SME IPOs: Sebi seeks to double minimum subscription to protect investors

The market regulator has proposed to at least double the minimum subscription amount for initial public offerings of small and medium enterprises as participation of retail investors in these offers has been rising.

The regulator proposed increasing the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh, according to a consultation paper released by the Securities and Exchange Board of India (Sebi) on Tuesday. In one of the other proposals, Sebi even suggested to increase the amount to ₹4 lakh.

“It is observed that retail individual participation has increased in SME IPO over last few years. Therefore, considering that SME IPOs tend to have higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors, it is proposed to increase the application size, as higher size will limit participation by smaller investors and shall attract investors with risk taking appetite, which will enhance the overall credibility of SME segment,” the paper said.

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The paper is open for public comments until 4 December.

The move is part of Sebi’s broader review of the listing process and corporate governance norms for SMEs, which have witnessed a surge in public offerings, especially since 2022, the regulator observed. “Since, the establishment of SME platforms, FY24 witnessed the highest number of SME public issue and highest SME fund raising with 196 IPOs tapping the market to mobilize more than ₹6,000 crore. Also, in FY25 already till Oct 15, more than ₹5700 crore has been raised through 159 SME IPOs”, the regulator highlighted.

It follows the regulator’s consistent warnings about questionable practices in the country’s SME market and cautioning investors about unrealistic projections by some SMEs.

Sebi’s proposal to double the minimum subscription amount is backed by a significant shift in the market. Since Sebi’s original framework was introduced over 14 years ago, the Nifty and Sensex indices have grown approximately 4.5 times. 

Sebi also suggested adopting the ‘draw of lot’ allotment system, used for retail investors in mainboard IPOs, in the SME IPOs as well. It also proposed splitting the non-institutional investor category into two sub-categories based on application size, ensuring that smaller investors have a better chance of securing allotments in case of oversubscription.

A key proposal in the paper is introducing a mandatory monitoring agency for IPOs if the issue exceeds ₹20 crore. These agencies would certify the use of proceeds, ensuring that funds are used for the purposes disclosed in the offer document. For smaller IPOs that do not meet this threshold, a statutory auditor’s certificate would be required to confirm the utilization of the funds.

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To tighten eligibility criteria, Sebi proposed that companies seeking listing should have an operating profit (earnings before interest and tax) of at least ₹3 crore in two of the last three financial years. Additionally, it suggested mandating shares issued in the IPO to have face value of ₹10 apiece for its issued capital and proposed new shares.

The capital market regulator also proposed extending the applicability of related-party transaction (RPT) norms from Sebi’s Listing Obligations and Disclosure Requirements Regulations (LODR) to SME listed entities. The exception is companies with a paid-up capital of less than ₹10 crore and a net worth of less than ₹25 crore.

The regulator also suggested a proposal to prohibit use of IPO proceeds for repaying loans taken by promoters or related parties. Companies that raise significant funds for working capital would be required to submit periodic utilization certificates from statutory auditors, ensuring that funds are used as intended, the regulator said.

Alongside the IPO process reforms, the consultation paper has proposed changes to improve corporate governance among SME-listed companies and bring the requirements on a part with IPOs listed on the main board.

Sebi’s paper is a significant step to enhance SME growth as these contribute nearly 45% of India's industrial output and employ around 62 million people, said Mukul Goyal, co-founder of Stratefix Consulting, a business consulting firm for SMEs. 

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“The consultation highlights the need for better corporate governance standards and more stringent oversight of related party transactions, which have been areas of concern in the SME sector,” Goyal said. “The success of this framework will be pivotal in determining how effectively SMEs can leverage public markets for their growth ambitions while ensuring sustainable practices.”

Ketan Mukhija, a senior partner at Burgeon Law, said the proposals sought to balance the need for easing access to capital markets for SMEs while ensuring robust corporate governance practices. “By addressing key areas such as listing norms and governance standards, the initiative aligns with India’s broader goal of fostering a conducive environment for SME growth and investor protection.”