Markets regulator Securities and Exchange Board of India’s (SEBI) proposed a sweeping overhaul of the small and medium enterprise (SME) initial public offering (IPO) landscape through a consultation paper. SEBI wants to tighten safeguards for investors without making it harder for viable smaller businesses to raise capital.

However, the consultation paper's proposed relaxation of underwriting and market-making requirements can also place higher responsibility on issuers and merchant bankers to ensure that there is genuine demand and liquidity.

SEBI has proposed more stringent profitability requirements, a change from paid-up capital to focusing on post-issue market capitalisation to determine listing eligibility, and changes to trading lots.

The regulator's aim is to strengthen investor protection while also retaining the SME platform as a serious fundraising avenue for smaller businesses hitting the markets. “The focus should be on ensuring that companies coming to market are better prepared for public investors,” said CA Sandeep Gupta, director at Valmiki Leela Capital.

Ritaban Basu, CEO, B2K Analytics shared that 158 SME IPOs raised Rs 7,542 crore between January and September 2026, compared with 183 issues raising Rs 8,535 crore in the corresponding period of 2025 and 200 issues raising Rs 7,044 crore in 2024.

SEBI has proposed to hike the average annual operating profit requirement to Rs 3 crore over the previous three years. However, for companies that do not meet this threshold, they can look to an alternative route wherein 75 percent of the offer would have to be allotted to qualified institutional buyers (QIBs).

According to experts, the tighter eligibility criteria can reduce the number of firms that qualify for an SME IPO. The higher threshold could exclude companies with uneven earnings or those whose profits have risen sharply just before listing.

“The three-year average is the harder part, because many companies show a sharp jump in profit just before listing,” said Tarun Singh, managing director and founder of Highbrow Securities.

However, Singh added that the regulator should clearly explain their definition of operating profit, including how depreciation is treated, so that asset-heavy manufacturing businesses don't see a disadvantage.