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Among various other propositions, Sebi recommends to increase the application dimension to Rs 2 lakh per application in such IPOs to guarantee that just educated capitalists with enough danger cravings and financial investment ability can use.
Sebi has actually welcomed public talk about the proposition, with a target date established for December 4. (Representative picture)
The Securities and Exchange Board of India (Sebi) has actually suggested a collection of reforms for SME going publics (IPOs). Among these, increasing the minimal application dimension from Rs 1 lakh to Rs 2 lakh is a vital procedure.
Why the Change?
The SME IPO market has actually experienced a rise in financier involvement recently. The applicant-to-allotted financier proportion leapt considerably from 4 times in FY22 to 245 times in FY24. However, the marketplaces regulatory authority kept in mind that SME IPOs bring greater dangers contrasted to mainboard IPOs. Sudden changes in market belief post-listing can leave smaller sized retail capitalists susceptible.
To address this, Sebi in its appointment paper currently recommends to increase the application dimension to Rs 2 lakh per application in such IPOs to guarantee that just educated capitalists with enough danger cravings and financial investment ability can use.
“The retail specific involvement has actually boosted in the SME IPO over the last couple of years. Therefore, taking into consideration that SME IPOs have a tendency to have greater component of dangers and capitalists obtaining stuck if beliefs transform message listing, in order to safeguard the passion of smaller sized retail capitalists, It is suggested to raise the application dimension from Rs 1 lakh per application to Rs 2 lakh per application in SME IPO,” Sebi kept in mind in its appointment paper.
Sebi’s proposed changes go beyond application size, aiming to address broader issues like liquidity, monitoring, and fair distribution of shares:
1. ‘Draw of Lots’ for Non-Institutional Investors (NIIs)
Sebi plans to replace proportional allotment with a ‘draw of lots’ system for NIIs. This method, already in use for mainboard IPOs, ensures a fairer distribution of shares and prevents over-leveraging by investors.
2. Offer-for-Sale (OFS) Restrictions
Currently, there are no restrictions on OFS in SME IPOs. Sebi has proposed capping OFS at 20 per cent of the issue size and limiting selling shareholders to offering no more than 20 per cent of their pre-issue holdings.
3. Mandatory Monitoring Agency
Sebi seeks to make appointing a monitoring agency compulsory for SME IPOs with an issue size exceeding Rs 20 crore, down from the current Rs 100 crore threshold. This ensures transparency in fund usage, especially for specific purposes like repaying loans or funding acquisitions.
4. Increased Lock-In for Promoters
Promoters would face a 5-year lock-in for minimum promoter contribution (MPC), compared to the current 3 years, with phased release for excess shares over two years. It aims to ensure promoter commitment and the long-term sustainability of the company.
5. Higher Allottee Count
To improve liquidity and market depth, Sebi has suggested raising the minimum number of allottees from 50 to 200.
Stricter Eligibility Criteria for Issuers
To ensure only fundamentally strong companies approach the SME IPO market, Sebi proposed that issuers meet these conditions:
– A minimum IPO issue size of Rs 10 crore.
– Operating profit (EBIT) of at least Rs 3 crore in two out of the three preceding financial years.
GCP Allocation Limits
Sebi also plans to restrict general corporate purpose (GCP) allocations to 10 per cent of the issue size, capped at Rs 10 crore. This ensures that funds raised are primarily directed toward specific business objectives.
A Growing Market with Increased Scrutiny
The SME IPO market has been thriving, driven by strong equity market performance. FY24 saw a record 196 SME IPOs raising over Rs 6,000 crore, while FY25 is already on track with 159 IPOs raising Rs 5,700 crore by mid-October.
However, Sebi’s reforms aim to temper this growth by ensuring that investor enthusiasm does not come at the cost of financial prudence.
Public Feedback Invited
Sebi has opened the floor for public comments on these proposals, with a deadline set for December 4. These reforms, if implemented, could reshape the landscape of SME IPOs, fostering a more informed and resilient investor base while safeguarding smaller investors from excessive risks.
The doubling of the minimum subscription amount is not just a financial adjustment but a step towards building a sustainable and credible SME IPO market. As the segment continues to grow, these measures could set the stage for long-term stability and success.
What Experts Say?
Makarand M Joshi, founder of corporate compliance firm MMJC & Associates, said, “The Sebi proposal to revamp listing regulations and compliance requirements for SME comes amid rising number of cases relating to misuse of SME platform by few market participants. Stricter compliance requirements would ensure there are checks and balances in place for detecting undesired manipulations.”
Sebi had in the middle of this in December 2023 made added monitoring actions appropriate to the SME sector in order to raise monitoring on baseless trading techniques, he included.
“With these conformity demands in position it is most likely that conformity prices for SME may obtain intensified,” Joshi stated.
