MUMBAI: The Securities and Exchange Board of India (SEBI) on Wednesday, December 18, announced a series of reforms to tighten IPO and listing norms for small and medium enterprises (SMEs). These changes, revealed after a recent SEBI board meeting, are designed to improve transparency, reduce risks, and ensure better investor protection in the SME segment.
Key reforms to SME IPO
Under the new regulations, companies seeking to launch an IPO in the SME segment must meet certain profitability thresholds. SEBI has made it mandatory for firms to have earned at least Rs1 crore in profit from operations in the last 2-3 financial years, ensuring that only financially stable businesses can tap into public markets.
“An issuer shall make an IPO only if the issuer has an operating profit (earnings before interest, depreciation, and tax) of Rs1 crore from operations for any 2 out of 3 previous financial years at the time of filing its draft red herring prospectus (DRHP),” said SEBI.
Another key change involves the offer for sale (OFS) portion of SME IPOs. SEBI has capped the OFS by selling shareholders to no more than 20 per cent of the total issue size, a move aimed at limiting the dilution of ownership for new investors.
Moreover, SME IPOs will no longer be allowed to raise funds to repay loans from promoters or related parties.
A significant restriction has also been imposed on selling shareholders. They will not be permitted to sell more than 50% of their shareholding in the SME IPO.
Lock-in period increased
SEBI has also introduced stricter lock-in norms for promoters of SME companies. The lock-in period for promoters’ shares in excess of the minimum public shareholding (MPS) requirement will be one year, with the remaining 50% of shares locked in for two years.
SEBI has mandated that the allocation of shares under the non-institutional investors (NII) category will be determined by a “draw of lots” method.
Related party norms
SEBI has also placed restrictions on the amount that can be raised for general corporate purposes. The cap has been set at 15 per cent of the total amount raised or Rs10 crore, whichever is lower.
Additionally, related party transactions (RPTs) have come under stricter scrutiny. For listed SMEs, RPTs will be deemed material if they constitute 10 per cent of the company’s annual consolidated turnover or Rs50 crore, whichever is lower.
