Investing in SME IPOs (Initial Public Offerings of Small and Medium Enterprises) can be a bit confusing, especially when you discover that the minimum investment needed is much higher than that for regular IPOs. This post explains what SME IPO means, where it is listed, why it requires a larger minimum investment (of ₹2 lakh), what “lot size” means, and other key points to know.
Many first-time investors also rely on investment advisory services to better understand these offerings before committing funds. Read on to know more.
Source: Economictimes
What Are SME IPOs?
SME IPOs are share offerings by small and medium businesses that want to raise money from the public. These companies don’t list on the main BSE or NSE exchanges. Instead, they appear on special platforms:
- BSE SME
- NSE Emerge
These platforms were created in 2012 specifically to help smaller companies raise funds. Through these IPOs, investors get an opportunity to invest in growing businesses at an early stage that have potential for significant growth.
Minimum Investment in SME IPOs
Unlike regular IPOs where you can invest small amounts, SME IPOs have a higher entry barrier.
- The minimum investment application size is now ₹2,00,000 (Rupees Two lakh)
- You cannot invest small amounts like ₹5,000 or ₹10,000
- You must apply for at least two full “lots” of shares
The minimum investment size has been increased to ₹2,00,000 (Rupees Two lakh) to avoid unnecessary speculation in SME IPO. This would help safeguard the interests of investors who are often swayed by rising share prices when making investment decisions.
Source: ET
The application process for SME IPOs is similar to regular IPOs – you can apply through your trading account with a registered broker. However, be aware that not all brokers provide access to SME IPOs, so you may need to check with your broker first or consider opening an account with one that specifically offers this service.
Understanding Lot Size in SME IPOs
Lot size refers to the minimum number of shares you need to buy in an IPO. In SME IPOs:
- One lot is worth ₹1 lakh.
- The number of shares in one lot depends on the share price.
- You cannot buy fewer shares than two lots.
- This lot size remains fixed even for secondary market trading after listing.
Since the minimum application now requires two lots, your actual investment must be ₹2,00,000 or more, depending on the final lot value and price band.
Why Is the Minimum Investment Higher for SME IPOs?
There are several important reasons for the higher minimum investment:
Investor Protection: Smaller companies can be riskier investments due to:
- Limited track records
- Higher chances of failure
- Less liquidity (fewer people buying and selling their shares)
Market Stability: The higher minimum investment:
- Prevents tiny trades that can cause extreme price movements
- Reduces excessive speculation
- Ensures more serious participation from investors
Fundraising Efficiency:
While regular IPOs need at least 1,000 investors, an SME IPO may need just 200 (updated from 50). Each investor is now expected to contribute more, helping the company raise the required capital with fewer participants.
Finally,
Investing in SME IPOs requires a minimum amount of ₹2 lakh, due to the fixed lot size system. This requirement is designed to protect investors and ensure stability in the SME market.
Despite the higher entry barrier, SME IPOs can offer good opportunities to participate in the growth story of small businesses with good potential. Many of these companies have shown stronger post-listing performance compared to some mainstream IPOs, though with higher volatility.
Before applying, carefully assess whether this investment size suits your budget and risk tolerance. For those new to such investments, consulting investment advisory services can provide valuable guidance on selecting SME IPOs and understanding the associated risks and rewards.
Remember that while these investments can potentially deliver good returns, they come with higher risks due to the smaller size and limited operating history of these businesses. Diversification and thorough research are particularly important when investing in this market segment.
