SEBI Floats Consultation Paper To Revamp SME IPO Framework

The Securities and Exchange Board of India (SEBI) has floated a consultation paper seeking comments on revamping the listing framework for small and medium enterprises (SME).

The paper suggests sweeping changes to the SEM IPO framework and has recommended increasing the minimum application size to INR 2 Lakh per application from INR 1 Lakh and limiting the offer for sale (OFS) component in the SME public issue to 20-25% of the total issue size.

The capital market regulator has also proposed establishing a monitoring agency to oversee SME IPOs with issue size exceeding INR 20 Cr to INR 50 Cr compared to the current requirement of INR 100 Cr. 

The market watchdog has also proposed changing the allocation methodology for non-institutional investors (NIIs) by introducing “draw of lots” allotment, on the lines of the retail category, as against proportionate allotment currently. 

Additionally, SEBI has also sought comments from the general public on increasing the threshold for minimum allottees in an SME public issue to 200 from 50 currently. It is pertinent to note that SEBI rules underscore that an SME public issue with at least 50 allottees is considered “successful”.

The watchdog has also sought public feedback on mandating an earnings before interest, depreciation and tax (EBITDA) of over INR 3 Cr for at least any two out of the three financial years preceding the application for the IPO. 

Additionally, the watchdog has also proposed changing the eligibility criteria to allow only those entities to list on the SME bourses where the issue size is more than INR 10 Cr. On top of that, it has also sought comments on whether the general corporate purpose amount in the IPO should be restricted to 10% of the issue size, with an absolute limit of INR 10 Cr, compared to 25% currently. 

The paper also pitches for releasing the minimum promoter contribution in an SME IPO in a phased manner, rather than releasing the entire holding in one go after three years. 

Notably, SEBI, in the paper, has also proposed mandating listed SME companies to submit data related to the shareholding pattern and financial results every quarter as against half-yearly currently. 

Why The Need For New Rules?

The SEBI paper comes at a time when the SME segment has been witnessing a surge in public issues led primarily by growing investor participation. In its paper, the regulator noted that the applicant to allotted investor ratio increased 245X in the fiscal year 2023-24 (FY24) from 46X in FY23.

As per reports, SMEs raised a record INR 7,016 Cr via IPOs till September this year as against INR 4,687 Cr in the entirety of 2023.

However, the regulator has flagged a slew of issues with this uptick in SME IPOs, including limited presence of “sophisticated investors” on their cap table to check the promoter’s influence and a “buildup of systemic risks in managing the funds raised by SME listed entities”.

“… SEBI has observed that in some SME companies, the entity diverted money raised through IPO and subsequent Rights Issue to shell companies controlled by the promoters. It has also been observed in another entity that a company has booked fraudulent sales and purchases through circular transactions amongst related parties/ connected parties. By doing so such companies try to create a positive sentiment to induce investors into purchasing such securities…,” read the paper. 

The development comes at a time when a number of new-age tech companies taking the SME IPO route is also on the rise. The likes of Menhood, TAC Security and Trust Fintech have already listed on NSE Emerge so far this year.