SEBI Tightens SME IPO Rules to Curb Speculation and Boost Investor Protection

SEBI is rolling out a series of stricter regulations aimed at reining in speculative listings and improving the quality of companies going public via the SME IPO route.

Here are the key changes:

1. Profitability Requirement
   • Issuers must now show operating profits of at least ₹1 crore in 2 of the last 3 financial years.
2. Limits on Offer-for-Sale (OFS)
   • The OFS portion in SME IPOs is capped at 20% of the total issue size.
   • Selling shareholders cannot offload more than 50% of their existing holdings at the time of listing.
3. Promoter Lock-In
   • Any promoter stake above the minimum promoter contribution will be locked in:
     • 50% of the excess after 1 year
     • Remaining 50% after 2 years
4. Minimum Application Size & Bid Structure
   • Bidding has been made stricter: the application size must be at least two lots, and the minimum amount per application has been raised to ₹2 lakh.
   • Once bids are submitted, investors cannot cancel or reduce them—the rules have been tightened to prevent speculative downward bidding.
5. Use of IPO Funds
   • SMEs are not allowed to use more than 15% of IPO proceeds (or up to ₹10 crore, whichever is lower) for general corporate purposes.
   • Importantly, they cannot repay promoter loans using IPO proceeds.
6. Listing Eligibility
   • SME issuers must now comply with more demanding eligibility checks. NSE has aligned its criteria to include a positive free cash flow to equity (FCFE) for 2 of the last 3 years.
   • SEBI is also pushing for better governance: SME companies will face tighter norms around related-party transactions, and may need to comply with parts of the main board listing rules.
7. Exchange Due Diligence
   • SEBI has asked stock exchanges to be “extra cautious” while approving SME IPOs. The regulator wants more detailed checks on the companies, even if it slows down the approval process.
8. Price Control on Listing
   • To limit extreme swings on debut, the NSE has imposed a 90% cap on how high the opening price of an SME IPO can go over its issue price.

Implications & Take-Away:

• For Investors: These changes could make SME IPOs less speculative and potentially safer. The higher application size, stricter financial criteria, and promoter lock-ins mean the listed SMEs should be more credible.
• For SMEs: The bar for going public has been raised. Not every SME will now be eligible, but those that do go ahead could gain more trust and stability.
• For the Market: SEBI appears to be shifting the SME IPO framework from a “fast IPO” playground to a more responsible capital-raising platform.