SME IPOs: Market regulator Sebi proposes 2x hike in application size

The Securities and Exchange Board of India (Sebi) on Tuesday proposed stiffer listing regulations for small and medium enterprises (SMEs).

 

These include enhanced eligibility conditions, increasing the minimum application value, lockin requirements by promoters, tighter norms for migrating to the main board, and stricter corporate-governance measures.

 

The move comes after the regulator found instances of funds and proceeds from initial public offerings being allegedly diverted, circular transactions to related parties to inflate prices, and booking fictitious transactions to create positive sentiment among investors.

 

Sebi has even halted the listing of an SME when concern was raised.

 

In the consultation paper, Sebi has proposed doubling the minimum application value to Rs 2 lakh, restricting the offer for sale (OFS) limit to 20 per cent of the issue size, mandating the appointment of monitoring agencies to ensure that the money raised through an IPO was used appropriately -- among dozens of other measures.

 

While exchanges keep reviewing eligibility norms, some thresholds have not been updated for over a decade.

 

Sebi is considering an increase in the minimum number of allottees from current 50 to 200 to declare an SME IPO successful.

 

“It is proposed that lock-in on minimum promoter contribution (MPC) in SME IPO shall be increased to 5 years. Additionally, lock-in on promoters’ holding held in excess of MPC shall be released in phased manner,” notes the discussion paper.

 

The draft documents of SME IPOs are processed by the stock exchanges and do not go through the scrutiny of the regulator. With the proposed measures, Sebi intends to bring more checks and balances in the segment, which has crossed Rs 2 trillion in market capitalisation.

 

Among the eligibility conditions, Sebi is considering an increase in the minimum issue size to Rs 10 crore, a minimum operating profit of the SME concerned of Rs 3 crore in at least two of the three financial years preceding the IPO application, and a minimum face value of Rs 10 for shares.

 

The National Stock Exchange (NSE) has the SME platform called “Emerge” while the BSE has a separate platform called “BSE SME”.

 

Last financial year witnessed the highest number of SME IPOs with 196 issues, mobilising more than Rs 6,000 crore.

 

This financial year till October, more than Rs 5,700 crore has been raised by 159 SME IPOs.

 

Upon meeting certain conditions, SMEs are allowed to migrate to the main board.

 

While a firm is on the SME platform, Sebi plans to subject its fund raising to higher disclosures such as quarterly results — as mandated for main board companies.

 

The regulator has suggested applying the same norms on related-party transactions to SMEs as those for companies on the main board and disclosures of boards of directors, meetings, etc.

 

These suggestions come on the findings that 50 per cent listed the SME platform undertook related-party transactions of more than 10 per cent of their consolidated turnover while it was over 50 per cent for one of seven SMEs.

 

The watchdog has proposed a two-year cooling-off period in case there is a change of promoter of the SME prior to the filing of the draft documents.