SEBI Proposes Major Changes to the SME IPO Framework
The Securities and Exchange Board of India (SEBI) has proposed several changes to the regulatory framework governing SME initial public offerings (SME IPOs). The proposed amendments cover company eligibility, profitability requirements, offer for sale (OFS), promoter lock-in, investor applications, share allotment, underwriting, market making and migration between the SME platform and the Main Board. One of the key proposals is to shift from paid-up capital-based eligibility thresholds to market capitalisation-based thresholds. Other proposals include a higher operating-profit requirement, changes to minimum application amounts and a revised framework for migration to the Main Board. These proposals could affect companies planning an SME IPO, existing SME-listed companies, promoters, pre-IPO investors, merchant bankers and other market participants. This article explains the proposed changes with comparisons of the existing provisions and the proposed amendments. Important: These are proposed amendments and should not be treated as final or notified regulatory requirements.
1. Overview of the proposed changes
| Area | Key proposal |
|---|---|
| Company eligibility | Introduce market capitalisation thresholds of ₹1,000 crore and ₹4,000 crore. |
| Profitability | Require an average operating profit of at least ₹3 crore per year over three years under the proposed standard route. |
| Alternative listing route | Allow issuers that do not meet the profitability test to use a QIB-led route, subject to specified conditions. |
| General corporate purposes | Remove the ₹10 crore cap while retaining the 15% limit. |
| Offer for sale | Introduce a holding-period requirement for OFS sellers, subject to specified exemptions. |
| Lock-in requirements | Revise lock-in periods for promoter and non-promoter holdings and introduce a promoter-group lock-in. |
| Investor applications | Reduce the proposed minimum application amount to ₹1 lakh. |
| Investor allocation | Revise investor categories, allocation requirements, anchor-investor provisions and retail allotment. |
| Post-listing requirements | Propose changes to underwriting, market making, trading lots and minimum subscription. |
| Main Board migration | Use market capitalisation instead of paid-up capital for specified migration requirements. ` |
| Offer documents | Expand certain disclosure requirements and revise lead manager responsibilities. |
2. Company eligibility, business history and profitability
2.1 Eligibility for an SME IPO — Regulation 229(1)–(2)
SEBI proposes that eligibility for the SME platform should be determined by the company's post-issue market capitalisation at the offer price rather than only by its post-issue paid-up capital.
| Particulars | SME IPO | Main Board IPO |
|---|---|---|
| Existing Provision | Post-issue paid-up capital up to ₹10 crore: SME only. Between ₹10 crore and ₹25 crore: optional SME. | The existing provision is not specified in the provided text. |
| Proposed Change | Eligibility based on post-issue market capitalisation up to ₹1,000 crore: SME only. Between ₹1,000 crore and ₹4,000 crore: optional SME, subject to Ind AS-restated financials. | Companies with post-issue market capitalisation above ₹4,000 crore: Main Board only. |
| What It Means | SME eligibility would be determined by the company's post-issue market capitalisation rather than only its paid-up capital. | Companies with post-issue market capitalisation above ₹4,000 crore would be required to list on the Main Board. |
Why is this proposed?
Paid-up capital does not necessarily reflect the overall market value of a company. An analysis of 735 IPOs identified a gap between paid-up capital and market capitalisation.
The proposal aims to reduce the incentive for companies to undertake bonus issues solely to meet the existing capital thresholds.
2.2 Re-testing eligibility at the RHP stage — Schedule XVI
The proposal introduces an eligibility re-test at the Red Herring Prospectus (RHP) stage.
| Particulars | Existing Provision | Proposed Change | What It Means |
|---|---|---|---|
| Eligibility Re-test | No specific provision. | SME: An SME DRHP with market capitalisation above ₹1,000 crore may continue, while one above ₹4,000 crore must be re-filed for the Main Board. Main Board: A Main Board DRHP with market capitalisation of ₹1,000 crore or below must be re-filed as an SME issue. | The applicable listing platform would be reassessed based on market capitalisation at the relevant stage. |
Why is this proposed?
The objective is to ensure that the final eligibility assessment reflects the actual pricing of the issue.
2.3 Business history after conversion — Regulation 229(4)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Period after conversion | One full financial year after conversion of a proprietorship, firm or LLP. | Four completed quarters, along with at least one post-conversion audited financial statement filed with the Registrar of Companies (RoC). | The proposed rule would use completed quarters and a post-conversion audited filing to determine the relevant period. |
Why is this proposed?
Under the existing rule, the waiting period can range from 12 months to almost 24 months, depending on the conversion date. The proposal seeks to address this timing issue.
2.4 Business reorganisation — Regulation 229(4)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Business history | Only statutory conversion is covered. | The scope would extend to acquisition, transfer, vesting, succession or a scheme where more than 50% of revenue comes from a predecessor proprietorship, firm or LLP. The predecessor's track record would count. | Certain reorganisations could be considered when assessing business history, subject to the proposed conditions. |
Why is this proposed?
The proposal seeks to provide similar treatment to economically similar transactions and address possible regulatory arbitrage.
2.5 Profitability requirement — Regulation 229(6)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Operating-profit test | Operating profit of ₹1 crore in two of the last three years. | Average operating profit of at least ₹3 crore per year over three years, based on restated consolidated financials. | The proposed standard route would require a higher average operating profit over the three-year period. |
Why is this proposed?
The existing ₹1 crore requirement is considered outdated. The proposed average-profit test would measure performance over a longer period and bring the approach closer to the Main Board framework.
2.6 Alternative route for issuers that do not meet the profit test — New Regulation 229(7)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Alternative route | No alternative route. | Issuers that fail the profitability test may list through book building with at least 75% allocated to Qualified Institutional Buyers (QIBs), or provide a full refund. Regulations 229(3)–(5) would continue to apply. | An issuer that does not satisfy the proposed standard profit test could use the alternative route, subject to the stated conditions. |
Why is this proposed?
The proposal mirrors the approach under Main Board Regulation 6(2). It seeks to distinguish a company's business maturity from its current profitability, with QIB demand serving as a form of market validation.
2.7 Allocation under Regulation 229(7)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Investor allocation | Not applicable. | Retail Individual Investors (RIIs): up to 10%; Non-Institutional Investors (NIIs): up to 15%; QIBs: at least 75%. | The proposed allocation framework for this route would give QIBs at least 75% of the issue. |
The proposed allocation framework aims to align with Main Board Regulation 32(2).
3. Issue structure, OFS and promoter contribution
3.1 General corporate purposes — Regulation 230(2)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Limit for general corporate purposes | Lower of 15% of the issue or ₹10 crore. | 15% of the issue, with the ₹10 crore cap removed. | The limit would continue to be 15%, but the fixed ₹10 crore ceiling would no longer apply. |
Why is this proposed?
The fixed cap can disadvantage larger issues. The proposed limit would remain lower than the Main Board's 25% limit.
3.2 Offer for sale (OFS) — New Regulation 230A
An offer for sale allows existing shareholders to sell their shares as part of an IPO.
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Overall OFS limit | Up to 20% of the issue. | The 20% limit would be retained. | The overall OFS limit would remain unchanged. |
| Limit for each seller | Up to 50% of each seller's holding. | The 50% limit would be retained, with limits also covering sales after DRHP filing. | The proposed framework would continue to restrict the amount each seller can offer. |
| Holding period | No holding-period requirement. | A one-year holding period, subject to specified exemptions similar to those under Regulation 8. QIB sellers would be exempt, except in issues under Regulation 229(7). | Certain sellers would need to satisfy a holding-period condition before offering shares in an OFS. |
Why is this proposed?
The proposal seeks to discourage shares acquired shortly before an IPO from being sold to the public immediately, while allowing genuine institutional investors to exit under the specified exemptions.
3.3 Lock-in of minimum promoters' contribution — Regulation 238
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Lock-in period | Three years from allotment or commencement of commercial production, whichever is later. | Three years from allotment. | The lock-in period would be calculated from allotment alone. |
The objective is to remove uncertainty caused by linking the lock-in period to commercial production.
3.4 Lock-in of excess promoter holding
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Excess promoter holding | 50% locked in for two years and the remaining 50% for one year. | The entire excess holding would be locked in for one year. | The two-stage lock-in would be replaced with a single one-year period. |
The objective is to simplify the lock-in structure.
3.5 Lock-in of promoter-group holdings — Regulation 239(2)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Promoter-group lock-in | No separate requirement. | One year. | A separate lock-in period would apply to promoter-group holdings. |
The objective is to prevent promoters from circumventing their own lock-in through promoter-group holdings.
3.6 Lock-in of non-promoter pre-issue capital — Regulation 239(1)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Lock-in period | One year. | Six months. | The lock-in period for non-promoter pre-issue capital would be reduced to six months. |
The proposal aims to align the treatment with the Main Board framework and make pre-IPO investor exits easier.
3.7 Lock-in enforcement through depositories
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Depository-based lock-in | Not available for SME companies. | Depositories may mark shares as “non-transferable”. | Transfer restrictions could be recorded and enforced through the depository system. |
The objective is to provide a practical method for enforcing lock-in requirements.
4. Investor categories, applications and allotment
4.1 Minimum application size — Regulation 267
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Minimum application | Two lots, with an application value above ₹2 lakh. | Four lots of at least ₹25,000 each, resulting in a minimum application of ₹1 lakh. | The minimum application amount would be reduced to ₹1 lakh. |
The proposal aims to widen access for investors, supported by other safeguards. The ₹2 lakh minimum was introduced in March 2025.
4.2 Investor categories — Regulation 253
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Retail investor terminology | “Individuals applying for minimum application size”. | “Retail Individual Investors” (RIIs). Proposed allocation: RII at least 35%, NII at least 15%, QIB up to 50%. | The investor categories and allocation framework would be revised to align with the Main Board approach. |
4.3 Anchor investors — Schedule XIII
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Anchor-investor provision | Not expressly provided for. | Up to 60% of the QIB portion may be allocated to anchor investors. | The framework would expressly permit anchor-investor participation within the specified limit. |
The objective is to encourage institutional participation.
4.4 NII sub-categories
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| NII categories | One category above two lots up to ₹10 lakh and another above ₹10 lakh. | Categories based on application value: ₹2–10 lakh and above ₹10 lakh, with a one-third/two-thirds split. | The sub-categories would be based on application value and align with the Main Board approach under Regulation 32(3A). |
4.5 Retail allotment — Regulation 268
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Basis of allotment | In minimum lots and multiples of lots. | At least one minimum lot per RII, with the balance allotted proportionately rather than in lot multiples. | The method of distributing shares among retail applicants would change when an issue is oversubscribed. |
The objective is to support fairer distribution in oversubscribed issues.
4.6 Minimum number of allottees
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Minimum allottees | 200. | 500. | The minimum number of allottees would increase to 500. |
The objective is to encourage wider shareholding.
4.7 Schedule XIV, Part A2
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| NII allotment illustration | Includes an illustration of NII allotment. | The illustration would be omitted. | The illustration would be removed to avoid duplication of the relevant regulation. |
4.8 Trading lot
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Trading lot | Price-band-based lots ranging from 100 to 10,000 shares under a 2012 circular. | One share; the circular would be rescinded. | The prescribed multi-share trading lots would be removed, allowing trading in single shares. |
Approximately 5% of holders were reportedly stuck with odd lots. The proposal seeks to lower the entry cost and address this issue, including for QIBs.
5. Underwriting, subscription and market making
5.1 Underwriting — Regulation 260
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Underwriting requirement | 100% mandatory underwriting, with the lead manager taking at least 15% on its own account. | The Main Board underwriting framework would apply. The QIB portion under Regulation 229(7) would not be underwritten. | The underwriting requirements would change, with an exception for the QIB portion under the alternative route. |
The figures cited in the consultation paper show underwriting fees as a proportion of issue expenses of approximately 49.5% and 38.4% for NSE, and 32.2% and 34.0% for BSE, across FY25 and FY26, respectively.
5.2 Minimum subscription — New Regulation 265A
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Minimum subscription | No express provision; 90% Registrar confirmation under Regulation 264(5). | Minimum subscription of 90%, except for OFS. Refund within four days. Regulation 264(5) would be omitted. | The proposal would expressly prescribe a minimum subscription threshold and a refund timeline. |
The objective is to ensure that an issue is completed only when there is genuine demand and to remove duplication.
5.3 Market making — Regulation 261
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Market-making requirement | Compulsory for three years, with at least 5% inventory. | The requirement would be omitted. | The mandatory market-making requirement would be removed. |
Market-making fees account for approximately 1.25%–4.2% of issue expenses. Market makers accounted for 0%–10% of turnover across 361 NSE and 268 BSE scrips.
6. Migration between the SME platform and Main Board
6.1 Main Board to SME migration — Regulation 276
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Migration from Main Board to SME | Permitted when paid-up capital is below ₹25 crore. | The provision would be omitted. | The specified route for moving from the Main Board to the SME platform would be removed. |
The objective is for the SME platform to serve as a graduation platform rather than a step-down platform.
6.2 Optional SME-to-Main Board migration — Regulation 277
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Eligibility and approval | Paid-up capital of ₹10–25 crore and a special resolution. | Market capitalisation of ₹1,000–4,000 crore and Board approval only. | Both the eligibility measure and the approval requirement would change. |
The proposal treats market capitalisation as a better measure of company size. Migration would also subject the company to stricter rules.
6.3 Mandatory SME-to-Main Board migration — Regulation 280(2)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Mandatory migration trigger | A further issue that takes paid-up capital above ₹25 crore. | Market capitalisation above ₹4,000 crore. The ₹25 crore trigger would be removed. Main Board LODR requirements would apply to further issues until migration. | The specified migration trigger would shift from paid-up capital to market capitalisation. |
6.4 Calculation of market capitalisation for migration
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Market capitalisation test | No specific method. | The average of average weekly high closing prices and average weekly low closing prices over 12 weeks, adjusted for corporate actions, multiplied by shares outstanding. The test would be conducted once, on the application date. | A 12-week price-based calculation would be used instead of relying on a single day's price. The test would not be repeated. |
The objective is to reduce the effect of price fluctuations and provide greater certainty to companies applying for migration.
7. Promoter contribution, offer documents and issue processes
7.1 Promoters' contribution — Regulations 236 and 237
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Promoters' contribution | SME-specific rules. | Alignment with Regulations 14 and 15, including treatment of shares with superior rights (SR shares), a proviso for partly paid-up shares involving ₹100 crore, and a wider list of ineligible allotments. | Specified promoter-contribution requirements would be aligned with the corresponding Main Board provisions. |
The objective is to apply the same rules where the regulatory purpose is the same.
7.2 Offer-document disclosures — Regulations 245 and 246
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Disclosure requirements | Disclosure duties tied to the offer document, with limited certificates. | Disclosure duties would extend to the DRHP; an updated DRHP would be filed after exchange observations. Requirements would include lead manager agreements and debenture trustee certificates, promoter PAN, bank and passport details, and Forms C and D. | Specified disclosures and documentation requirements would be expanded during the offer process. |
The objective is to strengthen due diligence and align the requirements with Regulation 25.
7.3 Price band — Regulation 250
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Price-band limit | Cap of up to 120% of the floor price. | Cap between 105% and 120% of the floor price. | The upper price-band limit would fall within the proposed range of 105% to 120% of the floor price. |
The objective is to align the provision with Schedule XIII.
7.4 Differential pricing — Regulation 251
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Lot-related condition | Includes a condition relating to a uniform minimum lot. | The lot condition would be removed, and the provision would refer to RIIs. | The differential-pricing provision would be revised in line with the proposed application framework. |
7.5 Advertisements and lead manager responsibilities — Regulations 264 and 271
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Offer-document references and lead manager responsibility | Generic reference to the prospectus and open-ended lead manager responsibility. | References would be to the RHP or Prospectus, as applicable. Lead manager responsibility would continue until listing or trading approval. | The relevant offer-document references and the period of lead manager responsibility would be clarified. |
The objective is to align the provision with Main Board Regulation 52(3).
7.6 Cross-reference — Regulation 279(7)
| Particulars | Existing provision | Proposed change | What it means |
|---|---|---|---|
| Regulatory reference | Refers to Chapter VII of the 2009 Regulations. | Changed to Chapter V. | The outdated cross-reference would be corrected. |
8. Transition provisions: When would the proposed framework apply?
The proposed transition framework illustrates notification on 31 December 2026. This is an illustrative assumption, not a confirmed notification date.
| Situation | Proposed treatment |
|---|---|
| DRHP filed on or after three months from notification, illustrated as 1 April 2027 | The revised framework would be mandatory. |
| DRHP filed during the three-month transition window | The issuer could choose the old or new framework. The choice would need to be stated in the DRHP. |
| RHP or Prospectus filed on or before notification | The existing framework would apply. |
| Main Board DRHP filed before notification | The existing Main Board framework would apply. |
| SME DRHP filed before notification, with no RHP filed | The issuer could choose the framework. If it chose the new framework, a DRHP addendum would be filed. |
| Trading lot and market making | These requirements would end for all SME scrips from the date of a separate rescinding circular. |
| Lock-ins already running | Existing lock-ins would continue until expiry. |
| Companies listed on or before notification | Existing migration rules would apply. |
| Companies listed after notification | Market-capitalisation-based migration rules would apply. |
Important: The transition dates and treatments are illustrative. They should not be interpreted as a confirmed implementation schedule unless supported by the final notified framework and applicable circulars.
9. What could these proposals mean for market participants?
The impact would depend on the final provisions adopted by SEBI and the circumstances of each company.
For companies planning an SME IPO: The proposed market capitalisation thresholds and higher profitability requirement could affect eligibility and IPO planning. Companies that do not satisfy the proposed profit test may need to examine the alternative route and its conditions.
For promoters and existing shareholders: The proposed changes to promoter contribution, OFS eligibility and lock-in periods could affect shareholding plans and the timing of permitted share sales.
For investors: Changes to minimum application amounts, investor categories, allotment methods and trading lots could alter the way investors participate in SME IPOs and trade SME-listed shares.
For merchant bankers and other intermediaries: Proposed changes to offer-document disclosures, underwriting, minimum subscription and lead manager responsibilities could require updates to issue planning, due diligence and compliance processes.
For SME-listed companies considering migration: The proposed market capitalisation-based framework could change the thresholds and approval process for migration to the Main Board.
These are potential implications of the proposals, not conclusions that the changes will necessarily take effect in their proposed form.
10. Disclaimer
This article is for informational purposes only and does not constitute legal, financial or regulatory advice. The amendments discussed are proposals and should not be treated as effective requirements unless and until notified by SEBI. Readers should refer to the applicable regulations and official circulars before relying on any provision for a transaction or compliance decision.