From light regulation to accountability: How Sebi is rethinking SME IPO rules

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Subscribe to enjoy similar stories. Markets regulator Securities and Exchange Board of India (Sebi) has recently identified several concerns plaguing the SME space such as misuse of IPO proceeds, fund diversion, promoter exits and market misconduct. These issues pose threats to investor protection and market integrity.

A Sebi analysis reveals that many SMEs have engaged in substantial related party transactions (RPTs) with nearly half of these companies undertaking such transactions exceeding ₹10 crore, and one in five surpassing ₹50 crore. Additionally, it has been observed that SMEs are promoter-driven or family-run businesses with minimal private equity or sophisticated investors, which limits check on promoter influence. Recent cases of misuse of IPO proceeds, underscore the urgency for regulatory intervention.

Sebi’s well-thought-out light regulatory framework was introduced in 2012 to boost SME listings aimed at contributing to economic growth. The results were promising: as of October 2024, 745 companies are listed on SME exchanges with a market capitalization of ₹2 trillion. In 2023-24, 196 IPOs raised over ₹6,000 crore and by October 2024, ₹5,700 crore was raised through 159 SME IPOs.

Investor participation, too, has grown in FY2022 to 46 times. Regulatory-lite models have typically been adopted by successful SME exchanges (Korea’s Konex and China’s ChiNext) worldwide to give the necessary push. These involved less rigorous compliance requirements compared to the main-board listings and delegating responsibility to stock exchanges to drive these listings.