SEBI Proposes Tougher Listing Regulations for SMEs

The Securities and Exchange Board of India (SEBI) has introduced new, stricter listing regulations for small and medium enterprises (SMEs) to improve transparency and corporate governance in the sector.

Background to the Proposal

This move comes after SEBI identified several irregularities, including the alleged diversion of IPO funds, circular transactions with related parties to inflate stock prices, and the booking of fictitious transactions to create artificial demand. In some cases, SEBI even halted SME listings due to these concerns.

Key Proposed Changes

• Eligibility Conditions:

1. 1. • SEBI is proposing an increase in the minimum application value from the current level to Rs 2 lakh.
      • The offer for sale (OFS) limit will be reduced to 20% of the issue size.
      • SMEs will be required to meet enhanced eligibility criteria, including a minimum issue size of Rs 10 crore and an operating profit of Rs 3 crore in at least two of the last three financial years.

• Lock-in and Corporate Governance Measures:

1. • The lock-in period for promoters’ minimum contribution (MPC) in an SME IPO will be increased to five years, with phased release of lock-in for promoters’ holdings exceeding the MPC.
   • The rules for related-party transactions will be aligned with those applicable to companies listed on the main board, including stricter disclosures and scrutiny of related-party dealings.
   • SEBI also plans to impose higher corporate governance requirements, including mandatory quarterly financial disclosures, similar to those required of main-board companies.

Stricter Corporate-Governance Framework

• SEBI intends to introduce more robust corporate governance practices for SMEs, which will include tighter disclosure requirements for board meetings, related-party transactions, and other financial information.
• SEBI found that many SMEs had related-party transactions exceeding 10% of their consolidated turnover, with some SMEs having over 50% of their turnover linked to related parties.

Migration to the Main Board

• SMEs that meet certain criteria may migrate to the main board after a successful listing. However, SEBI is considering raising the threshold for migration to the main board, ensuring only those with sufficient size and profitability make the transition.

Cooling-Off Period for Change of Promoter

SEBI has proposed a two-year cooling-off period for changes in SME promoters prior to filing the draft documents for an IPO. This is intended to prevent quick changes in management that could potentially harm investors.

Stock Exchange Platforms for SMEs

• NSE operates the Emerge platform for SME listings, while BSE has its own platform, BSE SME.
• These platforms allow SMEs to list and raise funds with relatively fewer regulatory requirements compared to the main board.

Growth of the SME IPO Market

• Last financial year saw a record 196 SME IPOs, raising over Rs 6,000 crore.
• As of October this year, 159 SME IPOs have already raised more than Rs 5,700 crore.
• With the new regulations, SEBI aims to foster further growth while ensuring greater investor protection.

Consultation Paper and Stakeholder Feedback

• SEBI’s consultation paper on these proposed changes invites feedback from market participants, with a goal of finalising the regulations after considering public comments. These changes aim to improve the overall integrity of the SME segment, which now has a combined market capitalization of over Rs 2 trillion.

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.