Sebi boards tightens framework for SME IPOs; to introduce profitability criteria

NEW DELHI: Markets regulator Sebi's board on Wednesday approved a stricter regulatory framework for small and medium enterprises (SMEs) IPO by introducing a profitability requirement.

Also, Sebi has decided to put a limit on offer-for-sale (OFS) and introduced phased lock-in for promoters.

The reforms, approved by the Sebi's board, aim to provide SMEs with a sound track record and an opportunity to raise funds from the public while protecting investor interests, the regulator said in a statement after the board meeting.

In this regard, the board approved amendments to the Sebi (ICDR) Regulations, 2018 and Sebi (LODR) Regulations, 2015.

This move follows a rise in SME issues, which has driven significant investor participation.

With regards to profitability criteria, Sebi said that SMEs planning to launch an initial public offering (IPO) are required to demonstrate operating profits (earnings before interest, depreciation, and tax - EBITDA) of at least Rs 1 crore in two of the three preceding financial years at the time of filing their Draft Red Herring Prospectus (DRHP).

Also, the offer-for-sale (OFS) by selling shareholders in SME IPOs has been capped at 20 per cent of the total issue size. Additionally, selling shareholders will not be allowed to offload more than 50 per cent of their existing holdings.

Further, promoters' shareholding over the Minimum Promoter Contribution (MPC) would be subject to a phased lock-in period. Half of the excess holding would be released after one year, while the remaining 50 per cent would be unlocked after two years.

The allocation methodology for non-institutional investors (NIIs) in SME IPOs would be aligned with the approach followed in main-board IPOs to ensure uniformity.

The amount allocated for general corporate purpose (GCP) in SME IPOs has been capped at 15 per cent of the total issue size or Rs 10 crore, whichever is lower.

SME issues will not be permitted to use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties, whether directly or indirectly.

The Draft Red Herring Prospectus (DRHP) for SME IPOs must be made available for public comments for 21 days. Issuers will be required to publish announcements in newspapers and include a QR code for easy access to the DRHP.

SME companies would be allowed to raise funds through further issues without migrating to the main board, provided they comply with the Sebi (LODR) rules applicable to main Board-listed entities.

SME-listed entities would have to comply with related party transaction (RPT) norms applicable to the main board-listed companies.

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 regulator has recently cancelled the SME IPO of Trafiksol ITS Technologies and directed the company to refund the money to investors following material misstatements in the firm's prospectus and suspected collusion with a shell entity.

In October, BSE postponed the listing of Trafiksol ITS Technologies on its SME platform after investor concerns. The Rs 45 crore IPO was oversubscribed by over 345 times, attracting bids worth more than Rs 10,000 crore.