SEBI Proposes Stricter Rules for SME Listings Amid Growing Market Concerns

The Securities and Exchange Board of India (SEBI) is set to introduce major changes to the guidelines governing the listing of small and medium enterprises (SMEs). Among the proposed revisions are an increase in the minimum application lot size to Rs 3-5 lakh, as well as raising the track record and market-making requirements to five years each. These changes are expected to take place before the end of the current year, according to sources in the exchange and merchant banking sectors.

This move follows concerns raised by SEBI regarding the growing froth in the SME segment, driven by irrational exuberance among traders and retail investors. Senior officials at the markets regulator have indicated that more stringent proposals will be put forward to address these issues. In recent months, SEBI has been seeking feedback from exchanges and merchant bankers to shape these new rules. One of the anticipated changes is the alignment of exchange eligibility criteria, ensuring that both the BSE and the National Stock Exchange (NSE) adopt similar standards.

At present, the BSE and NSE independently oversee the SME listing process, each with their own set of criteria on their respective platforms—NSE Emerge and BSE SME Exchange. However, both exchanges share a common eligibility requirement: a post-paid-up capital of under Rs 25 crore and a track record of at least three years. Sources suggest that SEBI plans to harmonize these criteria and make them more stringent across the board.

Increase in Minimum Application Size

One of the key proposals under discussion is to raise the minimum application size for SME listings from the current ₹1 lakh to ₹3-5 lakh. This change aims to curb speculative retail trading in micro-companies, a practice that has been on the rise since the inception of the application size rule in 2012. In addition, there is a push to extend the market-making agreement from the current three years to five years. Market makers play a critical role by providing liquidity through two-way quotes for at least 75% of trading hours following a company’s listing.

Further tightening of the listing requirements is also expected. Among the proposed changes are stricter underwriting rules, higher net worth and profitability thresholds, longer promoter lock-in periods, and a potential reshuffling of the portions reserved for qualified institutional buyers (QIBs) and anchor investors. These adjustments aim to ensure that only financially robust and well-managed companies are listed on SME platforms.

SEBI’s recent actions, including orders against companies like Debock Industries and holding up the listing of Trafiksol, underscore the regulator’s growing concerns about misuse of the SME platform. The regulator has been increasingly focused on addressing fraudulent activities and ensuring proper due diligence in the SME IPO process. As part of this effort, SEBI has urged exchanges and merchant bankers to be more stringent with their scrutiny of draft papers before clearing them for listing.

In addition to these proposals, the NSE has introduced a requirement for positive free cash flow (FCF) for at least two out of the three financial years preceding an SME listing. The exchange has also imposed a cap of 90% on listing gains, aiming to avoid dramatic price spikes that could lead to market volatility.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.