The Securities and Exchange Board of India (SEBI) has announced significant changes to the framework governing small and medium enterprise (SME) initial public offerings (IPOs). The new proposals aim to replace the existing paid-up capital-based eligibility criteria with a market capitalisation threshold. This initiative is part of SEBI’s efforts to enhance the SME segment, which has seen considerable growth since its inception.

Under the proposed regulations, companies with a post-issue market capitalisation of up to ₹1,000 crore will be required to list exclusively on the SME platform. Meanwhile, firms valued between ₹1,000 crore and ₹4,000 crore will have the option to choose their listing segment, albeit with stricter financial reporting obligations, including adherence to Indian Accounting Standards (Ind AS) where applicable.

As of 31 July 2026, there were 1,496 entities listed on the SME platform, which includes companies that later transitioned to the main board. Cumulatively, SME IPOs have raised ₹40,222 crore, with the market capitalisation of listed entities, including those that migrated, reaching ₹4.71 trillion.

Revised Profitability Requirements and Market Access

One of the notable changes proposed by SEBI is the increase in the minimum average operating profit requirement. The new threshold is set at ₹3 crore annually over the previous three financial years, based on restated consolidated financial statements. This is a significant rise from the current requirement of ₹1 crore in at least two of the last three years.

However, companies that do not meet this profitability criterion will still have the opportunity to access the market through an alternative route. According to the proposal, such issuers must employ the book-building process and allocate at least 75 per cent of the net offer to qualified institutional buyers (QIBs). If this condition is not fulfilled, the entire subscription amount will need to be refunded to investors.

Additionally, SEBI plans to eliminate the ₹10 crore absolute cap on the utilisation of IPO proceeds for general corporate purposes, while maintaining a limit of 15 per cent of the total issue size for such expenditures.

Enhanced Flexibility for Institutional Investors

The proposed changes also aim to provide institutional investors with increased flexibility regarding their investments. SEBI has suggested a dedicated framework for offers for sale (OFS), which includes a one-year holding requirement for shares sold through this mechanism. Qualified institutional buyers may be exempt from the existing quantitative limits on OFS, subject to certain safeguards.

It is important to note that these relaxations will not apply to issues using the alternative route for companies that do not meet the profitability threshold. Currently, regulations stipulate that an OFS by a selling shareholder must not exceed 20 per cent of the total issue size, and the shares offered through OFS by selling shareholders should not surpass 50 per cent of their respective pre-issue shareholding.

Sebi has opened the floor for public comments on the consultation paper, inviting feedback until 4 November. The proposed changes are expected to refine the SME IPO landscape, making it more accessible for businesses while ensuring investor protection remains a priority.

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