Sebi Wants to Raise the Minimum Subscription for SME IPOs in Order to Safeguard Investors

Nitin Konde, Varun Bhardwaj

Nov 21, 2024 — 3 min read

Sebi Plans to Raise SME IPO Subscription Limits for Investor Safety

Since more and more individual investors are participating in small and medium-sized business IPOs, the market regulator has suggested at least doubling the minimum subscription amount.

In a consultation document published on 19 November by the Securities and Exchange Board of India (Sebi), the regulator suggested raising the minimum application size for SME IPOs from INR 1 lakh to INR 2 lakh. Sebi even proposed raising the sum to INR 4 lakh in one of the other recommendations.

Over the past few years, there has been a growth in retail individual participation in SME IPOs. Therefore, it is suggested to increase the application size in order to protect the interests of smaller retail investors, given that SME IPOs tend to have a higher element of risk and that investors may become stuck if sentiments change after listing. This is because a larger application size will limit participation by smaller investors and attract investors who are willing to take on more risk, which will increase the SME segment's overall credibility, as per the paper.

Listing Process and Corporate Governance Norms for SMEs

Sebi said that the action is a component of its larger examination of corporate governance standards and the listing procedure for SMEs, which have seen a sharp increase in IPOs, particularly since 2022. With 196 initial public offerings (IPOs) that raised over INR 6,000 crore, FY24 saw the most SME capital raising and public issues since the creation of SME platforms. Additionally, as of October 15, 159 SME IPOs had raised over INR 5700 crore in FY25, the regulator noted.

It comes as the regulator has repeatedly warned investors about dubious activities in the nation's SME market and about some SMEs' exaggerated projections. A notable change in the market supports Sebi's plan to double the minimum subscription amount. The Sensex and Nifty indices have increased by about 4.5 times since Sebi's initial structure was implemented more than 14 years ago.

Further Suggestions Made by Sebi

Additionally, Sebi recommended that the "draw of lot" allocation method, which is employed for retail investors in mainboard IPOs, be applied to SME IPOs as well. In order to give smaller investors a greater chance of receiving allocations in the event of oversubscription, it was also suggested to divide the non-institutional investor group into two subcategories according to application size.

The introduction of an obligatory monitoring agency for initial public offerings (IPOs) if the issue exceeds INR 20 crore is one of the paper's main recommendations. By certifying the use of revenues, these organisations would make sure that money is spent for the reasons specified in the offer contract. A statutory auditor's certificate would be necessary to verify the use of the proceeds for smaller initial public offerings (IPOs) that fall below this threshold.

In an effort to tighten qualifying requirements, Sebi suggested that businesses looking to list must have made at least INR 3 crore in operating profit (profits before interest and taxes) in two of the previous three fiscal years. For its issued capital and proposed new shares, it also recommended requiring that shares issued in the IPO have a face value of INR 10 each.

Additionally, the capital market regulator suggested that SME-listed businesses be subject to the related-party transaction (RPT) standards found in Sebi's Listing Obligations and Disclosure Requirements Regulations (LODR). Companies with less than INR 10 crore in paid-up capital and less than INR 25 crore in net worth are an exception.