SEBI’s New Norms for SME IPOs: What SMEs Should Know

The SME (Small and Medium Enterprises) IPO platform in India has been a game-changer for smaller businesses seeking funding. Since its launch in 2008, hundreds of companies have raised capital and grown through public listings. However, the rapid growth has also brought challenges. The Securities and Exchange Board of India (SEBI) is rolling out new rules to protect investors and ensure market integrity. From revised profitability criteria to promoter lock-in periods to fund utilization rules, SEBI's new norms for SME IPO create a more robust ecosystem for SMEs.

Let’s break down the present scenario & understand SME IPO norms, key changes, and their significance in the capital market.

The Rise of SME IPOs in India

In 2024, the SME IPO segment saw exceptional growth, with 243 companies listed on NSE Emerge and BSE SME. The momentum continues in 2025, with 28 SME IPOs already listed. This surge highlights the increasing investor interest in SMEs, as numerous offerings have attracted significant subscriptions and delivered impressive listing gains, marking a milestone for the sector’s expansion.

SEBI's recent measures aim to strengthen investor protection and market integrity by addressing key areas such as SME IPOs, insider trading regulations, and merchant banking norms.??

Key Changes to SEBI Norms for SME IPOs: A Simplified Explanation

SEBI’s new guidelines are designed to strengthen trust in SME IPOs. By addressing common concerns including insider trading and illiquidity, these rules will create a more reliable ecosystem for small businesses and investors. Here's a breakdown of the key changes:

Key Change 1: Profitability Criteria for SME IPOs? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

• Existing Norms: The company should be profitable to qualify for an IPO.
• New Norms: The company can launch an IPO only if it has an operating profit (EBITDA) of ?1 crore or more in at least 2 out of the last 3 financial years before filing the DRHP.
• Why It Matters: Demonstrates sustainable business operations and reduces risk for investors, leading to increased confidence.

Key Change 2: Offer for Sale (OFS) Restrictions? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

• Existing Norms: No restriction on the offer for sale.
• New Norms: 1. OFS portion is limited to 20% of the issue size.

2. Selling shareholders cannot sell more than 50% of their shareholding.

• Why It Matters: It prevents a flood of shares from insiders post-IPO, stabilizes the stock price, and protects public investors.

Key Change 3: Promoter Lock-in Period

• Existing Norms: Minimum promoter contribution (MPC) is locked for 3 years, excess holding, and 1 year post-IPO.
• New Norms: Phased release of lock-in for promoter holdings more than MPC:

1. 50% of excess holdings released after 1 year
2. Remaining 50% after 2 years

• Why It Matters: Aligns promoter interests with long-term company performance, fostering trust and encouraging sustainable growth.

Key Change 4: Loan Repayment Prohibition? ? ? ? ? ? ? ? ? ?

• Existing Norms: No specific provision.
• New Norms: SME IPO proceeds cannot be used to repay loans taken from promoters, promoter groups, or related parties.
• Why It Matters: Ensures IPO funds are used for business expansion and growth, maximizing shareholder value creation.

Key Change 5: Allotment Process for Non-Institutional Investors ? ? ? ?

• Existing Norms: NII allotment is done on a proportionate basis.
• New Norms: NII allocation will now follow the Draw of Lots method, ensuring fairness and transparency like Main Board IPOs.
• Why It Matters: Creates a level playing field for NIIs, increasing participation and broadening the investor base.

Key Change 6: Related Party Transactions (RPT) Norms? ? ? ? ? ? ? ? ? ? ?

• Existing Norms: Mainboard norms did not apply.
• New Norms: Mainboard norms now apply, with RPT considered material if it is 10% of turnover or Rs.50 Cr (whichever is lower).
• Why It Matters: Enhances transparency and reduces potential conflicts of interest, promoting better corporate governance.

Key Change 7: Cap on General Corporate Purpose (GCP) ? ? ? ? ? ? ?

• Existing Norms: Funds allocated for GCP cannot exceed 25% of the total funds raised.
• New Norms: Funds allocated for GCP cannot exceed 15% of the total funds raised or ?10 crore, whichever is lower.
• Why It Matters: Directs funds towards core business activities and expansion plans, improving capital efficiency.

Key Change 8: Public Review of DRHP ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

• Existing Norms: No specific provisions.
• New Norms: Draft Red Herring Prospectus (DRHP) for SME IPOs must be made available for public comments for 21 days, along with a public announcement in newspapers and a QR code link.
• Why It Matters: Encourages informed investment decisions through increased transparency and public scrutiny of the DRHP.

What’s Unchanged?

• The 1-year norm on NSE Emerge & BSE SME platforms remains in place.
• There are no restrictions on issue size.
• Existing norms concerning financials and disclosures continue to apply.

Proposed Additions (Consultation Stage)

• A cooling-off period of a full financial year for recently converted private limited companies.
• Minimum issue size proposed at ?10 crores.
• Mandatory appointment of a monitoring agency to oversee fund utilization.

SEBI Streamlined Regulations for Merchant Bankers

SEBI has introduced new regulations for merchant bankers, categorizing them based on net worth. SEBI Registered Category 1 Merchant Banker, with a net worth of ?50 crore or more, can undertake all SEBI-regulated activities. Category 2 Merchant Banker, with a net worth of ?10 crore, faces restrictions, notably excluding equity mainboard issues. merchant bankers must also separate permitted and non-permitted activities, potentially hiving off the latter into a separate legal entity within two years, ensuring greater focus and regulatory compliance.

Looking Ahead: A Safer Future for SME IPOs ? ? ? ? ? ?

SME platforms have become a preferred route for small businesses to raise capital. The SME platform has immense potential, and SEBI’s reforms are designed to protect this potential while addressing the challenges.?

These changes signal the need to focus on governance and transparency and bring greater trust in the SME market. Together, these reforms pave the way for a more robust and reliable ecosystem for SME IPOs.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Gretex Corporate Services Limited’s Research Team, nor a report published by the Gretex Corporate Services Limited’s Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making investment decisions.