SEBI tightens norms for SME IPOs

New Delhi: Markets regulator Securities and Exchange Board of India (SEBI) has notified a stricter regulatory framework for small and medium enterprise (SME) IPOs by introducing a profitability requirement and capping a 20 per cent limit on offer-for-sale (OFS).

The reforms aim to provide SMEs with a sound track record an opportunity to raise funds from the public while protecting investor interests.

This move follows a rise in SME issues, which has driven significant investor participation.

With regard to profitability criteria, SEBI said SMEs planning to launch an IPO are required to have a minimum operating profits (earnings before interest, depreciation and tax or EBITDA) of Rs 1 crore for at least two out of the three previous financial years.

Also, the OFS component by selling shareholders in SME IPOs has been capped at 20 per cent of the total issue size. Additionally, selling shareholders will not be allowed to offload more than 50 per cent of their existing holdings, SEBI said in a notification dated March 4.

Further, promoters' shareholding over the Minimum Promoter Contribution (MPC) would be subject to a phased lock-in period. Half of the excess holding would be released after one year, while the remaining 50 per cent would be unlocked after two years.

The allocation methodology for non-institutional investors (NIIs) in SME IPOs would be aligned with the approach followed in main-board IPOs to ensure uniformity.

"Further SEBI has increased the minimum application size for SME IPO to two lots making entry stricter to avoid unnecessary speculation in SME IPO. This would help protect the interest of gullible investors who generally invest looking at the escalating share price," Makarand M Joshi, founder and Partner of corporate compliance firm MMJC and Associates, said.

The amount allocated for general corporate purpose (GCP) in SME IPOs has been capped at 15 per cent of the total issue size or Rs 10 crore, whichever is lower.

SME issues will not be permitted to use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties, whether directly or indirectly.

"Objects of the issue should not consist of repayment of loan taken from the promoter, promoter group or any related party, from the issue proceeds, directly or indirectly," SEBI said.

The Draft Red Herring Prospectus (DRHP) for SME IPOs must be made available for public comments for 21 days. Issuers will be required to publish announcements in newspapers and include a QR code for easy access to the DRHP.

Joshi said DRHP pertaining to IPO on the SME segment, which was till now cleared by the stock exchange, would now be available for public comment on the SME exchange, website of the issuer and merchant banker to the issue. The public would be made aware by way of a public advertisement that SME IPO DRHP is available for public comment.

This would allow the public at large to submit comments or raise complaints on draft red herring prospectus of companies going for IPO on small and medium enterprises segment, he added.

SME companies would be allowed to raise funds through further issues without migrating to the main board, provided they comply with the SEBI (LODR) rules applicable to main Board-listed entities.

"Where the post-issue paid-up capital pursuant to further issue of capital, including by way of rights issue, preferential issue, bonus issue, is likely to increase beyond Rs 25 crore, the issuer may undertake further issuance of capital without migration from SME exchange to the main board, subject to the issuer undertaking to comply with the provisions of LODR Regulations, 2015, as applicable to companies listed on the main board of the stock exchange(s)," the regulator said.

SME-listed entities will have to comply with related party transaction (RPT) norms applicable to the main board-listed companies.

To give this effect, the SEBI has notified ICDR (Issue of Capital and Disclosure Requirement) Rules.

Driven by the strong performance of India's equity markets, the number of public issues by SMEs has significantly increased over the past two years.

In 2024, around 240 small and medium enterprises raised over Rs 8,700 crore, nearly double the Rs 4,686 crore raised in 2023, according to the data provided by primedatabase.com.