SEBI Proposes a Comprehensive Recalibration of the SME IPO Framework

The Securities and Exchange Board of India (SEBI) has issued a consultation paper dated October 14, 2026, proposing a broad reassessment of the rules governing initial public offers (IPOs) by small and medium enterprises (SMEs) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). The proposals reflect the recommendations of a Working Group, the deliberations of the Primary Market Advisory Committee, and subsequent internal deliberations within SEBI. Comments are due by November 4, 2026.

Revising the Eligibility Criteria for SME IPOs

A key proposal is to replace the existing post-issue paid-up capital thresholds with post-issue market capitalisation as the principal criterion for determining the platform on which an issuer may undertake an IPO. Under the proposed framework, an issuer with post-issue market capitalisation of up to ₹1,000 crore would be required to access the SME platform, while an issuer with market capitalisation above ₹1,000 crore and up to ₹4,000 crore may choose between the SME platform and the Main Board. Issuers exceeding ₹4,000 crore would be required to access the Main Board.

The proposed thresholds would be tested at the stage of filing the red herring prospectus in a book-built issue or the prospectus in a fixed-price issue. Accordingly, an issuer that initially files under the Main Board framework but has estimated post-issue market capitalisation of ₹1,000 crore or below at the relevant later stage would be required to re-file under the SME framework. Conversely, an issuer that initially files under the SME framework may continue under that framework if its market capitalisation exceeds ₹1,000 crore but does not exceed ₹4,000 crore. If it exceeds ₹4,000 crore, it would be required to re-file under the Main Board framework. Issuers in the optional ₹1,000 crore to ₹4,000 crore band would also be required to prepare restated consolidated financial statements in accordance with Ind AS for the last three financial years and the stub period, if any.

The consultation paper also proposes changes to the eligibility requirements for issuers formed through conversion or business reorganisation. The existing requirement to complete one full financial year after conversion would be replaced with four consecutive completed financial quarters from the date of conversion or the latest effective date of the qualifying business reorganisation. The proposal would extend beyond statutory conversion to arrangements such as acquisition, transfer, vesting, succession or a scheme of arrangement involving a business previously carried on by a proprietorship concern, partnership firm or limited liability partnership, provided that more than 50% of the issuer’s revenue for the latest financial year is derived from such business. The issuer would also need to have filed at least one annual audited financial statement or part thereof prepared after the conversion or reorganisation with the Registrar of Companies before filing the draft offer document. The historical operating track record of the predecessor business may be considered for determining eligibility.

Profitability Test and an Alternative Route for Growth-Stage Issuers

The existing test requires operating profit of at least ₹1 crore in two of the three preceding financial years. The proposal replaces it with an average operating profit of at least ₹3 crore per year over the preceding three financial years, calculated on restated consolidated financial statements. The stated aim is a better measure of overall operating performance across the period.

The paper acknowledges that this test may exclude established growth-stage businesses that have invested in technology, capacity, product development or market expansion. It therefore proposes Regulation 229(7), an alternative route for issuers that do not meet the profitability test, provided they continue to satisfy the track record, business continuity and promoter continuity requirements. The issue must be conducted through the book-building process, with at least 75% of the net offer allotted to Qualified Institutional Buyers (QIBs). If that allocation is not achieved, the entire subscription money must be refunded. Under this route, not more than 10% of the net offer would go to retail individual investors, not more than 15% to non-institutional investors, and not less than 75% to QIBs. The QIB portion would not be underwritten. SEBI proposes to replace the existing requirement of operating profit of at least ₹1 crore in any two of the preceding three financial years with an average operating profit of not less than ₹3 crore per year during the preceding three financial years, computed on the basis of restated consolidated financial statements. The revised test is intended to provide a more consistent measure of operating performance over the relevant period.

Use of Issue Proceeds and Offer for Sale

In relation to the use of issue proceeds, SEBI proposes to remove the existing absolute cap of ₹10 crore on utilisation towards general corporate purposes (“GCP”), while retaining the limit of 15% of the amount being raised. The change is intended to provide greater flexibility to issuers undertaking larger SME IPOs without removing the proportional restriction on GCP.

SEBI also proposes to introduce a separate and dedicated framework for offer for sale (“OFS”) in SME IPOs, broadly aligned with the Main Board framework. The proposed framework would generally require securities offered through an OFS to have been held for at least one year before filing the draft offer document, subject to specified exemptions. QIB selling shareholders would be exempt from the existing quantitative limits of 20% of the issue size and 50% of their pre-issue shareholding, subject to the proposed holding-period requirement. However, this exemption would not apply to issues undertaken through the alternative QIB route under the proposed Regulation 229(7) of ICDR Regulations. In those cases, the quantitative OFS limits would continue to apply, so that the issue remains primarily directed towards capital raising.

Rationalisation of Lock-in Requirements

The proposed changes to the lock-in framework seek to simplify the applicable periods and bring them closer to the Main Board framework. The minimum promoters’ contribution would continue to be locked in for three years, but the period would run from the date of allotment in the IPO rather than the later of allotment or commencement of commercial production. Promoters’ holdings in excess of the minimum promoters’ contribution would be locked in for one year, replacing the existing staggered lock-in. The lock-in for pre-issue capital held by persons other than promoters would be reduced from one year to six months, while specified securities held by the promoter group would be subject to a one-year lock-in. SEBI also proposes to permit depositories to record securities as “non-transferable” where the lock-in cannot otherwise be created through the depository mechanism.

Changes to Application, Allotment and Trading Lot Requirements

The consultation paper proposes to reduce the minimum application value from ₹2 lakh to ₹1 lakh. Following subsequent internal deliberations, SEBI proposes a minimum lot value of ₹25,000 and a requirement to apply for at least four lots, with subsequent applications in multiples of the minimum application size. The framework would also expressly recognise allocation to Anchor Investors in book-built issues, up to 60% of the QIB portion, subject to the applicable conditions. The existing one-third/two-thirds allocation structure for non-institutional investors would be retained, with sub-categories determined by reference to a minimum application value of ₹2 lakh.

For issues undertaken through the alternative QIB route, the allocation structure would instead provide for not more than 10% to retail individual investors, not more than 15% to non-institutional investors and not less than 75% to QIBs. In addition, the minimum number of allottees in an SME IPO is proposed to increase from 200 to 500. Each retail individual investor would receive at least one minimum lot, subject to availability, and any remaining shares would be allotted proportionately without being restricted by the minimum lot size.

A further significant proposal is to reduce the trading lot for securities listed on the SME platform to one share. This would remove the existing price-based lot-size structure and address restrictions associated with odd-lot holdings, while allowing investors to trade their holdings more flexibly in the secondary market. The proposed one-share trading lot would apply to listed SME securities following issuance of a separate circular rescinding the existing trading-lot circular.

Rationalisation of Underwriting and Market-making

SEBI proposes to remove the requirement for 100% underwriting of an SME IPO and the obligation on lead managers to underwrite at least 15% of the issue on their own account. The underwriting framework would instead be aligned with the Main Board approach, under which the unsubscribed portion would be underwritten. A separate minimum subscription requirement is proposed, and the existing requirement for the Registrar to the Issue to confirm subscription of at least 90% before closure would be omitted as duplicative. The proposed QIB portion under the alternative eligibility route would remain outside the underwriting requirement.

The consultation paper also proposes to discontinue compulsory market making in SME securities, including the associated inventory and other mandatory arrangements. SEBI’s stated rationale is that a one-share trading lot would provide greater flexibility to investors and support liquidity through ordinary market activity, while reducing the compliance and operational costs borne by SME issuers.

Migration from the SME Platform to the Main Board

The proposed migration framework would position the SME platform as a pathway for growing enterprises to graduate to the Main Board. Migration from the Main Board to the SME platform would be discontinued. An SME-listed issuer with market capitalisation of at least ₹1,000 crore but below ₹4,000 crore may voluntarily migrate to the Main Board, subject to the Main Board exchange’s eligibility criteria and approval of the issuer’s Board of Directors. Migration would become mandatory where market capitalisation reaches or exceeds ₹4,000 crore, subject to fulfilment of the applicable Main Board listing criteria. The existing mandatory migration trigger linked to post-issue paid-up capital exceeding ₹25 crore pursuant to a further issue of capital is proposed to be removed.

For this purpose, market capitalisation would be calculated on the date of the migration application by multiplying the total number of equity shares outstanding on that date by the applicable market price. The applicable market price would be based on the average of weekly high closing prices and the average of weekly low closing prices over the preceding 12 weeks, with adjustments for bonus issues, stock splits and consolidation, as applicable. The test would be applied on the application date and would not be revisited for subsequent price movements.

Alignment with the Main Board Framework and Transition Arrangements

The paper proposes to bring a number of SME-specific provisions into line with the Main Board. These include minimum promoters' contribution, lead manager due diligence, filing and updating of offer documents, price bands and differential pricing, issue advertisements and post-issue responsibilities.

The revised framework would mandatorily apply to draft offer documents filed after a three-month period from notification of the revised framework in the Official Gazette. During that three-month period, an issuer may elect either the existing or the revised framework and must state its choice in the draft offer document. Issues for which a red herring prospectus or prospectus was filed before notification would continue under the existing framework. An SME issuer that filed its draft offer document before notification, but has not obtained in-principle approval or filed its red herring prospectus, may opt for the revised framework by issuing an addendum to the draft offer document.

Existing lock-in obligations of issuers already listed on the SME platform would continue until they expire, and the revised framework would not retrospectively modify them. Migration for issuers already listed on the SME platform at notification would continue under the existing framework. Issuers listed after notification would be subject to the revised market-capitalisation-based framework.