MUMBAI: As expected, the Securities and Exchange Board of India (Sebi) has tightened the regulations governing Initial Public Offerings (IPOs) for Small and Medium Enterprises (SMEs). In its Board meeting on Wednesday, the capital market regulator introduced profitability requirements as well as put a cap on shares to be sold through the offer for sale (OFS) route.
SMEs will now be required to have an operating profit of at least `1 crore for two out of the last three financial years before filing their DRHP. Also, the OFS size should not be more than 20% of the total issue size. Additionally, these shareholders can’t sell more than 50% of their total holding through the IPO.
The lock-in periods for promoters’ holdings in excess of the minimum promoter contribution (MPC) have been tightened. 50% of such excess holding will be locked-in for one year, and the remaining 50% for two years.When it comes to allocation, the allocation methodology for NIIs in SME IPOs has been aligned with the process used for main board IPOs. The amount allocated for general corporate purpose (GCP) in SME IPOs has been capped at 15% of the total issue size or Rs 10 crore, whichever is lower.
The new rules do not allow SME IPO proceeds to be used to repay loans to promoters, promoter groups, or related parties. Apart from that the public will now have 21 days to review SME IPO DRHPs and provide feedback. Stock exchanges will make the DRHPs accessible through public announcements and QR codes.
New set of rules have been made for post-IPO Compliances. SME companies can continue to raise funds without migrating to the main board, subject to compliance with main board listing regulations. Related Party Transaction norms applicable to main board-listed entities will be extended to SME-listed entities, with a lower threshold of 10% of annual consolidated turnover or Rs 50 crore.
Meanwhile, the Sebi board has also approved new regulations to ensure timely deployment of funds raised by Mutual Funds through New Fund Offers (NFOs). The new framework is aimed at encouraging AMCs to collect only as much funds in NFOs as can be deployed in a reasonable period of time, usually 30 days.
Among other changes approved by the board include reforms to boost ease of doing business for Debenture Trustees, ESG rating providers, InvITs, REITs, and SM REITs. Sebi decides to overhaul investment banking norms.
Sebi curbs on merchant bankers’ activities
The Sebi board on Wednesday took decision to restrict the ambit of work for merchant bankers or investment banks. As per the new rules, merchant bankers will undertake only permitted activities, which have been specified by the Sebi. Activities other than permitted activities should be hived off to a separate legal entity with a separate brand name, within a period of two years.