The Securities and Exchange Board of India (SEBI) is planning significant changes to the regulations governing SME IPOs (Small and Medium Enterprises Initial Public Offerings). The market regulator has proposed stricter rules in its consultation paper, which could impact small investors and reshape how SME IPOs function.
Higher Application Size for Investors
One key proposal is to increase the minimum application size for SME IPOs. Currently set at Rs 1 lakh, this may double to Rs 2 lakh or even Rs 4 lakh. This change could limit participation from small retail investors, making SME IPOs more accessible to wealthier or institutional investors.
New Allotment Rules for Non-Institutional Investors
SEBI has proposed changes to how shares are allotted in SME IPOs for non-institutional investors (NII). Instead of the existing proportional allocation system, SEBI suggests using a lottery system similar to what retail investors currently experience.
OFS May Be Restricted or Banned
The regulator is also considering banning Offer for Sale (OFS) in SME IPOs entirely or capping it at 20-25% of the total issue size. This aims to ensure that IPOs primarily serve growth funding rather than offering exits to existing shareholders.
Stricter Monitoring and Eligibility Requirements
To enhance transparency, SEBI has recommended appointing a monitoring agency for SME IPOs with issue sizes between Rs 20 crore and Rs 50 crore. Currently, monitoring agencies are required only for IPOs above Rs 100 crore. Additionally, SMEs aiming for an IPO must have an EBITDA of at least Rs 3 crore in two of the last three financial years.
Promoter Lock-In Period Revisions
Currently, promoters’ contributions are locked for three years after the IPO. SEBI proposes reducing this lock-in period to two years for 50% of the holdings, while the remaining will be locked for one year.
Tighter Corporate Governance Rules
SEBI also suggests limiting the allocation for general corporate purposes in IPO proceeds to 10% of the issue size, with a maximum cap of Rs 10 crore. It plans to extend related-party transaction provisions to listed SMEs and mandate quarterly shareholding disclosures.
Boosting Investor Participation
SME IPOs have seen a sharp rise in interest. The ratio of applicants to allotted investors surged from 4x in FY22 to 245x in FY24. SEBI aims to ensure that this growth does not lead to manipulative or fraudulent practices.
The regulator’s proposals, once implemented, could bring about a significant shift in the SME IPO landscape, ensuring better investor protection and transparency.
