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Published in: Regulatory Updates

SEBI New Rules for SME IPOs in 2025 (Summary)

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In 2025, SEBI introduced a set of amendments to the regulatory framework governing Small and Medium Enterprises (SMEs) seeking to launch Initial Public Offerings (IPOs). These new rules are aimed at enhancing the SME IPO process, promoting transparency, ensuring investor protection, and supporting the growth of well-performing SMEs. Here’s a summary of the key changes:

  1. Eligibility Criteria for IPO
    • SMEs can proceed with an IPO only if they have an operating profit (EBITDA) of ₹1 crore in at least two of the last three financial years.
    • Previously, only a positive operating profit in two out of three years was required.
  2. Offer for Sale (OFS) Limitations
    • Selling shareholders can now sell up to 20% of the total issue size in an SME IPO.
    • They cannot sell more than 50% of their total holdings in the IPO.
    • New Provision: This restriction was not present in earlier frameworks.
  3. Promoter Lock-In Period
    • A phased lock-in applies to promoters’ excess holdings:
      – 50% of excess holdings will be locked for 1 year.
      – The remaining 50% will be locked for 2 years.
    • Earlier: 20% of promoters’ holdings were locked for 3 years, and the rest for 1 year.
  4. Non-Institutional Investor (NII) Allocation
    • The allocation for Non-Institutional Investors (NIIs) in SME IPOs will now follow the same process as in Main Board IPOs.
  5. General Corporate Purpose (GCP) Allocation Cap
    • The GCP allocation is capped at 15% of funds raised or ₹10 crore, whichever is lower.
    • Earlier: GCP could be up to 25% of the gross proceeds.
  6. Prohibited Use of IPO Proceeds
    • Proceeds from the IPO cannot be used to repay loans owed to promoters, promoter groups, or related parties.
    • New Provision: This is a fresh restriction not included before.
  7. Public Feedback on DRHP
    • SME Draft Red Herring Prospectus (DRHP) must be available for public comments for 21 days, with public announcements in newspapers, including QR codes for easy access.
    • New Addition: This provision wasn’t part of previous regulations.
  8. Further Issues Without Migration
    • SMEs can raise additional funds without migrating to the Main Board, provided they comply with SEBI’s Main Board listing regulations (LODR).
  9. Related Party Transaction (RPT) Rules
    • Related Party Transaction norms for Main Board-listed companies will now apply to SMEs.
    • Transactions will be considered material if they exceed 10% of the annual consolidated turnover or ₹50 crores, whichever is lower.

Objective of the Amendments:

These amendments aim to:

  • Improve transparency and investor confidence in SME IPOs.
  • Ensure that SMEs comply with stricter corporate governance standards.
  • Support the sustainable growth of SMEs in the capital markets.

These changes reflect SEBI’s focus on creating a more robust framework that encourages investor protection while enabling SMEs to access public capital markets more effectively.

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