SEBI Board Meet : Likely Changes in SME IPO Norms

Why in the news?

  • SEBI Board: The Securities and Exchange Board of India (SEBI) is set to revamp SME IPO norms in a meeting on December 18.
  • Concerns Raised: The changes follow irregularities in SME IPOs, including issues like manipulation in pricing and fund diversion to shell companies.

SEBI BOARD MEET: LIKELY CHANGES IN SME IPO NORMS

SME IPOs Boom

  • Surge in IPOs: There has been a significant rise in SME IPOs, particularly from 2022-23 onwards. In FY24, 196 SME IPOs raised over Rs 6,000 crore.
  • Investor Participation: The applicant-to-allotted investor ratio has surged, increasing from 4x in FY22 to 245x in FY24.
  • Promoter Influence: Many SME companies are promoter-driven, with high shareholding concentration and limited involvement from private equity investors.

The Concerns

  • Misuse of Funds: SEBI has identified cases of diversion of IPO funds to related parties and shell companies.
  • Inflated Revenues: Concerns also include revenue inflation through circular transactions among promoters and related parties.

Norms Overhaul

  • Proposed Changes: SEBI is expected to implement key changes such as:
    • Higher minimum application size for SME IPOs (Rs 2-4 lakh).
    • Minimum allottees requirement raised to 200.
    • Lock-in period for promoter contribution increased to 5 years.
    • Eligibility criteria: IPO only if issue size is over Rs 10 crore and operating profit is Rs 3 crore for at least 2 out of 3 years.

Difference Between Normal IPO and SME IPO

  • Target Companies:
  • Normal IPO: Issued by large, well-established companies with a significant track record.
  • SME IPO: Issued by small and medium-sized enterprises (SMEs) with a relatively shorter business history or smaller scale of operations.
  • Market Size:
  • Normal IPO: Typically involves large amounts of capital, often raising hundreds or thousands of crores.
  • SME IPO: Generally smaller in size, with a focus on raising funds in the range of a few crores to tens of crores.
  • Eligibility Criteria:
  • Normal IPO: Requires stringent financial criteria, including profitability, operational history, and size.
  • SME IPO: More lenient in terms of profitability, with the focus on business potential rather than a long track record.
  • Investor Base:
  • Normal IPO: Attracts institutional investors, mutual funds, and a broader retail investor base.
  • SME IPO: Primarily aimed at retail investors and HNI (High Net-Worth Individual) investors, with fewer institutional participants.
  • Regulatory Requirements:
  • Normal IPO: Subject to more rigorous regulatory requirements and disclosures due to larger market impact.
  • SME IPO: While regulated, SME IPOs have relatively simpler regulatory requirements and a faster approval process.

Sources Referred:

PIB, The Hindu, Indian Express, Hindustan Times