In a significant move to strengthen the SME IPO ecosystem, the Securities and Exchange Board of India (SEBI) has rolled out major amendments to the SME IPO framework under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR). These changes come after a consultation paper was released on November 19, 2024, followed by SEBI’s approval in its board meeting held on December 18, 2024.

Since the launch of the SME segment in 2012, SEBI has continuously worked towards enhancing market efficiency and investor protection. With this latest overhaul, SEBI aims to bring greater transparency, bolster investor confidence, and improve overall market dynamics.

Let’s dive into the key updates and understand what they mean for market participants.

Stronger Eligibility Criteria for IPOs:

SEBI has tightened the eligibility norms for SMEs planning to go public. A key change is the ineligibility of issuers with outstanding convertible securities or rights to acquire equity shares, except in specific cases such as Employee Stock Option Plans (ESOPs). Additionally, businesses that have transitioned from proprietorships, partnerships, or LLPs must now be in existence for at least one full financial year before filing for an IPO.

Another notable introduction is the requirement for issuers to report a minimum operating profit (EBITDA) of ₹1 crore for at least two of the last three financial years. Moreover, if there is a complete change in promoters or if new promoters acquire over 50% of shares, the company must observe a one-year cooling-off period before filing a draft offer document.

Tighter Regulations on IPO Proceeds, Lock-in of MPC:

To ensure that IPO proceeds are used efficiently and promote greater accountability, SEBI has implemented stricter guidelines. The allocation for general corporate purposes is now capped at the lower of ₹10 crore or 15% of the total issue size, reduced from 25%. Additionally, issuers can no longer use IPO funds to repay loans taken from promoters, promoter groups, or related parties.

In terms of lock-in requirements, the standard three-year lock-in for the minimum promoter contribution remains. However, any excess holding is now split, 50% locked in for two years and the remaining 50% locked in for one year. Non-promoter pre-IPO shareholders will also face a lock-in period for shares acquired through stock appreciation right schemes.

Compliance Mechanisms:

SEBI has further strengthened compliance mechanisms by lowering the threshold for mandatory fund monitoring by a credit rating agency from ₹100 crore to ₹50 crore. For IPOs that fall below this threshold, the statutory auditor must certify fund utilization in quarterly financial results. If working capital exceeds ₹5 crore as one of the IPO objects, the statutory auditor must also certify its utilization.

Moreover, all transactions by promoters and promoter groups during the IPO process must be disclosed to stock exchanges within 24 hours. Any proposed pre-IPO placements must also be reported within this timeframe.

Enhanced Disclosure and Due Diligence Requirements:

SEBI has introduced several new disclosure norms aimed at improving investor confidence. Offer documents must now include details of Employees’ Provident Fund (EPF) and Employees’ State Insurance Corporation (ESIC) contributions, along with a site visit report prepared by the lead manager. Additionally, lead managers are now required to disclose their fees and annex site visit reports to their due diligence certificates.

To increase public scrutiny, draft offer documents will now be open for public comments for 21 days before approval. Issuers must also publish a newspaper notice informing investors about the filing.

Changes in Pricing, Allocation, and Application Norms:

The amendments bring about significant changes to IPO pricing and allocation mechanisms. Issuers must now announce the floor price or price band through newspaper advertisements at least two working days before the issue opens. The minimum application size has been increased to two lots, with a minimum investment requirement of ₹2 lakh.

For non-institutional investors (NIIs), the allocation is now split: one-third reserved for applications between two lots and ₹10 lakh, while two-thirds are reserved for those exceeding ₹10 lakh. Additionally, the minimum number of allottees in an SME IPO has been raised from 50 to 200, ensuring wider participation.

Revised Migration and Listing Norms:

Companies with a post-issue paid-up capital exceeding ₹25 crore can now migrate to the Main Board without first being listed on the SME Exchange, provided they comply with Main Board regulations. Moreover, in cases where an issuer alters its IPO objectives or contractual commitments related to IPO proceeds, dissenting shareholders must now be given an exit opportunity.

Conclusion:

These amendments reflect SEBI’s ongoing efforts to refine and strengthen the SME IPO ecosystem. By introducing stricter eligibility requirements, limiting fund misuse, enforcing better disclosures, and ensuring robust monitoring, SEBI is creating a more transparent and efficient capital market. For SMEs and market participants, aligning with these new regulations is crucial for successful public listings and sustainable growth. Stay informed about the latest regulatory developments and market trends as India’s SME sector Stay informed about the latest regulatory developments and market trends as India’s SME sector continues to evolve.