The Securities and Exchange Board of India (SEBI) has proposed significant changes to the norms governing small and medium enterprise (SME) IPOs, which may lower costs for companies but raise concerns about investor exit strategies. The plan includes eliminating compulsory market-making and 100% underwriting requirements, aiming to stimulate genuine market activity.
Proposed Changes to SME IPO Regulations
SEBI’s recent recommendations aim to transform the SME IPO landscape by abolishing the mandatory presence of a market maker for three years post-listing. Currently, companies are required to maintain an inventory of at least 5% of their listed securities through a market maker. In addition to this, the regulator has also suggested ending the requirement for 100% underwriting, which ensures that all shares offered in an IPO are sold, thereby providing a safety net for issuers.
These reforms are part of a broader strategy to make SME listings more attractive and accessible. Other recommendations include reducing the minimum application value from ₹2 lakh to ₹1 lakh and allowing trading in single shares rather than in lots. SEBI also proposes adjusting the minimum profitability requirement for IPO eligibility, raising it from ₹1 crore to ₹3 crore over three financial years.
The Impact on SME Listings
As these proposals unfold, there is a mixed bag of expectations in the market. Makarand M Joshi, founder of MMJC & Associates, emphasizes the importance of market-driven price discovery — “With unique investors at NSE crossing 13 crore in April 2026, price should be discovered by real demand-supply,” he stated. This shift is believed to foster a healthier ecosystem for genuine businesses.
However, experts like Siddharth Batra raise concerns about liquidity. While eliminating mandatory market-making can lower costs for companies, it might create challenges for investors looking to exit their investments. Without sufficient market participants, selling shares could become difficult, raising questions about the long-term viability of the changes.
Market Activity Amid Reforms
This reform comes at a time when SME IPO activities have been gaining momentum. According to a recent report by B2K Analytics, the July-September 2026 quarter saw companies raising ₹3,791.67 crore through SME platforms, almost doubling the previous quarter’s figure of ₹1,890.06 crore. The total number of listings surged by 111% sequentially, highlighting a growing interest in the SME sector.
With 80 new listings, many companies debuted at a premium, underscoring the potential return SME stocks have for investors. But as Tushar Kumar, another Supreme Court advocate, points out, the success of these changes should not solely focus on the volume of new listings. Investor confidence remains crucial, necessitating adequate safeguards and monitoring mechanisms to protect against potential pitfalls.
What This Means
The proposed changes by SEBI signify a marked shift in how the SME sector will function, opening avenues for innovative businesses while also posing risks around liquidity and investor protection. By lowering barriers for entry, the reforms could stimulate more startups to consider public listings. However, this can only succeed if the regulatory framework provides adequate safeguards and transparent practices to maintain investor confidence. A balance will be essential to foster growth without compromising on security and accountability in the SME segment.
Frequently Asked Questions
What are the key changes proposed by SEBI for SME IPOs?
SEBI has proposed eliminating compulsory market-making for three years, ending 100% underwriting requirements, lowering the minimum IPO application value from ₹2 lakh to ₹1 lakh, and introducing trading in lots of one share.
How will these changes impact investors?
While the reforms aim to reduce costs for companies, they also raise concerns about liquidity for investors. Without market makers, it may become challenging for investors to exit their holdings if there aren’t sufficient buyers or sellers in the market.
When will these proposed changes take effect?
The proposals are open for public comments until November 4, 2026. The implementation timeline will depend on the feedback received and subsequent regulatory decisions.
How are SME IPO activities performing currently?
SME IPO activities have shown significant growth, with companies raising ₹3,791.67 crore in the last quarter, marking an increase of nearly double compared to the previous quarter. The number of listings also rose sharply, indicating a vibrant interest in the sector.
