SME IPO Investments: Let’s Do Something About This ft. Makia Capital

Table of Contents

Published on: Dec 26, 2024

In a move to streamline fundraising and encourage credible SMEs to list on exchanges, the Securities and Exchange Board of India (SEBI) recently approved amendments to its regulations. These changes, affecting both the SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018, and the SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015, aim to strengthen investor protection while ensuring that only robust SMEs raise funds, properly utilize capital, and minimize fraud.

Key Updates
  • Eligibility for IPO
    • SMEs can now launch an IPO only if they have recorded an  operating profit (Earnings Before Interest, Tax, Depreciation, and Amortization—EBITDA) of at least ₹1 crore in at least two of the preceding three financial years at the time of filing the Draft Red Herring Prospectus (DRHP).

  • Offer for Sale (OFS)
    • The OFS portion in an SME IPO is capped at 20% of the total issue size.
    • Selling shareholders are limited to offloading a maximum of 50% of their holdings.
  • Lock-in Period for Promoters
    • Any holdings by promoters exceeding the Minimum Promoter Contribution (MPC) will be subject to a phased lock-in release.
    • 50% of the excess can be unlocked after one year, and the remaining 50% after two years.

  • Alignment for Non-Institutional Investors (NIIs)
    • The allocation rules for NIIs in SME IPOs will mirror those used in main board IPOs, ensuring consistency across markets.

  • General Corporate Purpose (GCP) Fund Limit
    • The GCP portion of the funds raised will be limited to 15% of the total issue size or ₹10 crore, whichever is lower.

  • Restrictions on Use of Proceeds
    • Proceeds from SME IPOs cannot be used—directly or indirectly—to repay loans to promoters, promoter groups, or related parties.

  • Public Comment on DRHP
    • DRHPs must be open for public comment for 21 days.
    • A public announcement and a scannable QR code must be placed in newspapers for easy access.

  • Further Issue Without Main Board Migration
    • SMEs can issue additional shares without migrating to the main board, provided they follow the SEBI (LODR) Regulations, 2015, applicable to main board-listed entities.

  • Related Party Transactions (RPT) Norms
    • RPT norms for main board-listed companies will now apply to SME-listed entities. 
    • The materiality threshold stands at 10% of the annual consolidated turnover or ₹50 crore, whichever is lower.

To give a clearer picture of what it takes for an SME to go public, below is a snapshot of current listing requirements on the two primary SME platforms in India—NSE Emerge and BSE SME.

 

  1. NSE Emerge Eligibility Criteria

  • Incorporation: Company must be incorporated under the Companies Act 1956/2013 in India.

     

  • Post Issue Paid-Up Capital: Must not exceed ₹25 crore (face value).

     

  • EBITDA: Must have an operating profit (EBITDA) of at least ₹1 crore in two of the preceding three financial years at the time of filing the DRHP.

     

  • Net Worth: Positive net worth.

     

  • FCFE (Free Cash Flow to Equity): Must be positive for at least two out of the last three financial years.

     

  1. BSE SME Eligibility Criteria

     

  • Incorporation: Company must be incorporated under the Companies Act 1956/2013 in India.

     

  • Post Issue Paid-Up Capital: Must not exceed ₹25 crore (face value).

     

  • Net Worth: At least ₹1 crore for the preceding full financial years.

     

  • Tangible Assets: At least ₹3 crore in the last preceding financial year.

     

  • Leverage Ratio: Should not exceed 3:1.

     

  • EBITDA: Must have an operating profit (EBITDA) of at least ₹1 crore in two of the preceding three financial years at the time of filing the DRHP.

     

Note: These criteria are subject to updates from the respective exchanges. Always confirm with the latest official circulars or guidelines.

Why These Changes Matter?
  • Enhanced Credibility: By requiring a track record of operational profitability and setting stricter lock-in periods, SEBI aims to ensure that only robust SMEs tap into public markets.

     

  • Investor Protection: Capping OFS and restricting the usage of IPO proceeds help safeguard investor interests.

     

  • Streamlined Compliance: Alignment with main board standards (for NIIs, RPTs, etc.) creates consistency and makes the transition to a public listing more straightforward.

     

Ultimately, these regulatory adjustments are designed to promote transparency and reduce the risk for investors, while giving well-performing SMEs a better shot at raising capital on favorable terms. As these new rules come into effect, we can expect to see more credible SMEs tapping public markets—fueling innovation, job creation, and overall economic growth.

For more insights on fundraising strategies and opportunities in the SME space, feel free to reach out to us at team@makiacapital.com. At Makia Capital, we’re dedicated to empowering SMEs through strategic investment, ensuring they have the resources and support needed to thrive.

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