The Securities and Exchange Board of India (SEBI) has introduced a series of regulatory reforms to tighten the initial public offering (IPO) and listing norms for small and medium enterprises (SMEs). Announced on December 18, 2024, these changes aim to boost transparency, ensure better governance, and provide stronger protection for investors in the SME segment.
Key Reforms to the SME IPO Framework:
- Profitability Threshold for IPOs
- Companies must demonstrate a minimum operating profit (EBITDA) of ₹1 crore for any two out of the last three financial years before filing a draft red herring prospectus (DRHP).
- This ensures only financially stable businesses can access public markets.
- Restrictions on Offer for Sale (OFS)
- The OFS component by selling shareholders has been capped at 20% of the total issue size.
- This reduces excessive dilution of ownership and provides greater protection for new investors.
- Prohibition of Loan Repayments to Promoters
- SME IPO proceeds can no longer be used to repay loans to promoters or related parties, ensuring funds are utilized for genuine business growth.
- Limit on Shareholder Sales
- Selling shareholders are restricted from selling more than 50% of their stake in the SME IPO, retaining alignment with the company’s growth.
- Enhanced Lock-In Period for Promoters
- Promoters’ shares exceeding the minimum public shareholding (MPS) requirement will be locked in for one year.
- The remaining shares will be subject to a lock-in period of two years.
- Fair Allocation Process for Non-Institutional Investors (NII)
- Allocation of shares in the NII category will now follow a “draw of lots” method, ensuring fairness in the distribution process.
Corporate Fundraising and Related Party Norms:
- Cap on General Corporate Purpose Allocation
- The amount allocated for general corporate purposes is capped at 15% of the total amount raised or ₹10 crore, whichever is lower.
- Stricter Scrutiny of Related Party Transactions (RPTs)
- For listed SMEs, RPTs will be classified as material if they exceed 10% of annual consolidated turnover or ₹50 crore, whichever is lower. This ensures greater accountability and transparency in dealings.
These reforms aim to safeguard investor interests, reduce risks associated with SME IPOs, and foster a more transparent and credible capital-raising environment for small and medium enterprises. By enforcing stricter norms, SEBI ensures that only well-managed and financially sound businesses can access public funds.
