SEBI Tightens SME C: Stricter Rules to Protect Investors
SEBI Tightens SME : The Securities and Exchange Board of India (SEBI) has introduced stricter regulations for Small and Medium Enterprise (SME) Initial Public Offerings (IPOs) to enhance transparency, protect investors, and ensure only fundamentally strong companies raise public funds. The reforms come as SME IPOs witness a surge in participation, with over ₹8,700 crore raised in 2024 alone—almost double the amount raised in 2023.
Key Changes in SME IPO Regulations
SEBI’s new framework introduces several crucial reforms, including profitability requirements, limits on the Offer for Sale (OFS), and tighter restrictions on fund utilization.
1. Profitability Requirement
To ensure only profitable SMEs enter the market, SEBI has mandated that companies must have a minimum Operating Profit (EBITDA) of ₹1 crore in at least two of the last three financial years before launching an IPO. This move is expected to filter out weaker companies with inconsistent financial performance.
2. Offer for Sale (OFS) Capped at 20%
Earlier, SME IPOs allowed higher proportions of OFS, leading to concerns over excessive selling by promoters. Now, SEBI has capped the OFS component at 20% of the total issue size. Additionally, existing shareholders cannot sell more than 50% of their pre-IPO holdings, ensuring promoters remain committed post-listing.
3. Stricter Lock-in Period for Promoters
To prevent early exits by promoters, SEBI has imposed a phased lock-in period:
- 50% of excess promoter holding (beyond the minimum promoter contribution) will be locked for one year.
- The remaining 50% will be locked for two years.
4. Allocation Changes for Non-Institutional Investors (NIIs)
To align SME IPOs with main-board IPOs, the allocation methodology for NIIs has been revised, making the process more uniform and structured.
5. Minimum Application Size Increased
The minimum application size has been raised to two lots, discouraging speculative investments and ensuring more serious participation from investors.
6. Restrictions on Fund Utilization
To prevent misuse of IPO funds, SEBI has barred companies from using proceeds to repay loans taken from promoters, promoter groups, or related parties. This ensures that the funds are used for business expansion rather than debt repayment.
7. General Corporate Purpose (GCP) Cap
The GCP allocation is now capped at 15% of the issue size or ₹10 crore (whichever is lower). This ensures transparency in fund utilization.
8. Public Feedback on DRHP
SME IPO issuers must now publish the Draft Red Herring Prospectus (DRHP) for public comments for 21 days. Additionally, issuers must publish advertisements and provide QR codes for easy access to the DRHP, enhancing transparency.
9. Further Fundraising Without Main-Board Migration
SMEs can now raise additional funds through rights issues, preferential issues, and bonus issues without migrating to the main board, provided they comply with SEBI’s listing regulations.
10. Compliance with Related Party Transaction (RPT) Norms
SME-listed entities must now adhere to the same related-party transaction rules as main-board companies, strengthening corporate governance.
Financial Ratios of SME IPOs (2024)
| Parameter | Value (2024) | Value (2023) |
|---|---|---|
| Total SME IPOs | 240 | 161 |
| Total Funds Raised (₹ crore) | 8,700 | 4,686 |
| Average IPO Size (₹ crore) | 36.25 | 29.1 |
| No. of Profitable Companies | 180+ | 120+ |
| Market Capitalization Growth | 52% | 41% |
Why These Changes Matter
With the number of SME IPOs rising sharply, SEBI’s stricter regulations aim to strike a balance between market expansion and investor protection. These changes will ensure that only financially sound and transparent SMEs access public funds, leading to better investor confidence and healthier market participation.
Q&A Section
1. Why has SEBI tightened SME IPO norms?
SEBI aims to enhance transparency, protect investors, and ensure only financially sound companies raise funds through IPOs.
2. What is the new profitability requirement for SME IPOs?
Companies must have a minimum EBITDA of ₹1 crore in at least two of the last three financial years before launching an IPO.
3. How much can existing shareholders sell in an SME IPO?
Existing shareholders can sell a maximum of 50% of their pre-IPO holdings, and the OFS component is capped at 20% of the total issue size.
4. What is the revised lock-in period for promoters?
- 50% of excess promoter holdings will be locked for one year.
- The remaining **50% will be locked for two years.
5. Can SME IPO proceeds be used to repay promoter loans?
No, IPO proceeds cannot be used to repay loans taken from promoters, promoter groups, or related parties.
6. What changes have been made to the minimum application size?
The minimum application size has been increased to two lots, discouraging speculative investments.
7. How will DRHP transparency improve?
The Draft Red Herring Prospectus (DRHP) must now be available for public comments for 21 days, with announcements in newspapers and QR codes for easy access.
8. Can SME companies raise more funds without moving to the main board?
Yes, SMEs can raise funds through further issues (rights, preferential, or bonus issues) without main-board migration if they follow SEBI’s listing regulations.
Final Thoughts
SEBI’s updated SME IPO regulations are a welcome step toward building a more robust and investor-friendly ecosystem. These measures will filter out weaker companies while allowing fundamentally strong SMEs to access public capital, ensuring sustainable growth in the SME sector.
By enforcing higher profitability standards, restricting promoter exits, and enhancing transparency, SEBI has taken a crucial step in safeguarding retail and institutional investors while promoting the long-term health of India’s SME IPO market.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.