In March 2025, Mumbai (Maharashtra)-based Securities and Exchange Board of India (SEBI) has notified a stringent regulatory framework for Small and Medium Enterprises (SME) Initial Public Offerings (IPOs). It has introduced a profitability requirement and capped the 20% limit of the total size on Offer-For-Sale (OFS) component.
- Also, selling share holders are not allowed to offload more than 50% of their existing holdings.
- These changes aim to ensure that only SMEs with a good track record have access to raise funds from the public while protecting investor interests.
Key Changes:
i.Minimum operating profit: As per the new framework, SMEs who are planning to launch an IPO, are required to show a minimum operating profit (Earnings Before Interest, Taxes, Depreciation, and Amortization or EBITDA) of Rs 1 crore in at least two of the previous 3 Financial Years(FY).
ii.Introduced phased lock-in-period: The shareholding of promoters over the Minimum Promoter Contribution (MPC) will be subject to a phased lock-in-period. 50% of the excess holding will be released after 1 year, while the remaining 50% will be released after two years.
iii.Increase the minimum application size: The new framework has increased doubled the minimum application size i.e. 2 lots.
iv.Publish of DRHP for public comments: The new framework has mandated the SME issuers to publish their Draft Red Herring Prospectus (DRHP) for public comments for 21 days. These documents will be made available on SME exchanges, issuer web portals, and merchant banker platforms, among others.
v.Limit on use of IPO Proceeds: SEBI has imposed certain restrictions on how IPO proceeds can be used like: the amount allocated for General Corporate Purposes (GCP) is now capped at 15% of the total issue size or Rs 10 crore whichever is lower.
- Also, IPO proceeds will not be used by SMEs to repay loans taken from promoters, promoter groups, or related parties.
vi.Fund-raising without migrating main board: If the post-issue paid-up capital after further issue exceeds Rs 25 crore, then in such case, SME-listed companies will be allowed to raise additional funds without migrating or switching to the main board.
- But, they are required to comply with provisions of Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, as applicable to companies listed on the main board of the stock exchange.
vii.Extension of RPT Rules: As per the new rules, it is mandatory for SME-listed companies to comply with Related Party Transactions (RPT) rules that are applicable to companies listed on the main board.
- The new rules have been notified by SEBI through amendments in Issue of Capital and Disclosure Requirement (ICDR) Rules.
Recent Related News:
In February 2025, SEBI introduced new industry standards under which listed entities are required to provide minimum information to the audit committee and shareholders when seeking approval for the (RPT).
- The new disclosure rule will come into effect from April 01, 2025.
- These new industry standards were issued by SEBI through a circular in exercise of powers given under Section 11 (1) and 11A of SEBI Act, 1992 read with regulation 101 of LODR Regulations.
