SEBI Regulations for SME IPOs: Stricter Guidelines on the Horizon
The Securities and Exchange Board of India (SEBI) is gearing up to implement important changes to the rules that govern small and medium enterprises (SMEs) looking to launch initial public offerings (IPOs). These updates are aimed at strengthening investor protection and curbing market manipulation. The final decisions on these changes are expected to be made during SEBI’s board meeting on December 18, 2024.
Here’s a breakdown of what’s in store for SEBI SME IPO regulations:
1. Increased Minimum Investment:
SEBI is contemplating raising the minimum application size for SME IPOs to encourage more serious, long-term investment. The current minimum of INR 1 lakh may be raised to a range between INR 2 lakh and INR 4 lakh. This move aims to deter speculative trading and reduce the risk of fraudulent activities by ensuring investors have a larger stake in the game.
2. Stricter Profitability Requirements:
SEBI is proposing a stricter profitability criterion for SMEs planning to go public. The new rule would require companies to demonstrate operational profitability in at least two of the last three financial years before launching an IPO. This requirement is not just about numbers; it’s intended to ensure that SMEs have a solid financial foundation, boosting investor confidence and minimizing risks.
3. Extended Lock-In Period:
Promoters may soon be required to hold onto their shares for five years post-IPO instead of the current one-year lock-in period. This change is meant to align the interests of promoters with the long-term objectives of investors. While some critics argue that this could discourage companies from going public, SEBI is focused on promoting accountability.
4. Cooling-Off Period for Business Conversions:
SEBI is considering a two-year cooling-off period for partnerships or proprietorships looking to transition into companies and pursue IPOs. This measure aims to ensure operational maturity before such entities enter the public market, preventing rushed transitions that could pose risks to IPO integrity.
5. Reduced OFS Component:
SEBI is looking to limit the proportion of ‘Offer For Sale’ (OFS) to 20% of the total issue size for SME listings. By reducing the OFS component, SEBI aims to encourage fresh equity issuances and inject more capital into small and medium enterprises, fostering sector growth.
SEBI’s upcoming changes to SME IPO regulations aim to enhance investor protection and market transparency. While these changes may limit retail participation due to higher investment thresholds, they could also burden smaller companies with additional administrative requirements.
SEBI is also expanding the definition of unpublished price-sensitive information (UPSI) to cover significant corporate events that could impact stock prices, such as resignations of auditors, changes in key personnel, fraud incidents, and arrests of senior officials.
The driving force behind these changes is SEBI’s concern about market manipulation and fraudulent practices within the SME space, as seen in cases like the recent cancellation of Trafiksol’s IPO. SEBI’s objective is to create a secure and trustworthy environment for investors while fostering sustainable growth for SMEs.
As SEBI finalizes these proposals, the focus remains on striking a balance between enhancing investor confidence and supporting SME growth. The proposed changes, especially those related to profitability and lock-in periods, could reshape how SMEs approach public listings and contribute to a fair and transparent market.
Despite initial concerns about the restrictions, these changes could lead to a transformative impact in the long run. By implementing stricter rules, SEBI aims to create a more credible and robust ecosystem for SMEs. Investors and SMEs will be closely monitoring these developments.
In the Indian primary market, there have been a total of 230 SME IPOs as of November 2024, with 207 listings showing positive performance. While 23 SME IPOs experienced negative returns, the average listing day return for SME IPOs stands at an impressive 59.81%, indicating the potential for significant gains in this dynamic market. Stay updated on IPO GMP, SEBI IPO Approval, and Live Subscription by following IPO Central.
