Sebi’s Stricter Regulations for SME IPOs: A Step Towards Enhanced Transparency and Investor Protection
In a significant move aimed at bolstering the integrity of the small and medium enterprises (SMEs) initial public offerings (IPOs) in India, the Securities and Exchange Board of India (Sebi) announced a series of stringent regulations on Wednesday. These new guidelines are designed to address growing concerns regarding transparency, governance, and the potential misuse of funds within the SME segment. By implementing these measures, Sebi aims to strengthen the SME IPO market, enhance the quality of listings, and safeguard the interests of investors.
Financial Robustness as a Prerequisite
One of the most notable changes introduced by Sebi is the requirement for companies seeking to list on the SME exchange to demonstrate financial robustness. Specifically, firms must show an operating profit, measured as earnings before interest, depreciation, and tax (EBITDA), of at least Rs 1 crore in a minimum of two out of the previous three fiscal years when submitting their Draft Red Herring Prospectus (DRHP). This requirement ensures that only financially sound and reliable companies gain access to the public market, thereby enhancing investor confidence.
Restrictions on Shareholder Divestment and Fund Utilization
In a bid to further protect investors, Sebi has imposed restrictions on the divestment of shares by selling shareholders during the IPO process. Specifically, selling shareholders are now limited to divesting no more than 50% of their stake during the initial public offering. Additionally, the offer for sale portion cannot exceed 20% of the total issue size. These measures are intended to prevent excessive dilution of ownership and maintain stability in the market.
Moreover, Sebi has placed strict regulations on how IPO proceeds can be utilized. Companies are now prohibited from using these funds to settle loans from promoters, directors, or associated parties, ensuring that the capital raised is used for legitimate business purposes. Furthermore, the amount allocated for general corporate purposes (GCP) is capped at either 15% of the total issue size or Rs 10 crore, whichever is lower. This restriction aims to promote transparency and accountability in the use of funds raised through public offerings.
Enhanced Investor Engagement and Accessibility
Sebi’s new guidelines also emphasize the importance of investor engagement and accessibility. The methodology for allocating shares to non-institutional investors (NIIs) in SME IPOs will now mirror the approach used in main-board IPOs. Additionally, the DRHP will require a 21-day public comment period, allowing investors to voice their opinions and concerns before the offering proceeds. Companies are also mandated to advertise their offerings in newspapers and incorporate QR codes to facilitate easy access to the DRHP, thereby enhancing transparency and investor awareness.
Compliance with Main Board Regulations
Another significant aspect of the new regulations is the requirement for SME firms to adhere to the same related party transaction (RPT) guidelines as those listed on the main board. This alignment with main-board regulations is expected to enhance corporate governance standards within the SME segment, ensuring that these companies operate with the same level of scrutiny and accountability as larger enterprises.
No Minimum Issue Size or Subscription Requirement
While Sebi has introduced several stringent measures, it has opted not to mandate a minimum size for the issue or a minimum required subscription for small business IPOs. This decision allows SMEs the flexibility to raise capital without being burdened by rigid requirements, fostering a more inclusive environment for smaller enterprises seeking to access public markets.
Addressing Recent Concerns in the SME Segment
The need for these regulatory changes has been underscored by recent incidents that raised alarms about the integrity of the SME IPO market. For instance, Sebi recently canceled the IPO of Trafiksol ITS Technologies, instructing the firm to return investors’ funds due to significant inaccuracies in its prospectus and suspected collusion with a shell organization. Such incidents have highlighted the necessity for stricter oversight and regulation in the SME segment, particularly as the market has seen an influx of capital this year.
A Growing SME IPO Landscape
Despite the challenges, the SME IPO landscape has shown remarkable growth. In 2023, approximately 230 SMEs raised a staggering Rs 8,414 crore, with 126 IPOs receiving subscriptions exceeding 100 times. The average bids for these offerings have doubled to an impressive 178 times, indicating a robust appetite for SME investments among investors.
Conclusion: A Positive Step Forward
In conclusion, Sebi’s newly announced regulations for SME IPOs represent a proactive approach to enhancing transparency, governance, and investor protection in the burgeoning SME segment. By imposing stricter financial requirements, limiting shareholder divestment, and ensuring proper fund utilization, Sebi aims to create a more stable and trustworthy environment for investors. As the SME sector continues to evolve, these measures will play a crucial role in fostering sustainable growth and maintaining investor confidence in the Indian capital markets.