SEBI’s Proposal to Increase Minimum Subscription Amount for SME IPOs: A Step Towards Enhanced Investor Protection
In a significant move aimed at bolstering investor protection and enhancing the credibility of the small and medium enterprises (SME) segment, the Securities and Exchange Board of India (SEBI) has proposed to at least double the minimum subscription amount for initial public offerings (IPOs) of SMEs. This proposal comes in light of the rising participation of retail investors in SME IPOs, which have seen a surge in public offerings over the past few years.
The Proposed Changes
According to a consultation paper released by SEBI, the minimum application size for SME IPOs is set to increase from ₹1 lakh to ₹2 lakh, with a possibility of raising it further to ₹4 lakh. This change is designed to limit participation from smaller investors, thereby attracting those with a higher risk appetite. SEBI’s rationale is that SME IPOs often carry a higher element of risk, and increasing the minimum subscription amount could help protect smaller retail investors from potential losses if market sentiments shift post-listing.
The consultation paper is open for public comments until December 4, allowing stakeholders to voice their opinions on these proposed changes.
The Context of the Proposal
The proposal is part of SEBI’s broader review of the listing process and corporate governance norms for SMEs, which have experienced a notable increase in public offerings since 2022. The regulator highlighted that FY24 witnessed the highest number of SME public issues, with 196 IPOs raising over ₹6,000 crore. Furthermore, by mid-October 2025, more than ₹5,700 crore had already been raised through 159 SME IPOs.
This surge in activity has prompted SEBI to issue consistent warnings regarding questionable practices in the SME market, urging investors to be cautious of unrealistic projections made by some SMEs. The proposed increase in the minimum subscription amount is seen as a necessary step to address these concerns.
Enhancing Allotment Processes and Monitoring
In addition to the increase in the minimum subscription amount, SEBI has proposed adopting a ‘draw of lot’ allotment system for SME IPOs, similar to that used for retail investors in mainboard IPOs. This change aims to improve the chances of allotment for smaller investors in cases of oversubscription.
Another key proposal is the introduction of a mandatory monitoring agency for IPOs exceeding ₹20 crore. These agencies would be responsible for certifying the use of proceeds, ensuring that funds are utilized for the purposes disclosed in the offer document. For smaller IPOs that do not meet this threshold, a statutory auditor’s certificate would be required to confirm the utilization of funds.
Stricter Eligibility Criteria and Governance Standards
To tighten eligibility criteria for companies seeking to list, SEBI has proposed that firms must demonstrate an operating profit of at least ₹3 crore in two of the last three financial years. Additionally, the regulator suggested that shares issued in the IPO should have a face value of ₹10 apiece.
SEBI also aims to extend the applicability of related-party transaction (RPT) norms from its Listing Obligations and Disclosure Requirements Regulations (LODR) to SME-listed entities, with exceptions for companies with a paid-up capital of less than ₹10 crore and a net worth of less than ₹25 crore. Furthermore, the use of IPO proceeds for repaying loans taken by promoters or related parties would be prohibited, ensuring that funds are directed towards genuine growth initiatives.
The Importance of Corporate Governance
The proposed reforms are not just about increasing the minimum subscription amount; they also emphasize the need for improved corporate governance among SME-listed companies. Mukul Goyal, co-founder of Stratefix Consulting, noted that these changes are crucial for enhancing the growth potential of SMEs, which contribute nearly 45% of India’s industrial output and employ around 62 million people.
Ketan Mukhija, a senior partner at Burgeon Law, echoed this sentiment, stating that the proposals aim to balance the need for easier access to capital markets for SMEs while ensuring robust corporate governance practices. By addressing key areas such as listing norms and governance standards, SEBI’s initiative aligns with India’s broader goal of fostering a conducive environment for SME growth and investor protection.
Conclusion
SEBI’s proposal to double the minimum subscription amount for SME IPOs marks a pivotal moment in the evolution of the SME market in India. By implementing stricter eligibility criteria, enhancing monitoring processes, and improving corporate governance standards, the regulator aims to create a more sustainable and credible environment for both investors and SMEs. As the consultation period unfolds, stakeholders will have the opportunity to provide feedback, shaping the future of SME public offerings in India.