SEBI's proposed policy on SME IPOs: Going a step closer towards transparency and growth.
As part of this proposed amendment, the Securities and Exchange Board of India (SEBI) has made some drastic changes to its policies to make SME IPOs more transparent, protect the interest of the investor, and increase market liquidity. Though these changes will affect different stakeholders differently, the objective behind this move is to create a stronger platform for SMEs that can raise capital effectively and protect the interests of investors as well. Now, let's dig deeper into some of the key proposals and implications.
1️⃣ The minimum size of the application increases
Current Rule: ₹1 lakh
Suggested Rule: ₹2 lakh
Impact: This may not even have a significant impact on most investors, as a leap from ₹1 lakh to ₹2 lakh is not drastic for serious market participants, but higher allocation per applicant may give more conviction-based investments. Overall, this shift is seen as positive for investors seeking worthwhile stakes in IPOs.
2️⃣ NII Allocation Shift
Current Rule: Proportionate allocation
Suggested Rule: Allocation by way of draw of lots
Impact: This would make allotment processes less cumbersome and give all investors a fair chance at getting into the system. However, this may be somewhat frustrating for bigger investors who liked the earlier mode of proportionate allotments. More importantly, those who utilized loans to apply for an IPO may find this rule most unfavorable to them. On a lighter note, this helps popularise the market, with more investor participation and increasing retail interest.
3️⃣ Offer for Sale (OFS) Cap
Existing Rule: No Cap
New Rule: 20% Cap on OFS
Effect: By capping the OFS at 20%, SEBI is nudging the entities to bring in fresh money and not rely heavily on secondary sales. Even though it sees a better flow of capital in the business, promoters who have higher dilution requirements may find their way around, which could otherwise have impacted short-term market dynamics.
4️⃣ Minimum Number of Allottees
Existing Rule: 50 allottees
New Rule: 200 allottees
Effect: Increasing the minimum number of allottees increases liquidity and a more diversified investor base. It is a welcome step toward making the market vibrant and inclusive.
5️⃣ Reduced Threshold for Monitoring Agency
Present Rule: More than ₹ 100 crores: Monitoring agency will be applicable.
Proposed Rule: Threshold reduced to ₹ 20-50 crores
Impact: This amendment further enhances checks and balances on the usage of funds and restores investor confidence. The compliance cost for smaller SMEs is likely to be higher and thus discourages certain entities from going for the IPO route
6️⃣ Staggered Release of Lock-In
Existing Regulation: 3 years lock-in for promoter's ends with front loading.
New Regulation: Staggered release of lock-in
Effect: A staggered promoter holding varies with market liquidity needs while giving incremental confidence to the market. This helps the promoters stay committed to the company for a longer period of time.
7️⃣ Prohibition on Corporate Purpose Allocation
Current Rule: Up to 25% for general corporate purposes
Proposed Rule: Restricted to 10%, capped at ₹10 crore
Impact: This creates transparency and facilitates the focused allocation of funds. However, this may limit flexibility for SMEs that have an actual need for funds for diversified purposes, especially those with needs toward unspecified applications of funds.
8️⃣ Related Party Transaction Rules
Current Rule: NA
Proposed Rule: Related party transaction rules to be implemented
Impact: SEBI will ensure higher levels of governance standards by enforcing related party transaction rules. Though this raises confidence in investors, compliance costs might increase for more modest SMEs.
9️⃣ Submission of Quarterly Shareholding Pattern
Present Rule: Every half-year submission
Proposed Rule: Every quarter submission
Impact: This enhances transparency for investors and brings SME IPO reporting to par with mainboard requirements. However, periodic reporting would result in increased operational costs for smaller companies.
🔟 Introduction of EBITDA Threshold
Present Rule: No minimum requirement for EBITDA
Proposed Rule: Minimum ₹3 crore EBITDA
Impact: A ₹3 crore EBITDA filter removes all such SMEs with healthy financials but potentially excludes high-growth startups that haven't yet gained profitability. Many early-stage firms may not reach that benchmark, thereby limiting the potential to raise funds via the SME IPO route. It definitely raises the quality of the SMEs listed but pushes such startups to seek alternate funding channels.
SEBI’s proposed changes for SME IPOs reflect a balanced approach to fostering market transparency and protecting investor interests. While some changes might pose challenges for SMEs and investors, the overall direction seems to prioritize market health and inclusivity.
The community feedback being heard by SEBI is hopeful of additional relief measures, especially within the ESM segment. The restructuring further reiterates the fact that SEBI is devoted to the evolution of the IPO ecosystem for SMEs, in a manner that it remains fair and robust for all players.
