The Securities and Exchange Board of India's board on Wednesday approved a series of proposals for stringent oversight of small and medium enterprises looking to raise capital through initial public offerings, bringing the rules for Small and Medium Enterprises (SMEs) closer to those of mainboard IPOs.
The new regulations require that an issuer must have an operating profit of Rs 1 crore for at least two out of the last three financial years to be eligible for an IPO, the markets regulator said in a statement late on Wednesday after its board meeting. Additionally, the offer for Sale by selling shareholders in SME IPOs will be capped at 20% of the total issue size, and shareholders cannot sell more than 50% of their holdings.
The new rules also include a phased release of lock-in restrictions on promoters' holdings exceeding the minimum promoter contribution. Specifically, 50% of the excess promoter holding will be unlocked after one year, and the remaining 50% will be released after two years. Further, the process for allocating shares to non-institutional investors in SME IPOs will now align with the main-board IPOs.
To prevent excessive fund allocation to non-essential purposes, the regulations also cap the amount allocated for general corporate purposes to 15% of the total funds raised or Rs. 10 crore, whichever is lower. Furthermore, SME IPOs will not be allowed if the proceeds are intended for loan repayment to promoters, promoter groups, or related parties, either directly or indirectly.
SEBI has also mandated that the DRHP for SME IPOs be made available to the public for 21 days to solicit comments, with the details of the DRHP published in newspapers and accompanied by a QR code for easy access.
The board has also decided that SME companies will be permitted to issue further shares without having to migrate to the main board, provided they comply with the provisions of the SEBI (LODR) Regulations, as applicable to main-board listed companies.
Additionally, the new rules extend related party transaction norms, which are applicable to main-board listed entities, to SMEs. However, the threshold for considering related party transactions as material will be set at 10% of the company's annual consolidated turnover or Rs. 50 crore, whichever is lower.
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