platform.
- Go to the IPO section and select the SME IPO you want to apply for.
- Enter the quantity of shares you want to apply for (within the allowed limits).
- Make the payment via UPI (Unified Payments Interface) or ASBA (Application Supported by Blocked Amount) for application submission.
- Your bid will be placed, and the money will be blocked in your account.
Offline Application:
- Fill out the physical application form available at your broker or bank.
- Provide your details, including the number of shares, price range, and UPI ID (for payment).
- Submit the form along with a cheque or demand draft for payment.
- Your application will then be processed manually.
Step 6: Payment and Application Confirmation
Once your bid is successfully placed, the money will be held in your account if you`re using ASBA or UPI. You will get a confirmation message through email or SMS from your broker or bank.
Step 7: Allotment and Listing
Once the IPO is completed, the company will distribute shares depending on how much demand there is and how many people subscribe. If you get allocated shares, they will be added to your Demat account.
- If you don`t receive allotment, your blocked funds will be unblocked.
The shares of the SME IPO will be listed on the exchange on the listing date, which usually happens a few days after the allotment.
Advantages of Investing in SME IPOs
- High Growth Potential: SMEs often offer high growth potential due to their innovative business models.
- Early Investment Opportunity: By investing in an SME IPO, you`re joining a company that`s starting to grow and has potential for future success.
- Diversification: Including SMEs in your portfolio can help diversify your investment across different sectors and business sizes.
Conclusion
Investing in SME IPOs can be both profitable and risky. It gives you a chance to support companies that are creating new and exciting ideas, but it`s important to do your homework and understand the possible risks. If you follow the steps mentioned and keep yourself updated, you can make smarter decisions during the SME IPO process and possibly add some fast-growing stocks to your investment list.
2025(259)
