Introduction

The Securities and Exchange Board of India (SEBI) is taking significant steps to revamp the regulations governing SME IPOs (Initial Public Offerings). These proposed changes aim to enhance transparency, tighten eligibility criteria, and address growing concerns over the misuse of IPO proceeds.

Key Proposed Changes

1. Enhanced Eligibility Criteria

• Minimum issue size to be increased to ₹10 crore.
• SMEs must show a minimum operating profit of ₹3 crore in at least two of the three preceding financial years.
• Shares will have a minimum face value of ₹10.

2. Increased Application Value

SEBI proposes doubling the minimum application size from ₹1 lakh to ₹2 lakh, ensuring more serious investor participation.

3. Stricter Promoter Lock-In

Promoters’ minimum contribution will have a lock-in period of five years, with phased releases for holdings exceeding this limit.

4. Tighter Corporate Governance

• Monitoring agencies will ensure the proper utilization of IPO funds.
• SME disclosures will align with main board companies, including quarterly results and related-party transaction norms.

5. Revised Migration Norms

SMEs can migrate to the main board after meeting stricter criteria, such as maintaining enhanced governance and financial disclosures.

Why the Overhaul?

SEBI identified several concerns with SME IPOs:

• Misuse of Funds: Allegations of fund diversion and fictitious transactions.
• Inflated Valuations: Circular trading and related-party transactions to manipulate stock prices.
• Weak Oversight: Current norms have not been updated in over a decade.

The market cap of SMEs on dedicated platforms has crossed ₹2 trillion, making regulatory updates crucial for investor confidence.

Impact on the SME IPO Landscape

Growing Participation

SME IPOs have shown strong growth, with 196 issues raising over ₹6,000 crore in the last financial year. This year, 159 IPOs have already mobilized ₹5,700 crore by October.

Enhanced Investor Confidence

Stricter norms aim to foster trust among investors, ensuring that SME IPOs are not just accessible but also reliable as investment options.

Conclusion

SEBI’s proposed measures mark a pivotal shift in the SME IPO ecosystem. By tightening regulations, the move seeks to address existing concerns while paving the way for a more robust and transparent platform for SMEs to raise funds.

As the consultation paper unfolds into actionable reforms, the SME sector is poised for a significant transformation.

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