Framework Enhancements for SME IPOs: Key Updates from SEBI

Strengthening SME IPO Regulations

The Securities and Exchange Board of India (SEBI) has approved key amendments to its SME framework under the SEBI (ICDR) Regulations, 2018, and SEBI (LODR) Regulations, 2015. These changes aim to bolster investor protection, enhance governance, and provide credible avenues for SMEs to raise funds and list on exchanges.

Eligibility Criteria Elevated

To ensure only robust SMEs enter the market, SEBI now mandates that issuers should report an operating profit of at least ₹1 crore in any two of the last three financial years before filing a draft red herring prospectus (DRHP). This change sets a higher standard for financial stability and operational soundness.

Limitations on Offer for Sale (OFS)

The amendments cap the Offer for Sale (OFS) by selling shareholders to 20% of the total issue size. Moreover, selling shareholders cannot offload more than 50% of their holdings, ensuring greater alignment with the company’s long-term growth.

Revised Lock-In Periods

Promoters’ holdings exceeding the minimum promoter contribution (MPC) will now be subject to a phased lock-in period. Half of the excess holdings can be released after one year, while the remainder will be unlocked after two years. This step aims to instil confidence among investors by fostering promoter commitment.

Governance Enhancements

The amendments introduce corporate governance norms applicable to SME-listed entities, mirroring those for main board companies. For related-party transactions (RPTs), a threshold of 10% of annual consolidated turnover or ₹50 crore, whichever is lower, has been set. This extension promotes transparency and accountability.

Prohibitions and Caps

To curb misuse of funds, SMEs will not be allowed to repay loans from promoters or related parties using IPO proceeds. Additionally, the general corporate purpose (GCP) allocation in SME IPOs is capped at the lower of ₹10 crore or 15% of the total amount raised.

Public Involvement in DRHP Review

To enhance transparency, the DRHP of an SME IPO must now be open for public comments for 21 days. Stock exchanges will ensure accessibility through public announcements featuring QR codes.

Simplified Further Issues

Further fund-raising by SME-listed companies is permitted without requiring migration to the main board, provided they comply with SEBI’s main board regulations. This move aims to provide flexibility while maintaining governance standards.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.