SEBI Proposes Tighter SME IPO Rules: Minimum ₹10 Crore Issue Size and Higher Application Limits
Source: Inc42 FinTech
The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing 10 major changes to the SME IPO framework to protect retail investors. Key proposals include raising the minimum application size to ₹2 lakh and mandating a minimum issue size of ₹10 crore.
- ▸Minimum investment in SME IPOs likely to rise from ₹1 lakh to ₹2 lakh.
- ▸Companies must have at least ₹3 crore EBITDA in 2 of the last 3 years to qualify for listing.
- ▸Promoter shares will face a mandatory 3-year lock-in for the minimum 20% contribution.
- ▸SME IPOs must be at least ₹10 crore in size to ensure better liquidity.
- ✓Minimum investment in SME IPOs likely to rise from ₹1 lakh to ₹2 lakh.
- ✓Companies must have at least ₹3 crore EBITDA in 2 of the last 3 years to qualify for listing.
- ✓Promoter shares will face a mandatory 3-year lock-in for the minimum 20% contribution.
- ✓SME IPOs must be at least ₹10 crore in size to ensure better liquidity.
Market regulator SEBI is moving to tighten the norms for Small and Medium Enterprises (SME) IPOs following concerns over price manipulation and low-quality listings. In a new consultation paper, the regulator has proposed a series of structural changes aimed at ensuring only credible companies tap the public markets while safeguarding retail investors from excessive volatility.
Higher Entry Barrier for Retail Investors
One of the most significant proposals is the doubling of the minimum application size. Currently set at ₹1 lakh, SEBI suggests increasing this to ₹2 lakh per application. The regulator believes this will ensure that only investors with a higher risk appetite participate in the SME segment, which is inherently more volatile than the mainboard. For certain 'high-risk' SME IPOs, this limit could even be pushed to ₹4 lakh.
Minimum Issue Size and Financial Track Record
To prevent very small, illiquid companies from listing, SEBI has proposed a minimum issue size of ₹10 crore. Furthermore, companies seeking to list on SME platforms must now demonstrate an operating profit (EBITDA) of at least ₹3 crore in two out of the three preceding financial years. This move is designed to filter out 'shell-like' companies that show sudden spikes in revenue just before an IPO.
Stricter Controls on Funds and Promoters
The proposals also target how companies use the money raised. SEBI wants to cap the portion of IPO proceeds used for 'General Corporate Purposes' (GCP) at 25% of the total issue. Additionally, the regulator has proposed a lock-in period for promoter shares. Under the new rules, the minimum promoter contribution of 20% would be locked in for three years, and any stake above that would be locked in for one year, preventing 'pump and dump' schemes where insiders exit shortly after listing.
Enhanced Transparency and Monitoring
To ensure accountability, SEBI has suggested that the appointment of a monitoring agency be mandatory for all SME IPOs exceeding ₹20 crore. Currently, this is only required for larger mainboard issues. The regulator also plans to restrict 'Offer for Sale' (OFS) components, proposing that promoters cannot sell more than 20% of their pre-issue holding through the IPO if the company is not yet profitable.
This report is for informational purposes only and does not constitute financial or investment advice.
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Frequently Asked Questions
Why is SEBI increasing the minimum application amount for SME IPOs?
SEBI aims to limit participation to informed investors with higher risk tolerance, as the SME segment is prone to high volatility and potential price manipulation.
What is the new minimum profit requirement for SMEs going public?
Proposed rules require companies to have an operating profit (EBITDA) of at least ₹3 crore in two out of the three years prior to the IPO application.
How do these rules affect existing SME stocks?
These proposals primarily target new IPO filings; however, they signal a stricter oversight environment which may improve the overall quality and credibility of the SME exchange.
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