New Delhi/Mumbai: India’s capital-market regulator, the Securities and Exchange Board of India (SEBI), is preparing a comprehensive review of the rules governing initial public offerings (IPOs) by small and medium enterprises (SMEs), a move that could reshape how smaller businesses raise money from the public.
SEBI Chairman Tuhin Kanta Pandey said on August 19 that a review of the SME IPO framework is underway, highlighting concerns around market-making and the costs it creates for small companies.
The proposed overhaul comes as India’s SME IPO segment has expanded rapidly, attracting both companies seeking growth capital and investors looking for opportunities beyond large listed businesses.
What is SEBI looking to change?
According to reports on the proposed framework, SEBI is considering changes across several areas, including eligibility requirements, market making, underwriting, trading lots, offer-for-sale rules and the use of IPO proceeds.
One of the biggest proposals could be a shift towards a market-capitalisation-based framework.
Under the proposal reported by Moneycontrol, companies with a market value of up to ₹1,000 crore could be required to list on SME platforms. Businesses valued between ₹1,000 crore and ₹4,000 crore could potentially get a choice between the SME platform and the mainboard, while companies above ₹4,000 crore would be directed towards the mainboard.
SEBI is also reportedly considering increasing the paid-up capital ceiling for companies eligible for SME listings from ₹25 crore to ₹100 crore.
The ₹2-lakh barrier could change
Another major proposal concerns the minimum trading and application size.
Under the current framework, SME IPO investors face a significantly higher entry requirement than investors participating in many mainboard IPOs. The current rules require bids in multiples of ₹2 lakh.
SEBI is considering removing the fixed market-lot system, allowing investors to buy or sell SME shares in quantities of their choice.
If implemented, this could make SME stocks more accessible to a wider pool of investors and potentially improve liquidity in the segment.
Why market making is under review
Market making has traditionally been an important feature of SME listings. Market makers are expected to provide continuous buy and sell quotes, helping create liquidity in stocks that may otherwise have relatively limited trading activity.
However, the system also adds costs for companies.
SEBI Chairman Pandey specifically pointed to market making as an area that is increasing costs for small-company IPOs.
Reports suggest SEBI is considering removing the mandatory market-making requirement along with mandatory underwriting for SME IPOs. According to Bloomberg reporting, underwriting and other requirements have contributed to higher investment-banking costs for SME offerings compared with mainboard IPOs.
What could it mean for small businesses?
For SMEs, the proposed changes could make the public markets a more practical source of growth capital.
Lower compliance and listing-related costs could allow more companies to consider an IPO without facing the same financial burden associated with the existing framework.
A wider eligibility framework could also allow relatively larger businesses to remain on SME platforms while they continue scaling before eventually moving to the mainboard.
For growing businesses, access to public capital can mean more money for expansion, technology, new facilities, hiring and entering new markets.
But easier access also means greater responsibility
The proposed reforms are not simply about making SME IPOs easier.
SME stocks can carry higher risks because many listed companies have smaller operations, lower liquidity and shorter public-market histories than established mainboard companies.
SEBI therefore faces a balancing act: reduce unnecessary costs and barriers for genuine businesses while protecting investors from excessive speculation and market manipulation.
The regulator had tightened SME IPO rules in 2024, including requirements around operating profitability, offer-for-sale limits and the use of IPO proceeds.
The latest review suggests that SEBI now wants to reassess whether some of those requirements are still appropriate as the SME market evolves.
What does this mean for investors?
If the proposed changes are implemented, investors could see a more flexible trading structure and potentially easier access to SME stocks.
However, easier access does not automatically make SME IPOs safer.
Investors would still need to examine a company’s revenue, profitability, debt, cash flows, promoters, valuation, business model and the intended use of IPO proceeds before investing.
The removal or reduction of certain structural safeguards could also make proper due diligence even more important.
A potential turning point for India’s SME market
India’s SME IPO ecosystem has grown significantly since dedicated SME platforms were introduced. The proposed overhaul could represent one of the most significant changes to the segment since its creation.
For entrepreneurs, it could mean lower barriers to accessing public capital.
For investors, it could mean greater participation and more flexible trading.
For SEBI, the challenge will be ensuring that greater accessibility does not come at the cost of investor protection.
The proposals are still under consideration and are expected to go through the consultation process before any final regulatory changes are implemented. Therefore, businesses and investors should treat the reported changes as proposals rather than as new rules already in force.
