The Securities and Exchange Board of India (SEBI) has rolled out a set of proposed reforms to enhance investor protection and ensure sustainable growth in the SME IPO ecosystem. Among the significant changes is a proposal to increase the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh. This step aims to filter investors to those who are financially equipped to handle the higher risks associated with such offerings.
Why SEBI is Increasing the Minimum Application Size
Over the years, retail participation in SME IPOs has surged. However, SEBI highlighted that SME IPOs are inherently riskier and can leave retail investors vulnerable, particularly when market sentiments shift unfavorably post-listing. To address this concern, SEBI recommends a higher entry threshold of ₹2 lakh. This move is expected to attract informed investors with a stronger financial standing and risk tolerance.
Proposed Allocation Changes for Non-Institutional Investors (NIIs)
SEBI has also suggested adopting a more structured allocation methodology for NIIs in SME IPOs, akin to the mainboard IPOs. This includes using a draw-of-lots mechanism for allotment and implementing specific reservation norms to ensure equitable distribution.
Capping the ‘Offer for Sale’ (OFS) Component
To align with the original intent of SME Exchanges—providing growth capital to small and medium enterprises—SEBI has proposed capping the OFS component of SME IPOs at 20% of the total issue size.
SEBI noted instances where promoters used IPOs primarily to dilute their stakes rather than raise fresh capital. Data from FY23-24 and FY24-25 revealed that in 30 out of 52 issues involving an OFS, the OFS portion exceeded 20%. This defeats the platform’s purpose as the proceeds from OFS do not contribute to the company’s growth.
Stricter Monitoring of Fund Utilization
To ensure transparency and accountability, SEBI has proposed mandatory fund utilization monitoring for issues exceeding ₹20 crore. Issuer companies with fresh issue sizes above this threshold must appoint a Monitoring Agency.
For smaller issues, companies will be required to submit statutory auditors’ certificates on fund utilization, ensuring compliance. These certificates will also need to be presented to the company’s Audit Committee and Board, and filed with the Exchange biannually until the funds are fully utilized.
Transparency in Merchant Banker Fees
SEBI raised concerns about disproportionately high fees charged by merchant bankers, which sometimes exceed 30%-40% of the issue size. To address this, the regulator has proposed that merchant banker fees be disclosed in the prospectus, enhancing transparency for investors.
Promoters’ Skin in the Game: Revised Lock-In Norms
Recognizing the promoter-driven nature of SMEs, SEBI has proposed stricter lock-in requirements for promoter contributions.
- Minimum Promoter Contribution (MPC): Lock-in extended to 5 years.
- Excess Promoter Holdings: 50% to be unlocked after 1 year; the remaining 50% after 2 years.
These changes aim to ensure that promoters remain committed to the company’s growth during its early years on the SME Exchange.
Why These Reforms Matter
The SME IPO market has seen unprecedented growth in recent years. As per SEBI data, investor participation skyrocketed, with the applicant-to-allotment ratio rising from 4:1 in FY22 to a staggering 245:1 in FY24. However, this growth has also brought challenges like risk mismanagement and misuse of the platform for stake dilution.
By implementing these reforms, SEBI seeks to strike a balance between promoting SME fundraising and safeguarding investors. This revamped framework is expected to foster a more robust and transparent SME IPO ecosystem.
Key Takeaways for Investors:
- Minimum Application Size: Raised to ₹2 lakh to encourage informed participation.
- OFS Restriction: Limited to 20% to prioritize fresh capital generation.
- Transparency Enhancements: Disclosure of merchant banker fees and stricter fund monitoring requirements.
- Lock-In Norms: Stricter regulations ensure promoter accountability.
These proposals, once implemented, will reshape the SME IPO landscape, ensuring that only companies committed to genuine growth and investors with adequate risk appetite participate in the ecosystem.
