The Securities and Exchange Board of India (SEBI) has introduced a series of proposals to revamp the framework for Small and Medium Enterprise (SME) Initial Public Offerings (IPOs). These measures are designed to protect investors, enhance transparency, and encourage sustainable growth in the SME segment. Let’s break down the changes and their potential impact.
Table of Contents
Key Proposals by SEBI
Higher Investment Lot Sizes
SEBI has suggested increasing the minimum lot size for SME IPOs to ₹2 lakh or ₹4 lakh.
This change aims to attract serious and committed investors, reducing speculative participation and ensuring long-term stability in the SME market.
Longer Promoter Lock-In Period
Promoters will now need to retain their shares for five years after listing.
This ensures a stronger commitment from promoters and prevents abrupt sell-offs that could destabilize share prices.
Restrictions on Fund Utilization
The use of IPO proceeds to repay loans availed by promoters or related parties will be restricted.
This move promotes transparency and ensures funds are allocated to genuine business growth.
Cooling Period for Converted Entities
Entities such as Limited Liability Partnerships (LLPs) or partnerships converting into companies must observe a two-year cooling-off period before they can list.
This ensures stability and track record validation before entering the market.
Increased Minimum Investors
The number of minimum investors for SME IPOs will rise from 50 to 200.
This widens the investor base, promoting fairness and reducing the risk of manipulation.
Fraud Prevention and Corporate Governance
SEBI plans to tighten listing norms and implement stricter corporate governance standards, including quarterly disclosures and related-party transaction norms.
These steps aim to build trust and prevent unethical practices like fund diversion or revenue inflation.
Reserved Quotas for Small Investors
One-third of the allocation for large investors will be reserved for those investing up to ₹10 lakh.
This provision ensures greater inclusivity for smaller investors in the SME space.
Flexibility for Fundraising
SMEs will be allowed to raise funds while remaining on the SME platform.
However, they will need to adhere to higher disclosure requirements similar to those for mainboard-listed companies.
Why Are These Changes Necessary?
The SME segment has seen increased market activity, but also instances of misconduct, such as fund siphoning and inflated revenues. These practices not only harm investors but also erode trust in the sector. SEBI’s proposals aim to address these issues and align SME IPOs with global best practices.
My Perspective
SEBI’s proposed changes are a significant step toward fostering a transparent and robust SME ecosystem. They strike a good balance between protecting investor interests and enabling SME growth. However, these reforms must remain adaptable to the unique challenges faced by SMEs. For instance, the increase in lot size might discourage small investors, and the stricter norms could impose additional compliance burdens on SMEs. A collaborative approach involving feedback from all stakeholders will be crucial to ensure the changes are effective and inclusive.
Conclusion
SEBI’s proposals are designed to create a more trustworthy and investor-friendly environment for SME IPOs. By enhancing governance standards and tightening fund utilization norms, the regulator is addressing key concerns that have plagued the SME segment. These measures, if implemented effectively, will not only boost investor confidence but also pave the way for sustainable growth in the SME sector. It will make it a vital contributor to India’s economic progress.
