SME Capital Market Gap: SEBI Targets Compliance and Cost Barriers

On Wednesday, February 11, 2026, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey stated that India’s small and medium enterprise (SME) capital market remains significantly underdeveloped as cimpared to the country’s economic potential.

He noted that many SMEs are still unfamiliar with capital market mechanisms and lack adequate access to credible intermediaries such as merchant bankers. Additionally, the relatively high cost of raising funds through initial public offerings (IPOs) discourages several smaller firms from tapping the market. Pandey was speaking at the India SME Finance & Investment Summit.

Addressing Structural and Operational Challenges

The capital market chairman highlighted several structural hurdles that continue to impede SME listings. These include insufficient practical guidance on documentation requirements and underdeveloped internal governance frameworks, which make regulatory compliance appear complex and burdensome for smaller businesses.

He emphasised that broader SME participation in capital markets would diversify funding sources, reduce excessive dependence on the banking system, and ease risk concentration within banks. Greater market-based financing would also allow banks to allocate more resources toward genuine working capital needs and priority sector lending.

To address these issues, SEBI is undertaking a comprehensive review of the Listing Obligations and Disclosure Requirements (LODR) Regulations to remove redundancies and clarify ambiguities. The regulator is also reassessing disclosure and compliance norms for SMEs with the objective of improving ease of doing business without compromising investor protection.

In addition, SEBI plans to gradually expand its presence by opening offices in state capitals to improve SMEs’ access to listing-related information and post-listing support. In collaboration with stock exchanges, the regulator is also developing a dedicated SME portal aimed at simplifying regulatory processes and enhancing transparency for issuers.

Strengthening Oversight After Past Misuse

Pandey acknowledged that earlier relaxations under the SME framework had been misused by certain entities, which undermined investor confidence. Instances were observed where IPO proceeds were diverted to related parties or where unfair trade practices were employed to artificially generate positive sentiment around public offerings. In response, SEBI strengthened the SME regulatory framework to ensure that only genuinely compliant and credible entities can access public markets.

Also Read: RBI Cancels Certificates of Registration for 7 NBFCs: Kanoi Leasfin, Aditi Sanchar and More 

Regional Concentration of SME IPOs

Regionally, western India continues to dominate SME IPO activity in the current financial year, followed by the northern region. The southern and eastern regions have recorded comparatively lower participation. Pandey underscored the need for deeper outreach beyond traditional financial hubs to broaden the participation of high-quality SMEs across the country.

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