SEBI’s Consultation Paper on SME Segment Framework under SEBI (ICDR) and SEBI (LODR) Regulations

The Update has been drafted by Suman Kumar Jha (Founder & Managing Partner), Prince Shankhdhar (Partner), Visakha Raghuram (Associate) and Ankit Abhishek Jha

Introduction

The Securities Exchange Board of India (‘SEBI’) has issued a consultation paper on November 19, 2024, proposing significant reforms to the SME (‘Small & Medium Enterprises’) IPO framework, introducing transformative measures to enhance investor protection and increase compliance standards for companies in the SME segment.

A brief overview of the changes proposed in the Consultation Paper in relation to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR’), and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’).

Proposals for Changes in SEBI (ICDR) Regulations, 2018

1. Increasing the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh, with an alternative option to raise it to ₹4 lakh, if the allocation between retail category and non-institutional investor category are merged.
2. The Non-Institutional Investors (NII) category will be divided into two subcategories based on application size, with a “draw of lots” allotment replacing the proportionate allotment method whereby one-third of allocation shall be for application sizes of up to Rs. 10,00,000 and two-third shall be for application sizes above Rs. 10,00,000.
3. Increasing the minimum number of allottees in SME IPOs to 200 and restrict the Offer for Sale (OFS) to 20% of the issue size, with selling shareholders’ shares not exceeding 20% of their pre-issue holding.
4. Appointment of Monitoring Agency for fresh issue size above ₹20 crore, and where not required, a Statutory Auditor’s certificate on the utilization of funds must be submitted with the half-yearly financial statement until the proceeds are fully utilized.
5. Increasing the lock-in period for minimum promoter contribution (MPC) in SME IPOs from 3 years to 5 years which staggered release of excess promoter’s contribution (50% after 1 year and 50% after 2 year)
6. Restrict the General Corporate Purpose amount to 10% of the issue size or ₹10 crore, whichever is lower and deletion of provision which permits raising funds for unidentified target/acquisition.
7. Addition of ‘promoter group’ in Regulation 228(b), (c), (d) which prohibits SME IPOs by those issuers whose promoters or directors are debarred from accessing the securities market or are a wilful defaulter or are a fugitive offender.
8. Company converting from an LLP or partnership must exist for at least two full financial years before filing the Draft Red Herring Prospectus (‘DRHP’), with restated financials in line with Schedule III of the Companies Act, 2013 and two year cooling-off period for SME IPOs if there is a change in promoters or acquisition of 50% or more shareholding before filing the draft offer document.
9. Eligible for SME IPO only if the issue size exceeds ₹10 crore, and SME issuers must have shares with a face value of ₹10 for both issued and proposed new shares to be issued and listed through IPO.
10. The issuer must have a minimum operating profit of Rs. 3 crore (earnings before interest, depreciation and tax) of Rs. 3 crore from operations for at least any 2 out of 3 financial years preceding the application.
11. For those issuers which are not eligible to migrate to Main Board under Regulation 280(2) of ICDR, allow such issuers to raise funds without migration but making them subject to disclosure requirements.
12. SME IPO proceeds should not be used to repay loans to promoters, promoter groups, or related parties, whether directly or indirectly.
13. Submission of statutory auditor certificate on half-yearly basis if amount raised for working capital purpose exceeds Rs. 5 crores.
14. Appointment of key managerial personnel and senior management by the issuer and Site visit by Merchant Banker which shall will form part of the due diligence report included in the offer document and disclosure of Merchant Banker fees, in any form, in the Red Herring Prospectus (‘RHP’).
15. Publishing DRHP on stock exchange websites and in one English, Hindi and Regional language newspaper for public comments which shall be open for atleast 21 days from public announcement.
16. Mandatory conversion of outstanding convertible securities before IPO.
17. Merchant Bankers will be required to submit a due diligence certificate to the Stock Exchanges when filing the Draft Offer Document and post-listing exit opportunities for dissenting shareholders may be provided in the SME chapter, similar to the Main Board provisions.
18. Issuer will be required to furnish explanation that Price per share for determining securities ineligible for MPC, shall be adjusted for corporate actions e.g. split, bonus etc.

Proposal for Changes in SEBI (LODR) Regulations, 2015

1. Extending RPT disclosure norms under LODR Regulations to SME-listed entities with paid-up capital exceeding ₹10 crore and net worth exceeding ₹25 crore with the exception of materiality threshold provisions which states that approval by shareholders for RPT shall be only for transactions exceeding 10% of annual consolidated turnover, and not lower of Rs. 1000 crore or 10% annual consolidated turnover since SMEs may not enter into high value transactions exceeding Rs 1000 crores.
2. Disclosure of the composition and details of Board and committee meetings to SME-listed entities with paid-up capital exceeding ₹10 crore and net worth exceeding ₹25 crore, on a quarterly basis in XBRL format.
3. Submission of shareholding patterns, statements of deviations or variations and financial results on a Quarterly basis, aligning with the requirements for Main Board listed entities.

SEBI invites public comments by December 04, 2024 on the above-mentioned proposals.