Tough rules on SME IPOs, insider trades

Sebi sets bigger IPO application amounts, profit criteria for SMEs

- Neha Joshi

Strict rules to list small and medium enterprises (SMEs), tight checks on insider transactions, tougher criteria for merchant bankers and easier rules for investment trusts are on the way, with the market regulator approving a series of measures on Wednesday to protect investors and improve ease of doing business.

The biggest measures pertain to SMEs, with new rules aiming to shield vulnerable investors, while ensuring that these companies themselves are on solid financial ground. Investors applying for SMEs' shares in initial public offerings (IPOs) will have to put in a minimum of ₹2-4 lakh, the Securities and Exchange Board of India (Sebi) said. The regulator hopes this will limit SME IPOs to well-informed investors who can stomach higher risks. Currently, the minimum IPO application amount for SME IPOs is ₹1 lakh. Meanwhile, the SME must have recorded an operating profit of at least ₹1 crore in two out of the last three financial years when filing its draft IPO papers.

Another crucial change pertains to offer for sale (OFS) by shareholders. SME promoters can collectively sell only 20% of their shareholding in IPO, and no single shareholder can sell more than 50%. Promoters' holdings above the minimum promoter contribution (MPC) will be subject to phased lock-in periods. Half of the excess promoter holding will be unlocked after one year, while the rest will be unlocked after two years. These measures aim to ensure promoters retain significant shareholdings in their companies even after the IPO.