Sebi Proposes Major Changes To SME IPO Rules, Cuts Minimum Investment To Half

The Securities and Exchange Board of India (Sebi) on October 14 proposed sweeping changes to small and medium enterprise (SME) initial public offering (IPO) rules, including replacing paid-up capital with market capitalisation as the listing eligibility criterion, raising the profit threshold and cutting the minimum investment from Rs 2 lakh to Rs 1 lakh. It also proposed allowing single-share trading, scrapping compulsory market making and changing underwriting, allotment and migration rules.

Companies with a post-issue market capitalisation of up to Rs 1,000 crore would have to list on the SME platform. Those valued above Rs 1,000 crore and up to Rs 4,000 crore could choose between the SME and Main Board, subject to additional disclosures. Sebi has invited public comments until November 4, 2026.

Why Sebi Wants To Revamp SME IPO Rules

Sebi said the SME segment has expanded significantly. “The SME segment has evolved significantly, with a substantial increase in the number of issuers accessing the platform, funds raised through SME IPOs and the number of investors participating in such issues,” the consultation paper said.

As of July 31, 2026, 1,496 entities had listed on the platform, including 365 that later migrated to the Main Board. SME IPOs had raised Rs 40,222 crore, and listed entities had a combined market capitalisation of Rs 4,70,984 crore.

Sebi said the aim is “a regulatory architecture that is proportionate to the nature and scale of issuers accessing SME Platform.”

Market Capitalisation To Replace Paid-Up Capital

Currently, companies with post-issue paid-up capital of up to Rs 10 crore must list on the SME platform, while those with capital above Rs 10 crore and up to Rs 25 crore can choose either board.

Sebi said, “The paid-up capital represents the nominal share capital of an issuer and may not adequately reflect the economic size, scale, valuation or growth potential of an enterprise.”

Its study of 735 Main Board and SME IPOs over the previous three financial years found a significant gap between paid-up capital and market capitalisation. Some companies had also issued bonus shares to meet the existing threshold, increasing costs and tax liabilities.

Companies valued at up to Rs 1,000 crore after an IPO would have to list on the SME platform. Those valued above Rs 1,000 crore and up to Rs 4,000 crore could choose either board but would need to submit restated consolidated financial statements under Indian Accounting Standards (Ind AS) for the previous three financial years and the stub period. This would ensure “greater comparability, consistency and quality of financial information.”

The test would be repeated when the Red Herring Prospectus (RHP) is filed. Main Board applicants valued at Rs 1,000 crore or less would have to refile under the SME framework, while SME applicants valued above Rs 4,000 crore would have to shift to the Main Board framework.

Higher Profit Threshold, Alternative Route For Growth-Stage Firms

Sebi has proposed raising the operating profit requirement from at least Rs 1 crore in two of the preceding three financial years to an average of Rs 3 crore annually over three years, based on restated consolidated financial statements.

The existing rule “may no longer adequately reflect the scale and financial capacity expected of an issuer accessing the public capital market,” Sebi said.

Companies that fail the higher threshold could still list under proposed Regulation 229(7), provided they use book-building and allot at least 75 per cent of the net offer to Qualified Institutional Buyers (QIBs). If the allocation requirement is not met, all application money must be refunded.

The proposal aims “to distinguish business maturity from financial performance.” Existing business track record, continuity and promoter continuity requirements would remain. Under this route, retail investors could receive up to 10 per cent of the net offer and non-institutional investors (NIIs) up to 15 per cent. The QIB portion would not be underwritten.

Sebi also proposed replacing the one-full-financial-year waiting period for businesses converted from proprietorships, partnerships or limited liability partnerships (LLPs) into companies with four consecutive completed quarters. The rule would also cover reorganisations where more than 50 per cent of the issuer's revenue comes from the businesses concerned.

Minimum Investment Cut To Rs 1 Lakh

In March 2025, Sebi raised the minimum SME IPO application size from Rs 1 lakh to Rs 2 lakh “with the objective of limiting participation by smaller retail investors in view of the higher risks associated with SME investments.”

It is now proposed to reduce it to Rs 1 lakh, split into four lots of at least Rs 25,000 each. Sebi said this would “operate within a substantially strengthened regulatory framework.”

The minimum number of allottees would rise from 200 to 500. Issuers could allocate up to 60 per cent of the QIB portion to anchor investors. Retail investors would receive at least one minimum lot, subject to availability, with remaining shares allotted proportionately.

Trading In Single Shares

Sebi proposed reducing the SME trading lot to one share. Current rules prescribe lots ranging from 10,000 shares for stocks priced up to Rs 14 to 100 shares for those priced above Rs 1,000.

The consultation paper noted that “approximately 5 per cent of unique PAN-based shareholders held shares constituting an odd lot.”

Lower Costs For Issuers

The regulator wants to scrap 100 per cent underwriting of SME IPOs and the requirement for lead managers to underwrite 15 per cent of the issue on their own account. Underwriting fees accounted for 49.52 per cent and 38.41 per cent of total issue expenses for NSE SME IPOs in FY 2024-25 and FY 2025-26, respectively.

Under the proposed rules, only the unsubscribed portion would need underwriting. Issues must achieve at least 90 per cent subscription, failing which application money must be refunded within four days of closure.

Sebi also proposed scrapping compulsory market making for three years after listing. Market makers currently need to maintain inventory of at least 5 per cent of shares. They contributed 0 to 10 per cent of turnover in 361 NSE and 268 BSE SME stocks between August 2025 and July 2026. Sebi said their “contribution of compulsory market making to actual trading activity may be limited in a substantial number of securities.”

Fund Use, OFS And Lock-In Changes

Sebi has proposed removing the Rs 10 crore ceiling on funds raised for general corporate purposes while retaining the 15 per cent cap, saying the SME framework “continues to prescribe a stricter framework as compared to the Main Board.”

OFS would have a separate regulation and a one-year holding requirement. QIB selling shareholders would be exempt from the existing 20 per cent cap on the OFS component. The Primary Market Advisory Committee (PMAC) has also suggested removing the 50 per cent limit on QIB sales. The holding requirement aims to ensure that “the OFS does not become a promoter exit mechanism predominantly.”

The three-year lock-in on minimum promoters’ contribution would start from IPO allotment instead of commercial production, addressing “extended and variable lock-in periods.” The lock-in for promoter holdings above the minimum contribution would be one year, while that for pre-issue non-promoter holdings would fall from one year to six months. The one-year lock-in for promoter group holdings would remain unchanged.

Migration And Transition Rules

Sebi proposed barring Main Board companies from moving to the SME platform, which should remain “a pathway for growth-oriented enterprises to graduate to the Main Board, rather than as a reverse migration route.”

SME companies valued between Rs 1,000 crore and Rs 4,000 crore could migrate to the Main Board with board approval. Migration would be mandatory above Rs 4,000 crore. Sebi also proposed scrapping the requirement to migrate when paid-up capital is likely to exceed Rs 25 crore after a further issue.

Market capitalisation for migration would be calculated using the applicable share price and outstanding shares on the application date. The price would be based on average weekly high and low closing prices over the preceding 12 weeks, adjusted for corporate actions.

The new rules would apply to draft offer documents filed three months after notification in the Official Gazette. During the transition, issuers could choose either framework. Sebi clarified that “the choice during the transition period is a choice of framework, and not merely a choice of stock exchange.” Issues whose RHP or Prospectus has already been filed, and companies already listed on the SME platform, would continue under existing rules.