SEBI recently concluded its 208th Board Meeting on 17 December 2024 in which it has introduced some landmark amendments in the Small and Medium Enterprise (SME) Initial Public Offering (IPO) framework. The major provisions are discussed herein:
- Mandatory Operational Profit: An Issuer can proceed with an IPO, only if it has an operational profit of Rs. 1 Cr from operations of any 2 years, out of the 3 previous financial years at the time of filing the Draft Red Herring Prospectus (DRHP).
- Capping the Offer for Sale (OFS): The OFS by existing shareholders of the Issuer shall not exceed 20% of the total issue size. Further, they cannot sell more than 50% of their holding in the IPO.
- Lock- in for Minimum Promoter Contribution (MPC): The shares held in excess by the Promoter shall be released in the following manner- 50% of the excess shares after 1 year of the IPO and the remaining 50% after the 2nd year of the IPO.
- Allocation to Non- Institutional Investors (NII): This has been made at par with the allocation prescribed for the Main Board IPO.
- Limit for General Corporate Purpose (GCP): The amount outlined for GCP in the DRHP shall not exceed 15% of the proposed amount to be raised through the IPO or Rs. 10 Crores, whichever is less.
- No IPO for repayment of loans: No IPO shall be allowed in case the object of the IPO is repayment of loans by the promoter, promoter group or any other related party.
- DRHP to be made available to public: The DRHP filed with the Stock Exchange shall be published in a newspaper with a QR code, and public comments can be made on the same for 21 days post publication in the newspaper.
- Further issue within SME Platform: The Issuer can undertake further issue on the SME platform, without any requirement for migrating to the Main board platform, provided that the issuer undertakes Listing Obligation and Disclosure Requirement (LODR) compliance as applicable to the companies on the main board.
- Related Party Transactions (RPT) made applicable: The RPTs shall now apply to SMEs. The threshold for considering RPT as material is prescribed as 10% of the turnover in the previous financial year or Rs. 50 Crores, whichever is lower.
MHCO Comments:
SME Platform has emerged as a fertile ground for raising capital in recent times. This can be corroborated by the fact that FY2023-24 witnessed the highest number of SME public issues and the highest SME fundraising, with 196 IPOs tapping the market to mobilise more than Rs 6,000 crore. Thus, there was an imperative requirement to bring the compliances and disclosure of SME IPOs at par with the Main board IPO.
Considering the active and legitimate scrutiny undertaken by SEBI in recent SME IPOs, the amendments are surely a step in the right direction, for the ultimate benefit of retail investors and to promote transparency and confidence in the capital markets. This article was released on 23 December 2024.
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