SME IPOs: Sebi proposes to raise minimum subscription amount to Rs 2 lakh from Rs 1 lakh; check other details here

The Securities and Exchange Board of India (Sebi) on Tuesday proposed increasing the minimum application size for SME IPOs from the present Rs 1 lakh to Rs 2 lakh, ensuring that only informed investors with the risk appetite and capability to invest are eligible to apply.

“It is observed that the retail individual participation has increased in SME IPO over last few years. Therefore, considering that SME IPOs tend to have higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors, it is proposed to increase the application size,” the market regulator said in the consultation paper.

The market regulator also proposed changes to allocation methodology for non-institutional investor in SME IPOs. “It was suggested that the draw of lot allotment methodology and reservation in the portion available for NIIs, as currently in place for main board IPOs should also be extended for allocation to NIIs in SME IPOs,” Sebi said.

The market watchdog also proposed to restrict ‘Offer for Sale’ component in SME IPOs to 20% of the issue size. In the rationale, Sebi added that the purpose of setting up of SME Exchange was to make finance available to needy small and medium enterprises for their growth.

However, from SME IPO data it is noted that there were two pure OFS SME IPO (100% OFS in FY 23-24) and one in FY 24-25 (till October 2024). Further, there was a total of 52 issues (in total in FY23-24 and FY24-25) where there was an OFS component along with a fresh issue, and in 30 out of 52 such issues, OFS portion was more than 20% of the total issue size.

“It is observed that the promoter of the proposed IPO dilutes its stakes which was not the objective of forming the SME platform. Hence, it is suggested to put restriction on OFS part of SME IPO as OFS proceeds are not forming capital for issuer and there may limit for OFS in terms of issue size as well as threshold may be prescribed for selling shareholders also,” Sebi said.

Sebi also proposed to tighter monitoring of use of funds for issues of more than Rs 20 crore.

“It is proposed that requirement of appointment of Monitoring Agency shall be made applicable for issuer company if fresh issue size is higher than 20 crore. In cases where there is no requirement for the appointment of a Monitoring Agency, there should be a mandatory requirement of a statutory auditor’s certificate for utilisation of money raised through the public issue, to be submitted to Exchange while filing the half-yearly financial statement, till the issue proceeds are fully utilized. These certificates should also be submitted to the Audit Committee and Board of the Issuer Company,” Sebi said.

From SME IPO data it is noted that in FY 24-25 (till Oct 2024) out of 145 issues only five issues were above Rs 100 crore, 95 issues were of size more than Rs 20 crore and 45 issues were of size less than 20 crore (out of which 16 issues were less than 10 crore in size), as per data shared by Sebi.

The regulator also proposed that fees to merchant bankers should be disclosed in the prospectus of SME IPOs.

“Many a times it is noted that fees of merchant bankers exceed 30%-40% of the issue size. Thus, it defeats the purpose of providing an alternative fund raising mechanism for SMEs,” Sebi said.

With an increase in the number of SME issues, investor participation has also increased in SME IPOs significantly as applicant to allotted investor ratio increased from 4 times in FY22 to 46 times in FY23 and 245 times in FY24, as per Sebi.

Since, SME companies are mostly promoter-driven, therefore Sebi added that it is necessary to ensure that promoters continue to have certain skin in the game until the company is on the SME Exchange, there is no need to align lock-in requirements of SME companies with main board

“It is proposed that lock-in on minimum promoter contribution (MPC) in SME IPO shall be increased to 5 years. Additionally, lock-in on promoters’ holding held in excess of MPC shall be released in phased manner ie lock-in for 50% promoters’ holding in excess of MPC shall be released after 1 year and lock-in for remaining 50% promoters’ holding in excess of MPC shall be released after 2 year,” Sebi said.