SEBI Makes the Rules for SME IPOs Rigorous

Nitin Konde, Varun Bhardwaj

Dec 19, 2024 — 2 min read

SEBI Tightens Rules for SME IPOs to Protect Investors

The Securities and Exchange Board of India (Sebi) has, as anticipated, strengthened the rules pertaining to IPOs for small and medium-sized businesses. The capital market regulator set a cap on shares that could be sold through the offer for sale (OFS) route and implemented profitability standards during its Board meeting on 18 December.

Before submitting their DRHP, SMEs must now demonstrate an operational profit of at least around INR 1 crore for two of the previous three fiscal years. Furthermore, the OFS size shouldn't exceed 20% of the issue size overall. In addition, through the IPO, these stockholders are not permitted to sell more than 50% of their whole holdings.

Tightening the Lock-In Period

Promoters who hold more than the minimum promoter contribution (MPC) are subject to longer lock-in periods. One year will be the lock-in period for half of such excess holdings, and two years for the other half. In terms of allocation, the main board IPO process and the NII allocation technique for SME IPOs are identical. 15% of the entire issue size, or INR 10 crore, whichever is less, is the maximum amount allotted for general corporate purpose (GCP) in SME IPOs.

According to the new regulations, debts to promoters, promoter groups, or associated parties cannot be repaid with the proceeds of an SME IPO. In addition, the public will now have 21 days to examine and comment on SME IPO DRHPs. The DRHPs will be made available by stock exchanges via QR codes and public notifications.

New Rules Will Change the Business Dynamics

A new set of guidelines for post-IPO compliance has been developed. If SME businesses follow the rules for main board listing, they can still raise money without moving to the main board. SME-listed companies would be subject to the same related party transaction regulations as main board-listed companies, with a lower threshold of 10% of yearly consolidated turnover, or INR 50 crore.

New rules have also been agreed upon by the Sebi board to guarantee that funds raised by mutual funds through New Fund Offers (NFOs) be deployed on schedule. The goal of the new structure is to incentivise AMCs to only collect as much money in NFOs as may be used within an acceptable time limit, typically 30 days.

Reforms to improve the ease of doing business for Debenture Trustees, ESG rating agencies, InvITs, REITs, and SM REITs are among the other improvements that the board has adopted. Sebi chooses to change the rules governing investment banking. On December 18, the Sebi board decided to limit the scope of activity for investment banks and merchant bankers. Under the new regulations, merchant bankers will only engage in activities that the Sebi has approved. Within two years, any activities that are not allowed should be divided into a different legal organisation with a different brand name.