SEBI Unveils Major Revisions to SME IPO Regulations

The Securities and Exchange Board of India (SEBI) has announced a comprehensive overhaul of the framework governing small and medium enterprise (SME) initial public offerings (IPOs). This initiative, aimed at broadening investor engagement and minimizing fundraising expenses, was detailed in a consultation paper released on Wednesday. The proposed changes are a result of extensive reviews conducted by a working group and an advisory committee.

Historically, SME platforms have played a crucial role in facilitating capital access for smaller companies. Since their inception, these platforms have successfully listed 1,496 firms, raising a total of Rs 40,222 crore. The new proposals are expected to further enhance this landscape by revising eligibility criteria and operational frameworks. Under the new guidelines, eligibility for SME listings will shift from paid-up capital to post-issue market capitalization, with companies valued up to Rs 1,000 crore required to list on SME platforms.

In addition to the eligibility changes, SEBI has proposed increasing the average annual operating profit requirement from Rs 1 crore to Rs 3 crore over three years. However, companies that do not meet this criterion may still access funds through a book-building process, provided that at least 75% of the issue is allocated to qualified institutional buyers (QIBs). If this allocation is not achieved, a full refund of the issue will be mandated.

The proposed regulations also include a reduction in the minimum application amount to Rs 1 lakh, divided into four lots of at least Rs 25,000 each. Furthermore, the minimum number of allottees will rise from 200 to 500, while the trading lot in the secondary market will be reduced to a single share. Notably, SEBI plans to eliminate the requirement for compulsory market making and the obligation for lead managers to underwrite 15% of the issue, aligning SME IPOs more closely with main-board frameworks.

Looking ahead, SEBI has set a three-month transition period for the implementation of these changes, during which it will accept public feedback until November 4, 2026. This initiative is poised to reshape the SME IPO landscape, providing new opportunities for companies and investors alike, while also ensuring robust investor protections and market integrity.