Consultation paper on Review of SME segment framework under SEBI (ICDR) Regulations, 2018, and applicability of corporate governance provisions under SEBI (LODR) Regulations, 2015 on SME companies to strengthen pre-listing and post-listing SME provisions
SEBI has come out with a consultative paper on SME IPO, dated 19th Nov, 2024 recommending certain changes to the SME IPO – Eligibility and Disclosure requirements, flagging the following Regulatory Concerns w.r.t. past SME IPO’s-
- Enhanced Investor participation in SME IPO to 46x in 2024
- SME IPO mostly of Family companies, limited presence of sophisticated Investors
- Significant Related Party Transactions in SME IPO
- Certain cases of diversion of SME IPO proceeds to Related parties, connected parties/shell companies, Inflation of Revenue
Accordingly, considering the increased activity in SME segment, instances of misconduct as aforementioned, risks relating to siphoning of funds, promoter / investors exiting the company after listing, etc., it is felt by SEBI that to protect the interest of the investors and market as a whole, there is a need to review SME IPO framework and applicability of corporate governance provisions to SME listed companies so that companies with sound track record make IPO/ raise funds and get listed on stock exchanges and comply with post listing requirements.
This consultative paper may be read in full on the website of SEBI – https://www.sebi.gov.in/reports-and-statistics/reports/nov-2024/consultation-paper-on-review-of-sme-segment-framework-under-sebi-icdr-regulations-2018-and-applicability-of-corporate-governance-provisions-under-sebi-lodr-regulations-2015-on-sme-companies-to-_88627.html
Public comments are invited on these proposals by December 04, 2024, through the following link:
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes
A comparative of the existing and proposed Eligibility and Disclosure requirements of SME IPO is summarised herein-
| S.No. | Issue | Existing Provision | Proposed Provision | Justification/ Likely Impact |
| 1. | Minimum Application Size / Market Lot | INR 1 Lacs | INR 2 Lacs Or INR 4 Lacs | Intended to encourage only informed investors who have more risk-taking appetite and capability to make investments in SME IPO. |
| 2. | Allocation for Non Institutional Investors (NII) | Proportionate Allotment | Draw of Lots | Proportionate allotment tends to encourage over-leveraging, over statement of interest and thus at times encourage mispricing. This provision is proposed to be aligned with Main board IPO. |
| 3. | Minimum No. of Public Shareholders | 50 | 200 | Enhanced number of public shareholders would ensure that post listing, there are sizeable number of investors and same shall help in providing liquidity in the market. |
| 4. | Offer for Sale (OFS) | No Restrictions | Restricted to 20% of Issue Size | Companies expected to raise Growth Capital through SME IPO with permissible upto 20% OFS as well for Promoters |
| 5. | Monitoring of Issue Proceeds (Monitoring Agency) | Mandatory above INR 100 Cr. Issue Size | Mandatory above INR 20 Cr. Issue Size.
Further, mandatory where Object to Issue is to- a.Fund Subsidiary; b.Repay Borrowings of Subsidiary; c.Investment in JV/Subsidiary d.Acquisition In other cases, Statutory Auditors certificate for IPO Funds utilisation with financial results. | Monitoring Agency would better track deployment of funds as per Object of the Issue clause. |
| 6. | Promoter Lock In | 20% minimum promoter contribution (MPC) by promoters locked in for 3 years and holding in excess of MPC locked in for 1 year post IPO. | 20% MPC by promoters locked in for 5 years and holding in excess of MPC is locked in for 1 year (50%) and 2 years (50%), post IPO. | Higher Promoter lock in proposed to ensure Promoter shareholding is not diluted, immediately post IPO. |
| 7. | General Corporate Purpose (GCP) | 25% of Gross Issue Size. 35% of Gross Issue Size including Unidentified Acquisitions | GCP amount in SME IPO to be restricted to 10% of issue size or Rs. 10 crore (whichever is lower). Further, Regulation 230(3) to be deleted which permits raising funds for unidentified target / acquisition. | Since there is no specific monitoring of GCP and Unidentified acquisition therefore, any expenses can be classified as general corporate purpose, it increases the risk of misuse of issue proceeds. |
| 8. | Promoter Group Eligibility | Existing restrictions upon “Promoter group” pertains to Debarment from accessing capital markets | Proposed inclusions for “Promoter group” w.r.t. Wilful Defaulter / Fraudulent Borrower / Fugitive Economic Offender | Considering public money is involved, this seems to be a right step expanding stricter restrictions on Promoter group as well. |
| 9. | Track record in case of Conversion from Partnership / LLP | Considered | In case of such conversion, the Company shall be in existence for at least period of Two full Financial Year before filing of DRHP | This restricts Partnership / LLP businesses to immediately come out with IPO with 2 year cooling period. As governance and compliances of Companies are better, so this would lead to better quality of companies in SME IPO. |
| 10. | Change in Promoters before DRHP | 1 Year cooling period | 2 Year cooling period | SEBI intends to have a 2 year cooling period in case of change of constitution including change of Promoters or shareholding of 50% or more. |
| 11. | Minimum Issue Size | No such requirement | INR 10 Cr. | Good decision to keep minimum Issue size as an Entry barrier. This implies a minimum post Issue Market Cap of approx. INR 38 Cr. for minimum dilution of 26.25%. |
| 12. | Minimum Operating Profit (EBITDA) | No such requirement | INR 3 Cr. for 2 out of 3 Financial Years before DRHP | Good decision to keep minimum operating profit criterion for filtration of companies. |
| 13. | Face Value per share | No such requirement | Face Value recommended of INR 10/- share | Intended to ensure comparability of all such companies |
| 14. | Capital Increasing beyond INR 25 Cr. | Not permitted | If ineligible to migrate to mainboard, enhanced capital permitted due to Fund Raising, subject to meeting Main board compliances including Corporate Governance and Quarterly results. | This would ease Fund Raising for companies crossing the INR 25 Cr. capital threshold |
| 15. | Repayment of Promoter / Promoter Group / Related Party Loans | No such requirement | Not Permitted | Intended to deploy the money towards business purposes. However there could be cases wherein promoters might have funded the business before IPO, to support its growth, which may require reconsideration. |
| 16. | Working Capital Funding | No such requirement | Where such amount is more than INR 5 cr, Statutory Auditor certificate on half yearly basis endorsing use of such funds. | This would practically be applicable to most SME IPO as Working Capital is a significant object to the Issue in all cases. |
| 17. | Additional Disclosures in DRHP | – | Disclosure of Site Visit by Merchant Banker, Senior Employees, ESI, PF details etc. Fees of Merchant Banker | More disclosures recommended for transparency. |
| 18. | DRHP to be made public for comments | No such requirement | DRHP of SME IPO filed with the Stock Exchanges shall be made available to public for comments, if any, for a period of at least 21 days from the date of public announcement, by hosting it on the websites of the stock exchanges and websites of lead manager(s) and making a public announcement in Newspapers regarding filing of DRHP and inviting the public to provide their comments | As such, DRHP is already posted on the website of Stock Exchanges, now option to give public comments also proposed, as per Mainboard IPO. |
| 19. | Conversion of outstanding securities before IPO | No such requirement | All outstanding securities shall be converted before IPO | Recommended, in line with mainboard IPO |
| 20. | Merchant Banker Due Diligence certificate submission | No such requirement | Merchant Banker to submit due-diligence certificate to Stock Exchanges at the time of filing of draft offer document | This would strengthen Due Diligence process and strengthen the system |
| 21. | Post-listing exit opportunity for dissenting shareholders | No such requirement | Post-listing exit opportunity for dissenting shareholders may be provided in SME chapter in line with main board provisions | Good Step for Public shareholders. |
| 22. | Applicability of Related Party Provisions (RPT) | As per Companies Act, 2013 | Applicability of RPT norms under LODR Regulations should be extended to SME listed entities other than those which have paid up capital not exceeding Rs. 10 crores and net worth not exceeding Rs. 25 crores. Materiality threshold for approval by shareholders for RPT shall be only for transactions exceeding 10% of annual consolidated turnover | Applicability of RPT norms as per LODR Regulations would bring more transparency while SME companies would also have to make their compliances robust. |
| 23. | Disclosure of composition and meetings of the board of directors and its committees | No such requirement | Requirement to disclose the composition and details of meetings (date, no. of directors present, etc.) of Board of Directors and its committees may be extended to SME listed entities other than those which have paid up capital not exceeding Rs. 10 crores and net worth not exceeding Rs. 25 crores on Quarterly basis. | Disclosure of Board meetings etc. would bring more transparency. |
| 24. | Disclosure of firm arrangement of finance up to seventy- five % of issue proceeds | – | Disclosure of sanction letter from the Bank/ financial institution shall be made in the draft offer document and offer document | Better disclosures to ensure Object to the Issue is achieved. |
| 25. | Shareholding Pattern and Financial Results | Six Monthly basis | Quarterly basis | Disclosure of Quarterly Financials and Shareholding would bring more transparency while SME companies would also have to make their compliances robust. |
