SEBI's Proposed SME IPO Overhaul: Market-Cap Eligibility, Rs. 3 Crore Profit Test and the End of Compulsory Market Making

Background: the framework today

Chapter IX of the ICDR Regulations governs public issues by small and medium enterprises on the SME platforms of BSE and NSE. Under the current framework:

• Eligibility (Regulation 229): An issuer with post-issue paid-up capital of up to Rs.10 crore may issue under Chapter IX. An issuer above Rs.10 crore and up to  Rs. 25 crore may also use it.
• Profitability: The issuer must have operating profit of at least Rs.1 crore in at least two of the three preceding financial years.
• Converted entities: An issuer that has converted from a proprietorship, partnership firm or LLP must have completed at least one full financial year after conversion before filing its draft offer document.
• General corporate purposes: GCP is limited to 15% of the amount raised or Rs.10 crore, whichever is less.
• Offer for sale: OFS is limited to 20% of the issue size, and each selling shareholder may sell no more than 50% of its pre-issue holding.
• Minimum application: Two lots with a value above Rs. 2 lakh, a level set by the March 2025 amendments.
• Underwriting and market making: Issues must be 100% underwritten, with the lead manager taking at least 15%. Compulsory market making applies for at least three years, with an inventory of at least 5%.

SEBI's concern is that paid-up capital is a poor proxy for the size of an enterprise. Some issuers restructure their capital, for example through bonus issues, simply to fall on one side of the threshold.

What SEBI has proposed

The consultation paper, dated 14 October 2026, builds on a Working Group report and on deliberations in SEBI's Primary Market Advisory Committee. Its principal proposals are set out below.

1. Eligibility by market capitalisation (Regulation 229(1) and (2))

New clauses in Schedule XVI would require an issuer to refile under the correct framework if its estimated size crosses a threshold between the DRHP and the RHP or prospectus.

2. Seasoning after conversion or reorganisation (Regulation 229(4))

The "one full financial year" requirement would become four consecutive completed financial quarters. At least one post-conversion audited financial statement must be filed with the RoC before the DRHP. The rule would also cover business reorganisations, including schemes of arrangement, where more than 50% of latest-year revenue comes from a predecessor proprietorship, firm or LLP. In those cases the predecessor's track record could be counted.

3. A tougher profitability test, with an alternative route

Proposed Regulation 229(6) would require average operating profit of not less than Rs.3 crore a year over the preceding three financial years, on restated consolidated financials.

Issuers that fail this test but meet the other eligibility conditions could use a book-built route under proposed Regulation 229(7). At least 75% of the net offer would go to QIBs, not more than 10% to retail individual investors and not more than 15% to non-institutional investors. If the QIB portion is not fully subscribed, the entire subscription money must be refunded.

4. Use of proceeds and offer for sale

• The Rs.10 crore absolute cap on GCP would be removed. The 15% limit would remain.
• The existing OFS limits in Regulation 230(1)(f) and (g) would be replaced by a dedicated Regulation 230A, modelled on the Main Board. It would include a one-year holding period before the DRHP. QIB sellers would be exempt from the 20% and 50% limits, except in Regulation 229(7) issues.

5. Lock-in (Regulations 238 and 239)

• Minimum promoter contribution: three years from allotment.
• Promoters' excess holding: one year. This replaces the current split of 50% for two years and 50% for one year.
• Promoter group: one year.
• Other pre-issue shareholders: six months, reduced from one year.

6. Application, allocation and trading

• Minimum application of Rs.1 lakh, made up of four lots of at least Rs.25,000 each.
• Anchor investors recognised, for up to 60% of the QIB portion.
• Minimum allottees raised from 200 to 500, with each retail investor guaranteed at least one minimum lot, subject to availability.
• Trading lot reduced to one share. The price-band lot table in Circular CIR/MRD/DSA/06/2012 would be rescinded.

7. Underwriting, minimum subscription and market making

• SME-specific 100% underwriting and the lead manager's 15% obligation would go. The Main Board approach would apply, and the 75% QIB portion in Regulation 229(7) issues would not be underwritten.
• A minimum subscription requirement aligned with Regulation 45 would be introduced, and Regulation 264(5) would be omitted.
• Compulsory market making under Regulation 261 would be removed.

8. Migration

The migration framework between the SME platform and the Main Board would be recalibrated around market capitalisation. Secondary commentary reports that migration from the Main Board to the SME platform would be removed, and that a transition window would allow ongoing issues to choose between regimes [verify against the full SEBI text before relying on this].

Analysis: a practitioner's view

The paper moves the SME platform away from structural protections, such as large tickets, mandatory underwriting and market makers, and towards economic tests and institutional demand.

Points that need clarification. Commentators have noted that the paper describes operating profit as EBIT in one place, while the draft regulation refers to earnings before interest, depreciation and tax. Under a Rs.3 crore average test, that difference matters a great deal. Whether a figure of exactly Rs.4,000 crore falls above or below the threshold also needs to be settled in the final text.

Effect on smaller issuers. Many small issuers may not meet a Rs.3 crore average operating profit. Their only option would be the Regulation 229(7) route, which depends on attracting QIBs. The smallest issuers may therefore find the platform harder to access.

Interplay with company law. For reorganisations by scheme, the "latest effective date" will usually be the effective date of the NCLT-sanctioned scheme. Issuers taking the Ind AS option should also plan the transition in their statutory financial statements.

Who is affected

The proposals affect promoters and CFOs planning SME listings in the next 6–18 months, recently converted firms and LLPs, and pre-IPO investors. They also affect merchant bankers, market makers and underwriters, and companies already listed on the SME platform through the migration and trading-lot changes.

Practical action checklist

• Re-test eligibility on restated consolidated numbers against the Rs. 3 crore average operating profit test.
• Estimate market capitalisation at the likely offer price to work out which band applies.
• Where the Rs.1,000–4,000 crore band is possible, assess how ready the company is for Ind AS.
• Review the timing of any conversion or reorganisation against the four-quarter rule and the RoC filing of audited post-conversion financials.
• Check pre-IPO cap tables for the one-year OFS holding period and the revised lock-ins.
• Revisit GCP planning, since the Rs.10 crore cap may go.
• Brief the board on the proposals. Consider making submissions through industry bodies or directly on SEBI's portal.
• Until amendments are notified, keep preparing DRHPs under the existing Chapter IX.

Key dates

• 14 October 2026: Consultation paper issued
• 4 November 2026: Last date for public comments
• Effective date: Not yet notified. The amendments will take effect only on Gazette notification.

Conclusion

If adopted, these proposals would make the SME platform a listing route sized by enterprise value, with lower entry costs for investors and fewer intermediary-driven costs for issuers, but with a stricter profitability filter. Promoters should model both regimes now rather than wait for notification.

VS Associates advises promoters and companies on IPO readiness, restructuring and corporate compliance. For help assessing how these proposals affect your listing plans, please reach out to our team.