SEBI to overhaul SME IPO framework; raises retail application minimum to ₹2 lakh

SEBI has proposed overhauling the SME IPO framework and introducing stricter compliance norms to enhance transparency, governance, and investor protection. The changes aim to safeguard investors while increasing listing requirements and costs for SMEs.

The regulator has proposed raising the minimum SME IPO size to ₹10 crore and doubling the minimum application size from ₹1 lakh to ₹2 lakh to mitigate risks for retail investors.

Other proposals include requiring companies seeking listing to have an operating profit (EBIT) of at least ₹3 crore in two of the last three financial years. Additionally, SEBI has suggested setting the face value of IPO shares at ₹10 per share and limiting the offer-for-sale (OFS) component to 20-25% of the total issue size.

To address concerns about fund misuse, SEBI has recommended prohibiting the use of IPO proceeds to repay loans taken by promoters or related parties. Companies raising significant funds for working capital would further need to submit periodic utilisation certificates from statutory auditors, while IPOs exceeding ₹20 crore would require oversight from a mandatory monitoring agency.

To align SME disclosures with those of mainboard IPOs, SEBI proposed requiring listed SMEs to disclose shareholding patterns and financial results quarterly instead of half-yearly. The regulator also suggested revising the allocation methodology for non-institutional investors by adopting a "draw of lots" system, similar to the retail investor category. Other recommendations include increasing the minimum number of allottees in SME public issues from 50 to 200 and mandating a 21-day public review period for IPO offer documents.

Public comments are invited until 4 December.

The regulator aims to bolster investor confidence and improve the SME listing ecosystem by tightening eligibility criteria and introducing stricter monitoring measures. "Stricter compliance requirements would ensure there are checks and balances in place for detecting undesired manipulations. SEBI had amid this in December 2023 made additional surveillance measures applicable to the SME segment in order to increase surveillance on unwarranted trading practices. With these compliance requirements in place, it is likely that compliance costs for SME might get escalated," says Makarand M Joshi, founder of advisory firm MMJC.

Why are these measures needed now?

The consultation paper comes amid rising public offerings with inflated valuations and probable fund misutilisation, raising governance concerns.

SME IPO activity surged in FY23-24, with 196 IPOs raising over ₹6,000 crore, marking the highest-ever number of public issues and funds raised since the establishment of SME platforms. In FY24-25, as of October 15, 159 IPOs have already mobilised ₹5,700 crore. 

“It is observed that retail individual participation has increased in SME IPO over the last few years. Therefore, considering that SME IPOs tend to have a higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors,” the paper said.

The SME segment previously saw growth in FY17-18, with 148 IPOs raising ₹2,147 crore, but experienced a slowdown between FY20-22 due to the COVID-19 pandemic, with only 127 IPOs during this period. Investor participation has also surged dramatically, with the applicant-to-allottee ratio increasing from 4X in FY22 to 46X in FY23 and further to 245X in FY24.

Despite the growth, SEBI has flagged concerns, including insufficient participation by sophisticated investors, systemic risks in fund management, and disclosure shortcomings. The regulator aims to address these through tightened norms, with proposals aimed at enhancing governance and ensuring sustainable growth in the SME segment.

“SEBI has observed that in some SME companies, the entity diverted money raised through IPO and subsequent Rights Issue to shell companies controlled by the promoters. It has also been observed in another entity that a company has booked fraudulent sales and purchases through circular transactions amongst related parties/ connected parties. By doing so such companies try to create a positive sentiment to induce investors into purchasing such securities,” the paper said.