Why SEBI might introduce changes to SME IPOs

Sub : Eco

Sec :Capital market

Background and Rationale for Norm Overhaul

Concerns Raised by SEBI:
- Instances of price manipulation, fund diversion to shell companies, and fraudulent financial transactions.
- Lack of adequate checks and balances due to limited participation of private equity and sophisticated investors.
Surge in SME IPO Activity:
- 159 SME IPOs in FY2024 (till October 15), raising ₹5,700 crore.

Concerns Highlighted by SEBI

Promoter-Driven Companies:
- High concentration of shareholding among promoters or promoter group entities.
- Limited external oversight from institutional or sophisticated investors.
Misuse of Funds:
- Diversion of IPO proceeds to related parties, connected entities, or shell companies.
- Inflation of revenue through circular transactions.
- Excessive Related Party Transactions (RPTs)
- Oversubscription Frenzy
- Fraudulent Cases

Proposed Changes to SME IPO Norms

Increase in Minimum Application Size:
- Raise from ₹1 lakh to ₹2-4 lakh to reduce speculative participation.
Higher Minimum Allottees Requirement:
- Increase from 50 to 200 investors for IPO success.
Stricter Promoter Lock-In Period:
- Raise lock-in on Minimum Promoter Contribution (MPC) from 3 years to 5 years to ensure promoters maintain long-term commitment.
Eligibility Criteria for IPO:
- SME IPOs to be allowed only if:
  - Issue size exceeds ₹10 crore.
  - Operating profit of ₹3 crore in at least 2 out of the preceding 3 financial years.

Related Party Transactions (RPTs):

Related Party Transactions (RPTs) are transactions conducted between a company and parties related to it.
These transactions occur between entities that share a pre-existing business relationship, where one entity holds control, significant influence, or a close relationship with the other.

Key Relationships Involved in RPTs:

A listed company engages in transactions with its own related parties (such as subsidiaries, directors, or significant shareholders).
Transactions between a listed company and the related parties of its subsidiaries, where the subsidiary acts as an intermediary.
Transactions where a subsidiary of the listed entity engages in dealings with the listed company’s related parties.
Transactions between a subsidiary and the related parties of that subsidiary, potentially involving the listed entity indirectly.