NSE (National Stock Exchange) updated its eligibility criteria for an SME IPO to take place on its exchange.

The new norms go into effect for any new IPO filings (DHRPs) filed on or after 1st Sept 2024. There is a lot misunderstood about this, sharing a few observations:

Old profitability criteria for SME IPO on NSE Emerge:

(1) Operating profit (earnings before interest, depreciation and tax) from operations for at least any 2 out of 3 financial years preceding the application

*New criteria for SME IPO (stricter on profitability)*

(1) Positive Free cash flow to Equity (FCFE) for at least 2 out of 3 financial years preceding the application

Caveat: Don’t mis-interpret FCFE as FCF (Free Cash Flow)
(a) FCFE ≠ FCF
(b) FCFE = FCF − Net Debt Issued (or Repaid) + Net Borrowings

Rationale for this change: SME IPO profitability criteria for both BSE and NSE is now IN-LINE.

BSE had updated its own profitability criteria for an SME IPO w.e.f. 1st January 2024 to require:

“Positive EBITDA in two out of the three most recent financial years, with positive EBITDA in the most recent year”

Some thoughts on the same
•⁠  ⁠It is good to see both NSE and BSE have upped the bar for the SME IPOs, especially given how many retail investors are participating
•⁠  ⁠It is also good to see that both exchanges are comparable on listing criteria (detailed notes below) therefore investors can trust both exchanges equally.

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