Sebi Eyes Tougher Norms for SME IPOs: Here is What Can Change for Investors

SME IPO frenzy has long been a troubled space for the market regulator, Sebi (Securities and Exchange Board of India). From irrelevant exuberance during bidding to sky-rocketing premiums at listing days, the SME space has been a major trouble point for the D-street players.

Thankfully the market regulator has started taking strict steps to tighten the norms.

In its consultation paper, released earlier this week, Sebi proposed raising the application amount to attract only informed investors with strong risk tolerance and financial capacity to play in the SME space. The market regulator has also proposed to set a minimum issue size and double the minimum application amount.

"With an increase in the number of SME issues, it is noted that investor participation has also increased in such offerings. Applicant to allotted investor ratio increased from 4X in FY22 to 46X in FY23 and 245X in FY24," the consultation paper read.

The SME IPO market has been a crazy place for D-street players lately as premiums soared to unbelievable levels. Just a few months back, Resourceful Automobile's IPO was planning to raise Rs 12 crore. However, the company ended up pulling in bids worth Rs 4,800 crore.

Sebi Moves to Protect Retail Investors

For retail investors, the SME space has been an attractive play but a risky one as well. With record premiums, some of these companies have witnessed their share price go down the hill and more often than not, its the retail investors that end up bearing the brunt of the loss.

"The retail individual participation has increased in the SME IPO over the last few years. Therefore, considering that SME IPOs tend to have higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors, It is proposed to increase the application size from Rs 1 lakh per application to Rs 2 lakh per application in SME IPO," Sebi said.

The market watchdog stated that the increased application size would restrict smaller investors and attract those with a higher risk appetite. It also proposed introducing a "draw of lots" system for non-institutional investors.

Currently, SME IPOs allocate shares to NIIs proportionally. This shift will prevent over-leveraging and promote fairer share distribution.

Most importantly, it has also suggested capping the OFS (Offer for sale) level of the issue size. This means only up to 20 per cent of the total shares being offered in the IPO can come from pre-issue sharholding.