How to Sell SME IPO Shares: A Step-by-step Guide for Retail Investors

Small and medium enterprises (SMEs) raise capital through SME IPOs by listing their shares on dedicated SME platforms. While the investment process is similar to that of regular IPOs, selling SME IPO shares after listing follows a different approach. This is mainly due to the trading and listing requirements specific to SME platforms.

This guide explains, in simple steps, how to sell SME IPO shares after they are allotted.

What is an SME IPO?

An SME IPO refers to an Initial Public Offering (IPO) by small- and medium-sized enterprises. It is the process through which SMEs in India raise capital from the public by selling their shares for the first time. These shares are listed on designated SME platforms such as the Bombay Stock Exchange (BSE) SME or the National Stock Exchange (NSE) Emerge, rather than on the main stock exchanges, which are reserved for larger companies. Once listed, public investors can subscribe to the shares and start trading. SMEs can later migrate to the main boards of BSE and NSE upon meeting the eligibility criteria, such as profitability, net worth, and other regulatory requirements.

Criteria for listing on the stock exchange

To be eligible for an SME IPO, the enterprise must fulfil the following criteria:

• It must be registered as a public limited company under the Companies Act, 1956 (now the Companies Act, 2013).
• The SME’s paid-up capital post-issue must not exceed ₹25 crore.
• The tangible assets of the company must be worth at least ₹1.5 crore.
• The SME should have earned an operating profit (EBITDA) of at least ₹1 crore in any two of the last three years. Additionally, the net worth and free cash flow to equity must be positive in at least two of the previous three years.
• Promoters must hold at least 80% of the company’s shareholding post-issue.
• The promoters of the company should not change for at least one year after applying for the IPO.
• The shares must be issued in dematerialised (demat) format.
• The IPO must have a minimum of 50 investors subscribing to the IPO.

Step-by-Step guide on how to sell SME IPO shares

Once the shares have been allotted to you, you will get a notification via email. The shares will then be credited to your demat account. If you have not been allotted any shares, the refund will be processed within a few days.

If you wish to sell the shares after allotment, here’s a step-by-step guide on how to sell SME IPO shares:

Step 1: Listing day

After the IPO closes and shares are allotted, they will be listed on the designated SME platforms on a specific date, which is announced in advance. It is usually within 10 working days. The listing date and other details will be available on the exchange’s website, the registrar’s website, or in the IPO prospectus.

Step 2: Trading/selling

Once the shares are listed, you can start trading during normal market hours. According to research by some traders, most IPOs tend to perform well on their listing day. Therefore, it is often advisable to sell on the listing day rather than wait for 2-3 years.

Step 3: Place the sell order

Log in to your demat account, go to the SME stock section, and select ‘Sell’. Enter the correct quantity, set the limit price, and confirm the order. If your order matches a buyer, it will be sold during market hours. If it doesn’t get executed, you may need to consider revising the price. If you choose a market order instead of a limit order, the shares will be sold immediately at the best available price.

Step 4: Trade in lot size

SME shares must be sold in lot sizes, unlike mainboard shares, which can be sold individually. Each SME IPO has a predefined minimum lot size. For instance, if the lot size is 1,000 shares, you must sell in increments of 1,000 shares. Partial selling of shares is generally not allowed.

Step 5: Monitor market forces

Unlike large-cap companies, SME stocks have lower liquidity. This means the selling price is significantly influenced by market demand and supply on the listing day. Monitor market fluctuations to determine when and how to sell your SME IPO shares.

Step 6: Trade settlement and payout

Once your order is executed, the proceeds will be credited to your trading account within 1-2 business days.

Factors to consider while selling SME shares

Before selling SME shares, here are some important factors to consider:

• Migration to the mainboard: If the SME has migrated to the mainboard, trading will be similar to regular mainboard stocks, with no restrictions on lot sizes. If the stocks are performing well, it may be wise to hold onto your shares until the SME completes its migration.

• Higher brokerage fees: SME trading often involves higher brokerage charges due to lower volumes and liquidity. Before selling, check the applicable brokerage fees, trading charges, and other transaction costs. Sometimes, it may cost you more than the profits that you earn from selling, especially for small lots.

• Company fundamentals and market volatility: Always research the company’s fundamentals and assess overall market conditions before deciding to sell.

• Tax implications: Profits from selling SME shares are taxable. If you sell the shares within one year, the gains are subject to short-term capital gains tax at a rate of 15%. If you hold the shares for more than one year, gains exceeding ₹1 lakh are taxed at 10% as long-term capital gains. Therefore, it is important to maintain all records related to the buying and selling of shares for tax filing purposes.

Conclusion

Small and medium-sized enterprises raise capital from public investors to support growth, expansion, and enhance their brand visibility. If you’re investing in SMEs, it’s essential to have a clear understanding of SME IPOs, including where they’re listed, the lot size or minimum investment amount, and the associated risks. At the same time, you should also know how to sell SME IPO shares to maximise returns.