SEBI has invited public comments on the proposal, with a deadline of December 4. (Representative Image)
The Securities and Exchange Board of India (SEBI) has proposed a series of reforms for SME initial public offerings (IPOs). Among these, the minimum application size is Rs. 1 lakh to Rs. Doubling up to 2 lakhs is the main criterion.
Why change?
The SME IPO market has seen a surge in investor participation in recent years. The applicant-to-allocated investor ratio jumped dramatically from 4 times in FY22 to 245 times in FY24. However, the market regulator noted that SME IPOs carry more risk than mainstream IPOs. A sudden change in market sentiment after listing can put small retail investors at risk.
To address this, SEBI in its consultation paper has now doubled the application size in such IPOs to Rs. 2 lakhs has been proposed to ensure that only informed investors with adequate risk appetite and investment capacity can apply.
“Retail individual participation in SME IPOs has increased over the past few years. Therefore, to protect the interest of small retail investors, considering that SME IPOs have a high element of risk and investors get stuck if the sentiment changes, the application size per application is Rs. 1 lakh to Rs. It is proposed to do. 2 lakh per application in SME IPO,” Sebi noted in its consultation paper.
Additional corrections
SEBI’s proposed changes go beyond application size, aiming to address broader issues such as liquidity, monitoring and fair distribution of shares:
1. ‘Draw of Lots’ for Non-Institutional Investors (NIIs)
SEBI plans to replace proportional allocation for NIIs with a ‘draw of lot’ system. This method, already used for mainboard IPOs, ensures fair distribution of shares and prevents excessive leverage by investors.
2. Offer-for-Sale (OFS) Restrictions
Currently, there are no restrictions on OFS in SME IPOs. Sebi has proposed capping OFS at 20 per cent of the issue size and restricting selling shareholders from offering more than 20 per cent of their pre-issue holdings.
3. Mandatory Monitoring Agency
SEBI current Rs. 100 crore threshold below Rs. Wants to make appointment of monitoring agency mandatory for SME IPOs with issue size above 20 crores. This ensures transparency in the utilization of funds, especially for specific purposes such as repayment of loans or acquisition of funds.
4. Increased lock-in for promoters
Promoters will face a 5-year lock-in for minimum promoter contribution (MPC), compared to the current 3 years, with a phased release for additional shares over two years. Its purpose is to ensure the commitment of the promoters and the long-term sustainability of the company.
5. High allotment number
SEBI has suggested increasing the minimum number of allotments from 50 to 200 to improve liquidity and market depth.
More stringent eligibility criteria for issuers
To ensure that only fundamentally sound companies approach the SME IPO market, SEBI proposed that issuers meet these conditions:
– Minimum IPO issue size Rs. 10 crores.
– In two of the previous three financial years at least Rs. 3 crore operating profit (EBIT).
GCP Allocation Limits
Sebi also plans to limit general corporate purpose (GCP) allocations to 10 per cent of the issue size, capped at Rs 10 crore. This ensures that the funds raised are primarily directed towards specific business objectives.
An evolving market with increasing scrutiny
The SME IPO market is thriving due to strong equity market performance. A record 196 SME IPOs raised over ₹6,000 crore in FY24, while FY25 is already on track with 159 IPOs raising ₹5,700 crore by mid-October.
However, Sebi’s reforms aim to curb this growth by ensuring that investor enthusiasm does not come at the expense of financial prudence.
Public feedback invited
SEBI has opened the framework for public comments on these proposals, with a deadline of December 4. These reforms, if implemented, could reshape the landscape of SME IPOs, fostering a more informed and resilient investor base by protecting small investors from excessive risks.
Doubling the minimum subscription amount is not just a financial adjustment but a step towards creating a sustainable and credible SME IPO market. As the segment continues to grow, these steps can set the stage for long-term stability and success.
What do the experts say?
Makarand M Joshi, founder of corporate compliance firm MMJC & Associates, said, “Sebi’s proposal to revise listing regulations and compliance requirements for SMEs comes amid increasing cases of misuse of the SME platform by a few market participants. Strict compliance requirements will ensure that there are checks and balances to detect unwanted manipulations.”
Sebi has meanwhile implemented additional surveillance measures in the SME segment to increase monitoring of unnecessary trading practices in December 2023, he added.
“With these compliance requirements in place, compliance costs for SMEs are likely to increase,” Joshi said.