Sebi proposes market cap-based SME IPO norms, seeks public comments on regulatory overhaul
Sebi has proposed a sweeping overhaul of SME IPO regulations, including market capitalisation-based eligibility thresholds, higher profitability requirements, lower minimum application values and changes to allotment norms. The proposals also cove...
By Kumar Gaurav, ETMarkets.com |
ANI
The meter will translate Sebi's existing credit rating framework into six colour-coded risk categories.
The Securities and Exchange Board of India (Sebi) has proposed changes to the regulatory framework for initial public offerings (IPOs) by small and medium enterprises (SMEs), including replacing paid-up capital-based eligibility criteria with market capitalisation thresholds.
In its latest consultation paper, the regulator proposed that issuers with post-issue market capitalisation of up to Rs 1,000 crore be required to list on the SME platform. Those with market capitalisation above Rs 1,000 crore and up to Rs 4,000 crore could also opt for the SME platform, subject to additional financial reporting requirements.
Sebi has invited public comments on the proposed changes to the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2018, until November 4, 2026.
Market cap to replace paid-up capital
Under the existing framework, issuers with post-issue paid-up capital of up to Rs 10 crore can access the SME platform, while those with paid-up capital above Rs 10 crore and up to Rs 25 crore may also issue securities under the framework.
The working group constituted by Sebi has recommended replacing paid-up capital with market capitalisation, arguing that the former may not adequately reflect an enterprise's economic size, valuation or growth potential. An analysis of 735 main board and SME IPOs over the preceding three financial years indicated a significant disconnect between the two measures, according to the consultation paper.
Issuers in the Rs 1,000-crore to Rs 4,000-crore market capitalisation band that opt for the SME platform would be required to present restated consolidated financial statements prepared in accordance with Indian Accounting Standards (Ind AS), if they have not already adopted them. The requirement would cover the last three financial years and the stub period, if any.
The proposed framework also addresses changes in an issuer's estimated post-issue market capitalisation during the IPO process. An issuer that initially files for a main board IPO would have to refile under the SME framework if its estimated post-issue market capitalisation falls to Rs 1,000 crore or below by the time it files the red herring prospectus in a book-built issue or the prospectus in a fixed-price issue.
An issuer that initially files under the SME framework could continue with that route if its market capitalisation exceeds Rs 1,000 crore but remains at or below Rs 4,000 crore. If it exceeds Rs 4,000 crore, the issuer would have to refile under the main board framework.
Higher profitability threshold
Sebi has proposed raising the minimum operating profitability requirement for SME IPOs. Under the existing framework, an issuer must have operating profit of at least Rs 1 crore from operations in at least two of the three preceding financial years. The proposal would require average operating profit of at least Rs 3 crore a year over the preceding three financial years, based on restated consolidated financial statements.
Issuers that do not meet the profitability requirement could use an alternative eligibility route through the book-building process, subject to at least 75% of the net offer being allotted to qualified institutional buyers (QIBs). If the required allocation is not achieved, the entire subscription money would have to be refunded. This route would not exempt issuers from other SME-specific requirements relating to business track record, conversion or reorganisation, and promoter stability.
Changes to business continuity requirements
The consultation paper proposes replacing the existing requirement to complete one full financial year after converting a proprietorship concern, partnership firm, or limited liability partnership (LLP) into a company with four consecutive completed financial quarters from the conversion date or the latest effective date of a qualifying business reorganisation.
Also read: Which bank stock should you buy ahead of Q2 results - HDFC Bank, ICICI Bank, Yes Bank or Axis Bank?
The issuer would also have to file at least one annual audited financial statement, or part thereof, prepared after the conversion or reorganisation with the Registrar of Companies before filing the draft offer document.
The proposed framework would extend to reorganisations in which an issuer derives more than 50% of its revenue from businesses previously carried on by a proprietorship concern, partnership firm or LLP. It also proposes a one-year seasoning requirement following a complete change in promoters or an acquisition of more than 50% of the shareholding by new promoters.
Changes to application and allotment
Sebi has proposed reducing the minimum application value for SME IPOs to Rs 1 lakh, while retaining a minimum application size of four lots, each worth at least Rs 25,000.
The proposals include allowing anchor investor allocation in book-built SME issues, with up to 60% of the portion available for QIB allocation eligible to be allocated to anchor investors.
For issues using the alternative eligibility route, the proposed allocation framework would provide for at least 75% of the net offer to QIBs, not more than 15% to non-institutional investors and not more than 10% to retail individual investors.
The minimum number of allottees in an SME IPO is proposed to increase from 200 to 500. Each retail individual investor would receive at least one minimum lot, subject to availability, with remaining shares allotted proportionately without being restricted to multiples of the minimum lot.
Sebi has also proposed reducing the trading lot for SME-listed securities to one share, replacing the existing price-band-based lot-size framework.
Underwriting and market making
The regulator has proposed removing the requirement for 100% underwriting of SME IPOs and the additional requirement for lead managers to underwrite at least 15% of the issue size on their own account.
Under the proposed framework, main board underwriting provisions would apply to SME issues, except that the 75% QIB portion under the alternative eligibility route would not require underwriting.
The consultation paper also proposes a minimum subscription requirement of 90%, with a refund where that threshold is not achieved. In line with this proposal, Sebi has proposed removing the existing requirement for the registrar to confirm that at least 90% of the offer has been subscribed before the announcement of issue closure.
Sebi has proposed removing compulsory market making for SME securities. The existing framework requires market making for at least three years from listing or migration from the main board, with the market maker required to maintain inventory of at least 5% of the securities proposed to be listed as of the allotment date.
The revised one-share trading lot and removal of compulsory market making would take effect only when Sebi issues a separate circular rescinding the existing trading-lot circular. Until then, existing market-making requirements would continue to apply, including to issuers listed after notification of the revised framework but before the separate circular is issued.
Lock-in and migration to main board
Under the proposed framework, the minimum promoters' contribution would remain locked in for three years from allotment, while promoters' holdings in excess of the minimum contribution would be locked in for one year.
The lock-in period for pre-issue capital held by persons other than promoters and the promoter group is proposed to be reduced from one year to six months. Specified securities held by the promoter group would remain subject to a separate one-year lock-in.
Existing lock-in obligations for companies already listed on the SME platform when the revised framework is notified would continue until the applicable periods expire. The changes would not retrospectively extinguish or modify those obligations.
Also read: HDB Financial Q2 Results: Net profit jumps 34% YoY to Rs 780 crore, revenue up 10%
Sebi has also proposed replacing paid-up capital-based migration thresholds with market capitalisation-based criteria. Under the proposed framework, migration to the main board would be linked to market capitalisation of Rs 1,000 crore or more but below Rs 4,000 crore, while migration would be mandatory if market capitalisation exceeds Rs 4,000 crore, subject to the applicable main board eligibility requirements.
Existing SME-listed companies would continue to follow the current migration framework, including paid-up capital-based thresholds. Companies listed on the SME platform after notification of the revised framework would be governed by the proposed market capitalisation-based criteria.
The consultation paper also sets out transitional arrangements for issuers that have already filed draft offer documents. Main board IPOs filed before notification of the revised framework would continue under the existing rules. Certain issuers that have filed draft offer documents for SME IPOs but have not obtained in-principle exchange approval or filed the relevant offer document may choose between the existing and revised frameworks, subject to the prescribed conditions.
SME IPOs raise Rs 40,222 crore
A total of 1,496 entities had been listed on SME platforms since inception as of July 31, 2026, including those that subsequently migrated to the main board. Of these, 365 companies had migrated to the main board.
Funds raised through SME IPOs since inception stood at Rs 40,222 crore, while the market capitalisation of entities listed on SME platforms, including those that had migrated, stood at Rs 4,70,984 crore, according to data from the National Stock Exchange and BSE cited in the consultation paper.
Sebi said the review seeks to make the regulatory framework proportionate to the size and nature of SME issuers, reduce avoidable compliance and fund-raising costs, facilitate wider capital market participation and retain safeguards necessary for investor protection and market integrity.
Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here
In its latest consultation paper, the regulator proposed that issuers with post-issue market capitalisation of up to Rs 1,000 crore be required to list on the SME platform. Those with market capitalisation above Rs 1,000 crore and up to Rs 4,000 crore could also opt for the SME platform, subject to additional financial reporting requirements.
Sebi has invited public comments on the proposed changes to the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2018, until November 4, 2026.
Market cap to replace paid-up capital
Under the existing framework, issuers with post-issue paid-up capital of up to Rs 10 crore can access the SME platform, while those with paid-up capital above Rs 10 crore and up to Rs 25 crore may also issue securities under the framework.
The working group constituted by Sebi has recommended replacing paid-up capital with market capitalisation, arguing that the former may not adequately reflect an enterprise's economic size, valuation or growth potential. An analysis of 735 main board and SME IPOs over the preceding three financial years indicated a significant disconnect between the two measures, according to the consultation paper.
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Issuers in the Rs 1,000-crore to Rs 4,000-crore market capitalisation band that opt for the SME platform would be required to present restated consolidated financial statements prepared in accordance with Indian Accounting Standards (Ind AS), if they have not already adopted them. The requirement would cover the last three financial years and the stub period, if any.
The proposed framework also addresses changes in an issuer's estimated post-issue market capitalisation during the IPO process. An issuer that initially files for a main board IPO would have to refile under the SME framework if its estimated post-issue market capitalisation falls to Rs 1,000 crore or below by the time it files the red herring prospectus in a book-built issue or the prospectus in a fixed-price issue.
An issuer that initially files under the SME framework could continue with that route if its market capitalisation exceeds Rs 1,000 crore but remains at or below Rs 4,000 crore. If it exceeds Rs 4,000 crore, the issuer would have to refile under the main board framework.
Higher profitability threshold
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Sebi has proposed raising the minimum operating profitability requirement for SME IPOs. Under the existing framework, an issuer must have operating profit of at least Rs 1 crore from operations in at least two of the three preceding financial years. The proposal would require average operating profit of at least Rs 3 crore a year over the preceding three financial years, based on restated consolidated financial statements.
Issuers that do not meet the profitability requirement could use an alternative eligibility route through the book-building process, subject to at least 75% of the net offer being allotted to qualified institutional buyers (QIBs). If the required allocation is not achieved, the entire subscription money would have to be refunded. This route would not exempt issuers from other SME-specific requirements relating to business track record, conversion or reorganisation, and promoter stability.
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Changes to business continuity requirements
The consultation paper proposes replacing the existing requirement to complete one full financial year after converting a proprietorship concern, partnership firm, or limited liability partnership (LLP) into a company with four consecutive completed financial quarters from the conversion date or the latest effective date of a qualifying business reorganisation.
Also read: Which bank stock should you buy ahead of Q2 results - HDFC Bank, ICICI Bank, Yes Bank or Axis Bank?
The issuer would also have to file at least one annual audited financial statement, or part thereof, prepared after the conversion or reorganisation with the Registrar of Companies before filing the draft offer document.
The proposed framework would extend to reorganisations in which an issuer derives more than 50% of its revenue from businesses previously carried on by a proprietorship concern, partnership firm or LLP. It also proposes a one-year seasoning requirement following a complete change in promoters or an acquisition of more than 50% of the shareholding by new promoters.
Changes to application and allotment
Sebi has proposed reducing the minimum application value for SME IPOs to Rs 1 lakh, while retaining a minimum application size of four lots, each worth at least Rs 25,000.
The proposals include allowing anchor investor allocation in book-built SME issues, with up to 60% of the portion available for QIB allocation eligible to be allocated to anchor investors.
For issues using the alternative eligibility route, the proposed allocation framework would provide for at least 75% of the net offer to QIBs, not more than 15% to non-institutional investors and not more than 10% to retail individual investors.
The minimum number of allottees in an SME IPO is proposed to increase from 200 to 500. Each retail individual investor would receive at least one minimum lot, subject to availability, with remaining shares allotted proportionately without being restricted to multiples of the minimum lot.
Sebi has also proposed reducing the trading lot for SME-listed securities to one share, replacing the existing price-band-based lot-size framework.
Underwriting and market making
The regulator has proposed removing the requirement for 100% underwriting of SME IPOs and the additional requirement for lead managers to underwrite at least 15% of the issue size on their own account.
Under the proposed framework, main board underwriting provisions would apply to SME issues, except that the 75% QIB portion under the alternative eligibility route would not require underwriting.
The consultation paper also proposes a minimum subscription requirement of 90%, with a refund where that threshold is not achieved. In line with this proposal, Sebi has proposed removing the existing requirement for the registrar to confirm that at least 90% of the offer has been subscribed before the announcement of issue closure.
Sebi has proposed removing compulsory market making for SME securities. The existing framework requires market making for at least three years from listing or migration from the main board, with the market maker required to maintain inventory of at least 5% of the securities proposed to be listed as of the allotment date.
The revised one-share trading lot and removal of compulsory market making would take effect only when Sebi issues a separate circular rescinding the existing trading-lot circular. Until then, existing market-making requirements would continue to apply, including to issuers listed after notification of the revised framework but before the separate circular is issued.
Lock-in and migration to main board
Under the proposed framework, the minimum promoters' contribution would remain locked in for three years from allotment, while promoters' holdings in excess of the minimum contribution would be locked in for one year.
The lock-in period for pre-issue capital held by persons other than promoters and the promoter group is proposed to be reduced from one year to six months. Specified securities held by the promoter group would remain subject to a separate one-year lock-in.
Existing lock-in obligations for companies already listed on the SME platform when the revised framework is notified would continue until the applicable periods expire. The changes would not retrospectively extinguish or modify those obligations.
Also read: HDB Financial Q2 Results: Net profit jumps 34% YoY to Rs 780 crore, revenue up 10%
Sebi has also proposed replacing paid-up capital-based migration thresholds with market capitalisation-based criteria. Under the proposed framework, migration to the main board would be linked to market capitalisation of Rs 1,000 crore or more but below Rs 4,000 crore, while migration would be mandatory if market capitalisation exceeds Rs 4,000 crore, subject to the applicable main board eligibility requirements.
Existing SME-listed companies would continue to follow the current migration framework, including paid-up capital-based thresholds. Companies listed on the SME platform after notification of the revised framework would be governed by the proposed market capitalisation-based criteria.
The consultation paper also sets out transitional arrangements for issuers that have already filed draft offer documents. Main board IPOs filed before notification of the revised framework would continue under the existing rules. Certain issuers that have filed draft offer documents for SME IPOs but have not obtained in-principle exchange approval or filed the relevant offer document may choose between the existing and revised frameworks, subject to the prescribed conditions.
SME IPOs raise Rs 40,222 crore
A total of 1,496 entities had been listed on SME platforms since inception as of July 31, 2026, including those that subsequently migrated to the main board. Of these, 365 companies had migrated to the main board.
Funds raised through SME IPOs since inception stood at Rs 40,222 crore, while the market capitalisation of entities listed on SME platforms, including those that had migrated, stood at Rs 4,70,984 crore, according to data from the National Stock Exchange and BSE cited in the consultation paper.
Sebi said the review seeks to make the regulatory framework proportionate to the size and nature of SME issuers, reduce avoidable compliance and fund-raising costs, facilitate wider capital market participation and retain safeguards necessary for investor protection and market integrity.
Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here
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