SEBI’s Proposed Reforms for SME IPOs: A New Era of Regulation
On Tuesday, the Securities and Exchange Board of India (SEBI) unveiled a comprehensive set of reforms aimed at fortifying the regulatory framework for Small and Medium Enterprises (SME) initial public offerings (IPOs). These proposals come in response to the remarkable growth of SME platforms on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), where a staggering 196 IPOs raised over ₹6,000 crore in the fiscal year 2023-24 alone. As the SME segment continues to gain momentum, SEBI’s initiatives seek to enhance investor protection, ensure corporate governance, and promote sustainable growth.
Raising the Bar: Minimum Application Size
One of the most significant proposals is the increase in the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh. This change aims to attract more informed investors with a higher risk appetite, thereby enhancing the credibility of the SME segment. SEBI has also opened the floor for public opinion on potentially raising this threshold to ₹4 lakh, which would effectively eliminate the retail investor category and reallocate reservations to non-institutional investors (NIIs). This shift is designed to ensure that only serious investors participate in these offerings, thereby reducing the risk of misconduct and enhancing overall market integrity.
Introducing a "Draw of Lots" System
In a bid to streamline the allocation process for non-institutional investors in oversubscribed SME IPOs, SEBI has proposed the introduction of a "draw of lots" system. This system, akin to the retail allotment process in main-board IPOs, would replace the current proportional allotment method for NIIs. By implementing this change, SEBI aims to create a more equitable distribution of shares among investors, particularly in scenarios where demand far exceeds supply.
Limiting Offer-for-Sale Components
Another noteworthy proposal is the limitation of the Offer-for-Sale (OFS) component in SME IPOs to 20% of the total issue size. Additionally, selling shareholders will be restricted from offloading more than 20% of their pre-issue holdings on a fully diluted basis. This measure is intended to prevent excessive dilution of shares and protect the interests of new investors entering the market.
Expanding the Shareholder Base
To broaden market participation and enhance liquidity, SEBI has suggested increasing the minimum number of allottees in SME IPOs from 50 to 200. This requirement aims to ensure a more diverse shareholder base, which is crucial for maintaining market stability post-listing. A larger number of investors can contribute to better liquidity, making it easier for shareholders to buy and sell shares.
Enhanced Monitoring and Fund Utilization
SEBI has also proposed reducing the threshold for mandatory appointment of a monitoring agency for SME IPOs from ₹100 crore to ₹20 crore. This change aims to ensure that even smaller offerings are subject to rigorous oversight, particularly concerning fund utilization. Companies with issues below ₹20 crore will need to submit statutory auditor-certified utilization reports alongside their half-yearly financial statements. If a monitoring agency is not appointed, a statutory auditor’s certificate will be required to confirm the proper use of the raised funds. These measures are designed to bolster investor confidence by ensuring that proceeds are used appropriately.
Extended Lock-in Period for Promoters
In a move to promote stability and sustainability within SME companies, SEBI has proposed extending the lock-in period for the minimum promoter contribution (MPC) from three years to five years. Additionally, for promoter holdings exceeding the MPC, a phased lock-in approach is suggested: 50% of the excess shares would be released after one year, with the remaining 50% released after two years. This extended lock-in period aims to prevent promoters from liquidating their holdings immediately after the lock-in expires, thereby fostering a more stable operational environment for the company.
Additional Eligibility Conditions for Issuers
To further refine the SME IPO landscape, SEBI has proposed additional eligibility conditions for issuers. An issuer would only be permitted to launch an IPO if the issue size exceeds ₹10 crore and if it has achieved an operating profit (EBIT) of at least ₹3 crore in two out of the three financial years preceding the application. These conditions are intended to ensure that only financially sound companies enter the public market, thereby protecting investors and enhancing the overall quality of SME listings.
Conclusion
SEBI’s proposed reforms for SME IPOs mark a significant step towards creating a more robust and transparent regulatory framework. By raising the minimum application size, introducing a draw of lots system, limiting OFS components, and enhancing monitoring mechanisms, SEBI aims to protect investors while promoting sustainable growth in the SME sector. As the consultation process unfolds, the regulator’s initiatives could pave the way for a more credible and resilient SME IPO market, ultimately benefiting both investors and the broader economy.