The market regulator’s move to tighten SME IPO norms has sparked a mixed reaction across market participants, with investor protection advocates welcoming the changes while some fear the stricter rules could make capital raising more difficult for small and medium enterprises.

The latest amendment increases the minimum application size to two lots, raises fund utilization oversight, and restricts the use of IPO proceeds for repaying loans to related parties.

Additionally, Draft Red Herring Prospectuses (DRHPs) will now be open for public comments, and a higher profitability threshold has been introduced to ensure only stable SMEs tap public markets.

This was the second round of tightening of norms for SMEs, with the first one being ratified in the December board meeting.

Protection or Overreach?

The move is expected to reduce speculative retail participation, but some market participants expect it could also shut out genuine small investors looking for exposure to SME growth stories.

“It was observed by SEBI that a lot of small, less-informed investors were applying in SME IPOs, drawn by the potential for quick gains and the low bid amount of Rs 1 lakh. This led to losses when SME stock prices tanked,” said Makarand M. Joshi, founder partner of MMJC and Associates.

By raising the application size and lot requirement, SEBI is ensuring that only those with a high-risk appetite and adequate knowledge invest in these IPOs, Joshi said.

For companies looking to list, SEBI has made fundraising more stringent. The threshold for IPO proceeds monitoring has been lowered from ₹100 crore to ₹50 crore, meaning more SMEs will have to disclose and account for how they use funds.

Additionally, a cap on Offer for Sale (OFS) at 20 per cent of the issue size and a lock-in period of up to two years for excess promoter holdings could limit liquidity for early investors.

“These reforms are essential for fostering a more transparent and sustainable SME IPO ecosystem,” said Tarun Singh, Founder & MD at Highbrow Securities. “The requirement for SMEs to demonstrate a minimum of ₹1 crore EBITDA in at least two of the last three years ensures that only financially stable companies access public markets. This not only reduces risk for investors but also improves the quality of listings.”

However, he also said that the new requirements might make it harder for smaller, high-growth firms to tap public funding.

The SME IPO platform has seen an influx of speculative trading, leading to concerns about governance and investor safety. With the regulator now enforcing stricter disclosure and financial viability requirements, the quality of SME listings is expected to improve. However, some industry players worry that the compliance burden could deter startups from going public.

“By limiting excessive dilution and ensuring IPO funds are used productively, SEBI is taking a balanced approach,” Singh said. “However, there will be short-term challenges for SMEs adjusting to these stricter norms.”

For now, the reaction to SEBI’s move remains divided. While retail investors may benefit from reduced risks, SMEs seeking public funding could face tougher hurdles