SEBI has introduced tough regulations to strengthen the framework for small and medium enterprise (SME) IPOs. These new SEBI SME IPO regulations are meant to protect the investor, curb speculative trading and increase transparency in SME listings. With a surge in SME IPOs and more retail participation, SEBI’s new move is to allow only financially sound companies to access public funds.
Key Changes in SEBI SME IPO Regulations
1. Stricter Profitability Criteria
The biggest change in SEBI SME IPO regulations is the introduction of profitability criteria for companies looking to go public. SMEs need to show a minimum of INR 1 crore EBITDA in at least two of the last three years. This ensures only companies with stable operations enter the market and reduces risk for investors.
2. Reduced Offer for Sale (OFS) Limit
To prevent dilution and boost investor confidence, SEBI has caps the OFS at 20% of the issue size. Existing shareholders cannot sell more than 50% of their holdings during the IPO. This prevents early investors from exiting the company quickly post-listing.
3. Phased Lock-In for Promoters
SEBI has introduced phased lock-in for promoters’ excess holding beyond Minimum Promoter Contribution (MPC):
- 50% of excess promoter holding will be locked in for 1 year post-listing.
- The remaining 50% will be released after 2 years.
This ensures that promoters are aligned with long-term company growth and don’t exit abruptly.
4. Higher Investment Entry Barrier
To prevent speculative trading, SEBI has increased the minimum application size for SME IPOs to 2 lots. This ensures only serious investors participate, reduces market volatility and fosters long-term investment.
5. IPO Funds Tighter Controls
SEBI has introduced stricter rules on how IPO funds can be used to address the mismanagement of funds:
- IPO funds cannot be used to repay loans taken from promoters, promoter groups or related parties.
- General corporate purposes (GCP) are capped at 15% of the issue size or INR 10 crore, whichever is lower.
This ensures that the money raised through IPOs is used for business growth and not debt repayment.
6. IPO Documentation Transparency
To increase transparency and investor awareness, SEBI has now made it mandatory to keep the Draft Red Herring Prospectus (DRHP) open for public review for 21 days before an IPO. Companies must also:
- Printed newspaper advertisements about the IPO.
- Include a QR code in the advertisement for easy digital access to the DRHP.
So that investors can raise concerns or objections before an SME IPO lists on the exchange.
7. No Main Board Migration for Additional Fundraising
A big change in SEBI SME IPO regulations allows SMEs to raise more capital without migrating to the mainboard if their post-issue paid-up capital is INR 25 crore and above and they comply with SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations. This gives SME more freedom to raise funds while still staying in the SME exchange framework.
8. Stricter Related Party Transaction (RPT) Compliance
To ensure fair play, SME listed companies must now comply with related party transaction (RPT) norms, the same as main board-listed companies. This prevents promoters from making unfair deals that can impact shareholder value.
9. Alignment with Main Board for Non-Institutional Investors (NIIs):
For non-institutional investors (NIIs), the allocation is now split: one-third reserved for applications between two lots and INR 10 lakh, while two-thirds are reserved for those exceeding INR 10 lakh. Additionally, the minimum number of allottees in an SME IPO has been raised from 50 to 200, ensuring wider participation.
Why SEBI Tightened SME IPO Regulations
SME IPOs have seen a surge, and SEBI is concerned about speculative trading and market manipulation. In 2024, over 247 SME IPOs raised INR 9,624.97 crore that delivered average listing returns of 60.26%. SEBI’s new reforms are to ensure quality listings, reduce speculation and protect retail investors.
Objectives of SEBI SME IPO Regulations:
- Protect investors by allowing only financially strong SME to go public.
- Reduce speculation by increasing investment entry barriers.
- Ensure long-term commitment from promoters and investors.
- Transparency in issue documentation and fund usage.
- SME growth with market integrity.
Balancing Market Growth with Investor Confidence
SEBI’s new SME IPO regulations are intended to provide a more stable and credible capital market. These rules may restrict some SMEs and investors in the short term, but they are aimed at creating a transparent and investor-friendly environment. By introducing tougher financials, capping of OFS, and more transparency in the SME landscape, SEBI is balancing SME growth with market integrity.
For more details related to IPO GMP, SEBI IPO Approval, and Live Subscription stay tuned to IPO Central.