Dr. Khalid Khan, Managing Partner | khalid.khan@insightjuris.in

SME listing lets eligible small and medium enterprises raise equity capital on dedicated platforms such as BSE SME and NSE Emerge. The process is governed by Chapter IX of SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, and by each exchange’s listing criteria.

Eligibility criteria

The SME framework applies to issuers with post-issue paid-up capital of up to ₹25 crore. An issuer with post-issue capital of up to ₹10 crore must list on an SME platform. An issuer between ₹10 crore and ₹25 crore may choose the SME platform.

Issuers must also meet the conditions of their chosen exchange, which differ between BSE SME and NSE Emerge.

For NSE Emerge, the key current conditions include:

• incorporation in India under the Companies Act;
• a three-year track record of the issuer, its promoters or promoting company, or a qualifying converted proprietorship or partnership business;
• operating profit of at least ₹1 crore in any two of the preceding three financial years;
• positive net worth; and
• positive free cash flow to equity in at least two of the preceding three financial years.

BSE SME has its own additional conditions, including net worth of at least ₹1 crore for the two preceding full financial years and net tangible assets of at least ₹3 crore in the preceding full financial year.

Promoters and offer-for-sale limits

Promoters must contribute at least 20% of post-issue capital, locked in for three years. Other pre-issue holdings are subject to phased lock-in release.

In an SME IPO, the offer for sale by selling shareholders cannot exceed 20% of the total issue size. Under NSE Emerge criteria, an individual selling shareholder cannot sell more than 50% of their pre-issue holding.

Investor application and trading

The minimum IPO application is two lots and must exceed ₹2 lakh, with larger applications in multiples of the lot size. SME securities generally trade in market lots rather than single shares, which can limit retail accessibility and secondary-market liquidity.

Offer document, disclosures and use of proceeds

The draft offer document is filed with the relevant SME exchange and must be public for comments for at least 21 days. It covers:

• financial information and restated financial statements;
• the proposed use of proceeds;
• material litigation, defaults and regulatory actions;
• promoter, group-company and director disclosures; and
• risk factors and business information.

Use of proceeds for general corporate purposes is capped at the lower of 15% of the amount raised and ₹10 crore. Proceeds cannot be used, directly or indirectly, to repay loans from promoters, the promoter group or related parties.

Restrictions and disqualifications

An issuer may be ineligible if it or its promoters or directors face capital-market debarment, wilful default or similar statutory disqualifications. Admitted insolvency proceedings, winding-up petitions and a serious adverse regulatory history can also block listing or require extensive disclosure.

Opportunities and risks

Opportunities: long-term growth capital, stronger visibility, better credibility with lenders and customers, and a platform for future fundraising or migration to the main board.

Risks: limited trading liquidity, sharp price movements, concentrated promoter ownership, compliance costs, and difficulty exiting when demand is weak.

Possible changes under consideration

SEBI is reported to be reviewing the SME IPO framework, following concerns about fund diversion, governance and inflated subscription figures. Reported ideas include:

• replacing the paid-up-capital test with a post-issue market-capitalisation threshold;
• a minimum average operating profit of ₹3 crore over the preceding three years;
• allowing single-share trading instead of mandatory market lots; and
• other measures, such as an institutional investor quota and shorter lock-in periods for pre-IPO investors.

These are proposals, not final rules, and details may change. Until SEBI notifies final regulations, companies and investors should rely on the current ICDR Regulations and the latest BSE SME and NSE Emerge criteria.

Disclaimer: This article is intended solely for informational purposes. The opinions expressed are personal to the author and should not be regarded as legal advice or as a legal opinion, whether express or implied.

Nothing in this article is intended to encourage or discourage any particular action. Readers should seek independent legal advice before relying on or acting upon any information discussed herein. The author accepts no responsibility or liability, financial or otherwise, for any consequences arising from reliance on this article.