On March 4, 2025, SEBI, the security market regulator, introduced stricter regulatory norms for the SME IPO ecosystem. The reforms allow only promising SMEs with sound track records to raise funds from the public while protecting investor interests.
Let’s check out what are the new amendments announced by SEBI and how it will affect the small and medium enterprises (SMEs) decision to go public.
1. Minimum Profitability Criteria for SME IPO
SMEs planning for IPO must have a minimum EBITDA (Earnings before interest, tax, depreciation, and amortization) of Rs 1 crore for at least two out of three preceding financial years.
Implication on SMEs: The introduction of a minimum profitability threshold is the most important decision that ensures that only financially stable companies with considerable amounts of revenues in the business can access public funds.
2. Maximum Limit on SME IPO offer for sale (OFS)
SEBI has capped offer for sale (OFS) to a maximum of 20% of the total issue size. It means SMEs cannot offer IPO through full offer for sale as the maximum allowed limit is now restricted to 20%. When Selling shareholders sell their shares to the public, it is called an offer for sale (OFS).
Additionally, individual selling shareholder cannot offload more than 50% of their existing holdings in the company. It ensures that promoters will keep a significant portion of their holding (at least 50%) in the company.
3. Lock-in period on promoter’s shareholding
SEBI has put a phased lock-in period on the promoters’ shareholding over the minimum promoter contribution (MPC). Here’s the lock-in period provision;
- 50% holding of promoters in excess of the MPC can be released after one year from the date of IPO allotment, and
- The remaining 50% shareholdings can be unlocked after 2 years.
Impact on SMEs: As promoters cannot sell all of their holdings after the IPO, the move ensures that promoters will have a long-term interest in the company’s performance.
4. Restrictions on the use of SME IPO proceeds
SEBI’s new regulations specify how SMEs can use the funds raised through IPO. SEBI restricts companies to use for the following purposes;
- Funds raised through SME IPO cannot be used to repay loans of promoters and/or promoters groups, and/or related parties, either directly or indirectly.
- Meeting general corporate purposes which is the most common objectives of many SME IPOs, SEBI has put a maximum cap of 15% of total issue size or Rs 10 crore, whichever is lower.
Implications on SMEs: SEBI has put restrictions on funds utilization in order to ensure that funds raised from the primary market by IPO must be primarily used for business growth and expansion and not only for daily financing needs of companies.
5. Increase in Minimum Investment Amount for SME IPO
Till date, investors can subscribe for a minimum of 1 lot in SME IPO, subject to Rs 1 lakh as a minimum investment. But as per the new norms brought by SEBI, the minimum application for SME IPO is increased from one lot to two lots, requiring a minimum investment of Rs 2 lakh.
Implications on SMEs: Implications: The decision to increase the minimum bidding amount for SME IPO makes stricter entry and avoid unnecessary speculation.
6. Allotment of Shares to Non-Institutional Investors
To maintain uniformity in the IPO allotment process, SEBI said that the same approach of share allotment will be followed or non-institutional investors in SME IPOs, as to that of mainboard methodology.
Out of NII quota, one-third will be reserved for subscription by small NIIs (for bidding amount up to Rs 10 lakh) and two-third will be for big NIIs (for bidding amount exceeding Rs 10 lakh).
7. Higher level of Transparency
To protect the public interest, SEBI said that DRHP (Draft Red Herring Prospectus) must be available for public comments for 21 days before the IPO. The IPO issuer company must publish newspaper ads and enclose QR codes for easier access to DRHP.
Implications: Early access to DRHP allows public to submit comments and raise complaints on the SME IPO DRHP.
8. Raising further capital post-SME IPOs without migration
SEBI’s amended norms allow SMEs to raise additional capital through further issues without even migrating to the mainboard exchange, even if the post-issue paid-up capital exceeds Rs 25 crore.
When SMEs raise additional funds through rights offerings, bonus shares, or preferential issues and the total post-issue paid-up capital increases beyond Rs 25 crore, the issuer company is not required to migrate to the BSE and NSE mainboard exchange, provided that SME comply with the SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations 2015.
9. SMEs must comply with Related Party Transaction Norms
Companies listed on the SME platform (NSE Emerge or BSE SME) are now subject to compliance with related party transaction (RPT) norms, just like the mainboard listed companies.
Implications: Adherence with related-party norms aims to boost transparency and fairness for all the transactions between company and promoters or related parties.
Refer SEBI Issue of Capital and Disclosure Requirements (ICDR) (Amendment) Regulations, 2025 for detailed insights.
