The Securities and Exchange Board of India (Sebi) has issued a consultation paper on 19 November to revise the listing framework for Small and Medium Enterprises (SMEs). The proposed changes aim to enhance compliance standards, improve investor protection, and address concerns about potential misuse of the SME platform as the segment sees exponential growth.
Increase In Minimum Application Size: Sebi has proposed raising the minimum application size for SME IPOs to Rs 2 lakh per application, doubling the existing threshold of Rs 1 lakh. This move is aimed at attracting serious investors and discouraging speculative participation.
Changes In Allocation For Non-Institutional Investors (NIIs): The current proportionate allotment system for NIIs may be replaced with a “draw of lots” methodology, similar to that used for retail investors. This change is intended to simplify the process and create a level playing field for all categories.
Cap On Offer For Sale (OFS): Sebi suggests capping the 'Offer For Sale' (OFS) portion of SME public issues at 20-25 per cent of the total issue size. Currently, there is no restriction on the size of the OFS portion. This measure seeks to ensure that a larger part of the issue benefits the SME itself rather than being routed to existing shareholders.
Increase In Minimum Allottees: To make SME public issues more diverse, Sebi has proposed increasing the required minimum number of allottees from 50 to 200. This change aims to broaden participation and prevent concentration of shares among a few investors.
Appointment Of Monitoring Agency: Sebi recommends lowering the threshold for appointing a monitoring agency to oversee the use of IPO proceeds. The requirement, currently applicable to issues over Rs 100 crore, would now apply to issues sized between Rs 20 crore and Rs 50 crore.
Promoter Contribution Lock-In Period: Under existing norms, the promoter's contribution is locked in for three years. Sebi proposes a phased release of these locked-in shares instead of releasing the entire holding in one go, improving liquidity without compromising long-term investor confidence.
Restricting General Corporate Purpose (GCP): Utilisation of IPO proceeds under the GCP category, which is often criticised for being vague, would be capped at 10 per cent of the issue size, with a maximum limit of Rs 10 crore. This is a significant reduction from the current allowance of 25 per cent.
Financial Criteria For Listing: SMEs seeking to list would need to demonstrate an EBITDA of at least Rs 3 crore in two of the last three financial years. This ensures that only financially sound entities access public markets.
Increased Compliance And Transparency: Sebi proposes applying the Related Party Transaction (RPT) provisions to listed SMEs to enhance transparency. SMEs would also need to submit shareholding patterns on a quarterly basis, aligning with mainboard regulations.
Stricter Compliance Amid Rising Market Concerns
The move to tighten norms follows concerns over the misuse of the SME platform. Makarand M Joshi, founder, MMJC and Associates, a corporate compliance firm, remarked, “Sebi’s proposal to revamp listing regulations and compliance requirements for SMEs is timely, given the rising misuse of the SME platform. Stricter compliance requirements will ensure checks and balances to detect undesired manipulations.”
Joshi also noted, “With these compliance requirements in place, the compliance costs for SMEs might escalate.” Sebi had earlier introduced additional surveillance measures for SMEs in December 2023 to curb unwarranted trading practices.
This consultation paper comes amid a period of exponential growth in the SME IPO segment. Sebi highlighted that the applicant-to-allottee ratio surged from 4 times in FY22 to 245 times in FY24, showcasing the surging interest among investors.
Commenting on the broader implications of the paper, Mukul Goyal, Founder, Stratefix Consulting, highlighted the importance of these reforms for long-term sustainability. “The SME segment contributes nearly 45 per cent to India's industrial output and employs around 62 million people. Sebi’s proposals aim to balance smoother access to equity markets for SMEs while safeguarding investor interests through enhanced corporate governance.”
Goyal noted gaps in governance among SME-listed entities, with many engaging in Related Party Transactions (RPTs) exceeding 10 per cent of turnover. "Mandatory monitoring and tighter controls over General Corporate Purposes will be game-changers," he added.
Data from the Prime Database reveals that in the calendar year 2024, 205 SME IPOs raised Rs 7,016 crore by September, significantly higher than Rs 4,687 crore raised in the whole of 2023.
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