Sebi proposes major reforms for SME Platform IPOs, including new eligibility criteria, tighter profitability tests, and revised underwriting rules to enhance market structure and investor protection.
By Sandeep Parekh The SME Platform has grown up. That, at least, is the premise of Sebi’s consultation paper of October 14 which proposes a near-complete rewrite of the rules for initial public offerings (IPOs) by small and medium enterprises. Most of the proposals point in the right direction. The difficulty lies in making all of them at once. As of July 31, 1,496 companies had listed on the SME Platform, raising Rs 40,222 crore, with a combined market capitalisation of about Rs 4.7 lakh crore.
Of these, 365 have since migrated to the Main Board. A window for small businesses has become a market in its own right. Its rules should reflect that scale, and the differences in size and maturity among the companies listed on it. Sebi proposes to use post-issue market capitalisation at the offer price instead. An issuer valued at up to `1,000 crore would have to list on the SME Platform. Issuers valued above `1,000 crore and up to `4,000 crore would have the option to do so, if their restated consolidated financial statements follow Ind AS (Indian Accounting Standards).
Paid-up capital measures the face value of shares, not the size of a business, so the principle is sound. The thresholds are another matter. In the last three financial years, at least 40 Main Board IPOs were valued at `1,000 crore or less, while the largest SME IPO was valued at `748 crore. An issuer that qualifies for the Main Board should not be compelled onto the SME Platform merely because of its size.
A Main Board issuer whose valuation falls to `1,000 crore or below by the red herring prospectus stage would have to re-file under the SME framework. Conversely, letting an issuer worth five times the largest SME IPO list as an SME invites regulatory arbitrage. And since the offer price is set by the issuer and its bankers, the threshold is, to a degree, one the issuer chooses. The profitability test would be tightened.
Today, an issuer must have an operating profit (EBITDA) of at least `1 crore in at least two of the preceding three financial years. Sebi would replace this with an average operating profit of not less than `3 crore per year over the same period. The higher figure is welcome; the averaging is not. Unlike the Main Board test in Regulation 6(1)(b) of the Issue of Capital and Disclosure Requirements (ICDR) Regulations, it does not require a profit in each year.
One strong year could carry two weak ones. An issuer that fails this test would not be shut out. It could still list through book building if at least 75% of the net offer is allotted to qualified institutional buyers (QIBs). Retail investors would be capped at 10%, and the subscription refunded if the QIB portion is not met. As under Regulation 6(2) for the Main Board, the premise is that institutional judgement can stand in for a profit record.
That holds only where institutional demand is deep and discerning, which Sebi should test in the SME segment rather than assume. Today, an offer for sale in an SME IPO cannot exceed 20% of the issue size, and a selling shareholder cannot offer more than 50% of its pre-issue shareholding. Sebi now proposes a one-year holding period for shares offered for sale, as on the Main Board, while exempting QIB selling shareholders from both limits.
The exemption would not extend to the alternative route, sensibly so. A route built on institutional validation should not double as an institutional exit. Otherwise, a cleaner exit could encourage pre-IPO investment by QIBs. The underwriting proposal is the easiest to support. Currently, every SME IPO must be 100% underwritten, with the lead manager underwriting at least 15% of the issue on its own account.
Sebi proposes to remove both requirements and adopt the Main Board underwriting framework, alongside a minimum subscription requirement of 90% of the offer, failing which application money is refunded. Underwriting fees accounted for nearly half of the total issue expenses of SME IPOs on NSE in 2024-25. Yet the working group found that underwriters had to take up shares in only four SME IPOs in three years.
Issuers have been paying for insurance that almost never paid out. A minimum subscription test, backed by a refund, is a more honest signal of demand. The retail proposals call for the most caution. In March 2025, Sebi raised the minimum application to above `2 lakh to limit participation by smaller investors in a high-risk segment. Nineteen months later, it proposes to bring this back to `1 lakh, in four lots of `25,000.
The trading lot would fall to one share, compulsory market making would go, and the lock-in on non-promoter pre-issue capital would be halved to six months. The IPO gate would stay at `1 lakh. On listing day, it would be the price of a single share. Replacing paid-up capital with market capitalisation, raising the profitability bar, and rationalising underwriting improve the structure of the market.
Widening retail entry, easing exits for pre-IPO investors, and removing market makers change who bears the risk in it. Each is defensible on its own. Introduced together, they could alter the risk profile of the segment far more than any one reform suggests, and leave no way of telling afterwards which change caused what. Sebi should sequence the reforms. The structural changes can go first. The retail relaxations should follow once the new eligibility filter has operated for at least a year and Sebi has seen the quality of the issuers it lets through.
The platform may have grown up. Its newest investors should not be the ones to find out whether its issuers have. Co-authored with Purva Mandale, Associate, Finsec Law Advisors The writer is managing partner, Finsec Law Advisors Disclaimer: The views expressed are the author's own and do not reflect the official policy or position of Financial Express.
