The capital market regulator SEBI has proposed a comprehensive overhaul of regulations governing initial public offerings (IPOs) by small and medium enterprises (SMEs), including tighter profitability criteria, revised listing eligibility based on market capitalisation and changes to shareholding lock-in requirements.
In a consultation paper issued on Wednesday, SEBI proposed raising the minimum profitability requirement for SME IPOs to an average operating profit of ₹3 crore annually over the preceding three financial years, compared with the existing requirement of ₹1 crore in at least two of the three years.
SEBI has invited public comments on the proposals by November 4.
It has also proposed to replacing the existing paid-up capital-based eligibility criteria with post-issue market capitalisation thresholds.
Also, the consultation paper suggests that the minimum application size for an SME IPO would be four lots, with each having a minimum value of ₹25,000, taking the minimum application value to ₹1 lakh. The current minimum lot size is ₹2 lakh ( 2 lots of ₹1 lakh).
Issuers with a market capitalisation of up to ₹1,000 crore would be required to list on the SME platform, while those valued above ₹1,000 crore and up to ₹4,000 crore could opt for the segment, subject to additional financial reporting requirements.
Companies in the higher band that have not adopted Indian Accounting Standards (Ind AS) would be required to prepare their restated consolidated financial statements under these standards.
However, companies that do not meet the profitability threshold could access the SME platform through an alternative route, provided the IPO follows the book-building process and at least 75 per cent of the net offer is allotted to qualified institutional buyers (QIBs). If the prescribed allocation is not achieved, the entire subscription amount would have to be refunded, said the consultation paper.
The proposals follow the expansion of the SME capital market. As of July 31, a total of 1,496 entities had been listed on the platform since inception, including those subsequently migrated to the main board. Of these, 365 companies had migrated to the main board, while SME IPOs had collectively raised ₹40,222 crore, said SEBI.
The market capitalisation of SME platform-listed entities, including companies that migrated to the main board, stood at ₹4.71 lakh crore.
Fund utilisation
SEBI has also proposed to removing the ₹10-crore absolute cap on the use of IPO proceeds for general corporate purposes, while retaining the ceiling of 15 per cent of the issue size.
It has also proposed a dedicated framework for offer for sale (OFS) transactions in SME IPOs, including a one-year holding requirement for shares offered for sale, subject to specified exemptions.
QIB relaxation
Qualified institutional investors would get greater flexibility to sell their holdings beyond the existing quantitative limits, though the relaxation would not apply to IPOs using the alternative route for issuers that fail to meet the profitability criterion.
The three-year lock-in for minimum promoters’ contribution would run from IPO allotment rather than commencement of commercial production. The lock-in on promoters’ excess holdings would be reduced to one year, while that for non-promoter pre-IPO capital would be cut from one year to six months.
The changes are intended to make the SME framework more proportionate to issuer size while retaining safeguards for investors and market integrity.