SEBI tightens SME IPO framework: Profitability criteria, offer-for-sale cap, NII allocation | Key changes

In a bid to protect the interest of investors, the Securities and Exchange Board of India (SEBI) on Wednesday approved a stricter regulatory framework for initial public offerings (IPOs) by small and medium enterprises (SMEs). The capital markets regulator approved a series of amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as part of its efforts to foster a vibrant SME ecosystem while protecting the interests of retail and institutional investors.

Key changes vis-a-vis SME IPOs approved by SEBI

• Under the revised framework, SMEs will be eligible to launch IPOs only if they report an operating profit (earnings before interest, depreciation, and tax - EBITDA) of at least ₹1 crore from operations in any two of the last three financial years.

• Offers for sale (OFS) by selling shareholders in SME IPOs will be capped at 20% of the total issue size, with no shareholder permitted to offload more than 50% of their holding.

• SEBI has introduced a phased lock-in mechanism for promoters’ holdings exceeding the minimum promoter contribution. Half of such holdings will be unlocked after one year, with the remainder released after two years.

• The regulator also set limits on the amount issuers can allocate for general corporate purposes (GCP) in SME IPOs, capping it at 15% of the funds raised or ₹10 crore, whichever is lower.

• SME IPO proceeds cannot be used to repay loans from promoters, promoter groups, or related parties, whether directly or indirectly.

• The amended rules also require draft red herring prospectuses (DRHPs) for SME IPOs to be available for public comments for 21 days, with a mandatory public announcement featuring a QR code for easy access.

• In a move to simplify compliance, Sebi has allowed SME companies to undertake further issues without migrating to the main board, provided they adhere to listing norms applicable to main board entities.

• Other key changes include extending related party transaction (RPT) norms applicable to main board entities to SME-listed entities, with a materiality threshold set at 10% of annual consolidated turnover or ₹50 crore, whichever is lower.