Mainboard IPO vs SME IPO: Key Differences

Understanding the SME vs Mainboard IPO debate in more detail is crucial if you’re an investor. These IPOs differ mainly in regulatory guidelines, company scale, and investor risk.

Mainboard IPOs primarily target established, large firms with substantial capital on the main exchanges (BSE/NSE). SME IPOs, on the other hand, enable growing and smaller entities to raise funds on less stringent and dedicated platforms (BSE SME/NSE Emerge) with lower compliance requirements. Let us now examine the key differences between these two IPO types. 

What is a Mainboard IPO?

A Mainboard IPO (initial public offering) is the first sale of stock by an established, large company to the general public, with the aim of raising capital, and is listed on key stock exchanges (BSE or NSE). Hence, the basic meaning of a Mainboard IPO is an initial public offering by a large firm with a solid financial history and track record to raise funds for expansion. Some key characteristics of these IPOs include greater liquidity, a broader investor base (including institutional investors), and stringent regulatory vetting. 

There are several Mainboard IPO requirements as well, in line with SEBI guidelines. Some recent examples of IPOs in this category include Hyundai Motors, NTPC Green Energy, Swiggy, and others. 

What is an SME IPO?

The term SME IPO refers to the initial public offering (IPO) by small and medium enterprises (SMEs). This enables them to raise funds on dedicated stock exchange platforms such as NSE Emerge or BSE SME rather than the main board. These listings provide greater visibility, liquidity, and access to growth capital, typically with smaller issue sizes and higher reward-to-risk ratios for investors. 

Also, the minimum application sizes may be higher than mainboard IPOs, often requiring a minimum investment of ₹1 lakh or more, thereby limiting participation. They are also riskier than mainboard IPOs due to higher volatility, lower liquidity, and limited operational history. 

Major Differences Between Mainboard IPO and SME IPO 

Here are the key differences between SME and Mainboard IPOs: 

These differences will help you better understand the debate between Mainboard IPOs and SME IPOs. 

Liquidity & Trading Behaviour in Mainboard and SME IPOs

Mainboard IPOs often witness active buying and selling by mutual funds, foreign investors, and insurance companies. On the other hand, SME IPOs are largely driven by retail investors, i.e., those seeking higher listing gains. This often leads to lower liquidity once the initial hype over the listing subsides.

SME IPOs also have larger minimum lot sizes (the minimum application size is usually ₹1 lakh), thereby restricting the number of retail participants and overall liquidity. Mainboard IPOs enable a more affordable, smaller entry point for retail participants. 

Since SME stocks have lower liquidity, SEBI mandates the appointment of a market maker for a minimum period of three years. This ensures the availability of buyers/sellers for the stock. SME IPOs may also sometimes witness erratic movements or sudden breakouts. Mainboard companies usually exhibit more predictable, gradual price movements, as they are more established entities with a solid track record.

Some successful SME companies may eventually switch to the mainboard, which can sometimes enhance their liquidity and attract broader institutional coverage.

Compliance & Reporting in Mainboard and SME IPOs

Mainboard companies are required to file their financial reports quarterly. SME companies, on the other hand, only have to file their financial results on a 6-month (half-yearly) basis. 

Mainboard DRHPs (draft red herring prospectuses) go through direct and stringent review by SEBI. However, SME documents are reviewed by stock exchanges, with SEBI serving only in a supervisory role.

Mainboard IPOs are associated with stringent corporate governance requirements, including specific composition requirements for independent directors. The norms for SMEs are usually more flexible, reducing the operational load on smaller firms. 

Mainboard IPOs are subject to detailed and extensive disclosures on the financials, business, and risks. SME compliance is lighter than that of larger companies, with lower accounting and legal costs.

The Mainboard process takes about 6-12 months due to the strict scrutiny, while the simpler SME procedure usually requires 3-4 months.

Market making is mandatory for SME IPOs for three years to ensure ample liquidity, while it is not compulsory for the Mainboard. These firms must also publish their financial results in national newspapers, whereas SME firms are usually exempt from this requirement. Mainboard also needs at least 1,000 shareholders, while SME needs just 50. 

Risk & Volatility Comparison Between Mainboard IPO and SME IPO

SME stocks often experience greater volatility owing to their smaller market capitalisation, which leads to sharper price swings than those of more stable and well-established Mainboard IPO companies. Mainboard shares have higher trading volumes, enabling easier buying/selling, while SME shares have higher liquidity owing to compulsory large lot sizes (often >₹1 lakh), making it hard to exit during downturns. 

Mainboard IPOs are SEBI-vetted, with stringent financial disclosures for higher transparency and comparatively lower risks. SME IPOs are approved by stock exchanges with less-stringent vetting.

Investment risks may also be higher for SMEs due to limited public information, whereas mainboard companies are often well-known and have reliable historical data. So, as a core takeaway, Mainboard IPOs carry lower risk, while SME IPOs carry higher risk. 

Capital Raising & Growth Stages in Mainboard and SME IPOs

Mainboard IPOs are tailored for larger, more mature companies with significant capital needs, often with post-issue paid-up capital exceeding ₹10-25 crore. SME IPOs have smaller issue sizes, mainly targeting companies with post-issue paid-up capital usually less than ₹25 crore. This makes them ideal for smaller and expanding companies. 

As for the growth stage, Mainboard IPOs are for established companies with proven track records, lower risk, and steady, predictable growth. SME IPOs are for high-growth or early-stage entities with higher risks, but ample potential for high returns from rapidly emerging businesses. 

So, Mainboard entities are in the phase of consolidation or further expansion, with capital required for large-scale global or domestic growth. On the other hand, SME entities are in the early growth phase, seeking capital to boost operations, acquire new technologies, or enter the market, often with limited operational histories. 

Which IPO is the Right Option for Businesses?

The right IPO option for any business depends on the company's size and maturity. Mainboard IPOs are for larger, established, and profitable companies seeking high liquidity and substantial capital. SME IPOs, on the other hand, are tailored for growing and smaller firms that need capital at lower cost and fewer compliance and regulatory barriers. 

Mainboard companies require a proven track record (more than 3 years of profitability) and higher post-issue capital (>₹25 crore), while SME is ideal for smaller companies with less stringent profitability requirements.

Mainboard listings involve greater regulatory scrutiny and compliance costs, while eligibility requirements for SME IPOs are less stringent. These IPOs have simpler listing procedures and lighter reporting burdens.

Mainboard companies offer higher liquidity and attract institutional investors, whereas SME platforms have higher volatility and lower liquidity. SMEs often have greater growth potential but also higher risks.

The mainboard IPO is perceived as a low-risk, more stable option for raising significant capital. So, if you’re a large corporation, you can consider opting for a Mainboard IPO. Alternatively, if you’re a growing company with smaller needs and limited compliance capacity, you can consider the SME IPO route. 

Which IPO is the Right Option for Investors?

As an investor, which option is right for you? Here’s looking at a key takeaway that you can use for both IPO types. 

Mainboard IPOs: 

• They are ideal if you are seeking better liquidity and stability in your investment, since they involve larger, more established companies with proven track records. 
• You will be assured of lower risks with stringent SEBI vetting. 
• They are more accessible, with lower application amounts, while higher trading volumes ensure more liquidity. 

SME IPOs: 

• They are suitable if you’re comfortable with higher risks and are aiming for potentially higher growth from emerging businesses. 
• The risks are higher, but so are the chances of big gains. 
• You also have to account for higher entry barriers (minimum investment of up to ₹2 Lakh) and lower liquidity due to smaller lot sizes. 

Hence, you can consider Mainboard IPOs for safe long-term wealth creation. If you’re an experienced investor who is comfortable with a high risk-reward ratio and has the ability to research and pick the best smaller companies, SME IPOs may be worth considering. 

Final Thoughts

Understanding the key differences between SME and Mainboard IPO is crucial for both investors and companies. Both categories have different requirements and processes, making it imperative to understand their core benefits before taking the plunge.