SEBI’s tightening of SME IPO norms has elicited a range of reactions from market participants, with advocates of investor protection lauding the changes while others express concerns that the stricter rules could hinder capital raising for small and medium enterprises.
The recent amendment includes raising the minimum application size to two lots, enhancing oversight of fund utilization, and limiting the use of IPO proceeds for repaying loans to related parties. Furthermore, Draft Red Herring Prospectuses (DRHPs) will now be subject to public comments, and a higher profitability threshold has been introduced to ensure only stable SMEs access public markets.
This marks the second round of tightening SME norms, following a previous amendment in the December board meeting.
Some view the move as a means to reduce speculative retail participation, while others worry it may exclude genuine small investors seeking exposure to SME growth stories. Makarand M. Joshi, founder partner of MMJC and Associates, noted that the increase in application size and lot requirement aims to attract only informed investors with a high-risk tolerance to SME IPOs.
For firms eyeing a listing, SEBI has made fundraising more rigorous by lowering the IPO proceeds monitoring threshold from ₹100 crore to ₹50 crore, necessitating more SMEs to disclose and justify fund usage. Additionally, a cap on Offer for Sale (OFS) at 20 per cent of the issue size and a lock-in period of up to two years for excess promoter holdings could restrict liquidity for early investors.
Tarun Singh, Founder & MD at Highbrow Securities, views these reforms as crucial for creating a transparent and sustainable SME IPO ecosystem. While ensuring financially stable companies access public markets, the requirement for SMEs to demonstrate a minimum of ₹1 crore EBITDA in at least two of the last three years reduces risk for investors and enhances listing quality. However, Singh also acknowledges that the new requirements might pose challenges for smaller, high-growth firms seeking public funding.
The SME IPO platform has witnessed a surge in speculative trading, prompting concerns about governance and investor safety. With stricter disclosure and financial viability requirements in place, the quality of SME listings is expected to improve. Nevertheless, some industry players fear that the compliance burden could deter startups from going public.
Singh believes that SEBI is adopting a balanced approach by curbing excessive dilution and ensuring IPO funds are utilized effectively. However, he acknowledges that SMEs may face initial challenges adjusting to the stricter norms.
Overall, opinions on SEBI’s move remain divided, with retail investors potentially benefiting from reduced risks while SMEs navigating tougher fundraising hurdles.
