Sebi Overhauls SME IPO Rules: Tighter Scrutiny, Investor Protection Enhanced
The Securities and Exchange Board of India (SEBI) has announced a series of measures to protect investors and enhance market integrity. The measures target various aspects of the market, including SME IPOs, insider trading regulations, and merchant banking norms.
Tighter Regulations for SME IPOs
To safeguard investors and ensure the financial stability of SMEs, Sebi has introduced stricter listing norms for SME IPOs. SMEs seeking to list must demonstrate a track record of profitability, with an operating profit (Earnings before interest, tax, and depreciation & amortization) of at least ₹1 crore in two of the preceding three financial years.
Restrictions on Promoter Share Sales
To prevent excessive offloading of shares by promoters during IPOs, Sebi has capped the offer for sale by SME promoters to 20% of their shareholding. Furthermore, individual shareholders are limited to selling a maximum of 50% of their holdings. To ensure continued commitment from promoters, Sebi has also implemented phased lock-in periods for promoter holdings exceeding the minimum promoter contribution. Half of the excess holdings will be unlocked after one year, while the remaining half will be unlocked after two years.
Transparency and Allocation in SME IPOs
Sebi has mandated a 21-day public review period for draft red herring prospectuses (DRHPs) for SME IPOs, allowing for public feedback and scrutiny. Sebi has introduced a cap on the amount allocated for general corporate purposes (GCP) in SME IPOs, restricting it to 15% of the total raised amount or ₹10 crore, whichever is lower. Further, SME IPOs cannot use proceeds to repay loans from promoters, promoter groups, or related parties.
Allocation Methodology for Non-Institutional Investors
Current Methodology for NIIs in SME IPOs: Previously, the allocation of shares to NIIs in SME IPOs was based on a proportionate allotment system. This method allowed investors to receive shares in proportion to their applications relative to the total demand from NIIs. However, this approach has faced criticism for potentially encouraging excessive leverage among investors and leading to mispricing of shares.
New Alignment with Mainboard IPOs: Under the new regulations, the allocation process for NIIs in SME IPOs will now mirror that of mainboard IPOs. This means that instead of proportionate allotment, a draw-of-lots system will be implemented. This system is designed to ensure a fairer distribution of shares among NIIs, similar to how shares are allocated to retail investors. The rationale behind this change is to mitigate risks associated with over-leveraging and to promote more equitable access to shares for all investors participating in the IPO.
Related Party Transaction (RPT) Norms
RPT norms applicable to listed entities on the Main Board will be extended to SME-listed entities. The threshold for considering RPTs as material will be 10% of annual consolidated turnover or Rs. 50 crores, whichever is lower.