SEBI Proposes Doubling SME IPO Minimum Investment to Protect Small Investors

The Securities and Exchange Board of India (SEBI) has proposed doubling the minimum subscription amount for Small and Medium Enterprise (SME) IPOs to safeguard retail investors.

Key Proposals:

1. Higher Minimum Investment:
   SEBI suggests increasing the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh. There’s also a proposal to raise it further to ₹4 lakh.
   • The idea is to attract investors who understand the higher risks of SME IPOs and can handle potential losses if the market sentiment changes after listing.
     
2. Allotment Process Changes:
   • SEBI wants to introduce the “draw of lots” method for SME IPOs, similar to the mainboard IPOs.
   • It also plans to divide non-institutional investors into two groups based on the size of their applications, improving allotment chances for smaller investors.
     
3. Stricter Oversight of IPO Funds:
   • For IPOs above ₹20 crore, a monitoring agency would ensure that funds are used as disclosed. For smaller IPOs, companies must submit a certificate from statutory auditors.
   • IPO proceeds cannot be used to repay loans taken by promoters or related parties.
     
4. Stricter Eligibility for SMEs:
   • Companies must show an operating profit of at least ₹3 crore in two of the last three financial years.
   • IPO shares must have a face value of ₹10 each.
     
5. Corporate Governance Improvements:
   • SEBI plans to enforce stricter rules for related-party transactions.
   • SME companies would face new governance standards similar to those on the main board.

Why These Changes?

• Growing Interest in SME IPOs:
  Retail participation in SME IPOs has increased recently. However, these investments carry higher risks due to market volatility and governance issues in some SMEs.
  
• Surge in SME IPOs:
  FY24 saw a record-breaking 196 SME IPOs raising over ₹6,000 crore, with another ₹5,700 crore raised by October FY25.
  
• Caution Against Fraud:
  SEBI has raised concerns about questionable practices, unrealistic growth projections, and poor governance in the SME market.

Expert Opinions:

• Mukul Goyal, Stratefix Consulting: These changes will encourage better governance and oversight, allowing SMEs to access public markets while promoting sustainable practices.
  
• Ketan Mukhija, Burgeon Law: The proposals balance easier access to capital for SMEs with strong investor protection, supporting India’s goal of fostering SME growth.

The consultation paper is open for public feedback until December 4, 2024. These reforms could significantly impact India’s SME sector, which contributes 45% of the country’s industrial output and employs over 62 million people.