The Securities and Exchange Board of India’s (SEBI) proposal to remove compulsory market-making for small and medium enterprise (SME) stocks could reduce the cost of going public but may also leave investors more dependent on actual market demand to exit their investments, experts said.
Existing norms
Under the existing framework, SME-listed companies must have a market maker for at least three years from listing or migration to the main board. Market makers are also required to maintain inventory equivalent to at least 5 per cent of the securities proposed to be listed.
SEBI recently proposed removing this requirement, along with compulsory 100 per cent underwriting of SME IPOs, as part of a wider overhaul of the segment. The proposals are open for public comments until November 4.
“The removal of compulsory 3-year market making and 100 per cent underwriting is the most important reform,” said Makarand M Joshi, founder partner of corporate compliance firm MMJC & Associates. “With unique investors at NSE crossing 13 crore in April 2026, price should be discovered by real demand-supply, not by interference of intermediaries. This will make SME listing healthier and genuinely accessible for good businesses.”
However, easier trading does not necessarily mean that investors will be able to sell their holdings when required. “Removing compulsory market-making will certainly reduce the cost and compliance burden, but the other side is liquidity,” said Siddharth Batra, an advocate on record at the Supreme Court of India. “In the absence of sufficient buyers and sellers, an investor may find it difficult to exit.”
The regulator has also suggested reducing the minimum SME IPO application value from ₹2 lakh to ₹1 lakh and allowing trading in listed SME securities in lots of one share. It has proposed replacing paid-up capital-based eligibility criteria with market-capitalisation thresholds and raising the minimum average operating profit requirement to ₹3 crore a year over the preceding three financial years, from the existing requirement of ₹1 crore in at least two of those years.
Companies that do not meet the profitability test could still list through the book-building route if at least 75 per cent of the net offer is allotted to qualified institutional buyers.
The proposed changes come amid a pickup in SME IPO activity. According to B2K Analytics’ quarterly review, companies raised ₹3,791.67 crore through BSE SME and NSE Emerge in the July-September 2026 quarter, nearly double the ₹1,890.06 crore raised in the previous quarter. The number of listings rose 111 per cent sequentially to 80. Of these, 51 debuted at a premium, 19 at a discount and 10 at their issue price.
Tushar Kumar, an advocate at the Supreme Court of India, said the changes must not come at the expense of investor confidence. “The success of the proposed framework will ultimately be measured not by the number of additional listings it facilitates, but by the quality of issuers admitted to the market and the confidence sustained among investors,” he said.
There need to be adequate safeguards, disclosure standards and monitoring to ensure that easier access to capital does not weaken investor protection.