SEBI Proposes Major Changes to SME IPO Rules

The Securities and Exchange Board of India (SEBI) has proposed a series of changes to the rules governing initial public offerings (IPOs) by small and medium enterprises (SMEs), covering listing eligibility, profitability requirements, investor participation, offer-for-sale (OFS) rules and post-listing trading.

In a consultation paper issued on October 14, the markets regulator proposed changes to SME IPO norms and invited public feedback until November 4.

SEBI said the proposals were formulated by its working group in response to the rapid increase in funds raised through SME IPOs and the number of investors participating in these issues.

Since the SME platform was launched in 2012, about 1,500 companies have listed on it and raised Rs 40,222 Cr. Startups such as Zappfresh, DroneAcharya, TAC Infosec and Yudiz have also used this route to go public.

The proposed changes include lowering the minimum IPO application amount, revising listing eligibility based on market capitalisation, increasing profitability requirements and removing mandatory underwriting and market-making requirements.

Market Capitalisation-Based Listing Criteria

SEBI has proposed replacing the existing paid-up share capital criterion with post-issue market capitalisation to determine whether a company can list on the SME platform or the main board.

Under the proposed framework, companies with a post-issue market capitalisation of Rs 1,000 Cr or less would be eligible to list on the SME platform. Companies valued above Rs 1,000 Cr and up to Rs 4,000 Cr could choose between the SME platform and the main board, subject to applicable eligibility requirements. Companies valued above Rs 4,000 Cr would have to list on the main board.

Currently, companies with post-issue paid-up share capital of up to Rs 25 Cr can opt for the SME platform, subject to other eligibility conditions.

Companies in the Rs 1,000 Cr to Rs 4,000 Cr market capitalisation band that choose the SME platform would also have to submit restated consolidated financial statements under Indian Accounting Standards (Ind AS) for the preceding three financial years if they have not already adopted Ind AS.

If an IPO applicant’s estimated market capitalisation crosses the applicable threshold during the IPO process, it would have to refile under the relevant listing framework.

SEBI Proposes Higher Profitability Requirements

SEBI has proposed requiring SME IPO applicants to report an average annual operating profit of at least Rs 3 Cr over the preceding three financial years, based on restated consolidated financial statements.

Under the existing framework, companies must report an operating profit of at least Rs 1 Cr in at least two of the preceding three financial years.

The consultation paper refers to earnings before interest and taxes (EBIT) in its narrative, while the existing provision mentions earnings before interest, taxes, depreciation and amortisation (EBITDA). The difference requires clarification.

Companies that fail to meet the proposed profitability requirement could still list on the SME platform through an alternative route. They would have to use the book-building process and allocate at least 75% of the net offer to qualified institutional buyers (QIBs).

If the required QIB allocation is not achieved, the entire subscription amount would have to be refunded.

Eligibility Rules for Converted and Reorganised Businesses

SEBI has proposed revising eligibility requirements for SMEs seeking an IPO after converting from a proprietorship, partnership or limited liability partnership (LLP). The draft rules also cover companies undergoing qualifying business reorganisations.

Currently, such companies generally need to complete at least one full financial year before filing their draft IPO papers.

Under the proposal, they would need to complete four consecutive financial quarters from the date of conversion or qualifying reorganisation and submit at least one annual audited financial statement prepared after the change.

The proposal also covers acquisitions, succession and schemes of arrangement where more than 50% of revenue comes from businesses that previously operated as proprietorships, partnerships or LLPs.

In such cases, the operating track record of the earlier business could be considered when assessing IPO eligibility.

SEBI Proposes Removing Rs 10 Cr Cap on General Corporate Purposes

SEBI has proposed removing the Rs 10 Cr cap on the amount companies can allocate from IPO proceeds towards general corporate purposes (GCP).

Currently, GCP allocation cannot exceed 15% of the amount raised or Rs 10 Cr, whichever is lower.

Under the proposal, the 15% limit would remain, but the fixed Rs 10 Cr ceiling would be removed. This would allow companies raising larger amounts to allocate more funds towards general business requirements.

Proposed Changes to Offer-for-Sale Rules

SEBI has proposed a dedicated offer-for-sale (OFS) framework with a one-year holding requirement, subject to specified exemptions.

The draft framework also seeks to remove the existing 20% ceiling on the OFS component for qualified institutional buyers. The Primary Market Advisory Committee (PMAC) has additionally suggested removing the 50% cap on a QIB’s pre-issue holding.

These exemptions would not apply to companies using the alternative listing route after failing to meet the proposed profitability requirement.

Lock-In Periods for Promoters and Shareholders

SEBI has proposed revising the lock-in periods applicable to promoters and other shareholders after an SME IPO.

Under the draft changes, the three-year lock-in for minimum promoters’ contribution would begin from the IPO allotment date. The existing framework links the lock-in date to the commencement of commercial production.

For promoter holdings above the minimum contribution, the existing staggered lock-in would be replaced with a uniform one-year lock-in.

The lock-in period for non-promoter pre-issue capital would be reduced from one year to six months. A separate one-year lock-in would apply to promoter group holdings from the IPO allotment date.

Depositories could also mark shares that cannot be locked in electronically as non-transferable for the applicable period.

Minimum SME IPO Application Amount May Fall to Rs 1 Lakh

SEBI has proposed reducing the minimum application amount for SME IPOs to Rs 1 lakh from the existing requirement of more than Rs 2 lakh.

Investors would have to apply for at least four lots, each worth a minimum of Rs 25,000. The Rs 2 lakh minimum application requirement was introduced in March 2025 to limit participation by smaller retail investors.

The consultation paper also proposes aligning investor categories and allocation rules more closely with the main-board framework, including the introduction of the Retail Individual Investor category.

Under the proposed framework, issuers could allocate up to 60% of the QIB portion to anchor investors in book-built issues.

SEBI has also proposed increasing the minimum number of allottees from 200 to 500.

Under the alternative route for companies that fail the profitability test, up to 10% of the net offer would be allocated to retail investors, up to 15% to non-institutional investors (NIIs), and at least 75% to QIBs.

SME Shares May Be Traded in Lots of One

SEBI has proposed allowing investors to trade SME-listed shares in lots of one share, replacing the existing price-linked lot sizes.

The consultation paper notes that around 5% of unique PAN-based shareholders held odd-lot shares, on average.

The proposed change could make it easier for investors to sell their entire holdings. However, it would not change the minimum IPO application amount.

SEBI Proposes Ending Mandatory Underwriting and Market Making

SEBI has proposed removing mandatory underwriting and market-making requirements for SME IPOs to reduce listing costs.

Currently, SME IPOs must be fully underwritten, with lead managers required to underwrite at least 15% of the issue themselves. Under the proposal, these requirements would be removed. The 75% QIB portion under the alternative listing route would not need to be underwritten.

According to SEBI, underwriting fees accounted for 49.52% and 38.41% of total SME IPO issue expenses on the NSE in FY25 and FY26, respectively. The corresponding figures for the BSE were 32.20% and 33.99%.

The minimum subscription requirement would remain at 90% of the offer, excluding OFS. If this threshold is not met, application money would have to be refunded within four days of the issue closing.

SEBI has also proposed removing the requirement to maintain market-makers for three years after listing.

Market-making fees accounted for 1.25%-4.20% of total issue expenses across the NSE and BSE in FY25 and FY26. While the proposed change could reduce costs, it may affect liquidity in SME stocks with limited trading activity.

Changes to Main-Board Migration Rules

SEBI has proposed revising the rules governing the migration of SME-listed companies to the main board.

Under the proposed framework, companies with a market capitalisation of Rs 1,000 Cr or less would not have to migrate solely because of their valuation.

Companies valued above Rs 1,000 Cr but below Rs 4,000 Cr could voluntarily migrate, subject to the main board’s eligibility criteria. Companies valued at Rs 4,000 Cr or more would have to migrate mandatorily.

Board approval would be sufficient for migration, without a shareholder vote. SEBI has also proposed removing the requirement to migrate when paid-up capital is likely to exceed Rs 25 Cr and scrapping migration from the main board to the SME platform.

Companies already listed on the SME platform when the new rules are notified would continue to follow the existing migration framework.

FAQs

1. What changes has SEBI proposed for SME IPO regulations?

SEBI has proposed changes to listing eligibility, profitability requirements, minimum application amounts, OFS rules, shareholder lock-in periods, underwriting, market making and main-board migration.

2. What would be the proposed minimum application amount for an SME IPO?

The minimum application amount would be reduced to Rs 1 lakh from the existing requirement of more than Rs 2 lakh. Investors would have to apply for at least four lots worth a minimum of Rs 25,000 each.

3. What profitability requirement has SEBI proposed for SME IPO applicants?

Companies would need to report an average annual operating profit of at least Rs 3 Cr over the preceding three financial years. Companies that fail this test could use an alternative route by allocating at least 75% of the net offer to QIBs.

4. What changes has SEBI proposed for SME share trading?

SEBI has proposed allowing SME-listed shares to be traded in lots of one share instead of the existing price-linked lot sizes. This would not change the minimum IPO application amount.

5. When can the public submit comments on the proposed SME IPO rules?

SEBI has invited public feedback on the consultation paper until November 4.

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