The Securities and Exchange Board of India has tightened the regulatory framework for SME IPOs to allow only those entities that have an operating profit in at least two of the previous three years while barring companies from raising funds to repay loans to promoter entities.
The board of the capital markets regulator, which met here in Mumbai today, approved a slew of changes for the SME IPO segment, which has been under the regulatory scanner for quite some time now.
"In order to strengthen the framework for public issues by Small and Medium Enterprises (SMEs) and to facilitate that SMEs with a sound track record have an opportunity to raise funds from the public and get listed on stock exchanges, and to protect the interests of investors in the SMEs, the Board approved amendments to the SEBI (ICDR) Regulations, 2018 and SEBI (LODR) Regulations, 2015," stated a release issued by SEBI on Wednesday.
"SME issues shall not be permitted, where objects of the issue consist of repayment of Loan from Promoter, Promoter Group or any related
party, from the issue proceeds, whether directly or indirectly," it added.
In terms of the profitability clause, an SME can come out with an IPO only if it has an operating profit (earnings before interest, depreciation and tax) of Rs 1 crore from operations for any two out of three previous financial years at the time of filing the draft red herring prospectus (DRHP).
Among the key changes, SEBI has said that the offer for sale (OFS) portion of an IPO cannot exceed 20% of the total issue size and selling shareholders cannot sell more than 50% of their holding.
Further, the amount for General Corporate Purpose in SME IPO has been capped at 15% of the IPO size or Rs 10 crore, whichever is lower.
Meanwhile, the IPO draft documents filed with the stock exchanges will be made available for 21 days for public to provide comments on the document.
The regulator has also mandated that the lock-in on promoters’ holding held in excess of minimum promoter contribution (MPC) will be released in phased manner i.e. lock-in for 50% promoters’ holding in excess of MPC will be released after one year and lock-in for remaining 50% promoters’ holding in excess of MPC will be released after two years.
The allocation methodology for non-institutional investors (“NIIs”) in SME IPOs has also been aligned with methodology used for NIIs in main board IPOs.
Last month, SEBI had come out with a discusson paper to review the listing framework for SME IPOs, proposing an increase in the minimum application size to Rs 2 lakh from the current Rs 1 lakh per application, among other things.
It had also proposed changing the allocation methodology for non-institutional investors, wherein the proportionate allotment for the NII category may be discontinued and “draw of lots” allotment be introduced, as is applicable for the retail category. Further, the offer for sale portion was proposed to be limited to 20-25% of the total issue size.
The SEBI proposals were essentially aimed at investor protection and dissuading retail investors who do not have the ability to take bigger risks. For example, draw of lots to decide on allotment for NIIs was proposed because the proportionate allotment, currently done, encouraged use of leverage, and caused mispricing.
This year has been a record year in terms of fund raising by SME IPOs as more than 225 companies have raised more than Rs 8,200 crore, a huge jump from last year's Rs 4,686 crore.
But the segment has been in the news for massive oversubscription -- most issues got subscribed in multiples of hundreds -- and huge listing gains, which caught the attention of the regulator and the exchanges.
Exchanges have already increased the scrutiny level of draft documents filed by SMEs and market participants say that many documents get returned due to inadequate disclosures.
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