The Securities and Exchange Board of India (SEBI) has introduced stricter regulations for Initial Public Offerings (IPOs) by Small and Medium Enterprises (SMEs).
These changes aim to help SMEs with a strong track record raise funds while protecting investor interests.
The updated rules focus on profit requirements and limitations on the Offer for Sale (OFS) by promoters.
Profit Requirements for SMEs
SMEs planning to launch an IPO must meet specific profit criteria. They are required to have a minimum operating profit (Earnings Before Interest, Tax, Depreciation,
and Amortization or EBITDA) of at least Rs 1 crore for at least two out of the previous three financial years.
Key Offer for Sale (OFS) Regulations
OFS Limit: Promoters and shareholders can sell up to only 20% of the total issue size under OFS.
Existing Holdings: Shareholders cannot sell more than 50% of their existing holdings in the company.
Additional Guidelines for SME IPOs
Allotment Process: The allotment process for Non-Institutional Investors (NIIs) in SME IPOs will align with the main stock exchange platforms for consistency.
General Corporate Purpose (GCP): Funds allocated for GCP are capped at 15% of the total issue size or Rs 10 crore, whichever is lower.
Usage of Funds: IPO proceeds cannot be used to repay loans taken directly or indirectly from promoters, the promoter group, or related parties.
Prospectus (DRHP) Availability: The Draft Red Herring Prospectus (DRHP) will be open for public comments for 21 days.
Issuers must publish announcements in newspapers and include a QR code for easy access to the DRHP.
These new regulations are designed to enhance transparency and fairness in SME IPOs, creating a safer environment for investors and encouraging the genuine growth of SMEs.
