SEBI AMENDS REGULATIONS FOR SME IPOS

SEBI has stepped in with proposed reforms aimed at tightening regulations and aligning the SME platform more closely with Main Board standards.

- By Shivanand Pandit

The SEBI is set to implement significant reforms in the small and medium enterprises (SMEs) Initial Public Offer (IPO) segment, introducing stricter regulations on how SMEs go public, raise capital, and maintain governance post-listing. The proposed changes aim to tighten the Offer for Sale (OFS) framework, enhance oversight of IPO fund utilisation, and strengthen investor protections. These reforms go beyond minor adjustments—they are a decisive response to growing concerns that the SME platform, originally designed to facilitate capital access for smaller businesses, is being exploited. Issues such as promoters cashing out, fund misappropriation, and retail investor losses have prompted the SEBI to take firm action to restore integrity to the system.

Launched in 2008, the SME platform was designed to simplify fundraising for smaller businesses, offering greater flexibility and fewer complexities compared to the Main Board. This approach has proven successful, driving significant growth in the SME segment in recent years. As of October 2024, 745 companies are listed on SME exchanges, with a total market capitalization of ₹2 lakh crore. In FY23-24, 196 SME IPOs collectively raised over ₹6,000 crore, while FY24-25 is following closely, with 159 IPOs raising ₹5,700 crore by October.

A Remarkable Surge since COVID

SME IPOs have witnessed a remarkable surge since the COVID-19 years, with activity nearly quadrupling. These offerings are no longer insignificant, but this rapid expansion has also highlighted critical flaws in the system. Key concerns include promoters cashing out, misuse of IPO proceeds, and heightened risks for retail investors, and poor liquidity. The OFS mechanism, originally intended to facilitate business growth, is increasingly being used by promoters as an exit strategy.