SEBI Tightens Regulations for SME IPOs. A 20% OFS Limit for Promoters, Enhanced Profitability Criteria, and Increased Application Size (Two Lots) Have Been Implemented, Enhancing Investor Protection.
SME IPOs: The Securities and Exchange Board of India (SEBI), the market regulator, has strengthened regulations related to Initial Public Offerings (IPOs) for Small and Medium Enterprises (SMEs). These changes aim to enhance investor protection and provide capital-raising opportunities for SMEs with a b track record.
New Profitability Criteria and a 20% Limit on Promoter Offer for Sale
According to SEBI's new guidelines, SMEs seeking an IPO must demonstrate a minimum of ₹1 crore in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for at least two financial years. Furthermore, the Offer for Sale (OFS) by promoters is capped at 20% of the total IPO size. This ensures promoters cannot sell more than 50% of their holdings.
Stricter Regulations to Protect Investor Interests
The allocation method for Non-Institutional Investors (NIIs) in SME IPOs has been standardized to ensure equitable participation. Additionally, SEBI has increased the minimum application size for SME IPOs to two lots, aiming to attract serious investors and deter speculative trading.
New Policy Related to SMEs
SEBI has also limited the amount allocated for Corporate General Purposes (CGP) for SMEs to 15% of the total issue size or ₹10 crore, whichever is lower. Crucially, funds raised by SMEs cannot be used to repay loans owed to promoters.
New Rules Benefit Investors
These changes offer increased protection to investors in SME IPOs, particularly small investors who typically invest hoping for share price appreciation.
New Requirements for Documentation and Disclosure
According to SEBI, the Draft Red Herring Prospectus (DRHP) for SME IPOs will be available for public comment for up to 21 days. Issuers are also required to publish their announcements and include QR codes to ensure easy access to the DRHP.
