The Securities and Exchange Board of India (SEBI) has proposed sweeping changes to the rules governing initial public offerings (IPOs) of small and medium enterprises (SMEs).
In a consultation paper floated on October 14, the markets regulator has proposed changes to SME IPO norms, including regulations pertaining to valuation thresholds, profitability and shareholder exits. The regulator has invited public feedback on the paper till November 4.
Citing its rationale, the regulator said that the paper has been formulated by its working group due to rapid increase in the funds raised through SME IPOs and the number of investors participating in such issues.
Since launch in 2012, about 1,500 companies have opted to list on the SME platform and have raised ₹40,222 Cr. Startups like Zappfresh, DroneAcharya, TAC Infosec, Yudiz, are a few startups that have also taken this route to go public.
In view of this, the regulator has proposed multiple changes, including lowering the minimum application threshold and removing mandatory underwriting and market-making requirements.
Here’s a look at some of the key changes that have been proposed:
The Market Cap-Based Listing Criteria
Under the proposed framework, companies with a post-issue market capitalisation of ₹1,000 Cr or less can now list on the SME platform. Those valued in the range of ₹1,000 Cr to ₹4,000 Cr can also choose to list either on the SME platform or the main board. Companies valued over ₹4,000 Cr will have to list on the main board.
SEBI has also proposed replacing the existing paid-up share capital criterion with post-issue market capitalisation to determine whether a company can list on the SME platform or the main board.
Currently, companies with post-issue paid-up share capital of up to ₹25 Cr can opt for the SME platform, subject to other eligibility conditions.
In addition, companies in the ₹1,000 Cr to ₹4,000 Cr band choosing the SME platform would also have to submit restated consolidated financial statements under Indian Accounting Standards (Ind AS) for the preceding three financial years, if they have not already adopted Ind AS.
If an IPO applicant’s estimated market capitalisation crosses the applicable threshold during the IPO process, it would have to refile under the relevant listing framework.
Minimum Profitability Requirements Raised
SEBI has proposed mandating SME IPO applicants to report an average operating profit of at least ₹3 Cr annually over the preceding three financial years, based on restated consolidated financial statements.
In contrast, the existing framework requires operating profit of at least ₹1 Cr in at least two of the preceding three fiscal years. However, the consultation paper refers to EBIT in its narrative, while existing provision mentioned EBITDA. This requires clarification.
Companies that fail the proposed profitability test could still list on the SME platform through an alternative route. They would have to use the book-building process and allocate at least 75% of the net offer to qualified institutional buyers (QIBs). If the required allocation is not achieved, the entire subscription amount would have to be refunded.
New Rules For Converted And Reorganised Businesses
SEBI has proposed changing the eligibility rules for SMEs seeking an IPO after converting from a proprietorship, partnership or limited liability partnership (LLP). These draft rules also cover companies undergoing qualifying business reorganisations.
Currently, such companies generally need to complete at least one full financial year before filing their draft IPO papers. Under the new proposal, they would need to complete four consecutive financial quarters from the date of conversion or qualifying reorganisation and submit at least one annual audited financial statement prepared after the change.
The proposal also covers acquisitions, succession and schemes of arrangement, where more than 50% of the revenue comes from businesses that previously operated as proprietorships, partnerships or LLPs. In such cases, the earlier business’ operating track record could be considered when assessing IPO eligibility.
The ₹10 Cr Cap On GCP Allocation May Go
SEBI has proposed removing the ₹10 Cr cap on the amount that the companies can allocate, from their IPO proceeds, towards general corporate purposes (GCP).
Currently, GCP allocation cannot exceed 15% of the amount raised or ₹10 Cr, whichever is lower. Under the proposal, the 15% limit would remain, but the fixed ₹10 Cr ceiling would be removed, allowing companies raising larger amounts to allocate more funds to general business needs.
SEBI Looks To Reshuffle OFS Rules
SEBI has also proposed a dedicated offer-for-sale (OFS) framework with a one-year holding requirement, subject to specified exemptions.
The draft framework also seeks to remove the existing 20% ceiling on the OFS component for qualified institutional buyers (QIBs). The Primary Market Advisory Committee (PMAC) went a step further and suggested removing the 50% cap on a QIB’s pre-issue holding as well.
These exemptions, however, would not apply to companies using the alternative listing route after failing the proposed profitability test.
Lock-In Periods To Be Revised
SEBI has proposed revising the lock-in periods for promoters and other shareholders after an SME IPO. The draft changes include:
- Minimum promoters’ contribution: The three-year lock-in on minimum promoter contribution would begin from the IPO allotment date. In contrast, the lock-in date is currently linked to the commencement of commercial production.
- Promoter holdings above the minimum contribution: The existing staggered lock-in would be replaced with a uniform one-year lock-in.
- Non-promoter pre-issue capital: The lock-in will reduce from the current one year to six months.
- Promoter group holdings: A separate one-year lock-in would apply from the IPO allotment date.
Depositories could also mark shares that cannot be locked in electronically as non-transferable for the applicable period.
SEBI to Further Trim Minimum IPO Application Threshold
The markets regulator has proposed lowering the minimum application amount for SME IPOs to ₹1 Lakh from the existing requirement of more than ₹2 Lakh. Investors would have to apply for at least four lots worth a minimum of ₹25,000 each. The ₹2 Lakh minimum was introduced in March 2025 to limit participation by smaller retail investors.
The consultation paper also proposes aligning investor categories and allocation rules more closely with the mainboard framework, including the introduction of the ‘Retail Individual Investor’ category.
Under the regime, Issuers can also allocate up to 60% of the QIB portion to anchor investors in book-built issues.
SEBI has also proposed increasing the minimum number of allottees from 200 to 500. Under the alternative route for companies failing the profitability test, up to 10% of the net offer would go to retail investors, up to 15% to NIIs and at least 75% to QIBs.
SME Shares Could Be Traded In Lots Of One
SEBI has proposed allowing investors to trade SME-listed shares in lots of one share, replacing the existing price-linked lot sizes.
The consultation paper notes that around 5% of unique PAN-based shareholders held odd-lot shares, on average. The proposed change could make it easier for investors to sell their entire holdings, but it will not change the minimum IPO application amount.
End For Mandatory Underwriting And Market-Making?
SEBI has proposed removing mandatory underwriting and market-making requirements for SME IPOs to reduce listing costs.
Currently, SME IPOs must be fully underwritten, with lead managers required to underwrite at least 15% of the issue themselves. Under the proposal, these requirements would be removed. The 75% QIB portion under the alternative listing route would not need to be underwritten.
Underwriting fees accounted for 49.52% and 38.41% of total SME IPO issue expenses on the NSE in FY25 and FY26, respectively. The corresponding figures for the BSE were 32.20% and 33.99%, according to SEBI.
The minimum subscription requirement would remain at 90% of the offer, excluding OFS. If the threshold is not met, application money would have to be refunded within four days of the issue closing.
SEBI has also proposed removing the requirement to maintain market-makers for three years after listing. Market-making fees accounted for 1.25%-4.20% of total issue expenses across the NSE and BSE in FY25 and FY26. The change could reduce costs but may affect liquidity in SME stocks with limited trading activity.
Changes To Mainboard Migration Rules
SEBI has proposed revising the rules that govern SME-listed companies, when they move to the mainboard.
Under the proposed framework, companies with a market capitalisation of ₹1,000 Cr or less would not have to migrate solely because of their valuation. Those valued above ₹1,000 Cr but below ₹4,000 Cr could voluntarily migrate, subject to the main board’s eligibility criteria. Companies valued at ₹4,000 Cr or more would have to mandatorily migrate.
Board approval would be sufficient for migration, without a shareholder vote. SEBI has also proposed removing the requirement to migrate when paid-up capital is likely to exceed ₹25 Cr and scrapping migration from the main board to the SME platform.
Companies already listed on the SME platform, when the new rules are notified, would continue to follow the existing migration framework.
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