The SME IPO segment has long been a crucial avenue for small and medium enterprises to access capital and drive growth. Since its inception in 2008, the platform has empowered hundreds of companies. With market dynamics evolving rapidly, SEBI’s latest reforms aim to balance robust growth with enhanced investor protection.

Key Highlights of the New Guidelines:

Profitability Criteria:

Companies must now demonstrate an operating profit (EBITDA) of at least ₹1 crore in 2 out of
the last 3 financial years before filing the DRHP. This ensures that only businesses with a
proven track record step into the public arena.

Offer for Sale (OFS) Restrictions:

Limiting the OFS to 20% of the issue size and capping insider sales at 50% helps stabilize the
post-IPO market and safeguards investor interests.

Phased Promoter Lock-In:

For promoter holdings exceeding the Minimum Promoter Contribution, a staggered release—50% after one year and the remainder after two years—aligns promoter commitment with the long-term performance of the company.

Dedicated Use of IPO Proceeds:

By prohibiting the use of IPO funds for repaying loans from promoters or related parties, these
measures ensure that capital is directed toward genuine business expansion.

Transparent Allotment for NIIs:

Adopting a Draw of Lots method for non-institutional investors promotes fairness and mirrors the
transparency seen in main board IPOs.

Enhanced Governance Measures:

Tighter norms on Related Party Transactions and a reduced cap on General Corporate Purpose expenditure (now 15% of total funds raised or ₹10 crore, whichever is lower) bolster corporate governance standards.

Public Review of DRHP:

A mandatory 21-day public comment period for the Draft Red Herring Prospectus, along with
public announcements via newspapers and QR code links, enhances transparency and investor
engagement.

These reforms are more than just regulatory tweaks—they’re about cultivating a sustainable, transparent ecosystem that benefits both SMEs and investors. As someone immersed in corporate finance and capital market strategies, I see these changes as pivotal in steering the market toward long-term value creation.

I’d love to hear your thoughts: How will these changes shape the future of SME IPOs, and what
impact do you foresee on investor confidence?

SEBI #SMEIPO #CapitalMarkets #InvestorProtection #CorporateGovernance #Finance

—
CA. Prakhar Goyal
Investor | Chartered Accountant | Partner, Satyanarayan Goyal & Co.