SEBI Stricter Regulations for SME IPOs to Ensure Transparency and Investor Protection

The SEBI (Securities and Exchange Board of India) has tightened rules for Small and Medium Enterprises (SME) IPOs with new amendments to ensure only financially sound entities can access public markets. Key changes include a profitability clause, restrictions on fund usage, and enhanced investor protection measures.

Key Highlights:

• Profitability Requirement: SMEs can now file for IPOs only if they report an operating profit of at least ₹1 crore in any two of the last three financial years.
• Restrictions on Fund Utilization: Companies are barred from using IPO proceeds to repay loans to promoters or related parties.
• Offer for Sale (OFS) Cap: The OFS portion is limited to 20% of the total issue size, with selling shareholders restricted to selling a maximum of 50% of their holdings.
• Lock-in Period for Promoters: Promoters’ holdings exceeding the minimum contribution will now have a staggered lock-in period, with 50% released after one year and the remaining after two years.
• Public Review Period: IPO draft documents will be open for 21 days to allow public comments.

Focus on Investor Protection

The updated framework also limits the allocation for General Corporate Purposes to 15% of IPO size or ₹10 crore. Additionally, the allocation methodology for Non-Institutional Investors (NIIs) in SME IPOs has been aligned with that of mainboard IPOs, ensuring a more uniform approach.

These changes come amid record-breaking SME IPO activity in 2024, with over ₹8,200 crore raised by 225+ companies. However, concerns about massive oversubscriptions and potential mispricing prompted SEBI to act.

By introducing these measures, SEBI aims to foster a robust and transparent ecosystem for SME listings while safeguarding investor interests.