SEBI Introduces Stricter Regulations for SME IPOs

Markets regulator SEBI has implemented a more stringent regulatory framework for SME IPOs, introducing a profitability requirement and capping the Offer-for-Sale (OFS) component at 20%.

These reforms aim to facilitate SMEs with a solid track record in raising public funds while safeguarding investor interests. The move follows a surge in SME listings, which has drawn considerable investor participation.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Profitability and Offer-for-Sale Limits

Regarding profitability criteria, SEBI mandates that SMEs planning an IPO must have a minimum operating profit (EBITDA) of ₹1 crore in at least two of the last three financial years. This requirement ensures that only financially stable companies enter the public market, reducing risks for investors.

Additionally, the OFS component in SME IPOs is now limited to 20% of the total issue size. Selling shareholders cannot offload more than 50% of their existing holdings, preventing excessive dilution of ownership and ensuring long-term commitment from stakeholders.

Lock-in Period and Allocation Changes

Promoters’ shareholding beyond the Minimum Promoter Contribution (MPC) will be subject to a phased lock-in period—50% of the excess holding will be released after one year, and the remaining 50% after two years. This restriction ensures promoter commitment even after the IPO.

To maintain consistency with main-board IPOs, the allocation methodology for Non-Institutional Investors (NIIs) in SME IPOs will be aligned accordingly. SEBI has also raised the minimum application size to two lots, curbing speculative investments. This measure is expected to discourage short-term speculation and promote responsible investing among retail and institutional investors.

Fund Utilization and Transparency

The amount allocated for general corporate purposes (GCP) in SME IPOs is now capped at 15% of the total issue size or ₹10 crore, whichever is lower. Additionally, SEBI has prohibited SMEs from using IPO proceeds to repay loans taken from promoters, promoter groups, or related parties. This measure enhances transparency and ensures that funds raised from the public are utilized for business expansion and growth, rather than for internal debt settlement.

The Draft Red Herring Prospectus (DRHP) for SME IPOs will now be open for public comments for 21 days. Issuers must publish newspaper announcements and include a QR code for easy access to the DRHP, increasing transparency and investor awareness. This move allows the general public to submit comments, raise concerns, and contribute to the due diligence process before an IPO is launched.

Compliance and Market Impact

Previously cleared by stock exchanges, SME IPO DRHPs will now be available for public review on the SME exchange, issuer's website, and merchant banker’s platform. This ensures broader scrutiny and helps detect potential issues at an early stage.

SME-listed firms can raise funds through further issues without transitioning to the main board, provided they comply with SEBI (LODR) regulations applicable to main-board entities. If the post-issue paid-up capital surpasses ₹25 crore due to additional fundraising, companies may continue issuing capital while adhering to main-board compliance norms.

Moreover, SME-listed entities must follow related party transaction (RPT) norms applicable to main-board companies. To implement these changes, SEBI has amended the Issue of Capital and Disclosure Requirement (ICDR) Rules.

Growing SME IPO Market

India’s SME IPO market has been booming, reflecting strong investor confidence and growing opportunities for small businesses to access capital markets. Fueled by India's robust equity market performance, SME public issues have surged in recent years. In 2024, approximately 240 SMEs raised over ₹8,700 crore—nearly double the ₹4,686 crore raised in 2023, according to data from primedatabase.com.

With these regulatory changes, SEBI aims to strike a balance between encouraging SME growth and protecting investor interests. The new framework ensures that only well-performing companies can access public funds, leading to a more stable and trustworthy SME IPO market in the long run.