SEBI Proposes Overhaul of SME IPO Rules, Eases Investment Norms

An extensive revision of the current system for initial public offerings (IPOs) by small and medium-sized businesses (SMEs) has been suggested by the Securities and Exchange Board of India (SEBI), the industry watchdog in India. As a result, SEBI is working to increase investor engagement, decrease fundraising expenses, and fortify investor protections.

Changes to IPO eligibility, fundraising, share allotment, trading liquidity, and migration to the main board were suggested in a consultation document issued by SEBI on 14 October. After a working group and advisory committee reviewed the recommendations, they were approved. The proposed system would substitute post-issue market capitalisation for paid-up capital in determining SME listing eligibility.

New Proposed Changes by SEBI

To be eligible to list on SME platforms, a company's post-issue market capitalisation cannot exceed INR 1,000 crore. Companies with a valuation between INR 1,000 crore and INR 4,000 crore have the option to be listed on the SME or main board, but they will have to comply with more financial reporting standards. In a three-year plan, SEBI wants to increase the operational profit threshold to INR 3 crore on average.

Consequently, for two of the three years, it will be necessary to replace the current demand of INR 1 crore. If qualified institutional buyers (QIBs) receive at least 75% of the issue, companies that do not fulfil the profitability criteria can nevertheless acquire capital through book-building. A full refund will be required in the event that this condition is not fulfilled. Through four rounds of at least INR 25,000 each, the regulator has also suggested lowering the minimum application amount to INR 1 lakh. A reduction of the secondary market trading lot to one share and an increase of the minimum number of allottees from 200 to 500 are proposed.

Significantly, SEBI intends to do away with mandatory market making, associated inventory requirements, and 100% underwriting of small and medium enterprise initial public offerings (IPOs), with the lead manager's responsibility to underwrite 15% of the issue eliminated as well. Rather, the minimum subscription threshold of 90% and the main-board underwriting structure would be in effect. Nevertheless, underwriting was not possible for mandated QIB allocations using the alternate profitability method.

SEBI Making SME Listing More Organised

Abolition of the limit of INR 10 crore on general corporate purposes spending from IPO proceeds is also proposed in the consultation document. Nevertheless, the 15% issue proceeds cap will remain in place. An exclusive framework, with certain exceptions, has been suggested by SEBI for offer-for-sale (OFS) transactions. This framework includes a holding requirement of one year. Alterations to the lock-in provisions for promoters and pre-IPO stockholders have also been suggested. For the first three years after allocation, the minimum promoter contribution cannot be changed.

A one-year lock-in would be imposed on the promoter group and surplus promoter holdings, though. For the next six months, all other pre-IPO assets would be frozen. SEBI has suggested putting a stop to the practice of moving funds backward from the main board to SME platforms. For qualifying businesses, migration to the main board would be voluntary for those with a market capitalisation between 1,000 crore and less than 4,000 crore INR. Further, it will be mandatory for those with a market capitalisation beyond 4,000 crore INR, all subject to eligibility restrictions.

With 1,496 companies listed and a total of INR 40,222 crore raised, SME platforms have come a long way since they started. In all, 365 of these businesses had made it to the main board by July 31, 2026. There would be stage-specific grandfathering provisions in the proposed framework, including a three-month transition period. Public opinions on the proposals can be sent to SEBI until November 4, 2026.