The Securities and Exchange Board of India (SEBI) has proposed a major overhaul of the initial public offering (IPO) rules for small and medium enterprises (SMEs). These changes aim to strengthen the SME IPO framework, enhance investor protection, and align key regulatory requirements with those applicable to main-board companies.
- Minimum application value reduced to ₹1 lakh from ₹2 lakh
- Minimum number of allottees increased from 200 to 500
- Operating profit threshold raised to ₹3 crore over three years
- Compulsory market-making requirement for SMEs proposed to be abolished
- New market capitalization-based framework for migration to the main board
- Trading lot size changed to one share for better accessibility
What are the key changes SEBI proposes for SME IPOs?
SEBI proposes to reduce the minimum application size for SME IPOs to ₹1 lakh, which would be four lots of ₹25,000 each. This reduction from ₹2 lakh aims to balance investor protection with wider access to SME IPOs. The minimum number of allottees will increase to 500, up from the current 200, to encourage broader investor participation.
The regulator also plans to abolish the compulsory market-making requirement for SME-listed firms, aligning with the main board where this is not mandatory. Additionally, the trading lot size will be standardized to one share, replacing the current price-band-based lot size. This change is expected to improve flexibility and accessibility for investors in the secondary market.
How will the profit and migration criteria change?
SEBI proposes raising the average annual operating profit requirement to ₹3 crore over three years, instead of the current ₹1 crore in at least two of three years. For issuers not meeting this profitability criterion, an alternative route is suggested where at least 75% of the issue is allocated to qualified institutional buyers (QIBs). If this allocation is not met, subscription money must be refunded.
Regarding migration to the main board, a market capitalization-based framework is proposed. Voluntary migration would be allowed for SME companies with a market capitalization between ₹1,000 crore and ₹4,000 crore, subject to eligibility. Companies exceeding ₹4,000 crore in market capitalization would be required to migrate mandatorily, provided they meet the relevant conditions.
What other regulatory adjustments has SEBI suggested?
The proposed framework includes aligning SME IPO price band caps with main board standards, setting the cap at a minimum of 105% of the floor price and retaining the upper limit of 120%. Differential pricing provisions will be updated by removing references to individual investors applying for the minimum application size, reflecting the revised application framework.
SEBI also plans to maintain SME-specific restrictions on offers for sale (OFS). The OFS portion would be capped at 20% of the total issue size, and shares offered by selling shareholders would be limited to 50% of their pre-issue shareholding on a fully diluted basis, with exemptions for qualified institutional buyers.
Furthermore, the amount used for general corporate purposes will continue to be capped at 15% of the funds raised, compared to 25% allowed for main board companies.
Why is SEBI proposing these changes now?
Since the SME platform's inception, it has evolved significantly. As of July 31, 2026, 1,496 entities have listed on the SME platform, raising ₹40,222 crore. Many companies have migrated to the main board, reflecting a wide range of sizes and maturity levels among SME-listed firms.
SEBI aims to create a regulatory framework that is proportionate to the nature and scale of issuers on the SME platform. The goal is to facilitate broader access to capital markets, reduce unnecessary regulatory burdens, and maintain safeguards to protect investors.
How can the public provide feedback on these proposals?
SEBI has invited public comments and suggestions on the proposed changes. Stakeholders can submit their feedback by November 4, 2026, to help shape the final regulatory framework for SME IPOs.
