SEBI Proposes Rule Changes for SME IPOs

India's Securities and Exchange Board (SEBI) has put forth substantial revisions to the regulations surrounding initial public offerings (IPOs) for small and medium enterprises (SMEs). These changes aim to adapt the framework to the growing volume of SME listings and increased investor participation.

A key shift involves listing criteria based on post-issue market capitalization, replacing the current measure of paid-up share capital. Companies with a market capitalization of up to ₹1,000 crore post-IPO can list on the SME platform. Those valued between ₹1,000 crore and ₹4,000 crore can choose between the SME platform or the main board, while companies exceeding ₹4,000 crore must list on the main board.

Profitability requirements are also being tightened. SEBI proposes that SME IPO applicants demonstrate an average operating profit of at least ₹3 crore annually over the preceding three financial years, a rise from the current requirement of ₹1 crore in at least two of the preceding three years. Companies opting for an alternative listing route must allocate at least 75% of the offer to qualified institutional buyers (QIBs).

Further adjustments are planned for entities that have converted their business structure (e.g., from sole proprietorship to company) or undergone qualifying reorganizations. Such companies will need to complete four consecutive financial quarters post-conversion/reorganization and submit at least one audited financial statement. Rules for offer-for-sale (OFS) and lock-in periods for shares are also being revised, including shorter lock-in periods for non-promoter pre-issue capital.