Is your company still SME-IPO eligible? What SEBI's proposed reset means for issuers in the pipeline

Is your company still SME-IPO eligible? What SEBI's proposed reset means for issuers in the pipeline

SEBI wants a smaller number of better-established companies on the SME platform — and wants their listings to cost less once they get there. Issuers preparing to file should model both regimes now.

The SME platform has grown well past the scale its rules were written for. By 31 July 2026, 1,496 companies had listed on it since inception, 365 of them had moved up to the Main Board, SME IPOs had raised ₹40,222 crore, and the segment's combined market capitalisation stood at about ₹4.71 lakh crore. SEBI's response, following a Working Group review and discussion in its Primary Market Advisory Committee, is a recalibration of almost every headline parameter in Chapter IX of the ICDR Regulations.

The proposals pull in two directions. Entry gets harder: a market-capitalisation test, a higher and more sustained profit bar, and a much larger minimum number of allottees. Life after listing gets cheaper: compulsory market making, SME-specific underwriting and the longer lock-ins would go. For a company in the pipeline, the effects interact, so they need to be modelled together rather than one at a time.

01Eligibility moves from share capital to value

Today, Regulation 229 looks at post-issue paid-up capital: up to ₹10 crore for the SME route, with access also open between ₹10 crore and ₹25 crore. SEBI's view is that nominal share capital says little about a company's real size — a company with few shares at a high price can be large in value while its capital looks small. The proposal replaces the test with post-issue market capitalisation at the offer price.

Eligibility would be re-tested when the RHP (book-built issue) or prospectus (fixed-price issue) is filed. An issuer that drifts below ₹1,000 crore must use the SME route; an SME issuer whose estimate rises above ₹4,000 crore must re-file under the Main Board framework. Valuation movements between DRHP and RHP therefore become an eligibility risk, not just a pricing question.

There is a drafting point to watch: SEBI's narrative speaks of market capitalisation, while parts of the draft text use "post-issue capital calculated at the offer price". The final wording should settle the calculation.

02A higher, steadier profit bar — and a way round it

The current test asks for operating profit of ₹1 crore in at least two of the last three years. The proposal asks for average operating profit of at least ₹3 crore a year over the preceding three years, from restated consolidated financial statements. It is an average, not a per-year floor.

For companies that miss the profit test, a proposed new Regulation 229(7) offers an institution-led route. The issuer must still meet the other eligibility conditions in Regulations 229(3) to (5), and the issue must:

• be made through book building;
• allot at least 75% of the net offer to QIBs, failing which all subscription money is refunded; and
• leave the compulsory QIB portion un-underwritten.

Retail and non-institutional allocations on this route are capped at 10% and 15% respectively, and QIB sellers in any offer for sale remain subject to the quantitative OFS limits. SEBI's intent is clear: the route is for established businesses institutions are willing to back, not an exit window for existing holders.

Converted and reorganised businesses

The track-record rule for issuers converted from a proprietorship, partnership or LLP would change from one full financial year to four completed quarters after conversion, with at least one post-conversion audited financial statement filed with the ROC before the DRHP. The rule would also extend to business reorganisations — acquisitions, transfers, schemes — where more than half of the issuer's latest-year revenue comes from businesses previously run by such entities. Promoters who restructured recently should map the effective dates now.

03What gets cheaper

On the cost side, SEBI relies on its own data: underwriting fees made up roughly a third to a half of total SME issue expenses in FY 2024-25 and FY 2025-26, and market makers accounted for under 10% of turnover in most SME scrips. The proposals:

• Market making: the compulsory three-year framework under Regulation 261 would be omitted.
• Underwriting: 100% underwriting and the lead manager's 15% own-account obligation would go, aligned with the Main Board approach; a 90% minimum subscription requirement would apply instead, with refunds within four days if it is missed.
• General corporate purposes: the ₹10 crore ceiling would be removed; the 15% of issue limit stays.
• Lock-in: promoter holding above the minimum contribution would be locked in for one year (now 50% for two years and 50% for one); other pre-IPO holders for six months (now one year). Minimum promoter contribution stays at three years from allotment.

04The investor side

The minimum application would fall from above ₹2 lakh to ₹1 lakh (four lots of at least ₹25,000 each), the minimum number of allottees would rise to 500, and after listing the trading lot would be one share. On the normal book-built route, retail would get at least 35%, non-institutional investors at least 15% and QIBs up to 50%.

For issuers, the 500-allottee floor is the number to plan around. It requires a genuinely wider distribution than many recent SME issues have achieved, and it will shape the choice of lead manager and the marketing effort.

05Offer for sale and migration

A dedicated Regulation 230A would govern the OFS portion: shares must ordinarily have been held for a year before the DRHP, the OFS is capped at 20% of the issue, and each seller may offer no more than 50% of its pre-issue holding (QIB sellers are generally exempt from the caps, except on the 229(7) route).

Migration to the Main Board would follow market capitalisation too: optional between ₹1,000 crore and ₹4,000 crore, and required at the top end. Migration from the Main Board down to the SME platform would be removed. Here too the draft and narrative differ — "₹4,000 crore or more" against "above ₹4,000 crore" — and the final text should resolve it.

06At a glance: today versus proposed

07Transition: which rules will apply to you

• RHP or prospectus filed on or before notification: the existing framework continues, even if the issue opens or lists later.
• DRHP filed in the three months after notification: the issuer may choose either framework and must state the choice. After three months, the revised framework is mandatory.
• SME DRHP filed before notification, no RHP yet: the issuer may elect either framework (subject to its in-principle approval position); electing the new one requires a DRHP addendum.
• Already listed: existing lock-ins run their course and the existing migration rules continue. Trading-lot and market-making changes would apply to all SME scrips from the date of a separate SEBI circular.

08What issuers should do now

• Run the profit test both ways. Compute three-year restated consolidated operating profit against today's ₹1 crore (2-of-3) test and the proposed ₹3 crore average.
• Estimate post-issue market capitalisation at a realistic price band and see where it falls against ₹1,000 crore and ₹4,000 crore — including the downside case at RHP.
• Assess Ind AS readiness if you may fall in the optional band; restating three years plus a stub is the item most likely to push back a filing date.
• Map conversion and reorganisation history — effective dates, completed quarters, ROC filings and the share of revenue from predecessor businesses.
• Revisit the offer structure: OFS holding periods and caps, GCP sizing, and a distribution plan that can reach 500 allottees.
• Decide on timing. If the current regime suits you better, the RHP filing date relative to notification is what matters.
• Consider commenting by 4 November, particularly on the open drafting points: the market-cap calculation, the operating-profit measure and the ₹4,000 crore trigger.