The Securities and Exchange Board of India (Sebi) is planning to introduce institutional participation quotas for small and medium enterprises (SMEs) IPOs, marking a significant shift from current regulations. According to sources with direct knowledge of the matter, up to 50 per cent of small companies' share issues could be reserved for qualified institutional buyers, with 35 per cent kept aside for retail investors and 15 per cent for non-institutional investors. As much as 60 per cent of the qualified institutional portion could be kept aside for anchor investors who commit capital before an offering opens more broadly. This institutional framework would mirror the mainboard IPO structure, representing a major policy change for the SME segment. The potential change comes after regulatory warnings about small businesses diverting funds raised from public markets and an investigation into investment banks extracting unusually high fees and juicing subscription numbers.
Sebi is considering raising the profitability threshold for SME listings to ₹30 million average profit over three years, significantly higher than the current requirement of ₹10 billion in at least two of the past three years. Additionally, the regulator is mulling replacing post-issue capital requirements with post-issue market capitalisation of ₹10 billion to ₹40 billion. These changes aim to ensure that only more established companies with proven financial track records can access the SME platform. The enhanced profitability criteria would address concerns about small businesses diverting funds raised from public markets and improve the overall quality of SME listings. The proposed changes come after regulatory warnings about small businesses diverting funds raised from public markets and an investigation into investment banks extracting unusually high fees.
The Securities and Exchange Board of India (Sebi) is planning a comprehensive review of the regulatory framework governing small and medium enterprises (SMEs) IPOs to protect investor interests. According to reports from The Hindu BusinessLine, Sebi chairman Tuhin Kanta Pandey announced that the regulator will issue a consultation paper for a comprehensive reform proposal. The chairman acknowledged that certain aspects of the SME framework are curbing growth and creating difficulties in trading for companies on the platform. "There are certain things about the SME framework which are actually curbing the organisations and enterprises that are on the SME platform. They are curbing their growth, and there are difficulties in their trading as well," Pandey stated. The regulator has specifically flagged difficulties related to trading, market making, underwriting and costs faced by companies on the SME platform.
Despite MSMEs and SMEs accounting for nearly one-third of GDP, they represent just 0.2 per cent of the country's overall equity market cap. As reported by The Hindu BusinessLine, this significant disparity highlights the underutilization of the SME platform for capital raising and market participation. The regulatory review aims to address this gap through targeted reforms to improve market accessibility for small and medium enterprises. In India, small businesses with paid-up capital of up to ₹1 billion ($10.5 million) can list on separate sections of the BSE and National Stock Exchange of India, which have fewer disclosure requirements and offerings are vetted by the exchanges as opposed to large IPOs which have to be cleared by Sebi.
According to data from Prime Database reported by Business Standard, SME IPO activity has shown consistent growth over recent years. In 2024, 240 SME IPOs raised ₹240 crore, which increased to 267 IPOs raising ₹11,455 crore in 2025. The momentum continued into 2026 with 125 SME IPOs debuting and raising around ₹5,724 crore so far. However, recent performance data shows a significant gap in fundraising between SMEs and large companies. Small firms raised $1.2 billion through more than 250 offerings last year and have added less than half that amount through about 100 offerings so far in 2026, compared to large companies that have raised about 17 times that amount this year. This performance disparity underscores the need for the proposed institutional framework changes.
Sebi is also considering an offer-for-sale framework to allow existing investors to exit during public offerings, which could shorten the lock-in for pre-IPO shareholders to six months from one year. Additionally, the regulator is exploring allowing trading in single shares against the current requirement of ₹200,000. These changes aim to improve liquidity and accessibility for retail investors. The proposed overhaul will address fundamental challenges including high listing costs, poor liquidity due to poor market making, and ongoing odd lot issues that have been identified as key barriers to SME participation. However, legal experts warn about potential risks. "The segment has not exactly been the poster child for governance. Allowing a larger-size company to choose between the SME segment and the main board to play the regulatory arbitrage is a dangerous proposition," says Kosturi Ghosh, a partner at Trilegal.
