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Among other proposals, Sebi proposes to double the application size to Rs 2 lakh per application in such IPOs to ensure that only informed investors with sufficient risk appetite and investment capacity can apply.
Sebi has invited public comments on the proposal, with a deadline set for December 4. (Representative image)
The Securities and Exchange Board of India (Sebi) has proposed a series of reforms for SME initial public offerings (IPOs). Among these, doubling the minimum application size from Rs 1 lakh to Rs 2 lakh is a key measure.
Why the Change?
The SME IPO market has witnessed a surge in investor participation in recent years. The applicant-to-allotted investor ratio jumped dramatically from 4 times in FY22 to 245 times in FY24. However, the markets regulator noted that SME IPOs carry higher risks compared to mainboard IPOs. Sudden shifts in market sentiment post-listing could leave smaller retail investors vulnerable.
To address this, Sebi in its consultation paper now proposes to double the application size to Rs 2 lakh per application in such IPOs to ensure that only informed investors with sufficient risk appetite and investment capacity can apply.
“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 noted in its consultation paper.
Additional Reforms
Sebi’s proposed changes go beyond application size, aiming to address broader issues like liquidity, monitoring, and fair distribution of shares:
1. ‘Draw of Lots’ for Non-Institutional Investors (NIIs)
Sebi plans to replace proportional allotment with a ‘draw of lots’ system for NIIs. This method, already in use for mainboard IPOs, ensures a fairer distribution of shares and prevents over-leveraging by investors.
2. Offer-for-Sale (OFS) Restrictions
Currently, there are no restrictions on OFS in SME IPOs. Sebi has proposed capping OFS at 20 per cent of the issue size and limiting selling shareholders to offering no more than 20 per cent of their pre-issue holdings.
3. Mandatory Monitoring Agency
Sebi seeks to make appointing a monitoring agency compulsory for SME IPOs with an issue size exceeding Rs 20 crore, down from the current Rs 100 crore threshold. This ensures transparency in fund usage, especially for specific purposes like repaying loans or funding acquisitions.
4. Increased Lock-In for Promoters
Promoters would face a 5-year lock-in for minimum promoter contribution (MPC), compared to the current 3 years, with phased release for excess shares over two years. It aims to ensure promoter commitment and the long-term sustainability of the company.
5. Higher Allottee Count
To improve liquidity and market depth, Sebi has suggested raising the minimum number of allottees from 50 to 200.
Stricter Eligibility Criteria for Issuers
To ensure only fundamentally strong companies approach the SME IPO market, Sebi proposed that issuers meet these conditions:
– A minimum IPO issue size of Rs 10 crore.
– Operating profit (EBIT) of at least Rs 3 crore in two out of the three preceding financial years.
GCP Allocation Limits
Sebi also plans to restrict general corporate purpose (GCP) allocations to 10 per cent of the issue size, capped at Rs 10 crore. This ensures that funds raised are primarily directed toward specific business objectives.
A Growing Market with Increased Scrutiny
The SME IPO market has been thriving, driven by strong equity market performance. FY24 saw a record 196 SME IPOs raising over Rs 6,000 crore, while FY25 is already on track with 159 IPOs raising Rs 5,700 crore by mid-October.
However, Sebi’s reforms aim to temper this growth by ensuring that investor enthusiasm does not come at the cost of financial prudence.
Public Feedback Invited
Sebi has opened the floor for public comments on these proposals, with a deadline set for December 4. These reforms, if implemented, could reshape the landscape of SME IPOs, fostering a more informed and resilient investor base while safeguarding smaller investors from excessive risks.
The doubling of the minimum subscription amount is not just a financial adjustment but a step towards building a sustainable and credible SME IPO market. As the segment continues to grow, these measures could set the stage for long-term stability and success.
What Experts Say?
Makarand M Joshi, founder of corporate compliance firm MMJC & Associates, said, “The Sebi proposal to revamp listing regulations and compliance requirements for SME comes amid rising number of cases relating to misuse of SME platform by few market participants. Stricter compliance requirements would ensure there are checks and balances in place for detecting undesired manipulations.”
Sebi had amid this in December 2023 made additional surveillance measures applicable to the SME segment in order to increase surveillance on unwarranted trading practices, he added.
“With these compliance requirements in place it is likely that compliance costs for SME might get escalated,” Joshi said.
