The Securities and Exchange Board of India (SEBI) has proposed a broad overhaul of the rules governing initial public offerings (IPOs) by small and medium enterprises (SMEs). The proposed changes include replacing paid-up capital-based eligibility criteria with market capitalisation thresholds, increasing the minimum average operating profit requirement, lowering the minimum IPO application value and revising rules for underwriting, market making and investor allocation.
The consultation paper, released on October 14, 2026, aims to make SME fundraising rules more closely reflect the size and financial position of businesses while retaining safeguards for investors. The proposals would require companies with post-issue market capitalisation of up to ₹1,000 crore to list on the SME platform, while companies valued above ₹1,000 crore and up to ₹4,000 crore could also opt for the segment subject to additional requirements. SEBI has invited public comments until November 4, 2026.
Key Takeaways
- Market capitalisation: SEBI proposes replacing paid-up capital thresholds with post-issue market value criteria.
- SME platform threshold: Companies valued at up to ₹1,000 crore would be required to list on the SME platform.
- Profitability requirement: The proposed minimum average operating profit is ₹3 crore annually over the preceding three financial years.
- Minimum application: The proposed value would fall from ₹2 lakh to ₹1 lakh.
- Institutional participation: Companies that do not meet the profitability test could qualify through an alternative route requiring at least 75% of the net offer to be allotted to qualified institutional buyers.
- Public consultation: Comments are invited until November 4, 2026.
- Current status: These are proposals, not rules that have already taken effect.
What Is SEBI Proposing for SME IPOs?
SEBI’s consultation paper recommends changes to the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, which govern public issues and related fundraising requirements.
The SME platform allows smaller businesses to raise equity capital from public investors. Over time, the segment has become a fundraising route for companies seeking capital to expand operations, invest in infrastructure, reduce debt or pursue other business objectives.
SEBI’s proposed overhaul addresses several parts of the process, including which companies qualify, how financial performance is assessed, how investors participate and what obligations apply after listing.
The regulator is seeking feedback before deciding whether and how to implement the recommendations. The final framework may differ from the consultation paper after SEBI considers comments from companies, investors, exchanges and other stakeholders.
Market Capitalisation to Replace Paid-Up Capital
One of the central proposals is to replace paid-up capital-based eligibility criteria with post-issue market capitalisation.
Under the existing framework described in the consultation paper, companies with post-issue paid-up capital of up to ₹10 crore can access the SME platform, while companies with paid-up capital above ₹10 crore and up to ₹25 crore may also issue securities under the framework.
SEBI’s working group has argued that paid-up capital does not necessarily reflect a company’s economic size, valuation or growth potential. Two businesses with similar paid-up capital can have very different valuations depending on their operations, financial performance and growth prospects.
The proposed market capitalisation framework is intended to align listing eligibility more closely with the value of a company after its IPO.
Proposed SME listing thresholds
| Post-issue market capitalisation | Proposed listing treatment |
|---|---|
| Up to ₹1,000 crore | Listing on the SME platform would be required |
| Above ₹1,000 crore and up to ₹4,000 crore | Company could opt for the SME platform, subject to additional requirements |
| Above ₹4,000 crore | Company would be required to follow the mainboard route under the proposed framework |
Companies in the ₹1,000 crore to ₹4,000 crore range choosing the SME platform would have to prepare restated consolidated financial statements in accordance with Indian Accounting Standards (Ind AS), if they had not already adopted them. The proposed requirement would cover the preceding three financial years and any applicable stub period.
The paper also proposes rules for companies whose estimated market capitalisation changes during the IPO process, including when they may need to refile under a different listing framework.
SEBI Proposes Higher Profitability Requirements
SEBI has proposed raising the operating profitability threshold for SME IPO applicants.
Under the existing framework described in the consultation paper, an issuer must have operating profit of at least ₹1 crore from operations in at least two of the three preceding financial years.
The proposed framework would instead require average operating profit of at least ₹3 crore per year over the preceding three financial years, calculated using restated consolidated financial statements.
The change would place greater emphasis on a company’s sustained operating performance before it enters the public market. However, profitability would not be the only route to eligibility.
Alternative route for companies below the profit threshold
Companies that do not meet the proposed profitability requirement could still access the IPO market through the book-building route, subject to at least 75% of the net offer being allotted to qualified institutional buyers (QIBs).
If the required allocation is not achieved, the entire subscription money would have to be refunded under the proposal.
This route would not remove other SME-specific requirements concerning business track record, business conversion or reorganisation, and promoter stability.
The proposal would give established institutional investors a larger role in evaluating some issuers that do not meet the standard profitability test. It would not guarantee that an IPO succeeds or that investors avoid losses.
Minimum SME IPO Application Value May Fall to ₹1 Lakh
Another significant proposal is to reduce the minimum application value for SME IPOs from ₹2 lakh to ₹1 lakh.
SEBI has proposed retaining a minimum application size of four lots, with each lot worth at least ₹25,000. The change would lower the minimum initial application amount while preserving a defined minimum participation size.
The regulator has also proposed reducing the trading lot for SME-listed securities to one share. This could provide investors with more flexibility when buying or selling shares in the secondary market, although the proposal’s implementation would depend on the final rules and a separate circular where required.
The changes are distinct: the minimum IPO application determines the initial subscription requirement, while the trading lot governs the size of transactions after listing.
Proposed application and allotment changes
| Area | Current framework described in reports | SEBI proposal |
|---|---|---|
| Minimum application value | ₹2 lakh | ₹1 lakh |
| Minimum application structure | Minimum lot requirements apply | At least four lots, each worth at least ₹25,000 |
| Minimum number of allottees | 200 | 500 |
| Trading lot after listing | Price-band-based lot-size framework | One share, subject to implementation requirements |
SEBI has also proposed that each retail individual investor receive at least one minimum lot, subject to availability, with remaining shares allotted proportionately rather than being restricted to multiples of the minimum lot.
Greater Role for Institutional Investors
The proposed framework seeks to increase institutional participation in SME IPOs, particularly where a company does not meet the standard profitability threshold.
For book-built SME issues, SEBI has proposed allowing anchor investor allocation, with up to 60% of the portion available for QIB allocation eligible to be allocated to anchor investors.
For IPOs using the alternative eligibility route, at least 75% of the net offer would be allotted to QIBs. The proposal would cap the non-institutional allocation at 15% and the retail individual investor allocation at 10% for this route.
The rationale is to place more emphasis on participation from professional investors in offerings by companies that do not meet the proposed profitability criteria.
However, institutional participation is not a substitute for due diligence. QIBs can also make investment decisions that turn out to be wrong, and investors should continue to assess an issuer’s business model, financial statements, valuation, governance and use of IPO proceeds.
Changes to Underwriting and Market Making
SEBI has proposed removing the requirement for 100% underwriting of SME IPOs and the additional requirement for lead managers to underwrite at least 15% of the issue size on their own account.
Instead, the mainboard underwriting provisions would apply to SME issues, with an exception for the 75% QIB portion under the alternative eligibility route.
The consultation paper also proposes a minimum subscription requirement of 90%, with a refund if the threshold is not achieved.
Another proposal is to remove compulsory market making for SME securities. Under the current framework described by SEBI, market making is required for at least three years from listing or migration to the mainboard, with the market maker maintaining a prescribed inventory.
The regulator has indicated that the proposed one-share trading lot and removal of compulsory market making would take effect only after a separate circular rescinds the existing trading-lot circular. Until then, the existing requirements would continue to apply.
This distinction matters because the publication of a consultation paper does not automatically change how an SME stock trades.
Proposed Changes to Promoter Lock-In and Mainboard Migration
SEBI has also proposed revising the lock-in periods for promoter and pre-IPO holdings.
Under the proposed framework, the minimum promoters’ contribution would remain locked in for three years from allotment. Promoters’ holdings beyond the minimum contribution would be locked in for one year.
The lock-in period for pre-issue capital held by people outside the promoter and promoter group would be reduced from one year to six months. Specified securities held by the promoter group would remain subject to a separate one-year lock-in.
The consultation paper proposes replacing paid-up capital-based mainboard migration thresholds with market capitalisation criteria. Under the proposed approach, migration would be linked to market capitalisation of ₹1,000 crore or more but below ₹4,000 crore, while migration would be mandatory if market capitalisation exceeded ₹4,000 crore, subject to the applicable mainboard eligibility requirements.
Existing SME-listed companies would continue under the current migration framework, according to the proposed transition arrangements. Companies listed after notification of the revised framework would be governed by the new market capitalisation-based criteria.
Why the Proposed Overhaul Matters
SME IPOs give smaller companies a route to raise public capital, but the segment also involves risks related to liquidity, disclosure quality, corporate governance and valuation.
SEBI’s proposals attempt to make eligibility criteria more closely reflect company size and operating performance while changing how investors participate in offerings. Lowering the minimum application value could reduce the initial amount required to apply, while the proposed profitability test would raise the financial threshold for the standard route.
The alternative route could provide access for companies that fall short of the profitability requirement, but it would require a high level of institutional allocation. Other changes, including revised lock-in periods and the proposed removal of compulsory market making, could alter how shares are held and traded after listing.
The final effect will depend on which recommendations SEBI adopts, the transition rules and how issuers, intermediaries and investors respond.
The Bigger Picture
The proposals come as SME platforms have become a significant part of India’s capital-raising ecosystem. SEBI’s consultation paper reported that 1,496 entities had been listed on SME platforms as of July 31, 2026, including companies that later migrated to the mainboard. Of these, 365 had migrated to the mainboard, while funds raised through SME IPOs since inception stood at ₹40,222 crore.
The regulator’s challenge is to preserve access to capital for growing businesses without allowing the smaller-company listing route to weaken investor protection. Market capitalisation thresholds, higher profitability criteria and a greater role for institutional investors could change which companies qualify and how their offerings are structured. But the proposals remain subject to public feedback, and the final regulations will determine the actual impact.
Looking Ahead
SEBI has invited comments on the consultation paper until November 4, 2026. The regulator will need to consider feedback from issuers, investment banks, stock exchanges, institutional investors and retail participants before finalising any changes. Companies preparing IPOs should therefore distinguish between the existing rules and the proposed framework rather than assuming that the new thresholds already apply.
If adopted, the changes could reshape SME IPO eligibility, subscription requirements, investor allocation and post-listing trading arrangements. Their practical impact will become clearer once SEBI publishes final rules and clarifies implementation dates and transitional provisions. Until then, the consultation paper is a proposal for regulatory change, not a completed overhaul.
Frequently Asked Questions
1. What has SEBI proposed for SME IPOs?
SEBI has proposed replacing paid-up capital-based eligibility criteria with market capitalisation thresholds and revising profitability, application size, allotment, underwriting, market-making and lock-in rules.
2. What is the proposed market capitalisation threshold?
Companies with post-issue market capitalisation of up to ₹1,000 crore would be required to list on the SME platform. Companies valued above ₹1,000 crore and up to ₹4,000 crore could also opt for the SME platform, subject to additional requirements.
3. What is the proposed minimum operating profit requirement?
SEBI proposes average operating profit of at least ₹3 crore annually over the preceding three financial years for the standard eligibility route.
4. Will the minimum SME IPO application amount fall?
The proposal would reduce the minimum application value from ₹2 lakh to ₹1 lakh, while retaining a minimum application structure of four lots worth at least ₹25,000 each.
5. Can a company that does not meet the profitability requirement still launch an IPO?
Under the proposal, it could use an alternative book-building route if at least 75% of the net offer is allotted to qualified institutional buyers, subject to the other eligibility requirements.
6. When will the proposed SEBI rules take effect?
They are not yet final. SEBI has invited public comments until November 4, 2026. Implementation would depend on the final regulatory decision and applicable circulars.
7. Will the proposed changes affect existing SME-listed companies?
The consultation paper includes transitional provisions. Existing SME-listed companies would generally continue under the current migration framework, and existing lock-in obligations would not be retrospectively removed.
8. Why is SEBI reviewing SME IPO regulations?
The review seeks to align eligibility with company size and valuation, reduce avoidable fundraising and compliance costs, encourage broader capital-market participation and retain investor-protection safeguards.
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