The Securities and Exchange Board of India (SEBI) is all set to introduce a series of transformative changes to the rules governing small and medium enterprises (SMEs) launching initial public offerings (IPOs). The proposed updates will be imposed to strengthen investor protection and limit market manipulation. These changes are expected to be finalized at SEBI’s board meeting on 18 December 2024.
What’s Changing in SEBI SME IPO Regulations?
1. Bigger Entry Ticket for Investors
In an effort to encourage serious, long-term investment, SEBI is considering raising the minimum application size for SME IPOs. Currently set at INR 1 lakh, the new threshold could range between INR 2 lakh and INR 4 lakh. The idea? Weed out speculative trading and reduce risks of fraudulent activities by ensuring investors have more skin in the game. While this could potentially limit participation from smaller investors, it’s expected to foster a more stable and credible investor base.
2. Profitability in Last Two Years
One of the standout proposals is a stricter profitability criterion for SMEs. SEBI wants companies to show operational profitability in at least two of the last three financial years before they can hit the IPO market. This rule isn’t just about numbers; it’s about ensuring that SMEs have a solid financial foundation. By doing so, SEBI hopes to inspire greater confidence among investors and mitigate the risks of investing in financially unstable firms.
3. Five Years Lock-In Period
Currently, promoters are required to hold onto their shares for one year post-IPO. That could soon change, with SEBI proposing to extend the lock-in period to five years. The rationale here is straightforward—it’s about aligning the promoters’ interests with the long-term goals of their investors. Critics, however, argue that this could discourage some companies from going public, but SEBI’s stance appears firm on promoting accountability.
4. Two-Years Cooling-Off Period for Business Conversions
For those thinking of quickly converting a partnership or proprietorship into a company to tap into IPO opportunities, SEBI might have some sobering news. A two-year cooling-off period is on the cards, aimed at ensuring operational maturity before such entities are allowed to go public. This measure seems designed to prevent rushed transitions that could jeopardize the integrity of IPOs
5. Reduced OFS Proportion
SEBI is proposing to cut the proportion of ‘Offer For Sale’ (OFS) in these listings, limiting it to just 20% of the total issue size. The rationale here is clear: by slashing the OFS component, SEBI hopes to shift the focus to fresh equity issuances rather than relying heavily on secondary market sales. This could help inject more capital into small and medium enterprises and promote growth within the sector.
Pros And Cons of SEBI SME IPO Rules
SEBI’s upcoming SME IPO regulations aim to enhance investor protection and market transparency by reducing the Offer For Sale cap to 20% and increasing IPO allottee requirements. However, these changes may limit retail participation due to higher investment thresholds and could burden smaller companies with additional administrative requirements​
Definition of UPSI
SEBI isn’t stopping at SME IPO regulations. Another major area of focus is the expansion of what constitutes unpublished price-sensitive information (UPSI). The revised guidelines will broaden the definition to cover significant corporate events that might impact stock prices, including:
- Resignations of auditors
- Changes in key managerial personnel, barring standard retirements
- Fraud incidents involving listed entities
- Arrests of senior company officials
SEBI’s Restrictions – Backstory
So, what’s driving these sweeping changes? It boils down to growing concerns about market manipulation and fraudulent practices in the SME space. Take, for example, SEBI’s recent cancellation of Trafiksol’s IPO due to suspected irregularities. Instances like these highlight the need for a tighter regulatory framework. SEBI’s goal is clear: foster a more secure and trustworthy environment for investors while promoting sustainable growth for SMEs.
SEBI SME IPO Rules – Balancing Act for Market Integrity
As SEBI prepares to finalize these proposals, the overarching theme is one of balance—enhancing investor confidence without stifling the growth of SMEs. The proposed changes, particularly those concerning profitability and lock-in periods, could reshape how SMEs approach public listings. At the same time, the expanded definition of UPSI reflects SEBI’s broader commitment to fair and transparent market practices.
While some of these measures might seem restrictive at first glance, their long-term impact could be transformative. By tightening the rules, SEBI isn’t just aiming to clamp down on malpractice—it’s setting the stage for a more robust and credible SME ecosystem. Investors and SMEs alike will be watching closely as these changes unfold.
As of November 2024, the Indian primary market has seen a total of 230 SME IPOs. Out of these, 207 SME listings have achieved positive performance. However, there were challenges as well, with 23 SME IPOs experiencing negative returns. Notably, the average listing day return stands at a remarkable 59.81% for SME IPOs, underscoring the potential for significant gains in this dynamic market. For more information related to IPO GMP, SEBI IPO Approval, and Live Subscription stay tuned to IPO Central.
