The Securities and Exchange Board of India (SEBI) has proposed a sweeping overhaul of the SME IPO framework, seeking to replace the existing paid-up capital criterion with market capitalisation, tighten profitability requirements and encourage greater institutional participation.
Under the proposed framework, companies with a post-issue market capitalisation of up to Rs 1,000 crore will have to list on the SME platforms of stock exchanges. Companies valued between Rs 1,000 crore and Rs 4,000 crore will also have the option of accessing these platforms.
The move marks a significant shift from the existing framework, under which companies with post-issue paid-up capital of up to Rs 25 crore are eligible to list on SME exchanges.
The regulator said the change was necessary because paid-up capital does not always reflect a company’s actual market value. By linking eligibility to market capitalisation, Sebi aims to bring greater consistency to the listing framework.
The proposals also seek to prevent companies from switching between the SME and mainboard frameworks simply by altering their issue size.
Companies whose issue size exceeds Rs 1,000 crore when filing draft offer documents but subsequently falls below that threshold at the red herring prospectus (RHP) stage will have to refile their documents under the SME framework.
Similarly, SME issuers crossing the Rs 4,000-crore threshold at the RHP stage will have to refile under the mainboard framework. Those remaining below the threshold can continue with the SME listing process.
The market regulator has also proposed significantly stricter profitability norms for SME IPO aspirants. Companies will now need an operating profit of more than Rs 3 crore in each of the preceding three financial years to qualify for an IPO. The current requirement is an operating profit of at least Rs 1 crore in two of the preceding three years.
However, the regulator has proposed an alternative route for companies that fail to meet the new profitability test. Such companies can still tap the SME IPO market, provided they allocate at least 75% of the net offer to qualified institutional buyers (QIBs). If the institutional subscription requirement is not met, the entire subscription amount will have to be refunded.
The proposal effectively puts greater responsibility on institutional investors to assess companies that do not meet the prescribed profitability standards.
While tightening eligibility norms, Sebi has proposed making SME IPOs more accessible to investors.
The minimum application amount is proposed to be halved from Rs 2 lakh to Rs 1 lakh. At the same time, the minimum number of allottees will rise from 200 to 500, potentially widening the investor base.
To attract greater institutional participation, the regulator has proposed allowing issuers to allocate up to 60% of the QIB portion to anchor investors.
It has also suggested relaxing offer-for-sale (OFS) restrictions for existing QIB shareholders. Such investors may be allowed to sell shares exceeding 20% of the total IPO size and more than 50% of their pre-issue holdings, provided the shares have been held for at least one year.
However, these relaxations will not apply to companies using the alternative institutional subscription route after failing to meet the profitability criteria.