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Markets regulator Sebi has notified a stricter regulatory framework for small and medium enterprise (SME) IPOs by introducing a profitability requirement and capping a 20% limit on offer-for-sale (OFS).
The reforms aim to provide SMEs with a sound track record an opportunity to raise funds from the public while protecting investor interests.
This move follows a rise in SME issues, which has driven significant investor participation. The allocation methodology for non-institutional investors (NIIs) in SME IPOs would be aligned with the approach followed in main-board IPOs to ensure uniformity.
With regard to profitability criteria, Sebi said SMEs planning to launch an IPO are required to have a minimum operating profits (earnings before interest, depreciation and tax or EBITDA) of ?1 crore for at least two out of the three previous financial years.
Also, the OFS component by selling shareholders in SME IPOs has been capped at 20% of the total issue size. Additionally, selling shareholders will not be allowed to offload more than 50% of their existing holdings, Sebi said in a notification dated March 4.
Further, promoters' shareholding over the Minimum Promoter Contribution (MPC) would be subject to a phased lock-in period. Half of the excess holding would be released after one year, while the remaining 50% would be unlocked after two years.
SME issues will not be permitted to use IPO proceeds to repay loans taken from promoters, promoter groups, or related parties, whether directly or indirectly.
"Objects of the issue should not consist of repayment of loan taken from the promoter, promoter group or any related party, from the issue proceeds, directly or indirectly," Sebi said.
The Draft Red Herring Prospectus (DRHP) for SME IPOs must be made available for public comments for 21 days. Issuers will be required to publish announcements in newspapers and include a QR code for easy access to the DRHP.
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