Sebi Mulls Stricter Rules For SME IPOs, Proposes Raising Min Application Size

It has been proposed that an issuer should only be allowed to launch an IPO if the issue size exceeds Rs10 crore. Additionally, the issuer should have an operating profit (EBIT) of at least Rs3 crore in 2 out of the 3 financial years preceding the application

Markets regulator Sebi proposed stricter rules for SME IPOs by setting a minimum issue size for companies going public, doubling the minimum application size and introducing a "draw of lots" system for non-institutional investors (NIIs).

In its consultation paper, Sebi proposed to increase the application size from Rs 1 lakh per application to Rs 2 lakh per application in SME IPOs to ensure that only informed investors with sufficient risk appetite and investment capacity can apply. The markets watchdog also invited public opinions on whether the minimum application amount should be increased further to Rs 4 lakh. This move follows a rise in SME (small and medium enterprise) issues, which has driven significant investor participation.

The applicant-to-allotted investor ratio surged from 4 times in FY22 to 46 times in FY23 and further to 245 times in FY24. "The retail individual participation has increased in the SME IPO over the last few years. Therefore, considering that SME IPOs tend to have higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors, It is proposed to increase the application size from Rs 1 lakh per application to Rs 2 lakh per application in SME IPO," Sebi said.

The higher size will limit participation by smaller investors and shall attract investors with risk taking appetite, which will enhance the overall credibility of the SME segment, Sebi added. Additionally, Sebi has proposed introducing a "draw of lots" system for non-institutional investors (NIIs) aligning with the SME segment with main-board initial public offerings (IPOs). At present, SME IPOs use proportional allotment for NIIs.

This change aims to prevent over-leveraging and ensure a fairer distribution of shares. Also, Sebi has proposed limiting Offer-for-Sale (OFS) to 20 per cent of the issue size and ensuring that selling shareholders do not offer more than 20 per cent of their pre-issue shareholding. Currently, there are no restrictions on OFS in SME IPOs.

Further, it has been suggested to increase the minimum number of allottees to 200, from 50 at present, to improve liquidity and market depth. Apart from these proposals, Sebi has proposed making the appointment of a monitoring agency mandatory for all SME IPOs with an issue size exceeding Rs 20 crore. Currently, a monitoring agency is only required for SME IPOs with an issue size above Rs 100 crore.

Additionally, for specific uses of proceeds, such as funding subsidiaries, repaying loans, or acquisitions, a monitoring agency should be required even if the issue size is smaller. If a monitoring agency is not appointed, a statutory auditor's certificate will be required to confirm the proper use of the raised funds.

To ensure promoter commitment and the long-term sustainability of the company, Sebi has suggested extending the lock-in for minimum promoter contribution (MPC) to 5 years, with phased release for excess shares -- 50 per cent after 1 year and the remaining 50 per cent after 2 years. Currently, promoter shares have a lock-in period of 3 years for minimum promoter contribution and 1 year for excess shares.

The markets regulator has suggested restricting general corporate purpose (GCP) allocation to 10 per cent with an absolute cap of Rs 10 crore, aiming to ensure that a majority of the funds raised are directed toward specific business needs. Currently, GCP can be up to 25 per cent of the issue size. Further, a proposal has been made to set additional eligibility conditions for issuers making SME IPOs.

It has been proposed that an issuer should only be allowed to launch an IPO if the issue size exceeds Rs 10 crore. Additionally, the issuer should have an operating profit (EBIT) of at least Rs 3 crore in 2 out of the 3 financial years preceding the application. Driven by the strong performance of India's equity markets, the number of public issues by SMEs has significantly increased over the past two years.

In FY 2023-24, the number of SME IPOs and the funds raised reached record levels, with 196 IPOs raising over Rs 6,000 crore. In FY 2024-25, by October 15, 159 SME IPOs had already raised more than Rs 5,700 crore. The Securities and Exchange Board of India (Sebi) has sought public comments till December 4 on the proposals.