New Delhi: Strengthening the SME IPO Market

The Securities and Exchange Board of India (Sebi) has introduced stringent regulations for small and medium enterprises (SMEs) initial public offerings (IPOs) to address concerns around transparency, governance, and misuse of funds in the SME segment.

According to the newly approved guidelines, companies seeking SME exchange listing must demonstrate an operating profit (EBITDA) of Rs 1 crore in at least two out of the previous three fiscal years when submitting their Draft Red Herring Prospectus (DRHP). This ensures that only financially robust and reliable companies gain access to the market.

The regulations also limit selling shareholders from divesting beyond 50% of their stake during the initial public offering. Sebi has also capped the offer for sale portion at 20% of the total issue size.

Additionally, the watchdog has imposed restrictions on IPO proceeds utilisation. Companies are now prohibited from using these funds to settle loans from promoters, directors, or associated parties, ensuring proper fund utilisation. The amount allocated for general corporate purposes (GCP) is capped at 15% of the total issue size or Rs 10 crore, whichever is lower.

The methodology of allocation for non-institutional investors (NIIs) in SME IPOs will be aligned with the approach followed in main-board IPOs, and the DRHP will require a 21-day public comment period. Companies must advertise in newspapers and incorporate a QR code to facilitate easy DRHP access.

Despite small and medium enterprises securing unexpected capital this year, issues regarding market inflation, corporate governance, and share price manipulation have attracted regulatory attention. Sebi recently canceled Trafiksol ITS Technologies' SME IPO and instructed the firm to return investors' funds, citing significant inaccuracies in the prospectus and suspected collaboration with a shell organization.

Small enterprises with yearly revenue between Rs 5 crore and Rs 250 crore list on separate segments of the BSE and NSE. These listings face reduced disclosure requirements and are cleared by exchanges, unlike larger IPOs which require Sebi clearance. This year, approximately 230 SMEs raised Rs 8,414 crore, out of which 126 IPOs received subscription exceeding 100 times, and the average bids doubled to 178 times.