SEBI Proposes Overhaul of SME IPO Norms by Slashing Application Size to Rs 1 Lakh and Raising Allottees to 500

The Securities and Exchange Board of India (SEBI) has proposed an extensive overhaul of the regulatory framework governing initial public offerings (IPOs) by Small and Medium Enterprises (SMEs). Through a consultation paper issued on October 14, 2026, the capital markets regulator outlined measures aimed at lowering entry barriers for retail investors, expanding the investor base, and aligning segment guidelines closer to the mainboard framework.

The market regulator has invited comments and suggestions from stakeholders on the proposed amendments through November 4, 2026.

Lower Application Ticket Size and Higher Allottee Count

Under the existing framework, the minimum application size for SME IPOs was set at Rs 2 lakh. SEBI has now proposed lowering the minimum application value to Rs 1 lakh. Under the new structure, an application would comprise four lots of at least Rs 25,000 each, with subsequent bids permitted in multiples of the lot size.

Simultaneously, SEBI proposes to raise the minimum number of allottees in an SME public issue from 200 to 500. Retail individual investors will receive at least one minimum lot, subject to availability, while the balance of shares will be allotted on a proportionate basis rather than strictly in minimum-lot multiples. The shift is designed to reduce concentration risks, encourage wider retail and non-institutional distribution, and improve post-listing share price discovery.

One-Share Trading Lots and Scrapping Market Making

To address liquidity concerns in secondary trading on SME platforms, SEBI has proposed abolishing the pre-defined, price-band-dependent lot system. Instead, securities listed on SME exchanges would trade with a lot size of just one share, matching the secondary market trading mechanism of the mainboard.

In addition, SEBI recommended removing the compulsory three-year market-making obligation for SME listings. Currently, merchant bankers or dedicated market makers are required to provide two-way quotes and ensure continuous liquidity for three years post-listing, a requirement that imposes substantial costs on smaller businesses.

Key Proposals in the SEBI Consultation Paper:

• Application Threshold: Minimum application size reduced from Rs 2 lakh to Rs 1 lakh, split into four lots of Rs 25,000 each.
• Minimum Allottees: Increased from 200 to 500 to expand the ownership base.
• Secondary Market Trading: Replacement of bundled lot trading with single-share trading lots.
• Market-Making Relief: Elimination of mandatory three-year market making for issuers.
• Underwriting Standards: Scrapping of 100% compulsory underwriting, introducing a standard 90% minimum subscription requirement.
• Profitability Metric: Minimum average operating profit requirement raised to Rs 3 crore over three years. Companies unable to meet this benchmark must allocate at least 75% of the net offer to qualified institutional buyers (QIBs).

Shift to Market-Cap-Based Eligibility

The consultation paper also proposes doing away with paid-up capital as the determinant of exchange listing eligibility. Under current rules, eligibility hinges on post-issue paid-up capital up to Rs 25 crore.

Under the new tiered proposal:

• Companies with a post-issue market capitalisation of up to Rs 1,000 crore must list exclusively on the SME platform.
• Companies with valuations between Rs 1,000 crore and Rs 4,000 crore may choose between the SME board and the mainboard, subject to Ind AS reporting compliance.
• Companies exceeding Rs 4,000 crore in post-issue valuation must list directly on the mainboard.

According to SEBI data, 1,496 entities have tapped the SME platform since its inception through July 31, 2026, collectively raising Rs 40,222 crore. If implemented, the proposed framework is anticipated to lower compliance overheads for budding corporations while providing Indian retail investors with improved accessibility and secondary market exit liquidity.

Tags: SEBI BSE SME NSE Emerge SME IPO Primary Market