Sebi amends rules to tighten SME IPO norms

Sebi introduces stricter regulations for SME IPOs, including profitability requirement and 20% cap on offer-for-sale.

Markets regulator Sebi has notified a stricter regulatory framework for small and medium enterprise (SME) IPOs by introducing a profitability requirement and capping a 20% limit on offer-for-sale (OFS).

The reforms aim to provide SMEs with a sound track record an opportunity to raise funds from the public while protecting investor interests.

This move follows a rise in SME issues, which has driven significant investor participation.

With regard to profitability criteria, Sebi said SMEs planning to launch an IPO are required to have a minimum operating profits (earnings before interest, depreciation and tax or EBITDA) of ₹1 crore for at least two out of the three previous financial years.

Also, the OFS component by selling shareholders in SME IPOs has been capped at 20% of the total issue size. Additionally, selling shareholders will not be allowed to offload more than 50% of their existing holdings, Sebi said in a notification dated March 4.

Further, promoters' shareholding over the Minimum Promoter Contribution (MPC) would be subject to a phased lock-in period. Half of the excess holding would be released after one year, while the remaining 50% would be unlocked after two years.

The allocation methodology for non-institutional investors (NIIs) in SME IPOs would be aligned with the approach followed in main-board IPOs to ensure uniformity.