SEBI Proposes Stricter SME IPO Norms to Ensure Market Integrity

The Securities and Exchange Board of India (SEBI) has released a consultation paper on November 19, proposing key changes to the listing framework for Small and Medium Enterprises (SMEs). These recommendations aim to enhance transparency, investor protection, and regulatory oversight in the SME IPO space.

Key Proposals:

1. Increased Minimum Application Size
   SEBI suggests raising the minimum application size for SME IPOs to ₹2 lakh, ensuring that investors have a higher stake and commitment.
2. Allocation Method for Non-Institutional Investors (NIIs)
   A shift from the proportionate allotment method to a “draw of lots” system for NIIs has been proposed, similar to the retail investor category.
3. Limits on Offer for Sale (OFS)
   Merchant bankers and stock exchanges may restrict the OFS portion in SME public issues to 20-25% of the total issue size, limiting excessive promoter exits.
4. Increased Minimum Allottees Requirement
   SEBI proposes increasing the minimum number of allottees in an SME public issue from 50 to 200 to ensure wider participation.
5. Introduction of Monitoring Agencies
   Monitoring agencies may now be mandated for issue sizes between ₹20 crore and ₹50 crore, compared to the existing threshold of ₹100 crore.
6. Phased Lock-In for Promoter Contributions
   SEBI suggests releasing promoter-held securities in a phased manner rather than all at once after the three-year lock-in period.
7. Reduced General Corporate Purpose (GCP) Allocation
   The GCP allocation in the offer document may be capped at 10% of the issue size, with an absolute ceiling of ₹10 crore, down from 25%.
8. Stricter Related Party Transaction Rules
   SEBI proposes extending Related Party Transaction provisions to listed SMEs and requiring quarterly submission of shareholding patterns.
9. Profitability Criteria for Listing
   SMEs must show an EBITDA of over ₹3 crore in at least two of the last three financial years to qualify for IPO listing.

Investor Concerns and Market Trends

SEBI highlighted the dramatic rise in investor participation in SME IPOs. The applicant-to-allottee ratio surged from 4x in FY22 to an astounding 245x in FY24. While this indicates growing interest, it has also raised concerns about irrational exuberance, speculative investments, and potential price manipulation.

SEBI’s Whole-Time Member, Ashwani Bhatia, stated that the regulator is closely monitoring SME listings to prevent fraud, price manipulation, and unethical trade practices.

Record-Breaking SME Fundraising in 2024

The SME IPO space has already set new benchmarks in 2024. Between January and September, 205 SME IPOs collectively raised ₹7,016 crore, significantly surpassing the ₹4,687 crore raised in 2023, according to Prime Database.

These proposals underline SEBI’s commitment to safeguarding market integrity while ensuring the sustainable growth of the SME segment.

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