MUMBAI: The Securities and Exchange Board of India (SEBI) has introduced stricter regulations for small and medium enterprise (SME) initial public offerings (IPOs), enforcing profitability criteria, capping the offer-for-sale (OFS) component, and implementing phased lock-in requirements for promoters’ shares in the new SME IPO framework.
Under the new SME IPO framework, SMEs seeking to go public must report a minimum operating profit (EBITDA) of Rs1 crore in at least two of the last three financial years.
The OFS component has been restricted to 20 per cent of the total issue size, with individual selling shareholders barred from offloading more than 50 per cent of their existing holdings.
To ensure stability, any promoter shareholding exceeding the Minimum Promoter Contribution (MPC) will be subject to a phased lock-in period – half to be released after one year and the remaining 50 per cent after two years.
Additionally, SME IPOs must align the allocation methodology for non-institutional investors (NIIs) with main-board IPO norms to maintain uniformity.
SEBI has also increased the minimum application size to two lots, making SME IPO entry stricter to curb speculative trading.
Use of IPO proceeds
The use of IPO proceeds has been restricted – companies cannot use funds to repay loans from promoters, promoter groups, or related parties. The allocation for general corporate purposes (GCP) is now capped at 15 per cent of the total issue size or Rs10 crore, whichever is lower.
To enhance transparency, the Draft Red Herring Prospectus (DRHP) for SME IPOs will be open for public comments for 21 days, with issuers required to publish newspaper announcements and include a QR code for easy access.
SEBI has also permitted SME-listed entities to raise further capital without migrating to the main board, provided they comply with main-board listing norms under the LODR (Listing Obligations and Disclosure Requirements) Regulations.
Additionally, SME-listed companies must now adhere to the related-party transaction (RPT) norms applicable to main-board firms.
The SME IPO market has witnessed significant growth, with 240 companies raising over Rs8,700 crore in 2024 – nearly double the Rs4,686 crore raised in 2023, according to data from Prime Database. SEBI’s tightened norms aim to ensure that only fundamentally strong SMEs access public markets while safeguarding investor interests.
