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The Securities and Exchange Board of India (SEBI) has introduced stringent rules for SMEs aiming to launch IPOs, mandating a minimum operating profit of INR 1 crore in at least two of the last three fiscal years. These changes, outlined in the Draft Red Herring Prospectus (DRHP), aim to ensure financial stability and safeguard investors. SEBI has also limited existing shareholders to selling a maximum of 20% of IPO shares, restricted IPO proceeds for loan repayment, and implemented stricter lock-in periods for promoters. Enhanced transparency measures include randomized share allocation and caps on related party transactions exceeding INR 50 crore or 10% of annual revenue.
The Securities and Exchange Board of India (SEBI), during a recent board meeting, announced new directives that aim to increase transparency within the market and bolster rules for IPOs (Initial Public Offerings) and listing on stock exchanges stricter for Small and Medium Enterprises (SMEs). The new provisions require that companies within the SME market looking to go public need to meet a specific profitability target. Advertisement
SEBI has mandated that companies that plan to launch an IPO are required to earn INR 1 crore from profits in the previous 2-3 fiscal years, thereby only allowing companies with stable financial performance to enter the market.
In a statement, SEBI outlined the new regulations, requiring operating profit - before deducting interest, depreciation, and tax - to be INR 1 crore in at least two of the last three financial years. This is to be confirmed when the company submits its Draft Red Herring Prospectus (DRHP) - a detailed document outlining the company's business, financials, and plans for the IPO.
These changes focus on making information clearer and more accessible, minimizing potential problems or uncertainties, and safeguarding the interests of people who invest in SME companies.
Additionally, SEBI has also introduced two new rules for Offer for Sale (OFS) for SME IPOs. Firstly, there is now a limit on selling of shares, with SEBI allowing existing shareholders to sell up to only 20% of the total IPO size, which aims to reduce ownership dilution. Secondly, those raising money through IPOs will not be allowed to use the money to repay loans taken from promoters or other relevant entities.
For existing shareholders, they will no longer be allowed to sell more than 50% of their shares in the IPO. For promoters - company founders or key owners - are required to keep their shares locked in for a certain period of time, i.e., they cannot sell their shares. Any shares they hold beyond the required minimum public shareholding must be locked in for one year and 50% of the remaining shares will be locked in for two years.
Share allocation for non-institutional investors (NII) - which includes wealthy individuals or smaller firms - will be determined by a random selection process, or 'draw of lots'. SEBI has also imposed restrictions on funds to be raised for general corporate purposes - companies can use only up to 15% of the IPO proceeds or INR 10 crore (whichever is lower) for general business expenses. There are also restrictions on related party transactions (RPTs). For listed SMEs, any transactions with related parties (like promoters or affiliated companies) will be considered significant if they are worth 10% of the company's yearly revenue or INR 50 crore (whichever is lower).
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