Sebi proposes tighter IPO rules for SMEs, seeks views on minimum amount

India's markets regulator on Tuesday proposed tighter rules for the initial public offerings of smaller firms, including setting an issue size for companies looking to go public and doubling the minimum investment amount at the least for prospective investors.

The Securities and Exchange Board of India's consultation paper proposed to raise the minimum application size for the IPOs of small and medium enterprises (SMEs) to Rs 2,00,000 from Rs 1,00,000.

The regulator also sought views on whether the minimum application amount should be even higher at Rs 4,00,000.

Since alternative funding sources are available for smaller capital requirements, the regulator proposed that an SME company should be eligible for an IPO only if the issue size is more than Rs 100 million.

Buoyed by India's surging equity markets, public issues by SMEs have soared over the past two years.

In the current financial year till Oct. 15, more than 159 small- and medium-sized firms have raised Rs 57 billion ($675.46 million) through such issues, compared with the previous year's record of Rs 60 billion.

Some of these issues were subscribed 500-1,000 times, raising concerns around misuse of the platform.

The regulator said that given the surge in SME IPOs and the rising risk of misconduct such as diversion of funds, it was important to review the framework guiding such offerings.

It also suggested to only let companies file for SME IPO if they had an operating profit of 30 million rupees in at least two of the three fiscal years preceding the application.

The Sebi proposed that the offer for sale (OFS), which is the amount of shares existing shareholders sell through the issue, should be restricted to 20 per cent of the total issue size. It further proposed that shares offered through OFS should not exceed 20% of the shareholders' total stake in the company.

Other proposals included tighter monitoring of fund use from such issues and mandating the disclosure of merchant bankers' fees in draft papers.

The regulator has sought public comments on the proposals by Dec. 4.