SME IPOs has seen massive growth in recent years. In FY2023-24, a record 196 SME IPOs raised over Rs 6,000 crore, with 159 IPOs raising more than Rs 5,700 crore by October 2024. However, this rapid growth has raised concerns. There are issues of fund diversion, inflated revenues, and misuse of proceeds. To address these concerns and protect investors, the SEBI has introduced new rules for SME IPOs. They aim to ensure greater transparency and market integrity.

What is an SME IPO?

An SME IPO lets small and medium-sized businesses raise capital. They do this by offering shares to the public on stock exchanges for SMEs, like BSE SME and NSE Emerge. They are for smaller companies. This makes it easier for them to raise capital to grow.

Key Differences Between SME IPOs and Mainboard IPOs

1. Size and Scale: SME IPOs are for smaller companies, with paid-up capital under Rs 25 crore. Mainboard IPOs are for larger companies.
2. Regulations: SME IPOs have less stringent compliance requirements than Mainboard IPOs .
3. Investor Base: SME IPOs attract retail and small institutional investors. Mainboard IPOs target a wider range of investors.
4. Listing Platforms: SME IPOs are on dedicated platforms like BSE SME and NSE Emerge. Mainboard IPOs are on major exchanges like the NSE and BSE.
   

Recent Surge in SME IPOs

In just the first half of FY2024 (until October 15), 159 SME IPOs raised more than Rs 5,700 crore. Many of these IPOs were oversubscribed by large margins—some oversubscribed more than 700 times.

For instance, Rajputana Biodiesel’s IPO was oversubscribed 718 times. Apex Ecotech’s was oversubscribed 457 times. Lakshya Powertech’s was oversubscribed 573 times.

While the growing interest in SME IPOs reflects a strong investor appetite, it also raises concerns. SEBI’s data shows that the applicant-to-allotted investor ratio increased significantly. It rose from 4 times in FY2022 to 46 times in FY2023, and 245 times in FY2024. This rise in investor participation shows the risks of fraud. It also highlights the need for tighter regulations.

Concerns Around SME IPOs

While SME IPOs have helped many businesses raise capital, they have also raised several concerns:

Promoter-Controlled Entities: Many SME IPOs are by family or promoter-controlled firms with concentrated ownership. This limits the influence of independent investors or private equity, who usually help keep the promoters in check.

Diversion of Funds: Some companies have diverted IPO proceeds to related parties and shell companies. Some companies have engaged in circular transactions. They recorded sales and purchases among related parties to inflate revenues and create a false image of growth.

Inflated Revenues: Some companies mislead investors by inflating revenues through circular transactions.

SEBI has been actively investigating and acting against companies that misuse IPO funds. For example, it recently cancelled the IPO of Trafiksol ITS Technologies. The IPO had been oversubscribed 345.65 times. This was after discovering evidence of fund misuse through shell companies. SEBI also instructed the company to refund the money to investors.

New SEBI Regulations for SME IPOs

On December 18, 2024, SEBI introduced new eligibiliy criterias to improve the framework for SME IPOs. These measures aim to protect investors and ensure market integrity. They allow only financially sound and transparent SMEs to access public capital markets.

Key Changes in SEBI’s New Regulations:

• Profitability Requirement: SMEs must have operating profits of at least ₹1 crore in two of the last three years before applying for an IPO.

• Cap on Promoter Offer for Sale (OFS): Promoters can only sell up to 20% of the issue size during the IPO and no more than 50% of their total holdings.

• Restriction on Loan Repayment: IPO proceeds cannot be used to repay loans from promoters, related parties, or promoter groups.

• Cap on General Corporate Purposes (GCP): A maximum of 15% of the total amount raised, or ₹10 crore (whichever is lower), can be allocated for general corporate purposes.

These new rules aim to prevent misuse of proceeds. They ensure that only companies with strong finances and clear operations can enter the public market.

The Future of SMEs in India

Despite these concerns, the future of SMEs in India looks promising. Government initiatives like Startup India and Make in India, and a rise in tech for compliance and reporting, are helping SMEs. As more SMEs use digital tools to improve operations and reporting, the SME IPO market should grow further. This will offer great opportunities for businesses and investors.

However, as the market continues to expand, it’s crucial that SEBI’s new regulations are followed to ensure that the sector remains transparent, trustworthy, and sustainable. With these new safeguards in place, SMEs can access the public market in a way that promotes investor confidence and ensures long-term growth.