Difference Between Mainboard IPO and SME IPO

Introduction

When companies in India have the requirement of raising money from the public, one of the most common routes they prefer is an Initial Public Offering (IPO). Now you might be curious to know how an IPO works. When an IPO takes place, a private company becomes a publicly listed company. To keep it simple, its shares can be bought and sold on a stock exchange. However, for many retail investors the confusion still remains as IPOs in India are broadly divided into Mainboard IPOs and SME IPOs.

Be it Mainboard IPOs or SME IPOs, both of them allow investors to participate in a company’s growth journey. That said, they are meant for very different kinds of businesses. It is of integral importance to clearly understand the difference between mainboard IPO and SME IPO because the risks, investment size, regulations, and return potential can vary significantly.

This blog explains the difference between mainboard IPO and SME IPO in simple English for Indian investors. We have included everything right from how each IPO works, eligibility criteria, minimum investment, risks, benefits, and which type of investor each IPO is best suited for. After reading this blog till the end, you should have a clear idea of where you stand as an investor and what to look for before applying.

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What is an IPO?

An Initial Public Offering (IPO), is the process by which a company offers its shares to the public for the first time and gets listed on a stock exchange. Prior to an IPO, the company is usually owned by promoters, founders, and a few private investors. After the IPO, public investors also become shareholders.

The following are some of the many reasons due to which companies launch IPOs:

• Raising funds for expanding business
• Bringing down debt
• Elevating brand visibility and credibility
• Offering an exit option to early investors

In India, Securities and Exchange Board of India (SEBI) is the body that regulates IPOs. Also note that these IPOs are listed on recognised stock exchanges like NSE and BSE.

Understanding a Mainboard IPO and an SME IPO

What is a Mainboard IPO? 

A Mainboard IPO is an IPO launched by relatively large and established companies. These companies usually have a strong financial track record, higher revenues, and a larger market presence. Mainboard IPOs are listed on the main platforms of stock exchanges, such as the NSE Main Board or BSE Main Board.

Main board IPOs tend to attract a lot of interest from ordinary folks as well as from the big players – be it institutional investors, mutual funds, insurance companies or even foreign investors. Because they’re a lot bigger and have to jump through some pretty tough regulatory hoops, main board IPOs are often viewed as a bit more solid than SME IPOs – but that doesn’t mean they’re completely safe and sound.

What is an SME IPO?

An SME IPO, on the other hand, is basically for smaller and medium sized businesses looking to get their hands on some cash from the public. These companies are a wee bit smaller in scale and maybe not even out of their teenage years in terms of growth yet. SME IPOs list on those special platforms that are usually for smaller outfits like the NSE SME or the BSE SME.

The main aim of SME IPOs is to make it easier for these growing businesses to tap into the capital markets. While they do offer the potential for some good growth, they also carry a higher risk because of the lower liquidity, smaller scale of operations and pretty much no track record to fall back on.

Reason for introducing SME IPOs in India

There are heaps of small businesses in India that are really struggling to get the funds they need through more traditional means – like bank loans or from private investors. To solve this problem, special SME platforms were introduced to allow smaller companies to list with simpler compliance requirements.

The idea was to:

• Support entrepreneurship and innovation
• Provide growth capital to small businesses
• Create investment opportunities beyond large companies
• Encourage transparency and better corporate governance

It becomes easier to understand the difference between mainboard IPO and SME IPO once you know that both serve different segments of the economy.

Eligibility Criteria: Mainboard IPO vs SME IPO

Eligibility for Mainboard IPO

Companies planning a mainboard IPO must meet strict eligibility conditions. These usually include:

• Strong financial performance over previous years
• Minimum net worth and profitability requirements
• Higher paid-up capital
• Proven business model and operational history

Because of these requirements, only well-established companies can opt for a mainboard IPO.

Eligibility for SME IPO

SME IPOs have comparatively relaxed eligibility norms, such as:

• Lower minimum net worth
• Smaller issue size
• Shorter operating history allowed
• Simpler compliance requirements

This flexibility helps smaller companies access the stock market without the heavy burden faced by large corporations.

Issue Size and Fundraising Capacity

One of the biggest points in the difference between mainboard IPO and SME IPO is the issue size.

Mainboard IPOs generally raise large amounts of money, often running into hundreds or even thousands of crores. These funds are used for major expansion plans, acquisitions, or large-scale debt reduction.

When it comes to SME IPOs, they raise much smaller amounts. Generally they come somewhere between a few crores to around a hundred crores. These funds are used typically for working capital needs, small expansions, or technology upgrades.

Minimum Investment and Lot Size

Mainboard IPO Lot Size

Mainboard IPOs are designed to be accessible to retail investors. The lot size is usually small, and the minimum investment often falls within a reasonable range that most retail investors can afford.

This encourages wide participation from individual investors.

SME IPO Lot Size

SME IPOs usually have a much larger lot size. The minimum investment amount can be significantly higher compared to mainboard IPOs. This is done to limit participation to serious investors who understand the higher risks involved.

Because of this, SME IPOs may not be suitable for investors with limited capital.

Listing Platforms and Trading

Mainboard IPO shares are listed on the main trading platforms of NSE and BSE. These stocks enjoy high liquidity, meaning it is easy to buy or sell shares at market prices.

SME IPO shares are listed on separate SME platforms. Liquidity in these stocks is usually low, and trading volumes can be limited. This means investors may find it difficult to sell their shares quickly.

Liquidity is a crucial factor when comparing the difference between mainboard IPO and SME IPO.

Liquidity and Volatility

Mainboard IPO Liquidity

Mainboard IPO stocks generally have:

• Higher trading volumes
• Better price discovery
• Lower chances of extreme price manipulation

While prices can still fluctuate, liquidity is usually sufficient for smooth entry and exit.

SME IPO Liquidity

SME IPO stocks often experience:

• Low trading volumes
• Sharp price movements
• Difficulty in exiting positions

Prices can rise or fall sharply even with small trades. This makes SME IPOs more volatile and risky for inexperienced investors.

Regulatory Requirements, Compliance

Mainboard IPOs are subject to strict regulatory oversight. Companies must follow detailed disclosure norms, corporate governance standards, and periodic reporting requirements.

SME IPOs enjoy certain relaxations in compliance to reduce costs and encourage participation. However, this also means investors may have access to less information compared to mainboard companies.

This regulatory difference is another important aspect of the difference between mainboard IPO and SME IPO.

Risk Profile: Mainboard IPO V/s SME IPO

Risks in Mainboard IPOs

Mainboard IPOs are generally less risky compared to SME IPOs, but risks still exist. These include:

• Market volatility
• Overvaluation at the time of listing
• Poor performance after listing

However, the presence of institutional investors and stricter regulations often boosts the confidence levels.

Risks in SME IPOs

SME IPOs carry higher risks such as:

• Limited operating history
• High dependence on a few clients
• Lower liquidity
• Higher price volatility

Hence, due to the above factors, investors must carefully assess their risk tolerance before investing in SME IPOs.

Growth Potential and Returns

Mainboard IPOs usually offer stable and moderate growth over the long term. These companies are often already well-established, so explosive growth may be limited.

On the other hand, SME IPOs can offer very high returns if the company grows successfully. Many small companies have the potential to turn out to be large businesses in the future. That said, it is not that all SME IPOs succeed, and some may fail.

This risk-reward trade-off is central to understanding the difference between mainboard IPO and SME IPO.

Investor Participation

Mainboard IPOs attract a wide range of investors:

• Retail investors
• Institutional investors
• Mutual funds
• Foreign investors

SME IPOs mainly attract:

• High-net-worth individuals
• Experienced investors
• Long-term investors with higher risk appetite

Retail participation in SME IPOs is usually limited due to high investment requirements.

Migration from SME to Mainboard

An interesting feature of SME IPOs is that successful companies can later migrate to the mainboard. On meeting the required criteria, they can shift to the main trading platform. This often improves liquidity and visibility.

This migration can be beneficial for early investors. However, there is guarantee.

Taxation of Mainboard IPO and SME IPO

From a taxation perspective, there is no major difference between mainboard IPO and SME IPO for investors. Capital gains tax rules apply in the same manner:

• Short-term capital gains if shares are sold within a year
• Long-term capital gains if shares are held for more than a year

Tax treatment depends on the holding period and applicable tax laws.

How to Choose Between Mainboard IPO and SME IPO

Before you invest in an IPO, ask yourself the following questions:

• What is my risk tolerance?
• What is the amount of capital I can invest?
• Does liquidity matter to me?
• Is my purpose of investing short-term gains or long-term growth?

If you are looking for stability, liquidity, and lower risk, mainboard IPOs may suit you more. On the other hand, if you are ready to take higher risk for potentially higher returns and can invest a larger amount, it may be worth considering SME IPOs.

Common Myths About SME IPOs

Many investors believe SME IPOs always give higher returns, though this is not true. Though some SME IPOs do perform exceptionally well, others may struggle or fail.

Another myth is that SME IPOs are unsafe. The reality is that they are regulated but designed for a different category of investors.

Understanding facts instead of myths helps in making better decisions about the difference between mainboard IPO and SME IPO.

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Key Takeaways

• Mainboard IPOs are for large, established companies whereas SME IPOs are for small and medium enterprises.
• Mainboard IPOs have lower risk, better liquidity, and smaller minimum investment requirements.
• SME IPOs offer higher growth potential but also carry higher risk and lower liquidity.
• When compared to SME IPOs, regulatory requirements are stricter for mainboard IPOs.

Investors should choose based on risk appetite, investment size, and financial goals.

Parting Words

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