Impact Assessment

of SEBI Consultative
Paper on SME IPO

19 November 2024
Consultation paper on Review of SME segment framework under SEBI
(ICDR) Regulations, 2018, and applicability of corporate governance
provisions under SEBI (LODR) Regulations, 2015 on SME companies to
strengthen pre-listing and post-listing SME provisions

SEBI has come out with a consultative paper on SME IPO, dated 19 th Nov, 2024
recommending certain changes to the SME IPO – Eligibility and Disclosure
requirements, flagging the following Regulatory Concerns w.r.t. past SME IPO’s-

1. Enhanced Investor participation in SME IPO to 46x in 2024

2. SME IPO mostly of Family companies, limited presence of sophisticated
Investors
3. Significant Related Party Transactions in SME IPO
4. Certain cases of diversion of SME IPO proceeds to Related parties, connected
parties/shell companies, Inflation of Revenue

Accordingly, considering the increased activity in SME segment, instances of

misconduct as aforementioned, risks relating to siphoning of funds, promoter /
investors exiting the company after listing, etc., it is felt by SEBI that to protect the
interest of the investors and market as a whole, there is a need to review SME IPO
framework and applicability of corporate governance provisions to SME listed
companies so that companies with sound track record make IPO/ raise funds and
get listed on stock exchanges and comply with post listing requirements.

This consultative paper may be read in full on the website of SEBI -

https://www.sebi.gov.in/reports-and-statistics/reports/nov-2024/consultation-
paper-on-review-of-sme-segment-framework-under-sebi-icdr-regulations-2018-
and-applicability-of-corporate-governance-provisions-under-sebi-lodr-
regulations-2015-on-sme-companies-to-_88627.html

Public comments are invited on these proposals by December 04, 2024, through the
following link:
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?do
PublicComments=yes

A comparative of the existing and proposed Eligibility and Disclosure requirements

of SME IPO is summarised herein-
S. Existing Justification/
Issue Proposed Provision
No. Provision Likely Impact
1. Minimum INR 1 Lacs INR 2 Lacs Intended to encourage
Application Size / Or only informed investors
Market Lot INR 4 Lacs who have more risk-
taking appetite and
capability to make
investments in SME IPO.

2. Allocation for Non Proportionate Draw of Lots Proportionate allotment

Institutional Allotment tends to encourage over-
Investors (NII) leveraging, over
statement of interest and
thus at times encourage
mispricing.
This provision is
proposed to be aligned
with Main board IPO.

3. Minimum No. of 50 200 Enhanced number of

Public public shareholders
Shareholders would ensure that post
listing, there are sizeable
number of investors and
same shall help in
providing liquidity in the
market.

4. Offer for Sale No Restrictions

Restricted to 20% of Companies expected to
(OFS) Issue Size raise Growth Capital
through SME IPO with
permissible upto 20%
OFS as well for
Promoters
5. Monitoring of Mandatory Mandatory above INR Monitoring Agency would
Issue Proceeds above INR 100 20 Cr. Issue Size. better track deployment
(Monitoring Cr. Issue Size of funds as per Object of
Agency) Further, mandatory the Issue clause.
where Object to Issue
is to-
a.Fund Subsidiary;
b.Repay Borrowings of
Subsidiary;
c.Investment in
JV/Subsidiary
d.Acquisition
 In other cases,
Statutory Auditors
certificate for IPO
Funds utilisation with
financial results.
6. Promoter Lock In 20% minimum 20% MPC by Higher Promoter lock in
promoter promoters locked in for proposed to ensure
contribution 5 years and holding in Promoter shareholding is
(MPC) by excess of MPC is not diluted, immediately
promoters locked in for 1 year post IPO.
locked in for 3 (50%) and 2 years
years and (50%), post IPO.
holding in
excess of MPC
locked in for 1
year post IPO.

7. General Corporate 25% of Gross GCP amount in SME Since there is no specific
Purpose (GCP) Issue Size. IPO to be restricted to monitoring of GCP and
10% of issue size or Rs. Unidentified acquisition
35% of Gross 10 crore (whichever is therefore, any expenses
Issue Size lower). can be classified as
including general corporate
Unidentified Further, Regulation purpose, it increases the
Acquisitions 230(3) to be deleted risk of misuse of issue
which permits raising proceeds.
funds for unidentified
target / acquisition.

8. Promoter Group Existing Proposed inclusions Considering public

Eligibility restrictions for “Promoter group” money is involved, this
upon w.r.t. Wilful Defaulter / seems to be a right step
“Promoter Fraudulent Borrower / expanding stricter
group” pertains Fugitive Economic restrictions on Promoter
to Debarment Offender group as well.
from accessing
capital markets
9. Track record in Considered In case of such This restricts Partnership
case of conversion, the / LLP businesses to
Conversion from Company shall be in immediately come out
Partnership / LLP existence for at least with IPO with 2 year
period of Two full cooling period.
Financial Year before
filing of DRHP As governance and
compliances of
Companies are better, so
 this would lead to better
quality of companies in
SME IPO.
10. Change in 1 Year cooling 2 Year cooling period SEBI intends to have a 2
Promoters before period year cooling period in
DRHP case of change of
constitution including
change of Promoters or
shareholding of 50% or
more.
11. Minimum Issue No such INR 10 Cr. Good decision to keep
Size requirement minimum Issue size as
an Entry barrier.
This implies a minimum
post Issue Market Cap of
approx. INR 38 Cr. for
minimum dilution of
26.25%.
12. Minimum No such INR 3 Cr. for 2 out of 3 Good decision to keep
Operating Profit requirement Financial Years before minimum operating
(EBITDA) DRHP profit criterion for
filtration of companies.
13. Face Value per No such Face Value Intended to ensure
share requirement recommended of INR comparability of all such
10/- share companies
14. Capital Increasing Not permitted If ineligible to migrate This would ease Fund
beyond INR 25 Cr. to mainboard, Raising for companies
enhanced capital crossing the INR 25 Cr.
permitted due to Fund capital threshold
Raising, subject to
meeting Main board
compliances including
Corporate Governance
and Quarterly results.
15. Repayment of No such Not Permitted Intended to deploy the
Promoter / requirement money towards business
Promoter Group / purposes.
Related Party However there could be
Loans cases wherein promoters
might have funded the
business before IPO, to
support its growth, which
may require
reconsideration.
16. Working Capital No such Where such amount is This would practically be
Funding requirement more than INR 5 cr, applicable to most SME
Statutory Auditor IPO as Working Capital is
 certificate on half a significant object to the
yearly basis endorsing Issue in all cases.
use of such funds.
17. Additional - Disclosure of Site Visit More disclosures
Disclosures in by Merchant Banker, recommended for
DRHP Senior Employees, ESI, transparency.
PF details etc.

Fees of Merchant
Banker
18. DRHP to be made No such DRHP of SME IPO filed As such, DRHP is already
public for requirement with the Stock posted on the website of
comments Exchanges shall be Stock Exchanges, now
made available to option to give public
public for comments, if comments also
any, for a period of at proposed, as per
least 21 days from the Mainboard IPO.
date of public
announcement, by
hosting it on the
websites of the stock
exchanges and
websites of lead
manager(s) and
making a public
announcement in
Newspapers regarding
filing of DRHP and
inviting the public to
provide their
comments

19. Conversion of No such All outstanding Recommended, in line

outstanding requirement securities shall be with mainboard IPO
securities before converted before IPO
IPO
20. Merchant Banker No such Merchant Banker to This would strengthen
Due Diligence requirement submit due-diligence Due Diligence process
certificate certificate to Stock and strengthen the
submission Exchanges at the time system
of filing of draft offer
document

21. Post-listing exit No such Post-listing exit Good Step for Public
opportunity for requirement opportunity for shareholders.
dissenting dissenting
shareholders shareholders
 may be provided in
SME chapter in line
with main board
provisions

22. Applicability of As per Applicability of RPT Applicability of RPT

Related Party Companies norms under LODR norms as per LODR
Provisions (RPT) Act, 2013 Regulations should be Regulations would bring
extended to SME listed more transparency while
entities other than SME companies would
those which have paid also have to make their
up capital not compliances robust.
exceeding Rs. 10
crores and net worth
not exceeding Rs. 25
crores.

Materiality threshold
for approval by
shareholders for RPT
shall be only for
transactions
exceeding 10% of
annual consolidated
turnover

23. Disclosure of No such Requirement to Disclosure of Board

composition and requirement disclose the meetings etc. would
meetings of the composition and bring more transparency.
board of directors details of meetings
and its (date, no. of directors
committees present, etc.) of Board
of Directors and its
committees may be
extended to SME listed
entities other than
those which have paid
up capital not
exceeding Rs. 10
crores and net worth
not exceeding Rs. 25
crores on Quarterly
basis.
24. Disclosure of firm - Disclosure of sanction Better disclosures to
arrangement of letter from the Bank/ ensure Object to the
finance up to financial institution Issue is achieved.
seventy- five % of shall be made in the
issue proceeds draft offer document
and offer document
25. Shareholding Six Monthly Quarterly basis Disclosure of Quarterly
Pattern and basis Financials and
Financial Results Shareholding would
bring more transparency
while SME companies
would also have to make
their compliances
robust.
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