SEBI Consultation paper on applicability of corporate governance provisions under SEBI (LODR) Regulations, 2015 on SME companies
SEBI recently released a Consultation paper on Review of SME segment framework under SEBI (ICDR) Regulations, 2018, and applicability of corporate governance provisions under SEBI (LODR) Regulations, 2015 on SME companies to strengthen pre-listing and post-listing SME provisions. At present, most of the corporate governance requirements under LODR Regulations are not applicable to the following equity listed entities:
a. Listed entities which have paid up equity share capital not exceeding Rs. 10 crores and net worth not exceeding Rs. 25 crores (“Small entities listed on Main Board”).
b. Listed entities which have listed their specified securities on the SME Exchange (“SME listed entities”).
Through this consultation paper, SEBI has proposed to at least double the minimum subscription amount for initial public offerings of small and medium enterprises as participation of retail investors in these offers has been rising. It also suggested for increasing the minimum application size for SME IPOs from Rs. 1 lakh to Rs. 2 lakh.
It is observed that SME IPOs have witnessed a surge in recent years particularly 2022-23 onwards. Since, the establishment of SME platforms, FY 2023-24 witnessed the highest number of SME public issue and highest SME fund raising with 196 IPOs tapping the market to mobilize more than Rs. 6000 crore. Also, in current FY 2024-25 already till Oct 15, 2024, more than Rs. 5700 crore has been raised through 159 SME IPOs.
It follows the SEBI’s consistent warnings about questionable practices in the country’s SME market and cautioning investors about unrealistic projections by some SMEs.
Other suggestions include adopting the ‘draw of lot’ allotment system, used for retail investors in mainboard IPOs, in the SME IPOs as well, splitting the non-institutional investor category into two sub-categories based on application size, ensuring that smaller investors have a better chance of securing allotments in case of oversubscription, a mandatory monitoring agency for IPOs if the issue exceeds Rs. 20 crore for ensuring that funds are used for the purposes disclosed in the offer document, an operating profit (earnings before interest and tax) of at least Rs. 3 crore in two of the last three financial years, applicability of related-party transaction (RPT) norms and prohibit use of IPO proceeds for repaying loans taken by promoters or related parties among others.
Public comments may be submitted by 4th December, 2024
