SEBI’s Updated Rules for SME IPOs: What Small Businesses Need to Know
The SME IPO platform in India has been a game-changer for small and medium enterprises seeking funding. Since its inception in 2008, numerous companies have successfully raised capital and grown through public listings. With the rapid growth of SME IPOs, new challenges emerged, prompting regulators to introduce updated rules to protect investors and strengthen market integrity. From profitability requirements to promoter lock-in periods and fund utilization guidelines, the new norms aim to create a more reliable ecosystem for SMEs.
Here’s a clear breakdown of the current scenario, key changes in SME IPO regulations, and their significance.
Growth of SME IPOs in India
The SME IPO segment has seen strong growth in recent years. In 2024, 243 companies were listed on SME platforms, and in early 2025, 28 new SME IPOs have already launched. Investor interest in SMEs continues to grow, with several offerings delivering notable subscription levels and listing gains.
The updated regulations focus on improving transparency, reducing risks, and enhancing investor confidence in the SME market.
Key Updates in SME IPO Rules
1. Profitability Requirement
- Previous Rule: Companies had to be profitable to qualify.
- New Rule: Companies must have an operating profit (EBITDA) of at least ₹1 crore in two out of the last three financial years before filing.
- Significance: Ensures sustainable business operations and reduces investment risk.
2. Offer for Sale (OFS) Limits
- Previous Rule: No restrictions on OFS.
- New Rule: OFS is capped at 20% of the issue size, and selling shareholders cannot sell more than 50% of their holdings.
- Significance: Prevents oversupply of shares post-IPO, stabilizing prices and protecting investors.
3. Promoter Lock-in Period
- Previous Rule: Promoter holdings above the minimum contribution were locked for one year post-IPO.
- New Rule: 50% of excess promoter holdings unlock after one year, the remaining 50% after two years.
- Significance: Encourages promoters to align with long-term company performance.
4. Restriction on Loan Repayment
- New Rule: IPO funds cannot be used to repay loans from promoters or related parties.
- Significance: Ensures funds are used for business growth and expansion.
5. Non-Institutional Investor Allocation
- Previous Rule: Proportionate allotment.
- New Rule: Allocation through a lottery system.
- Significance: Provides fairer access and increases participation from retail investors.
6. Related Party Transaction Norms
- New Rule: Material related party transactions are those exceeding 10% of turnover or ₹50 crore, whichever is lower.
- Significance: Enhances transparency and reduces conflicts of interest.
7. Cap on General Corporate Purposes (GCP)
- Previous Rule: Maximum 25% of funds could be used.
- New Rule: Maximum 15% of funds or ₹10 crore, whichever is lower.
- Significance: Encourages better use of funds for core business activities.
8. Public Review of Draft Prospectus
- New Rule: Draft Prospectus must be open for public comments for 21 days, with a newspaper announcement and QR code link.
- Significance: Promotes informed investment decisions through greater transparency.
What Remains Unchanged
- The one-year listing requirement on SME platforms continues.
- No restrictions on issue size.
- Existing financial and disclosure norms still apply.
Proposed Changes (Under Consultation)
- Cooling-off period of one financial year for recently converted private companies.
- Minimum IPO size proposed at ₹10 crore.
- Appointment of a monitoring agency to oversee fund usage.
New Guidelines for Merchant Bankers
Merchant bankers are now categorized based on net worth. Those with higher net worth can undertake all regulated activities, while smaller entities have limited roles. Non-permitted activities may need to be separated into distinct entities within two years to ensure compliance and operational focus.
Looking Ahead
SME IPOs are an essential route for small businesses to raise capital. The new rules prioritize transparency, governance, and investor protection, fostering a stronger, more reliable SME market. Businesses that comply with these norms are likely to attract greater investor confidence and pave the way for sustainable growth.