Sebi considers overhauling SME listing regulations amid rising concerns
Mumbai, Nov 19, 2024
Suggests higher entry amount, stringent norms for corporate governance
The Securities and Exchange Board of India (Sebi) on Tuesday proposed an overhaul of listing regulations for small and medium enterprises (SMEs), including eligibility conditions, an increase in minimum application value, lock-in requirements for promoters, tighter norms for migrating to the mainboard, and corporate governance measures.
The move comes after the market regulator found several instances of alleged diversion of funds and initial public offering (IPO) proceeds, circular transactions with related parties to inflate prices, and fictitious transactions to create positive sentiments among investors.
Sebi has taken action this year on several SMEs listed on exchanges and even halted the listing of an SME where concerns were raised.
In a consultation paper floated on Tuesday, Sebi proposed doubling the minimum application value from Rs 1 lakh to Rs 2 lakh, restricting the offer-for-sale (OFS) limit to 20 per cent of the issue size, mandating the appointment of a monitoring agency to ensure the correct usage of funds raised through the IPO, among dozens of other measures.
While exchanges continue to review the eligibility norms, some thresholds have not been updated for over a decade.
Sebi is also considering increasing the minimum number of allottees from the current 50 to 200 investors to declare an SME IPO successful.
“It is proposed that the lock-in on minimum promoter contribution (MPC) in SME IPOs shall be increased to five years. Additionally, the lock-in on promoters’ holdings held in excess of MPC shall be released in a phased manner,” notes the discussion paper.
The draft documents of SME IPOs are processed by the stock exchanges and do not undergo scrutiny by the market regulator. With the proposed measures, Sebi intends to introduce more checks and balances in the segment, which has already crossed Rs 2 trillion in market capitalisation.
Among the eligibility conditions, Sebi is considering increasing the minimum issue size to Rs 10 crore, requiring a minimum operating profit of Rs 3 crore in at least two of the three financial years preceding the IPO application, and a minimum face value of Rs 10 for shares.
The National Stock Exchange (NSE) has the SME platform Emerge, while its counterpart BSE also has a separate platform called BSE SME.
FY24 witnessed the highest number of SME IPOs, with 196 issues mobilising more than Rs 6,000 crore. In the current financial year till October, over Rs 5,700 crore has already been raised through 159 SME IPOs.
Upon meeting certain conditions, SMEs are allowed to migrate to the mainboard. Sebi plans to make these conditions more stringent and allow fund-raising while remaining on the SME platform, subject to higher disclosure requirements such as quarterly results—similar to those mandated for mainboard companies.
The market regulator has also suggested higher corporate governance norms, such as applying related-party transaction norms to SMEs similar to those for companies listed on the mainboard and mandating the disclosure of board meetings and other governance details.
These suggestions follow findings that one out of two listed SMEs undertook related-party transactions amounting to more than 10 per cent of their consolidated turnover, while the same stood at over 50 per cent for one out of seven SMEs.
Sebi has also proposed a two-year cooling-off period in cases where there was a change of promoter of the SME before the filing of the draft documents.
[The Business Standard]
