SEBI tightened Rules for SME IPOs with Profitability Mandate

Current Context: The Securities and Exchange Board of India (SEBI) introduced stricter rules for Small and Medium Enterprises (SME) Initial Public Offerings (IPOs) on March 4, 2025, to ensure only fundamentally strong SMEs access public markets while safeguarding investor interests.

Key Changes:

• Profitability Mandate: SMEs must have a minimum operating profit of ₹1 crore in at least two of the last three financial years.
• Offer-for-Sale (OFS) Cap: Limited to 20% of the total issue size, and selling shareholders cannot offload more than 50% of their holdings.
• Phased Lock-In for Promoters: Excess promoter shareholding beyond the minimum contribution will be locked in for 1-2 years.
• Minimum Application Size: Increased to two lots to deter speculative participation.
• Use of IPO Proceeds: Restricted from repaying loans taken from promoters or related parties.
• Transparency: Draft Red Herring Prospectus (DRHP) must be open for public comments for 21 days.
• Fundraising Without Main Board Migration: SMEs can raise funds without migrating to the main board if post-issue paid-up capital exceeds ₹25 crore, subject to compliance with main-board regulations.

Question:

Q.1 What is the new minimum operating profit requirement for SMEs to be eligible for an IPO under SEBI’s revised rules?
a) ₹50 lakh in any of the last three financial years
b) ₹1 crore in at least two of the last three financial years
c) ₹2 crore in the most recent financial year
d) No specific profitability requirement

Answer: b) SEBI has mandated that SMEs must show financial stability by having a minimum operating profit of ₹1 crore in at least two of the last three financial years.