SEBI Tightens Rules For SME IPOs

SUMMARY

In its Board meeting, the capital market regulator introduced profitability requirements as well as put a cap on shares to be sold through the offer for sale (OFS) route

An SME can come out with an IPO only if it has an operating profit of INR 1 Cr from operations for any two out of three previous financial years

The OFS size should not exceed 20% of the total issue size

The Securities and Exchange Board of India (SEBI) has tightened the regulatory framework governing initial public offerings (IPOs) for small and medium enterprises (SMEs).

In its Board meeting yesterday (December 18), the capital market regulator introduced profitability requirements as well as put a cap on shares to be sold through the offer for sale (OFS) route.

In terms of the profitability clause, an SME can come out with an IPO only if it has an operating profit (earnings before interest, depreciation and tax) of INR 1 Cr from operations for any two out of three previous financial years at the time of filing the draft red herring prospectus (DRHP).

Also, the OFS size should not be more than 20% of the total issue size. Additionally, these shareholders cannot sell more than 50% of their total holding through the IPO.

The new rules do not allow SME IPO proceeds to be used to repay loans to promoters, promoter groups, or related parties. Apart from that the public will now have 21 days to review SME IPO DRHPs and provide feedback. Stock exchanges will make the DRHPs accessible through public announcements and QR codes.

The market watchdog has also streamlined allocation methodology for non-institutional investors in SME IPOs with the methodology followed for investors in main board IPOs.

Besides, SEBI also said that regulated entities will now have to take full responsibility for the use of artificial intelligence (AI) designed by them or acquired from others.

This comes a month after SEBI floated a consultation paper seeking comments on revamping the listing framework for SME. At that time, the market regulator also proposed establishing a monitoring agency to oversee SME IPOs with issue size exceeding INR 20 Cr to INR 50 Cr. Most of the proposed changes in that consultation paper have been implemented.

It is pertinent to note that the SME segment has been witnessing a surge in public issues led primarily by growing investor participation. In one of its papers, SEBI mentioned 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.