SEBI Tightens Rules For SME IPOs, Caps Offer-For-Sale At 20% And Sets Profitability Criteria
The changes aim to ensure only fundamentally strong SMEs access public markets while safeguarding investor interests.

Markets regulator SEBI has introduced a stricter framework for initial public offerings by small and medium enterprises, including mandatory profitability requirements and tighter limits on offer-for-sale components. The changes aim to ensure only fundamentally strong SMEs access public markets while safeguarding investor interests.
According to a notification issued on March 4, SEBI said SMEs planning to launch an IPO must have minimum operating profits of Rs 1 crore in at least two of the last three financial years. The OFS component in such IPOs will also be capped at 20% of the total issue size, and selling shareholders cannot offload more than 50% of their existing shareholding in the offering.
The new rules come amid a sharp rise in SME IPO activity over the past two years, with increased participation from retail investors. In 2024 alone, about 240 SMEs have raised over Rs 8,700 crore, nearly double the Rs 4,686 crore raised in 2023, according to primedatabase.com.
Lock-in and Other Restrictions for Promoters
To further strengthen the framework, SEBI has tightened promoter shareholding norms. Any promoter stake exceeding the minimum promoter contribution will be subject to a phased lock-in—50% of the excess shares will be released after one year, and the remaining 50% after two years.
Additionally, SEBI has aligned the allocation methodology for non-institutional investors in SME IPOs with that of main-board IPOs to ensure consistency.
Stricter Entry Norms to Curb Speculation
In a bid to reduce speculative participation, SEBI has also doubled the minimum application size to two lots, making it more difficult for casual investors to enter SME IPOs.
Commenting on these changes, Makarand M Joshi, Founder and Partner at corporate compliance firm MMJC & Associates, said, “By increasing the minimum application size, SEBI is aiming to deter unnecessary speculation and protect investors who often invest simply by watching share price momentum in SME IPOs.”
Limits on Use of IPO Proceeds
SEBI has also placed restrictions on how SMEs can use the funds raised through IPOs. The amount allocated for general corporate purposes will be limited to 15% of the total issue size or Rs 10 crore, whichever is lower. Importantly, companies will not be allowed to use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties.
“Objects of the issue should not consist of repayment of loans from promoters, promoter groups, or related parties, whether directly or indirectly,” SEBI stated in the notification.
Public Consultation on DRHP
In a major step towards transparency, SEBI has made it mandatory for draft red herring prospectuses of SME IPOs to be available for public comments for 21 days. Companies will be required to publish newspaper notices with QR codes for easy access to the DRHP on their websites, as well as that of the merchant banker and SME exchange.
Explaining the significance, Joshi added, “Until now, SME IPO DRHPs were only cleared by the stock exchange. Now, these documents will be open for public scrutiny and feedback, ensuring greater accountability from issuers.”
Further Fundraising Without Main Board Migration
SEBI has also allowed SME-listed companies to raise additional funds without migrating to the main board, provided they agree to comply with Listing Obligations and Disclosure Requirements applicable to main board-listed entities.
“If the post-issue paid-up capital after a further issue exceeds Rs 25 crore, SMEs may still raise funds without moving to the main board, as long as they commit to following LODR rules,” SEBI clarified.
Related Party Transactions Norms Extended
SME-listed companies will now have to comply with related party transaction rules that are applicable to companies listed on the main board.
The new guidelines have been notified through amendments to SEBI’s Issue of Capital and Disclosure Requirements Regulations.
These measures come as SME IPOs have surged, driven by the broader rally in India’s equity markets and growing investor appetite for new listings. With these regulatory changes, SEBI aims to balance growth in the SME segment with investor protection and stronger corporate governance.
(With Inputs From PTI.)