The Securities and Exchange Board of India (SEBI) has proposed reforms to initial public offerings (IPOs) of small and medium enterprises (SMEs), at a time when the Reserve Bank of India (RBI) is turning hawkish.
Given the present interest rate scenario and rate expectations, the choice between borrowing and equity raising is of great significance for the SMEs, which account for more than 31% of the country’s gross value added (GVA).
The RBI Monetary Policy Committee’s “calibrated tightening” stance by a 4-2 vote signals further hikes amid inherent strengths in the macroeconomy.
Heightened inflation risk, driven by higher oil prices and a deficient monsoon, led the RBI to raise the repo rate for the first time in nearly four years. The reasoning is that higher rates may squeeze margins, limiting the ability of businesses to invest in expansion since borrowing costs and debt-servicing burdens are tightly linked.
For a highly leveraged SME with volatile cash flows, raising equity through IPOs can strengthen the balance sheet and improve ability to borrow on better terms later.
The cost of credit remains a structural constraint for SMEs, although available data does not establish a uniform rise across all Indian SMEs.
Bank loans have been the main funding source for SMEs, but borrowing costs are generally higher than those of large enterprises.
An International Finance Corporation (IFC) study found the SME sector’s overall debt-to-equity ratio is about 4:1, and about 3:1 for early-stage firms.
SEBI’s latest initiative is not to make equity universally cheaper than debt, but to give viable SMEs a choice of financing suited to their business models. In a high-interest-rate regime, such a choice can be valuable.
SEBI has proposed relaxing SME listing norms, potentially widening access to capital markets and reducing certain compliance costs, while imposing stronger profitability and governance tests.
Timing matters
The mainboard segment saw robust growth in the number of IPOs, while SME IPO activity contracted. The mainboard IPOs raised about ₹1.73 lakh crore in FY2025-26, compared with ₹5,363 crore through NSE’s SME platform. The average mainboard issue was more than 33 times the average SME issue in that year.
SEBI’s proposed reforms could help revive the smaller-company segment, although their ultimate effect will depend on market conditions, eligibility requirements and investor confidence.
SEBI’s proposals
Under the new seven-point eligibility framework, the minimum application amount for SME IPOs would fall to ₹1 lakh from ₹2 lakh. Investors would have to apply for at least four lots, each valued at no less than ₹25,000.
The minimum number of allottees is proposed to be raised to 500 from 200, in a bid to widen the investor base.
The minimum operating-profit requirement would also change significantly, from ₹1 crore in at least two of the preceding three financial years to an average of ₹3 crore a year over three years.
However, firms failing this test could still access the market through book-building if at least 75% of the net offer is allotted to QIBs or qualified institutional buyers, whose due diligence could provide an additional layer of scrutiny, although it cannot replace regulatory safeguards or guarantee investment returns.
SEBI, instead of depending upon paid-up capital-based criteria, proposes using a post-issue market capitalisation (M-cap) framework, which could help growing businesses whose size and funding needs no longer fit comfortably within the existing SME-platform arrangements.
Firms with a post-issue M-cap of up to ₹1,000 crore would necessarily have to seek listing on the SME platform; those valued ₹1,000-4,000 crore could go either on the SME or the main board, subject to eligibility norms. Companies exceeding ₹4,000 crore threshold would need to get listed on the main-board, even as it seeks to end reverse migration to mainboard.
SEBI has removed mandatory market making for SME-listed stocks, along with related inventories and the removal of the 100% underwriting requirement for SME IPOs, including the lead manager’s obligation to underwrite 15% of the issue.
It has been proposed to allow SME-listed shares to be traded in single-share lots in a move to allow investors to buy or sell smaller quantities in the secondary market.
SEBI has also proposed changes to shareholding lock-in rules and the use of IPO proceeds. The offer for sale (OFS) route would have a separate framework, with a one-year holding requirement and specified exemptions.
Who benefits?
The potential is huge, but the number of entities that will actually benefit is yet to be quantified reliably.
The Ministry of MSME’s official data showed that more than 7.83 crore enterprises were registered on the Udyam Registration Portal and Udyam Assist Platform as of February 28, 2026. These include informal microenterprises that are unlikely to meet the financial, governance and disclosure norms of a public listing.
The Government’s Economic Survey reported that more than 1,380 firms had listed on the BSE and NSE SME platforms since inception, with 217 SME listings during FY26 up to December 2025.
The opportunity is notably relevant in sectors such as manufacturing, engineering, technology, defence components and specialised services, where companies may need substantial investment before their cash flows fully mature.
It becomes more relevant with many startups getting into highly specialised and capital-intensive rocketry and missile technologies.
Governance dividend
The primary benefit for SMEs is capital raising but secondary spin-off is the enhanced visibility in the capital markets.
A stronger capital base can reduce leverage and potentially improve lenders’ assessment of creditworthiness, which in turn, helps widen the access to subsequent funding.
Pitfalls
Micro enterprises, especially, may find IPOs impractical as public listing involves costs, disclosures, governance requirements and scrutiny. Moreover, credit rating penetration remains limited relative to the size of India’s MSME sector, although that is not a prerequisite.
Market volatility can play spoilsport as it shuts the IPO window when businesses need funds, while weak post-listing performance can damage investor confidence.
SEBI’s proposed changes are therefore more relevant to established, growth-oriented SMEs that have the financial capacity to meet listing requirements.
Central theme
The central aim is to make fundraising easier for firms while ensuring that investors are not exposed to disproportionate risk. If ease of access comes at the expense of governance and market integrity, a short-term rise in listings could ultimately weaken investor confidence.
The potential economic dividend of a deeper SME capital market is not the replacement of bank lending but a better balance between debt and equity.