𝐅𝐫𝐨𝐦 𝐎𝐯𝐞𝐫𝐬𝐮𝐛𝐬𝐜𝐫𝐢𝐩𝐭𝐢𝐨𝐧𝐬 𝐭𝐨 𝐎𝐯𝐞𝐫𝐬𝐢𝐠𝐡𝐭 𝐭𝐨 𝐎𝐯𝐞𝐫𝐝𝐫𝐢𝐯𝐞: 𝐈𝐬 𝐒𝐄𝐁𝐈 𝐡𝐢𝐧𝐝𝐞𝐫𝐢𝐧𝐠 𝐄𝐚𝐬𝐞 𝐨𝐟 𝐃𝐨𝐢𝐧𝐠 𝐁𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐟𝐨𝐫 𝐒𝐌𝐄𝐬?

The SME platform for IPOs has undeniably flourished, with record-breaking IPO activity in FY 2023-24 and investor enthusiasm skyrocketing from 4x in FY 2021-22 to an unprecedented 245x in FY 2023-24. With this, regulatory authorities like SEBI are taking multiple steps to refine the rules governing these SME IPOs. A closer look at the decisions made during its December 18, 2024 board meeting raises questions about their impact on ease of doing business for small and medium enterprises which are discussed below:

1.             SEBI (ICDR) Regulations, 2018 currently do not mandate any operating profit for companies seeking listing on SME exchanges. However, BSE SME and NSE EMERGE platforms already require operating profit from operations in 2 of the last 3 financial years before the application date. SEBI has now approved a minimum operating profit threshold of Rs. 1 crore in furtherance of these platform requirements. While this step aims to filter out weaker SMEs, it could potentially exclude high-potential startups still navigating early-stage financial volatility.

2. SEBI has capped Offer for Sale (OFS) to 20% of the total issue size. Additionally, selling shareholders cannot offload more than 50% of their holdings in an SME IPO. Earlier, there was no restriction on OFS.

3.             Another interesting change is with respect to Promoter’s lock-in period. Under Regulation 238 of ICDR, the minimum promoter contribution is locked in for three years, while any holding exceeding this minimum is locked in for one year. Fron now, Promoters’ shares in excess of the minimum contribution will be released in a phased manner. This might discourage promoters from tapping into SME IPOs if their capital remains locked up for extended periods.

4.             SEBI has capped the funds allocated for ‘general corporate purposes’ While this ensures defined fund usage, it may stifle adaptability, especially when SMEs need to respond quickly to market dynamics.

5.             Companies can no longer use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties. Earlier, there was no such condition under the regulations. This change has been brought following a study revealing that 1 in 2 SME-listed entities engaged in RPTs exceeding Rs.10 crores and 1 in 5 exceeded Rs.50 crores. However, this might disincentivize promoters who often provide critical early-stage funding to SMEs.

In a global environment where regulators are easing norms to support small businesses, SEBI’s approach appears to tilt toward overregulation.

The question remains: Are these changes fostering investor trust at the cost of stifling SME growth?