SEBI Tightens SME IPO Norms, Limits OFS Portion - Here's What's Changed

Capital market regulator, Sebi in a consultation paper released on November 19, reviewed the listing framework of SMEs and made several recommendations.

What Does SEBI Suggest?

Sebi in this consultation has suggested that the allocation methodology for non-institutional investors should be changed by discontinuing proportionate allotment for the NII category. Instead the regulator suggests that "draw of lots" allotment should be introduced as applicable for the retail category.

The regulator has also proposed merchant bankers and stock exchanges to limit the 'Offer For Sale' portion in the SME public issue to 20-25% of the total issue size.

Currently, the success criteria of SME issues is considered to have a minimum of 50 allottees in the public issue. Sebi has suggested that this number be raised to 200 instead.

Currently, monitoring agencies are appointed for an issue size of Rs 100 crore. Among other suggestions, the regulator has also suggested that from now on monitoring agencies should be appointed even for an issue size of Rs 20-50 crore.

For promoter contributions the minimum lock-in period in SME IPOs is three years, traditionally. Sebi has suggested to release lock in of securities held by promoters in a phased manner, instead of releasing the holding all at once.

Sebi has also suggested that the General Corporate Purpose must be restricted to 10% instead of 25% of the issue size with an absolute limit of Rs 10 crore.

Related Party Transaction provisions are also applicable to listed SMEs and entities will be needed to submit the shareholding patterns every quarter as per the regulator's suggestions.

Additionally, Sebi says that SMEs seeking listing on the bourses must have an EBITDA of more than Rs 3 crore.

Why The Noose?

Sebi has noted that investors have lately shown a keen interest in the SME sector and their participation has increased over time, so much so, that the applicant to allotted investor ratio jumped from 4 times in FY22 to 46 times in FY23 and to 245  times in FY24.

Earlier in October Ashwani Bhatia, whole-time member of Sebi had hinted that the public issues in the SME space have been under the scanner for long and that norms might get tightened eventually and a consultation paper might be floated on the matter, he said at the Global Fintech Fest in Mumbai.

This is the reason why this scrutiny has now surfaced.