Securities and Exchange Board of India (SEBI) has introduced stricter regulations for small and medium enterprise (SME) initial public offerings (IPOs). The new framework, announced on March 4, aims to ensure that only financially strong SMEs can raise funds from the public while enhancing investor protection and corporate governance.
Key Changes in SME IPO Regulations
1. Profitability Requirement for IPO Eligibility
To qualify for an IPO, SMEs must now have a minimum operating profit (EBITDA) of ₹1 crore in at least two of the last three financial years. This ensures that only companies with a stable financial track record can enter the public market.
2. Stricter Offer-for-Sale (OFS) Rules
SEBI has capped the OFS component at 20% of the total issue size. Additionally, selling shareholders cannot offload more than 50% of their existing shareholding in the IPO. This move is designed to prevent excessive dilution and ensure that promoters remain committed to their businesses post-listing.
3. Phased Lock-in for Promoter Holdings
Promoters will face stricter lock-in rules for shares exceeding the Minimum Promoter Contribution (MPC). SEBI has mandated a phased release:
50% of excess shares will be unlocked after one year
The remaining 50% will be released after two years
4. Higher Minimum Investment to Curb Speculation
To discourage speculative participation, SEBI has doubled the minimum application size for SME IPOs to two lots. This change is expected to filter out casual investors who invest purely based on market momentum.
5. Greater Transparency: Public Consultation on DRHP
SEBI now requires SME issuers to publish their Draft Red Herring Prospectus (DRHP) for public comments for 21 days.
DRHP must be accessible via QR codes in newspaper ads
It will be available on the SME exchange, issuer’s website, and merchant banker platforms
This ensures that investors and stakeholders can review and raise concerns before IPO approval.
6. Limits on IPO Fund Utilization
SMEs will face stricter rules on how IPO proceeds can be used:
The amount allocated for general corporate purposes (GCP) is capped at 15% of the total issue size or ₹10 crore, whichever is lower.
Companies cannot use IPO funds to repay loans taken from promoters, promoter groups, or related parties.
7. SME Fundraising Without Main Board Migration
SEBI has introduced flexibility for SME-listed firms to raise additional funds without moving to the main board, provided they comply with Listing Obligations and Disclosure Requirements (LODR) applicable to larger firms.
8. Stricter Rules for Related Party Transactions
SME-listed companies will now have to comply with the same related party transaction (RPT) norms that apply to main-board firms. This move strengthens corporate governance and prevents financial mismanagement.
Why SEBI Tightened SME IPO Rules
Over the past two years, the SME IPO market has seen significant growth, attracting retail investors in large numbers. In 2024 alone, around 240 SME IPOs raised over ₹8,700 crore, nearly double the ₹4,686 crore raised in 2023. SEBI’s new regulations aim to:
✔ Ensure that only fundamentally strong SMEs go public
✔ Protect investors from speculative IPOs
✔ Improve transparency and governance in SME listings
With these reforms, SEBI is balancing the rapid growth of SME IPOs with stronger investor safeguards and responsible capital raising.
