A new consultation paper suggests lowering the minimum application size for SME IPOs from ₹2 lakh to ₹1 lakh. This change aims to increase participation on SME platforms. However, experts worry this could turn these risky markets into hubs for speculators, similar to the issues seen with weekly index options.
It is usually tough to pinpoint the exact time or the specific change that led to drastic alterations in stock trading patterns. The way algo trading took over Indian stock market around 2010 is a case in point. SEBI had given permission for direct market access to foreign investors and allowed exchanges to set up colocation facilities in 2008 and 2009. Algo trading followed stealthily in the wake of these changes, taking over more than two-thirds of the cash and derivative trading volume in just few months. Regulatory framework for algos followed much later.
Weekly index options are another example. SEBI had permitted weekly index options in 2015, with the noble intent of introducing product differentiation in derivative contracts. Nobody could have foreseen that traders would discover the quick road to riches by trading in the final hour of expiry day of these contracts and that exchanges would launch contracts which expire every day of the week to make the most of this hysteria. Despite the regulatory clamp-down over the last two years, these instruments still account for over two-thirds of the equity derivatives’ turnover.
Another such trouble-spot could be created on the SME platforms of stocks exchanges if the recommendations of the recent consultation paper on SME IPOs are accepted. The paper suggests, among other things, that liquidity and participation on the SME platforms should be increased while allowing offers of larger sizes to be listed here. These suggestions will alter the fundamental nature of SME platforms — which is to help small companies raise capital while facing lower compliance burden with minimal small investor participation.
What the paper suggests
The consultation paper reviewing SME initial public offerings, which is currently open for receiving public feedback, suggests three important changes,
One, it is proposing that the minimum application in SME IPOs be lowered from the existing level of ₹2 lakh to ₹1 lakh, to increase participation. The minimum application size was set at ₹1 lakh when the SME platforms were launched in 2012. The higher limit then, when compared with mainboard IPOs, was fixed to deter smaller retail investors since these issuances are highly risky and not suitable for investors with limited capital.
It may be recalled that this limit was increased to ₹2 lakh in 2025, following rampant malpractices found by the regulator in these primary offerings. Given that SME companies continue to bear higher risk, it is surprising that SEBI is reversing its stance, after just one year. Though the profitability criteria for listing is proposed to be tightened, SME stocks continue to be more vulnerable to market vagaries and business cycles given their smaller scale.
The other significant proposal is to lower the minimum trading lot in SME stocks to one share. In 2012, minimum trading size had been fixed at ₹1 lakh, again with a view to keep small investors away from the secondary market for SME stocks. The lot size has remained between ₹1 lakh and ₹1.6 lakh for various SME stocks since then. Given that 14 years have passed since the launch of the SME platform, and that inflation has been climbing every year, the minimum trading lot size should have been adjusted higher to at least ₹2 lakh. But instead of increasing the lot size, the regulator is proposing the remove the trading barrier completely. While it is true that trading lots in secondary markets can be inefficient and create odd lots, this is necessary to keep a high barrier for investors and control trading activity. The paper is suggesting lowering the allotment for retail investors in SME primary offers. But this will not stop retail investors from trading in the secondary market for these stocks, if the lot size is lowered.
The proposal to link eligibility to list on SME platforms with post-issue market capitalisation, instead of post-issue paid-up capital, will help more companies list on the SME platform. But stating that companies with post-issue market cap of up to ₹4,000 crore can list on the SME platforms can lead to relatively larger companies using the SME platform, changing the nature of stocks listed on it. The platform may no longer be limited to small companies.
Why it’s a bad idea
It is obvious that market intermediaries, including stock exchanges and stockbrokers, will gain if the trading volumes on the SME platforms increase. Currently, the daily trading volumes on these platforms is a few hundredcrores and form a tiny fraction of the daily cash trading volumes. This is because of the minimum trading lot size of ₹1 lakh prescribed by SEBI. But if the trading lot is decreased to one share, retail investors are bound to converge on these stocks.
But given the limited supply of shares, prices of these stocks could skyrocket. Towards the end of July 2026, 743 SMEs were listed on the NSE EMERGE platform and 753 SMEs were listed on BSE SME.
The combined market capitalisation of these stocks was ₹4.7 lakh crore. This is less than one per cent of the market capitalisation of the Indian markets, which is around ₹470 lakh crore.
Also, with the average market capitalisation of the SME stocks being around ₹300 crore, with many stocks having market cap below ₹100 crore, these stocks will be particularly vulnerable to price manipulation, pump-and-dump activities, front running, etc. Retail investors are likely to make a beeline for these platforms where price action is likely to give a adrenaline rush.
Needless to add, SEBI will have a tough challenge on its hands if it opens the floodgates for retail investors.
There is no need to get aggressive in growing liquidity and participation on the SME platforms.
These are highly risky investments, suitable for the more informed and long-term institutional investors. Portfolio churn should therefore be limited and the trading volumes should also be low.
Too much tampering with the inherent nature of the SME platform is uncalled for.