SME IPOs have expanded rapidly in India, and with that growth has come a structural challenge: post-listing liquidity. Unlike many mainboard stocks, SME scrips often trade in larger lots, with thin order books and high impact costs—a combination that can turn “price discovery” into “price gaps”.

This is precisely why the SME ecosystem uses compulsory market making: a designated broker (or set of brokers) is obligated to continuously provide buy-and-sell quotes so investors can transact with at least some predictable depth and continuity. Let’s explore what are Market Makers in SME IPOs?

What Are Market Makers in SME IPOs?

In the SME context, a Market Maker is typically a stock broker registered on the SME exchange (NSE EMERGE or BSE SME) who is obligated to:

• provide two-way quotes (bid and ask),
• maintain a minimum quote depth,
• do it for a specified proportion of trading time,
• and support liquidity from the day of listing.

NSE’s EMERGE platform sets out these roles and obligations explicitly: two-way quoting for 75% of the time, minimum quote depth of INR 1,00,000, execution guarantee at the quoted price/quantity, and no more than five market makers per scrip.

BSE SME similarly describes two-way quoting for 75% of the time, execution guarantee, and a cap of five market makers; it states a minimum depth of one lot on its platform.

The Legal Spine: SEBI ICDR Regulation 261

The most important rule for investors and issuers is this: market making is compulsory for SME public issues under SEBI ICDR.

Key points from Regulation 261:

• The lead manager must ensure compulsory market making “in the manner specified by the Board” for a minimum of three years from listing (or from migration to SME, where applicable).
• The market maker’s inventory as on the date of allotment must be at least 5% of the specified securities proposed to be listed on the SME exchange.
• The market maker cannot buy shares from promoters/promoter group (or persons who acquired from them) during the compulsory period.
• If a shareholder holds less than the minimum tradable contract size, the market maker must buy the holding in one lot, but the market maker cannot sell in lots smaller than the minimum contract size.

This is why market making is not just “a broker providing liquidity”; it is a regulated, ring-fenced obligation with inventory and conduct constraints.

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What Market Maker Does Each Trading Day?

Across the framework (SEBI’s trading master circular chapter and exchange rules), the practical obligations map to four operational “must-haves”:

A) Time Obligation: Two-Way Quotes for 75% of Day

SEBI’s consolidated trading framework specifies the 75% requirement and that the exchange monitors compliance; market makers must also inform exchanges about “blackout periods” (times they won’t quote).

B) Depth Obligation: Minimum Quote Depth

SEBI’s trading framework states minimum depth of INR 1,00,000.
NSE repeats the same minimum depth of INR 1,00,000 for EMERGE market makers.
BSE’s SME describes minimum depth as one lot.

Investor interpretation: depth rules attempt to ensure that quotes are not “decorative”, but have meaningful executable size.

C) Execution Obligation: Guaranteed Fills at the Quoted Price/Quantity

SEBI and exchange rules emphasise that the market maker must execute at the quoted price and quantity (for quotes they have posted).

D) Spread Controls: Exchange Can Cap the Spread

SEBI’s trading framework states that exchanges may prescribe maximum bid–ask spreads, and for a new issue, the spread is to be specified in the offer document with the exchange’s prior approval.

This is a critical point investors often miss: the market maker is not meant to post an absurdly wide spread and claim compliance.

Inventory Management: When Can a Market Maker Stop Giving Buy Quotes?

Market making creates a genuine risk for the broker: if sell orders dominate, the market maker accumulates inventory. SEBI, therefore, permits a structured “inventory threshold” mechanism on the upper side, tied to issue size.

SEBI’s framework specifies:

• A table of issue-size thresholds and the inventory levels at which a market maker may get a buy-quote exemption (i.e., can provide only sell quotes), and the re-entry threshold at which they must resume two-way quotes.
• For example:
  • Up to INR 20 crore issue: buy quote exemption at 25%, re-entry at 24%
  • INR 20–50 crore: 20/19%
  • INR 50–80 crore: 15/14%
  • Above INR 80 crore: 12/11%

Two investor-relevant nuances:

1. No exemptions for the first three months: the market maker must provide two-way quotes irrespective of inventory during that initial period.
2. No downside exemption: if inventory falls (they sell out), there is no symmetric relief; exchanges may escalate if the market maker exhausts inventory.

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SME Lot Sizes: Why Liquidity is Structurally Harder than Mainboard

SME scrips trade in standardized lots, and those lots can be large. NSE’s EMERGE lot table (used for IPO and secondary trading) shows, for example:

• Price band INR 50–70: 2,000 shares per lot
• Price band INR 90–120: 1,200 shares per lot
• Price band above INR 1,000: 100 shares per lot

Implication: even a “small” trade may represent a meaningful rupee value. Large lots tend to:

• reduce retail granularity,
• widen impact costs,
• increase the value of a standing market maker quote.

How might the spread be constrained?

SEBI’s framework allows the exchange to prescribe a maximum spread and requires the new-issue spread to be specified in the offer document with approval. So, in a well-structured SME IPO, the offer document should disclose the spread commitment and the market maker details.

Market Maker vs. Underwriter vs. Liquidity Provider

• Market Maker (SME): Post-listing liquidity obligation—two-way quotes, depth, execution guarantee, inventory rules.
• Underwriter (SME IPO): Ensures subscription support during the IPO; not the same as quoting continuously after listing.
• Liquidity enhancement schemes (general market): Separate concept; SEBI allows exchanges to run liquidity enhancement schemes for illiquid securities, but SME market making is a distinct compulsory construct in the SME IPO framework.

Bottom Line

In an SME IPO, a market maker is not a “nice-to-have.” It is a regulatory architecture meant to ensure that once the stock lists, it does not become functionally untradeable.

The high-signal summary of Market Makers in SME IPOs:

• Compulsory market making is mandated for minimum 3 years (ICDR Reg 261).
• Market makers must typically quote two-way for 75% of the day, with meaningful depth and execution guarantee; spreads can be controlled and must be disclosed for new issues with approval.
• Inventory thresholds define when buy-quote exemptions can apply—but not in the first three months.