The Securities and Exchange Board of India (SEBI) has proposed a series of changes to the regulatory framework for initial public offerings (IPOs) by small and medium enterprises (SMEs). The proposals cover eligibility conditions, profitability requirements, investor allotment, trading lot sizes and other aspects of SME listings.
SEBI issued a consultation paper on October 14, 2026, seeking public feedback on recommendations to review the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) relating to SME IPOs.
The proposed changes aim to make the SME listing framework more proportionate to the size and maturity of businesses, improve market accessibility and reduce avoidable compliance costs while retaining safeguards for investors.
Why Has SEBI Proposed a Review of SME IPO Rules?
The SME platform has grown considerably over the years, attracting more companies and investors. According to the consultation paper, as of July 31, 2026, a total of 1,496 entities had been listed on SME platforms since inception, including companies that subsequently migrated to the Main Board. Of these, 365 companies had migrated to the Main Board.
SME IPOs had raised a cumulative ₹40,222 crore, while the market capitalisation of SME platform-listed entities, including those that migrated to the Main Board, stood at ₹4,70,984 crore.
SEBI believes that this growth warrants a fresh look at the existing framework. Certain requirements introduced when the SME market was smaller may need to be reassessed in light of changing market conditions, business valuations and investor participation.
Key Changes Proposed by SEBI for SME IPOs
1. SME IPO Eligibility May Be Linked to Market Capitalisation
SEBI has proposed replacing the existing post-issue paid-up capital-based eligibility criteria with a framework based on post-issue market capitalisation.
Under the proposal:
- Companies with a post-issue market capitalisation of up to ₹1,000 crore would be required to list on the SME platform.
- Companies with a post-issue market capitalisation above ₹1,000 crore and up to ₹4,000 crore could also choose the SME platform.
- Companies in the ₹1,000 crore to ₹4,000 crore band opting for the SME platform would be required to prepare restated consolidated financial statements in accordance with Indian Accounting Standards (Ind AS), if they have not already adopted them.
- Companies whose estimated post-issue market capitalisation exceeds ₹4,000 crore at the relevant offer-document stage would be required to move to the Main Board IPO framework.
The proposed approach seeks to align eligibility more closely with the economic size and market valuation of a business instead of relying primarily on its nominal paid-up capital.
2. Minimum Average Operating Profit May Increase to ₹3 Crore
SEBI has proposed revising the profitability requirement for companies seeking to access the SME platform.
Under the existing framework, an issuer must have minimum operating profits of ₹1 crore from operations in at least two of the preceding three financial years.
The proposal would replace this test with a requirement for an average operating profit of at least ₹3 crore per year during the preceding three financial years, calculated using restated and consolidated financial statements.
The change is intended to provide a more consistent assessment of a company's financial performance across multiple years, rather than depending on whether it meets a specified profit threshold in individual years.
The consultation paper also examines an alternative eligibility route for certain issuers that do not meet the proposed profitability criterion, subject to specified conditions.
3. Trading Lot May Be Reduced to One Share
One of the significant proposals concerns the trading of SME-listed shares.
At present, SME securities are subject to prescribed trading lots linked to the share price. Depending on the price band, investors may have to trade in predetermined quantities rather than individual shares.
SEBI has proposed rationalising the trading lot to one share in the secondary market.
The proposed change could allow investors to buy or sell shares in quantities that better match their actual holdings. It may also help address the issue of odd-lot holdings, which can make it difficult for investors to trade their entire shareholding through the regular market mechanism.
The proposal is also intended to improve accessibility for investors, including institutional participants, by reducing the restrictions associated with larger trading lots.
4. Minimum Number of Allottees May Increase to 500
SEBI has also sought feedback on increasing the minimum number of allottees in an SME IPO from the existing 200 to 500.
The proposal forms part of the broader review of the issue and allotment framework for SME public offerings.
If implemented, the higher threshold could encourage a wider distribution of shares among investors. However, the final requirement will depend on the outcome of the consultation process and any subsequent regulatory changes.
5. Compulsory Market-Making Requirements May Be Removed
The consultation paper proposes removing compulsory market-making requirements for securities listed on the SME platform.
The existing framework requires issuers to comply with prescribed market-making arrangements, which can involve additional operational expenses, market-maker fees and inventory-related requirements.
SEBI has considered whether these mandatory arrangements remain proportionate, particularly in light of the proposed one-share trading lot.
The proposed removal could reduce regulatory and operational costs for SME issuers. However, market liquidity and investor access remain important considerations, and the proposal is intended to be assessed alongside the other changes to the trading framework.
6. Eligibility Conditions Following Business Conversion May Be Revised
SEBI has proposed changes to the eligibility conditions applicable to businesses that convert from a proprietorship, partnership firm or limited liability partnership (LLP) into a company, as well as certain qualifying business reorganisations.
The existing framework generally requires the company to have completed at least one full financial year after conversion before filing its draft offer document.
The proposal would replace this requirement with four consecutive completed financial quarters from the date of conversion or the latest effective date of the qualifying business reorganisation.
It would also require the issuer to have filed at least one annual audited financial statement, or part thereof, prepared after the conversion or reorganisation, with the Registrar of Companies before filing the draft offer document.
The proposal would extend the framework to certain business reorganisations where more than 50% of the issuer's revenue comes from businesses previously carried on by a proprietorship, partnership firm or LLP.
The objective is to provide more consistent eligibility conditions while recognising the operating history of the underlying business.
What Do the Proposed Changes Mean for SMEs and Investors?
The proposals could affect both companies planning to raise funds through SME IPOs and investors trading in SME-listed securities.
For companies, the revised eligibility and profitability criteria may influence whether they qualify for an SME listing and the financial information they need to prepare. The proposed changes to market-making and other requirements could also affect the cost of listing and ongoing compliance.
For investors, a one-share trading lot could provide greater flexibility when buying or selling SME shares. A change in the minimum allottee requirement could also affect how shares are distributed in public issues.
However, these proposals should not be viewed as a relaxation of all SME IPO requirements. SEBI's consultation paper seeks to balance ease of access to capital markets with financial discipline, transparency and investor protection.
Public Consultation and Next Steps
SEBI has invited comments and suggestions from stakeholders on the proposed changes to the SME IPO framework. The consultation paper contains specific questions covering the proposed eligibility criteria, profitability threshold, allotment framework, trading lot and other regulatory requirements.
The proposals are not yet final regulations. Their implementation will depend on the feedback received and SEBI's subsequent decisions, including any required amendments to the ICDR Regulations and related circulars.
Companies planning an SME IPO, merchant bankers, investors and other market participants should review the official consultation paper to understand the proposals and assess their potential implications.
Click here to view/download the official consultation paper
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