SME IPOs: Regulators wary, but investors impetuous

The BSE, NSE and market regulator SEBI have been working actively to rein in irrational investor behaviour in SME IPOs.

In a recent move, both exchanges introduced several measures to tone down the exuberance in this segment. One key change: the category ‘Retail Individual Investor’ has been renamed ‘Individual Investor’. Under this new avatar, an investor must apply for a minimum of two lots (i.e. at least ₹2 lakh) for SME IPOs. This is nearly double the previous threshold for small investors. Besides, qualified institutional buyers and non-institutional investors are also required to apply for more than two lots. For others such as employees, shareholders and policyholders, the minimum application size is two lots (over ₹2 lakh), with a cap of up to ₹5 lakh.

No cut-off option

Another key tweak is the removal of the cut-off price option while applying for SME IPOs. Investors will now have to place bids at a specified price. Earlier, investors could place bids without quoting a price by selecting the ‘cut-off’ option, which made them eligible for allotment at the final issue price determined by the company. Now, bids must match the issue price, or they risk rejection.

Another strict measure is that bids can no longer be modified or cancelled. Once a bid is placed, it cannot be withdrawn or reduced. For all categories, the bidding window will close at 4 pm on the last day, and UPI mandate approval must be completed by 5 pm on the same day, said the exchanges.

These measures, effective from July, aim to curb speculative activity and ensure that only serious investors participate in SME IPOs.

SEBI tightens nooose

Earlier, in March, SEBI had tightened the eligibility norms for SMEs planning to go public. Accordingly, only companies with a minimum operating profit (EBITDA) of ₹1 crore in at least two of the last three financial years are eligible to launch an SME IPO. Besides, if there is a complete change in promoters or if new promoters acquire over 50 per cent of shares, the company must observe a one-year cooling-off period before filing a draft offer document.

SEBI also tweaked regulations on IPO proceeds. To promote greater accountability, the regulator said general corporate purposes is now capped at the lower of ₹10 crore or 15 per cent of the total issue size, reduced from 25 per cent earlier. Besides, SMEs can no longer use IPO funds to repay loans taken from promoters, promoter groups, or related parties.

Another important change is the ineligibility of issuers with outstanding convertible securities or rights to acquire equity shares, except in specific cases such as ESOPs. Further, companies that have transitioned from proprietorships, partnerships, or LLPs should have been in existence for at least one full financial year before filing for an IPO.

In terms of lock-in requirements, the standard three-year lock-in for the minimum promoter contribution remains. However, any excess holding is now split—50 per cent locked in for two years and the remaining 50 per cent for one year. Non-promoter pre-IPO shareholders will also face a lock-in period for shares acquired through stock appreciation right schemes.

Frenzy continues

However, despite the new rules kicking in from July 1, frenzy in SME IPOs is still continuing. For instance, the issue of Cryogenic OGS on the BSE-SME platform attracted nearly 25,000 individual investors (each applying for two lots), and the portion was subscribed nearly 120 times with still one more day to go (issue closes on July 7).

On the other hand, Happy Square Outsourcing Services, launched on the NSE-Emerge, saw a modest response. The issue is also closing on July 7. So far, the IPO has been subscribed 0.42 times, with the retail portion attracting 0.65 times; only 205 individuals have bid for the stock so far.

No matter how strict the rules, unless retail investors understand the risks of short-term betting and shift towards goal-based, long-term investments in fundamentally strong companies, these efforts may yield little. For that, investor education is key. Exchanges, for their part, can also strengthen the due diligence process to ensure fly-by-night companies do not enter the market.

Published on July 4, 2025