SEBI
Sebi tightens rules for SME IPOS, merchant banking biz

Regulator’s Board Approves Most Proposals From Its Nov Paper

Mumbai: Markets regulator Sebi on Wednesday tightened rules for small and medium enterprises (SMEs) aiming to tap the public market through listing. The new regulations also affect merchant bankers, stipulating a time frame for mutual fund managers to deploy funds raised through new fund offers (NFOs), and expand the definition of price-sensitive events.

Additionally, all Sebi-regulated entities, including fund houses, exchanges, depositories, and custodians using artificial intelligence, are now deemed responsible for its fair use. This regulation includes adherence to rules surrounding investor protection and data usage.

Key Points from Sebi Board:

  • EBIDTA Requirement: Small and medium enterprises must demonstrate an operating profit (earnings before interest, depreciation, and tax) of at least ₹1 crore for two out of the last three financial years prior to filing for an IPO.
  • Prohibition on Loan Repayment: The objective of an IPO cannot be to repay loans to promoters or associated entities. Additionally, the offer-for-sale amount in an SME IPO cannot exceed 20% of the total issue size, and selling shareholders are restricted to selling no more than 50% of their holdings through that offer.
  • Lock-in Period for Promoters: Lock-in periods for promoters’ holdings exceeding the minimum promoter contribution (MPC) can only be released in phases. 50% of promoters’ excess holdings can be released after one year from listing, with the remainder after two years.
  • Restrictions on IPO Submissions: SMEs are prohibited from pursuing an IPO if the offer includes loan repayment to promoters or related parties, directly or indirectly.
  • Mutual Fund Deployment: Mutual fund managers must deploy funds raised through NFOs within 30 days. If this is not achieved, they are obligated to provide exit options for all investors to redeem their investments without any exit load.
  • Commission Adjustments for Switches: If an investor switches from an existing mutual fund investment to an NFO, the distributor will receive the lower commission between the two schemes. This measure aims to discourage unnecessary switching prompted by higher commissions.

Last month, Sebi had issued a consultation paper on SMEs, and most of its proposals have now been approved by the board. A comparison of the proposed and approved rules highlights significant changes intended to enhance the regulatory framework for SMEs and protect investors.

Sebi also modified the rules governing merchant bankers in India. There will now be two categories of merchant bankers:

These changes reflect Sebi’s commitment to strengthening the regulatory landscape, encouraging responsible practices, and safeguarding investor interests in the evolving financial market.

Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked...