SEBI SME IPO Rules Overhaul: ₹1 Lakh Minimum Bid, ₹1,000 Crore Cap; Comments by 4 November

SEBI's proposed new SME IPO rules would replace the paid-up capital test for listing on the SME platform with a post-issue market capitalisation test of up to ₹1,000 crore, cut the minimum application from above ₹2 lakh to ₹1 lakh, and raise the profitability bar for issuers. The proposals are in a consultation paper dated 14 October 2026 on review of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 as they apply to initial public offers by small and medium enterprises, and public comments are due by 4 November 2026.

The paper carries recommendations of a SEBI working group, reviewed by the Primary Market Advisory Committee (PMAC) and by SEBI internally. On some points, such as the minimum application size and the limit on selling shareholders, the final proposal differs from what the working group suggested, and the paper says so. Merchant bankers, promoters planning an SME listing, auditors preparing restated financials and retail investors in the segment all have something to respond to before the window closes.

SEBI sets the proposals against the size the segment has reached. According to NSE and BSE figures in the paper, as of 31 July 2026, 1,496 entities had listed on the SME platforms since inception, 365 had migrated to the Main Board, SME IPOs had raised ₹40,222 crore and SME-listed entities had a combined market capitalisation of ₹4,70,984 crore.

Market capitalisation replaces the ₹10 crore and ₹25 crore paid-up capital limits

Today an issuer with post-issue paid-up capital of up to ₹10 crore uses the SME route under Chapter IX of the ICDR Regulations, and one with more than ₹10 crore and up to ₹25 crore may also use it. SEBI says paid-up capital tells little about the size of an enterprise. Its review of 735 Main Board and SME IPOs over the last three financial years, of issuers with paid-up capital above ₹10 crore, found wide gaps between paid-up capital and market value, and some issuers had to restructure capital through bonus issues only to meet the thresholds.

The proposed regulation 229(1) makes the SME route apply where post-issue capital at the offer price, that is, post-issue market capitalisation, is up to ₹1,000 crore. A new regulation 229(2) lets an issuer with a post-issue market capitalisation above ₹1,000 crore and up to ₹4,000 crore choose the SME route, but only with restated consolidated financial statements under Ind AS for the last three years and any stub period. An issuer not already on Ind AS would have to adopt it for this purpose, which brings in transition work for the issuer and its auditor well before the draft offer document is filed.

Two new clauses in Schedule XVI deal with price discovery moving an issue across the line. A Main Board draft red herring prospectus whose market capitalisation falls to ₹1,000 crore or below at the red herring prospectus or prospectus stage must be re-filed under the SME chapter. An SME draft offer document that crosses ₹4,000 crore at that stage must be re-filed under Chapter II or IIA.

Operating profit test rises to ₹3 crore average, with a QIB route for loss-making issuers

Regulation 229(6) currently asks for an operating profit of ₹1 crore in at least two of the three previous financial years. SEBI proposes an average operating profit of at least ₹3 crore a year over the preceding three financial years, measured on restated consolidated financial statements. A company with ₹5 crore, ₹2.5 crore and ₹1 crore of operating profit over three years would average ₹2.83 crore and fail the new test, even though it passes the current one.

An issuer that fails the profitability test is not shut out. Under a proposed regulation 229(7), it may still come to the SME platform if it meets regulations 229(3), 229(4) and 229(5), uses book building and allots at least 75% of the net offer to qualified institutional buyers. Allocation in such an issue would be not more than 10% to retail individual investors, not more than 15% to non-institutional investors and not less than 75% to QIBs. If the QIB portion is not met, the entire subscription money is refunded.

Illustration: a loss-making SME issuer brings a net offer of ₹60 crore under the proposed regulation 229(7). QIBs must be allotted at least ₹45 crore (75% of ₹60 crore), retail individual investors can get no more than ₹6 crore (10%) and non-institutional investors no more than ₹9 crore (15%). If QIB demand reaches only ₹40 crore, the issue fails and every applicant, retail included, gets the money back. The paper also proposes that this QIB portion will not be underwritten.

Company converted from a partnership or LLP: four quarters instead of a full year

Regulation 229(4) now requires a company formed by converting a proprietorship, partnership or LLP to complete at least one full financial year in corporate form, with restated post-conversion financials under Schedule III. The proposal asks instead for four consecutive completed quarters from conversion or from the latest effective date of a business reorganisation, plus at least one audited annual financial statement, or part of one, prepared after the conversion or reorganisation and filed with the Registrar of Companies before the draft offer document is filed.

The rule would also cover reorganisations in which the issuer gets more than 50% of its latest financial year's revenue from businesses earlier run by a proprietorship, partnership or LLP. A new explanation defines business reorganisation to include acquisition, transfer, vesting, succession and schemes of arrangement, and the predecessor's operating track record may be counted towards Chapter IX eligibility.

Minimum SME IPO application cut to ₹1 lakh in four lots

SEBI's amendment of 4 March 2025 raised the minimum application in an SME IPO from ₹1 lakh to above ₹2 lakh, in two lots. The working group suggested two lots of at least ₹50,000 each. SEBI's own proposal for regulation 267(2) keeps the ₹1 lakh total but spreads it over four lots of at least ₹25,000 each. The amount payable on application stays at 25% of the issue price, with the full price payable for the offer-for-sale portion.

Illustration: at an issue price of ₹120, the smallest lot of at least ₹25,000 would be 209 shares (₹25,080), so a four-lot minimum bid would be 836 shares, or ₹1,00,320. Under the current two-lot rule above ₹2 lakh, the same issue would need a bid of more than ₹2,00,000. The actual lot size in an issue will be fixed under whatever methodology is finally notified.

Allocation under regulation 253(1) would be not less than 35% to retail individual investors (the term replaces "individual investors"), not less than 15% to non-institutional investors and not more than 50% to QIBs, with 5% of the QIB portion for mutual funds. Anchor investors could take up to 60% of the QIB portion. The non-institutional portion would be split one-third for applications above ₹2 lakh and up to ₹10 lakh and two-thirds for applications above ₹10 lakh, in place of the present reference to "more than two lots".

The allotment rules change with it. The minimum number of allottees goes up from 200 to 500 under regulation 268(1). Each retail individual investor would get at least one minimum lot, subject to availability, with the balance allotted proportionately and not in lot multiples. Each non-institutional investor would get at least the minimum application size of its sub-category, and allotment under reservations other than for employees would be capped at ₹2 lakh.

One-share trading lot and an end to compulsory market making

SME shares now trade in lots fixed by price band under SEBI's circular of 21 February 2012, ranging from 10,000 shares for prices up to ₹14 to 100 shares above ₹1,000. SEBI proposes a trading lot of one share, which would allow that circular to be rescinded and end the link between the trading lot and the IPO lot. The paper notes that about 5% of unique PAN-based shareholders in the segment held odd lots.

Compulsory market making for three years after listing, including the market maker's 5% inventory requirement, would go with the deletion of regulation 261. SEBI found that market makers accounted for 0-10% of total turnover in 361 SME scrips on NSE and 268 on BSE between August 2025 and July 2026, while their fees took up to 4.20% of issue expenses on BSE in FY 2024-25.

Underwriting, minimum subscription and general corporate purposes

The 100% underwriting requirement in regulation 260(1) and the lead manager's obligation in regulation 260(2) to underwrite at least 15% of the issue on its own account would be removed. SME issues would move to the Main Board approach, where only the unsubscribed portion is underwritten, and a new minimum subscription requirement under regulation 265A would be aligned with regulation 45 for Main Board issues. Regulation 264(5), which requires a registrar's certificate of 90% subscription before closure is announced, would be omitted.

The cap on money raised for general corporate purposes in regulation 230(2), now 15% of the amount raised or ₹10 crore, whichever is lower, would lose its ₹10 crore limit. On an issue raising ₹120 crore, the present cap works out to ₹10 crore, because 15% would be ₹18 crore. Under the proposal the full ₹18 crore could be earmarked for general corporate purposes.

Offer for sale limits and the new lock-in periods

The present 20% ceiling on the offer for sale in an SME issue under regulation 230(1)(f), and the limit of 50% of a selling shareholder's pre-issue holding under regulation 230(1)(g), would be omitted and replaced by a separate framework in a new regulation 230A. It keeps a one-year holding requirement for shares offered for sale, with exemptions for government and infrastructure SPVs, shares received under court- or tribunal-approved schemes where the business has existed for more than a year, and certain bonus shares issued out of free reserves and securities premium but not out of revaluation reserves or unrealised profits. The 20% and 50% limits would no longer apply to QIB selling shareholders, except in issues under regulation 229(7). The working group had wanted to keep a 50% cap on QIB sellers; PMAC removed it. Limits are to be counted on shareholding at the time of filing the draft offer document and cumulatively with any secondary sales up to issue opening.

The lock-in proposals under regulations 238 and 239 shorten most periods.

Existing exemptions from the non-promoter lock-in for ESOP and ESPS shares, shares held by an ESOP trust, and shares held for a year by Category I or II AIFs, venture capital funds or FVCIs are retained. Where shares cannot be locked in electronically, depositories may, on the issuer's instruction, record them as non-transferable.

Migration to the Main Board to be re-based

Migration between the SME platform and the Main Board still turns on paid-up capital: regulation 277 allows an SME-listed company with post-issue paid-up capital above ₹10 crore and up to ₹25 crore to move up, and regulation 280(2) forces migration when a further issue would take paid-up capital past ₹25 crore, unless the company undertakes to follow Main Board LODR requirements. SEBI says these tests may not show an issuer's real size and proposes aligning the migration framework with the market capitalisation thresholds above. Track record, business continuity and promoter stability requirements are not being changed, as Business Standard reported on 14 October 2026.

The segment's record on disclosures is part of the backdrop; SEBI's August 2026 order in the Trafiksol ITS SME IPO case barred the company and its promoters for a year over its 2024 issue. Comments on each numbered question in the paper, from 1A on eligibility to 12A on market making, are due by 4 November 2026; the changes take effect only once SEBI amends the ICDR Regulations.

Official source: View the official source document