SEBI proposed seven key changes to SME IPO norms to make the market more robust. The regulator plans to reduce the minimum application amount from ₹2 lakh to ₹1 lakh. It also suggested raising the minimum average annual operating profit to ₹3 crore to ensure companies have a sound track record.
SEBI has proposed seven key changes to norms governing SME initial public offerings (IPOs). In a consultation paper, the market regulator outlined measures covering profitability criteria, allotment norms and mandatory market-making requirements.
The most significant proposal is to reduce the minimum application amount for SME IPOs from ₹2 lakh to ₹1 lakh. Under the proposed framework, investors would have to apply for a minimum of four lots, each worth at least ₹25,000. Currently, they must bid for at least two lots of ₹1 lakh each. SEBI had raised the minimum investment size to ₹2 lakh in July 2025 to cool an overheated market.
SEBI has also proposed raising the minimum number of allottees to 500 from 200, potentially widening the investor base of SME companies. Several experts, including BusinessLine in this column, have urged the regulator to take stronger measures, given that many investors seek quick listing gains rather than long-term returns.
Against this backdrop, reducing the minimum application amount is a welcome move. It could benefit both companies genuinely seeking to raise funds and investors looking to make informed, long-term investments.
Another noteworthy proposal is to raise the minimum average annual operating profit to ₹3 crore from ₹1 crore in at least two of the preceding three financial years. Operating profit captures income and expenses arising from a company's core business. Given the need to ensure that companies entering the SME platform have a sound operating track record, the proposed increase appears modest.
Market-cap norm
The third key change is the shift from post-issue paid-up capital to market capitalisation as the basis for determining listing eligibility. Currently, companies with post-issue paid-up capital exceeding ₹25 crore must list on the main board rather than the SME platform.
Under the proposed framework, companies with a post-issue market capitalisation of up to ₹1,000 crore would have to list on the SME platform. Those valued above ₹1,000 crore and up to ₹4,000 crore could choose either the SME platform or the main board, subject to eligibility requirements. Companies with a market capitalisation exceeding ₹4,000 crore would have to list on the main board.
Market capitalisation is a more relevant metric for trading and assessing a company's market value than paid-up capital.
Another significant proposal is to allow SME-listed shares to be traded in single-share lots, replacing the existing price-based lot sizes. This would allow investors to buy and sell smaller quantities, potentially improving liquidity and broadening participation in the secondary market. It could also make well-performing SME stocks more accessible to institutional investors.
IPO proceeds
SEBI has proposed removing the ₹10-crore cap on the use of IPO proceeds for general corporate purposes while retaining the limit of 15 per cent of the total issue size. The change would give SME companies greater flexibility in deploying the funds raised.
The regulator has also proposed removing the mandatory three-year market-making requirement and the 100 per cent underwriting requirement. This could reduce compliance burdens and allow market forces to play a greater role in price discovery. However, adequate liquidity and investor protection will remain important considerations in the SME segment.
Another key proposal is to end “reverse migration”, which allows companies to move from the main board back to the SME platform. Under the proposal, once an SME graduates to the main board, where disclosure and listing requirements are more stringent, it cannot return to the SME platform.
Lock-in norms
SEBI has also proposed changes to shareholding lock-in requirements. The minimum promoters’ contribution would remain locked in for three years from allotment, while excess promoter holdings would have a one-year lock-in. For non-promoters, the lock-in period for pre-IPO shares would be reduced from one year to six months. For offer-for-sale (OFS) transactions, the proposal provides a separate framework, including a one-year holding requirement and specified exemptions.
While the proposed changes are steps in the right direction, retail investors must remain mindful of the risks of investing in SME stocks. Lower entry barriers and greater trading flexibility do not necessarily translate into sound business fundamentals, adequate liquidity or attractive valuations. Investors must assess a company's financial performance, governance standards and growth prospects rather than invest solely in the hope of listing gains.