SEBI Proposes SME IPO Reforms: Lower Minimum Application, Tougher Profit Test

SEBI, India’s markets regulator, has proposed changes to how small and medium enterprises (SMEs) list through an initial public offering (IPO). These are proposals, not final rules. The source for this post, an analysis in The Hindu, does not say when the rules will be finalised or when any change would take effect. That has not been announced.

For a founder, the useful question is not “should I list?” but “what would the new tests ask of a company like mine?” The proposals loosen some listing norms while making the profitability and governance tests tougher, so they matter mostly to established, growing firms rather than early-stage startups.

Why this is being discussed now

The Hindu’s analysis ties the proposals to the interest-rate backdrop. The Reserve Bank of India (RBI) has raised the repo rate for the first time in nearly four years, and the analysis says higher rates may squeeze margins and limit the ability of businesses to invest in expansion.

• Bank loans have been the main funding source for SMEs, but borrowing costs are generally higher than those of large enterprises.
• The analysis cites an International Finance Corporation (IFC) study that found the SME sector’s overall debt-to-equity ratio is about 4:1, and about 3:1 for early-stage firms.
• It also says available data does not establish a uniform rise in credit costs across all Indian SMEs.

The Hindu’s argument is that SEBI’s aim is not to make equity cheaper than debt for everyone, but to give viable SMEs a choice of financing that suits their business model. For a highly leveraged SME with volatile cash flows, raising equity through an IPO can strengthen the balance sheet and improve its ability to borrow on better terms later.

What SEBI has proposed

Under a new seven-point eligibility framework, as described in the article:

• A smaller minimum application. The minimum application amount for SME IPOs would fall to ₹1 lakh from ₹2 lakh. Investors would have to apply for at least four lots, each valued at no less than ₹25,000.
• More allottees. The minimum number of allottees would rise to 500 from 200, to widen the investor base.
• A different profit test. The existing requirement is operating profit of ₹1 crore in at least two of the preceding three financial years. The proposal is an average of ₹3 crore a year over three years.
• A route for firms that miss the profit test. They could still reach the market through book-building if at least 75% of the net offer is allotted to qualified institutional buyers (QIBs). The Hindu notes that their due diligence could add a layer of scrutiny, but it cannot replace regulatory safeguards or guarantee investment returns.

Which market a company lists on

Instead of criteria based on paid-up capital, SEBI proposes a framework based on post-issue market capitalisation:

• Up to ₹1,000 crore: the company would necessarily have to seek listing on the SME platform.
• Between ₹1,000 crore and ₹4,000 crore: either the SME platform or the main board, subject to eligibility norms.
• Above ₹4,000 crore: the company would need to list on the main board. The article says this also aims to end reverse migration to the main board.

Trading and offer-structure changes

• Mandatory market making for SME-listed stocks, and the related inventories, would go.
• The 100% underwriting requirement for SME IPOs would also go, including the lead manager’s obligation to underwrite 15% of the issue. The article words both of these as done changes, but because the whole package is a proposal, treat them as proposed until final rules are published.
• SME-listed shares could be traded in single-share lots, so investors can buy or sell smaller quantities in the secondary market.
• The offer for sale (OFS) route would get a separate framework, with a one-year holding requirement and specified exemptions.
• SEBI has also proposed changes to shareholding lock-in rules and the use of IPO proceeds. The article gives no further detail.

Where SME IPOs stand today

The Hindu puts the proposals against a weak patch for SME listings:

• Mainboard IPOs raised about ₹1.73 lakh crore in FY2025-26, compared with ₹5,363 crore through NSE’s SME platform. The average mainboard issue was more than 33 times the average SME issue.
• The Economic Survey reported more than 1,380 firms listed on the BSE and NSE SME platforms since inception, with 217 SME listings during FY26 up to December 2025.
• The Ministry of MSME’s data showed more than 7.83 crore enterprises registered on the Udyam Registration Portal and Udyam Assist Platform as of February 28, 2026. These include informal microenterprises that are unlikely to meet the financial, governance and disclosure norms of a public listing.

The analysis adds that SMEs account for more than 31% of the country’s gross value added, and that the number of firms that will actually benefit has not yet been reliably quantified.

Cautions from the analysis

• Micro enterprises may find IPOs impractical, because a public listing involves costs, disclosures, governance requirements and scrutiny.
• Market volatility can shut the IPO window just when businesses need funds, and weak post-listing performance can damage investor confidence.
• The Hindu says the changes are therefore more relevant to established, growth-oriented SMEs with the financial capacity to meet listing requirements. It names manufacturing, engineering, technology, defence components and specialised services as sectors where firms may need large investment before cash flows mature.
• If easier access comes at the expense of governance and market integrity, a short-term rise in listings could weaken investor confidence.
• Its closing view is that a deeper SME capital market is about a better balance between debt and equity, not a replacement for bank lending.

What this means for you

• There is nothing to apply for. This is a set of proposed listing rules, not a grant or funding scheme. No application process, portal or dates have been announced in the source.
• Check yourself against the proposed tests. If you run an established company, compare your operating profit and your likely shareholder base with the proposed ₹3 crore average and the 500 allottees. If you are early-stage, these tests are probably years away.
• Wait for the final rules before planning around them. Figures can change between a proposal and the final text.
• Treat equity as one option, not a replacement for loans. The Hindu’s point is a better mix of debt and equity, not the end of bank borrowing.
• Get professional advice before deciding. This post is a summary of one analysis and is not investment or listing advice.

Source: The Hindu, analysis by Santosh V. Perumal, on SEBI’s proposed SME IPO reforms.

Cover photo: Ameya Khandekar on Unsplash