SME IPO rules set for major overhaul? Here's what SEBI has proposed

Capital markets regulator, the Securities and Exchange Board of India (SEBI), has proposed a major overhaul of the IPO framework for small and medium enterprises (SMEs). The proposed changes include reducing the minimum application value to ₹1 lakh, increasing the minimum number of allottees from the existing 200 to 500 and amending the operating profit threshold requirement.

The proposals seek to strengthen the SME IPO framework, improving investor protection and aligning key regulatory requirements with those applicable to main-board issues.

The market regulator also proposes to abolish the compulsory market-making requirement for SME-listed firms, similar to the main board-led companies, where such a mandatory requirement does not apply, according to its consultation paper.

On eligibility for migration to the main-board, SEBI has proposed a market capitalisation-based framework. Under the proposal, voluntary migration would be permitted for SME-listed companies with a market capitalisation of ₹1,000 crore or more but less than ₹4,000 crore, subject to applicable eligibility requirements.

Mandatory migration to the mainboard has been proposed for companies whose market capitalisation exceeds ₹4,000 crore, subject to fulfilment of the relevant eligibility conditions.

In relation to profit, SEBI has proposed increasing the average annual operating profit requirement to ₹3 crore over three years, in place of the current requirement of ₹1 crore in at least two of the three years.

Further, introducing a specific alternative route for an issuer which does not satisfy the profitability requirement. This is applicable provided at least 75% of the issue is allocated to qualified institutional buyers (QIBs).

If the prescribed allocation is not achieved, the entire subscription money would have to be refunded.

SEBI noted that the SME Platform has undergone significant evolution since the framework was introduced. The increase in the number of issuers, capital raised, investor participation, market capitalisation and migration of entities listed on SME Platform to the Main Board indicates that the segment now encompasses enterprises with a wider range of size, maturity and market profile.

"Accordingly, the present review seeks to examine the SME regulatory framework holistically, with the objective of creating a regulatory architecture that is proportionate to the nature and scale of issuers accessing SME Platform, facilitates wider access to and participation in the capital market, reduces avoidable regulatory and financial burden, and at the same time preserves appropriate safeguards for investors," it stated.

SEBI proposes major overhaul of SME IPO framework: check highlights

• An issuer with a post-issue market capitalisation of up to ₹1,000 can access only the SME Platform.
• An issue with post-issue market capitalisation over ₹1,000 crore and up to ₹4,000 crore may also access SME Platform.
• If an issuer files a DRHP under the SME framework and its post-issue market capitalisation crosses ₹4,000 crore at the file of filing an RHP. In this case, the issuer needs to refile the DRHP under the mainboard framework.
• The issuer needs to have an average operating profit of ₹3 crore per year during the preceding three financial years.
• If an issuer does not satisfy the profitability requirements, it needs to take the book-building route with at least 75% qualified institutional buyers (QIBs) allotment.
• For general corporate purposes, the 15% ceiling of total IPO size remains. ₹10 crore cap removed.
• An investor would be required to apply for a minimum of four lots of at least ₹25,000, taking it to ₹1 lakh.

As on July 31, 2026, as many as 1,496 entities listed on SME platform since inception (including entities migrated from SME to the mainboard).

Together, these entities raised ₹40,222 crore. Under the proposed changes, the minimum application size for an SME IPO would be four lots, with each lot having a minimum value of ₹25,000, taking the minimum application value to ₹1 lakh.

Subsequent applications would be made in multiples of the applicable lot size. The proposed reduction to ₹1 lakh from ₹2 lakh would therefore "seek to balance investor protection with meaningful access to SME IPOs...as the reduction would operate within a substantially strengthened regulatory framework."

It would also facilitate greater fragmentation of the investor base and capital among a wider number of investors, thereby supporting broader participation in SME IPOs, it added.

The regulator has also proposed increasing the minimum number of allottees in an SME public issue to 500 from 200, while retaining the requirement that retail individual investors receive at least one minimum lot, subject to availability, with the remaining shares allotted proportionately.

Further, SEBI has proposed making the trading lot for securities listed on the SME platform one share, replacing the existing price-band-based lot-size framework. The move is expected to improve accessibility and flexibility for investors trading in SME stocks in the secondary market.

The proposed framework also seeks to align certain aspects of SME IPOs with main board requirements while retaining safeguards specific to smaller enterprises. For book-built issues, SEBI has proposed that the cap of the price band should be at least 105% of the floor price, while retaining the existing upper limit of 120%.

The regulator has further proposed changes to differential pricing provisions by removing the reference to individual investors applying for the minimum application size.

The change is intended to reflect the proposed revised minimum application framework.

Under the proposed SME framework, the amount utilised for general corporate purposes would continue to be capped at 15% of the amount being raised, compared with 25% under the Main Board framework.

The regulator has also proposed retaining SME-specific restrictions on offers for sale (OFS). The OFS portion would not exceed 20% of the total issue size, while shares offered by a selling shareholder would be capped at 50% of their pre-issue shareholding on a fully diluted basis, subject to specified exemptions for qualified institutional buyers.

The Securities and Exchange Board of India (SEBI) has invited public comments and suggestions on the proposals by November 4.