SEBI Tightens IPO Rules for Small Firms Over Governance

India’s market regulator, SEBI, is reportedly planning new regulations for public offerings by small businesses, aiming to align them more closely with rules for larger companies. These proposed changes seek to address growing concerns over fund diversion and allegations of inflated subscription numbers.

Addressing Market Integrity Concerns

The potential regulatory adjustments come in response to issues identified in the small business public offering segment. Concerns include small businesses diverting funds obtained from public markets and an ongoing investigation into investment banks for allegedly charging excessive fees and artificially inflating subscription numbers.

Currently, small businesses with a paid-up capital of up to 1 billion rupees ($10.5 million) can list on specific sections of the BSE and National Stock Exchange of India. These dedicated platforms currently operate with fewer disclosure requirements compared to mainboard Initial Public Offerings (IPOs).

Key Proposed Regulatory Shifts

Under the new proposals, SEBI intends to introduce a quota for institutional investors prior to share sales. Up to 50% of small companies’ share issues could be reserved for qualified institutional buyers, mirroring the structure for mainboard companies. Retail investors would be allocated 35%, with non-institutional investors receiving 15%.

Furthermore, up to 60% of the qualified institutional portion might be allocated to anchor investors who commit capital before the offering opens more broadly. This move aims to enhance the quality of institutional participation and provide greater stability to the offerings.

Significant changes are also being considered for listing eligibility. SEBI plans to raise the average profit requirement for listing to at least 30 million rupees ($313,938) over the past three years, representing a substantial increase from the current threshold. The post-issue capital requirement could also be replaced by a post-issue market capitalization ranging from 10 billion to 40 billion rupees.

The regulator is exploring an offer-for-sale framework to enable existing investors to exit during the public offer. This could potentially reduce the lock-in period for pre-IPO shareholders from one year to six months. SEBI is also considering allowing trading in single shares, a departure from the current 200,000 rupees requirement.

Market Performance and Expert Commentary

The small firms segment has seen fluctuating activity. Last year, small firms collectively raised $1.2 billion through over 250 offerings. However, in 2026, they have raised less than half that amount through approximately 100 offerings.

Kosturi Ghosh, a partner at Trilegal, expressed reservations regarding the expanded scope of the platform. She noted that such an expansion could introduce new risks, highlighting that the segment has not always demonstrated exemplary governance standards.