SEBI Proposes Major Overhaul of SME IPO Framework, Seeks Public Comments

New Delhi, Oct 21 (KNN) The Securities and Exchange Board of India (SEBI) has proposed a major overhaul of the SME IPO framework, including stricter profitability criteria, revised listing norms, lower application sizes and changes to shareholding lock-in requirements.

In a consultation paper, the regulator proposed raising the minimum operating profit requirement to an average of Rs 3 crore annually over the preceding three financial years, from Rs 1 crore in at least two of the three years. 

Public comments have been invited by November 4.

Revised Eligibility And Listing Norms

SEBI has proposed replacing paid-up capital-based eligibility criteria with post-issue market capitalisation thresholds. Companies valued up to Rs 1,000 crore would be required to list on the SME platform, while those above Rs 1,000 crore and up to Rs 4,000 crore could opt for it, subject to additional financial reporting requirements.

Companies in the higher band that have not adopted Indian Accounting Standards (Ind AS) would need to prepare restated consolidated financial statements under these standards.

Voluntary migration to the main board would be allowed for companies with a market capitalisation of Rs 1,000 crore or more but below Rs 4,000 crore, subject to eligibility conditions. Mandatory migration has been proposed for companies exceeding Rs 4,000 crore.

Issuers failing to meet the profitability threshold could use an alternative route, provided the IPO follows the book-building process and at least 75 per cent of the net offer is allotted to qualified institutional buyers (QIBs). Otherwise, the entire subscription amount must be refunded.

Lower Application Size, More Allottees

The regulator has proposed reducing the minimum SME IPO application value to Rs 1 lakh from Rs 2 lakh, through four lots of at least Rs 25,000 each. The minimum number of allottees would increase to 500 from 200.

SEBI has also proposed a one-share trading lot for SME-listed securities, replacing the existing price-based lot-size framework, and removing the mandatory market-making requirement.

Changes To Shareholding And IPO Proceeds

The proposed framework removes the Rs 10-crore absolute cap on the use of IPO proceeds for general corporate purposes, while retaining the limit of 15 per cent of the issue size.

For offer-for-sale (OFS) transactions, the regulator has proposed capping the OFS portion at 20 per cent of the total issue size and limiting shares offered by a selling shareholder to 50 per cent of their pre-issue holding on a fully diluted basis, subject to specified exemptions for QIBs.

The three-year lock-in for minimum promoters' contribution would begin from IPO allotment rather than commencement of commercial production. The lock-in for promoters' excess holdings would be reduced to one year and that for non-promoter pre-IPO capital from one year to six months.

SEBI has also proposed greater flexibility for institutional investors to sell holdings beyond existing quantitative limits. This relaxation would not apply to IPOs using the alternative route for issuers failing the profitability test.

Other proposals include changes to price-band and differential pricing provisions to align them with the revised application framework.

SME IPO Market Expansion

As of July 31, 2026, a total of 1,496 entities had been listed on the SME platform since its inception, including 365 that subsequently migrated to the main board. These companies had collectively raised Rs 40,222 crore, with a combined market capitalisation of Rs 4.71 lakh crore.

SEBI said the review aims to align regulatory requirements with the size and maturity of issuers, widen capital market participation and reduce avoidable compliance burdens while maintaining investor safeguards.

(KNN Bureau)