Sebi Proposes Stricter Regulations for SME IPOs, Doubling Minimum Application Size to Rs 2 Lakh

The Securities and Exchange Board of India (Sebi) has proposed new rules for SME IPOs, aiming to enhance investor protection and market credibility. The regulator suggests setting a minimum issue size, doubling the application size, and introducing a draw of lots for non-institutional investors. These changes are intended to ensure only informed investors with adequate risk appetite participate in the market.

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In its consultation paper, Sebi recommends increasing the application size from Rs 1 lakh to Rs 2 lakh for SME IPOs. This measure is designed to attract investors who can handle higher risks, thereby boosting the credibility of the SME segment. Sebi is also seeking public feedback on whether this amount should be raised further to Rs 4 lakh.

Proposed Changes in Allotment and Offer-for-Sale

To align SME IPOs with main-board IPOs, Sebi proposes a draw of lots system for non-institutional investors, replacing the current proportional allotment method. This change aims to prevent over-leveraging and ensure fairer share distribution. Additionally, Sebi suggests limiting Offer-for-Sale (OFS) to 20% of the issue size, with selling shareholders restricted to offering no more than 20% of their pre-issue shareholding.

Sebi also proposes increasing the minimum number of allottees from 50 to 200 to improve liquidity and market depth. Currently, there are no restrictions on OFS in SME IPOs. These measures are part of a broader effort to enhance transparency and fairness in the market.

Monitoring Agency and Promoter Lock-In Period

The appointment of a monitoring agency would become mandatory for all SME IPOs exceeding Rs 20 crore under Sebi's proposals. Presently, this requirement applies only to issues above Rs 100 crore. For specific uses like funding subsidiaries or repaying loans, a monitoring agency should be required even for smaller issues. If not appointed, a statutory auditor's certificate will confirm fund usage.

Sebi suggests extending the lock-in period for minimum promoter contribution (MPC) to five years, with phased release for excess shares—50% after one year and the remaining 50% after two years. Currently, promoter shares have a three-year lock-in for MPC and one year for excess shares.

General Corporate Purpose Allocation and Eligibility Conditions

Sebi proposes restricting general corporate purpose (GCP) allocation to 10%, with an absolute cap of Rs 10 crore. This aims to ensure funds are directed toward specific business needs. Currently, GCP can be up to 25% of the issue size. Additional eligibility conditions are also suggested for issuers making SME IPOs.

An issuer should only launch an IPO if the issue size exceeds Rs 10 crore. Furthermore, they must have an operating profit (EBIT) of at least Rs 3 crore in two out of the three financial years preceding the application. These conditions aim to ensure that only financially sound companies enter the market.

Market Trends and Public Feedback

The number of SME IPOs has surged due to strong performance in India's equity markets over recent years. In FY 2023-24 alone, there were 196 IPOs raising over Rs 6,000 crore. By October 15 in FY 2024-25, another 159 IPOs had already raised more than Rs 5,700 crore.

Sebi is inviting public comments on these proposals until December 4. The regulator aims to gather diverse opinions before finalising any changes, ensuring that they align with market needs while protecting investor interests.