SME Connect IPO Funding

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‘ICICI Bank presents SME Connect’ – the weekly series in the Times of India – is more than just a business consultant for SMEs and Emerging Corporates; it goes beyond seeking to empower them with the knowledge and skills to become globally competitive. We sought to do so on August 14th, 2010, with a feature on IPO Funding. We received plenty of queries from readers eager to learn more, and they have been answered in detail by our expert below. .
 

     
  Q. I have an SME setup. I am planning to go for an IPO. Please suggest what points shall I take into consideration?  
     
  A: IPO is a dream for any SME given the reputation attached with being a listed company. It is also an important source of funds for expansion projects.

Key ingredient to a successful IPO is a strong business model. The company should strive to become one of the key players in the segment in which it is operating in terms of size, relative profitability, sustainable competitive advantage, etc.

The company should also try to generate awareness about its products, specialities, relative strengths, upcoming projects, etc. A widely known company tends to get more favourable market response.
 
     
  Q. What are the risks that I should keep in mind if I plan to raise funds through the IPO channel?  
     
 
A: Running an IPO is an expensive process. As the company is widely discussed during the IPO process, its market reputation is also at stake. A major risk therefore is of poor market response. Unless the company achieves minimum subscription the proceeds have to be returned. The company's image also takes a hit if the market reaction is unfavourable.

If the IPO has lower participation from institutional players and general public, post-issue trading volumes may be low denying the company of many benefits which it seeks from an IPO.
 
     
  Why should I involve a bank when filing for an IPO? What does the bank bring to the table?  
     
 
A: A merchant banker brings in experience of the IPO process and pulse of the market. He leads the company through every stage in the IPO process e.g. pre-issue activities such as deciding on valuation, IPO size, proposed capex, investor presentation, regulatory approvals, issue related road shows, presentations, networking, positioning of the company and the IPO, logistical support like appointment of collection agents, accepting bids, etc. He ensures that the issue receives desired market response and the process unfolds smoothly.