SEBI Considers Stricter Rules and Institutional Quotas for SME Public Offers

The Securities and Exchange Board of India (SEBI) is considering applying regulations typically reserved for large companies to public offers by smaller businesses. According to sources with direct knowledge of the matter, these potential changes include mandatory quotas for institutional investors prior to share sales.

The potential policy shift follows regulatory warnings regarding small businesses diverting capital raised from public markets. It also comes in the wake of investigations into investment banks reportedly extracting unusually high fees and inflating subscription figures. Earlier this month, SEBI chief Tuhin Kanta Pandey stated that the rules governing small business listing platforms were currently under review. An email query sent to SEBI regarding the matter went unanswered.

Under the proposed changes, up to 50 percent of small company share issues could be reserved for qualified institutional buyers. Furthermore, 35 percent would be allocated to retail investors and 15 percent to non-institutional investors, aligning the structure with mainboard companies. Within the institutional portion, as much as 60 percent could be designated for anchor investors who commit capital prior to the broader opening of an offering.

The regulator is also reviewing the limits on company size for firms listing on dedicated small-firm platforms. Under another proposal, firms could list if they report an average profit of at least ₹3 crore over the past three years. Additionally, post-issue capital requirements could be replaced by a post-issue market capitalization requirement ranging from ₹1,000 crore to ₹4,000 crore.

Other structural modifications under consideration include an offer-for-sale framework that would enable existing investors to exit during public offers, potentially reducing the pre-IPO shareholder lock-in period from one year to six months. Authorities are also evaluating a proposal to permit trading in single shares, moving away from the current ₹200,000 requirement.

Data indicates that small firms raised $1.2 billion through more than 250 offerings last year, compared to roughly half that amount raised through about 100 offerings so far in 2026. Large companies have raised approximately 17 times that amount during the same period.

Industry experts have highlighted potential risks associated with altering these thresholds. Kosturi Ghosh, a partner at Trilegal, noted that expanding the platform's scope could introduce new risks, stating that allowing larger companies to choose between the SME segment and the mainboard to leverage regulatory arbitrage presents a challenging regulatory proposition.

"The proposed changes by SEBI mark a crucial step toward maturing India's SME public offering ecosystem. Introducing institutional quotas and stricter profit requirements will likely bring greater transparency and accountability to smaller public listings. While these measures address genuine governance concerns and safeguard retail investor interests, regulators must carefully balance the compliance burden to ensure that early-stage growth capital remains accessible for emerging enterprises." — Dr. Shishir Gupta, Founder & CEO, StartupLanes