The Securities and Exchange Board of India (SEBI) has introduced stricter regulations for Small and Medium Enterprise (SME) IPOs to enhance transparency, investor protection, and financial discipline. These new norms, outlined in SEBI’s notification dated March 4, bring significant changes to various aspects of SME public listings. Here are the key amendments:
1) Offer for Sale (OFS) Limitations
SEBI has capped the Offer-for-Sale (OFS) component in SME IPOs at 20%. Additionally, selling shareholders are now restricted from offloading more than 50% of their existing holdings during the IPO, ensuring greater commitment from existing investors.
2) Profitability Requirements
SMEs planning to go public must demonstrate financial stability by reporting a minimum operating profit (EBITDA) of ₹1 crore in at least two of the last three financial years. This ensures that only financially sound companies enter the SME IPO market.
3) Lock-In Period for Promoters
Promoters’ shareholding, beyond the Minimum Promoter Contribution (MPC), will now be subject to a phased lock-in period:
- 50% of the excess holding will be unlocked after one year
- The remaining 50% will be released after two years
This measure aims to prevent premature exits by promoters and ensure long-term stability.
4) Increased Minimum Application Size
The minimum investment required in SME IPOs has been revised to two lots, making entry more stringent and ensuring participation from serious investors.
5) General Corporate Purpose (GCP) Allocation Cap
The amount that SMEs can allocate for general corporate purposes (GCP) in an IPO has been capped at 15% of the total issue size or ₹10 crore, whichever is lower. This prevents excessive use of IPO proceeds for unspecified corporate expenses.
6) Restriction on Loan Repayment to Promoters
SMEs can no longer use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties. This move ensures that IPO funds are used for business expansion rather than internal debt restructuring.
7) Public Comments on Draft Red Herring Prospectus (DRHP)
The Draft Red Herring Prospectus (DRHP) for SME IPOs must now be open for public comments for 21 days before final submission. Issuers must also publish newspaper announcements and include a QR code for easy access to the DRHP.
8) Fundraising Through Further Issues
SMEs can raise additional funds through further public offerings without migrating to the main board, provided they comply with the SEBI (LODR) regulations applicable to main-board listed companies.
9) Mandatory One-Year Existence for Converted Entities
If an SME was previously a proprietorship, partnership firm, or LLP before converting into a company, it can only file for an IPO after completing one full financial year as a company. This ensures stability and a track record before public listing.
10) Waiting Period for Companies with a Change in Promoters
If an SME has undergone a complete change in promoters or if new promoters have acquired more than 50% of shareholding, the company can only file a draft offer document one year after the final change. This prevents abrupt ownership transitions before going public.
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