When we think of IPOs, we usually picture big brands making headlines on business news channels. But beyond the main board, there’s another fast-growing segment quietly raising capital SME IPOs. These are small and medium enterprises listing on special SME platforms of stock exchanges like NSE Emerge and BSE SME.
SME IPOs are meant to give smaller companies access to public funds while still following the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). Over the years, this route has become popular among companies looking for visibility, credibility, and growth capital.
However, SEBI has recently noticed that some SME IPOs were coming to market without a solid profit track record. Investors often found it hard to judge their sustainability, and post-listing performance was uneven. To fix this, SEBI has introduced a new profitability test for SME IPOs in 2025. Let’s break this down in plain language.
What Has Changed?
Under the March 2025 amendment to the ICDR Regulations, an SME company must now show that it has earned an operating profit (EBITDA) of at least ₹1 crore in any two of the last three financial years before filing its Draft Red Herring Prospectus (DRHP)[1].
In simple words if a company wants to go for an SME IPO, it should be able to demonstrate that it’s not just growing on paper but actually making money through operations in at least two recent years. EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is a measure of operating profit it tells us whether the business model is working before accounting for financing or depreciation costs.
Why Did SEBI Bring This Change?
The goal is simple: to improve quality and investor confidence.
Earlier, even companies with weak or inconsistent profits could attempt IPOs. Some raised funds only to meet working capital needs or repay loans, without a strong business story. As a result, a few IPOs struggled after listing, and investor trust began to dip. By introducing this profitability filter, SEBI wants to ensure that only those SMEs that have proven stability and a minimum earning capacity can tap public money[2]. This also protects small investors who might otherwise be drawn to every “new issue” without understanding the risks.
Why the Profitability Filter Was Necessary: Market Trends and Fundraising Realities
The timing of SEBI’s new profitability requirement becomes clearer when viewed against current market behaviour. While the broader primary market has moderate i.e. raising about US $14 billion so far in 2025 compared to US $19 billion in 2024 still SME fundraising continues to surge[3]. By November 2025, SMEs had already raised ₹9,165 crore, marking one of the strongest years ever for small-company listings. Yet, despite the volume, listing-day gains have cooled significantly; average gains across 2025 SME IPOs hover around 10%, far below the highs seen in previous years. This divergence reflects a deeper issue: strong SMEs continue to perform, but early-stage or thin-margin businesses often struggle after listing, affecting investor trust and long-term market stability.
Seen in this backdrop, SEBI’s ₹1-crore EBITDA test serves not as a hurdle but as a quality badge for genuine SMEs. Companies with consistent operating profitability will stand out, command better valuations, and attract more institutional and long-term investors. The rule also nudges the ecosystem toward discipline. Over time, this filter will reduce speculative listings, improve post-listing performance, and elevate SME platforms closer to main-board credibility, ensuring that the right companies shine brighter in India’s evolving capital markets.
Conclusion
The SME platform remains one of India’s most exciting capital-raising avenues. SEBI’s new profitability test is not meant to discourage small companies but to help the right ones shine brighter. Every amendment carries a story in this case, a story of making SME IPOs safer, cleaner, and more trustworthy.
[1] Regulation 229 (6) of ICDR Regulations: An issuer may make an initial public offer, only if the issuer had minimum operating profits (earnings before interest, depreciation and tax) of ₹1 crore from operations for at least two out of the three previous financial years.]
[2] https://www.sebi.gov.in/reports-and-statistics/reports/nov-2024/consultation-paper-on-review-of-sme-segment-framework-under-sebi-icdr-regulations-2018-and-applicability-of-corporate-governance-provisions-under-sebi-lodr-regulations-2015-on-sme-companies-to-_88627.html
[3] Data from Kotak Institutional Equtiy’s Primary Market Report (October 19, 2025)
This has been published on taxguru.
https://taxguru.in/sebi/sme-ipo-rules-2025-sebis-rs-1-crore-ebitda-test-explained-icdr.html