Summary: The Securities and Exchange Board of India (SEBI), through its consultation paper dated October 14, 2026, has proposed substantial changes to the regulatory framework governing initial public offerings by Small and Medium Enterprises (SMEs). The proposals seek to replace the existing paid-up-capital-based listing eligibility criteria with market-capitalisation thresholds, introduce revised financial eligibility conditions, rationalise investor allocation and underwriting requirements, and modify the rules governing migration from SME platforms to the Main Board. Under the proposed framework, issuers with post-issue market capitalisation up to ₹1,000 crore would generally access the SME platform, while issuers valued above ₹1,000 crore and up to ₹4,000 crore could choose between the SME platform and the Main Board, subject to eligibility requirements. The consultation paper also proposes an average annual operating-profit threshold of ₹3 crore over three financial years and an alternative route for issuers that do not satisfy the profitability requirement, supported by substantial Qualified Institutional Buyer participation. Other major proposals include a minimum IPO application value of ₹1 lakh, revised retail and institutional allocation, an increase in minimum allottees to 500, changes to promoters’ and pre-issue shareholders’ lock-in periods, rationalisation of underwriting, a 90% minimum subscription requirement, a trading lot of one share and discontinuation of compulsory market making. The proposed migration framework would also rely on market capitalisation instead of primarily on paid-up capital. The consultation paper contains transitional provisions for ongoing public issues and distinguishes between existing SME-listed issuers and companies listing after the proposed amendments. These changes remain proposals for public consultation and do not automatically amend the presently applicable SEBI ICDR Regulations. Comments have been invited up to November 4, 2026.
SEBI Proposes Major Overhaul of SME IPO Framework: Key Changes in Eligibility, Profitability, Investor Allocation, Lock-in and Migration to Main Board
- Introduction
- 1. Why Has SEBI Proposed a Review of the SME IPO Framework?
- 2. Major Change: Eligibility Based on Post-Issue Market Capitalisation
- Existing framework
- Proposed framework
- Additional Ind AS requirement
- What happens if market capitalisation changes during the IPO process?
- 3. Revised Financial Eligibility Criteria
- Average operating profit of ₹3 crore per year
- Alternative eligibility route for issuers not meeting the profitability requirement
- 4. Additional Conditions Following Conversion or Business Reorganisation
- Four completed financial quarters
- Filing of financial statements with the ROC
- Qualifying business reorganisation
- Change in promoter control
Introduction
The Securities and Exchange Board of India (SEBI), through its consultation paper dated October 14, 2026, titled “Consultation Paper on Recommendations pursuant to Review of provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 related to Initial Public Offer by Small and Medium Enterprises”, has proposed a comprehensive review of the regulatory framework governing initial public offers (IPOs) by Small and Medium Enterprises (SMEs).
The proposed reforms seek to recalibrate the SME IPO framework in view of the significant growth of the segment, increasing investor participation, the rising market capitalisation of listed entities and the need to balance access to capital with investor protection.
The consultation paper proposes changes across several areas, including eligibility for listing on the SME platform, financial eligibility criteria, minimum application size, allocation to investor categories, underwriting, minimum subscription, offer for sale, promoters’ lock-in, trading lots, compulsory market making and migration to the Main Board.
Importantly, these are proposals for public consultation and not amendments that have automatically become effective law. The existing SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), as currently applicable, will continue to govern SME IPOs until the relevant amendments are formally notified and become effective.
1. Why Has SEBI Proposed a Review of the SME IPO Framework?
The SME platform was established to facilitate smaller enterprises in accessing public capital markets while maintaining safeguards appropriate to their size, scale and risk profile.
Over time, the segment has evolved considerably. The consultation paper reports that, as of July 31, 2026, the SME platform had a market capitalisation of approximately ₹4,70,984 crore, including entities that had migrated to the Main Board.
SEBI considers that certain existing requirements may require rationalisation to reflect the present market environment. In particular, the existing framework contains requirements relating to paid-up capital, minimum application size, underwriting, market making and migration that may impose additional costs or restrictions on issuers and investors.
The proposed framework seeks to achieve three broad objectives:
- Align eligibility with the economic size and market value of an issuer rather than relying primarily on paid-up capital.
- Rationalise SME-specific requirements where alignment with the Main Board is considered appropriate.
- Retain or introduce safeguards necessary for investor protection, business continuity and orderly market functioning.
2. Major Change: Eligibility Based on Post-Issue Market Capitalisation
Existing framework
Regulations 229(1) and 229(2) of the ICDR Regulations presently determine eligibility for an SME IPO principally on the basis of post-issue paid-up capital.
Broadly, an issuer with post-issue paid-up capital of up to ₹10 crore may access the SME platform, while an issuer with post-issue paid-up capital exceeding ₹10 crore and up to ₹25 crore may also issue securities under the SME framework, subject to the applicable requirements.
Proposed framework
SEBI proposes to replace this paid-up-capital-based eligibility framework with a market-capitalisation-based framework.
| Proposed post-issue market capitalisation | Proposed listing route |
|---|---|
| Up to ₹1,000 crore | SME platform only |
| Above ₹1,000 crore and up to ₹4,000 crore | SME platform or Main Board, subject to applicable eligibility conditions |
| Above ₹4,000 crore | Main Board |
The market capitalisation for this purpose is proposed to be calculated at the offer price.
Additional Ind AS requirement
An issuer having post-issue market capitalisation above ₹1,000 crore and up to ₹4,000 crore that opts for the SME platform would be required to present its restated consolidated financial statements prepared in accordance with Indian Accounting Standards (Ind AS), if it has not already adopted Ind AS.
The requirement is proposed to cover the preceding three financial years and the stub period, if any.
What happens if market capitalisation changes during the IPO process?
The consultation paper also addresses situations in which an issuer’s estimated post-issue market capitalisation changes between the filing of the draft offer document and the filing of the Red Herring Prospectus (RHP) or prospectus, as applicable.
Where an issuer initially files under the Main Board framework but its estimated post-issue market capitalisation falls to ₹1,000 crore or below at the relevant subsequent stage, it would be required to re-file under the SME framework.
Conversely, an issuer initially proceeding under the SME framework may continue under that framework if its estimated post-issue market capitalisation exceeds ₹1,000 crore but remains within ₹4,000 crore.
If it exceeds ₹4,000 crore, re-filing under the Main Board framework would be required.
Practical implication: Issuers and merchant bankers would need to assess the applicable listing platform carefully at the draft offer document stage and monitor the estimated post-issue market capitalisation as the IPO progresses.
3. Revised Financial Eligibility Criteria
Average operating profit of ₹3 crore per year
Under the proposed Regulation 229(6), an issuer would be required to have an average operating profit of at least ₹3 crore per year during the preceding three financial years.
The calculation is proposed to be based on restated consolidated financial statements.
The requirement is an average over the three-year period. It does not mean that the issuer must necessarily earn operating profit of at least ₹3 crore in each of the three individual financial years.
The consultation paper proposes a profitability-based eligibility route while retaining SME-specific requirements relating to business track record, continuity and promoter stability.
Alternative eligibility route for issuers not meeting the profitability requirement
Proposed Regulation 229(7) would permit an issuer that does not satisfy the prescribed profitability requirement to undertake an IPO through the book-building process, subject to enhanced institutional participation.
Under this route:
- At least 75% of the net offer must be allotted to Qualified Institutional Buyers (QIBs).
- The allocation to Retail Individual Investors (RIIs) must not exceed 10% of the net offer.
- The allocation to Non-Institutional Investors (NIIs) must not exceed 15% of the net offer.
- The proposed allocation framework provides for 5% of the QIB portion to be allocated to mutual funds, subject to the applicable provisions.
If the prescribed minimum QIB allocation of 75% is not achieved, the entire subscription money would be required to be refunded.
This route is intended to provide an alternative for issuers that do not meet the profitability test while requiring substantial participation from institutional investors.
4. Additional Conditions Following Conversion or Business Reorganisation
The consultation paper proposes changes to the eligibility requirements applicable to companies formed through conversion of a proprietorship concern, partnership firm or limited liability partnership (LLP), as well as certain qualifying business reorganisations.
Four completed financial quarters
The existing requirement linked to the completion of one full financial year is proposed to be replaced by a requirement to complete four consecutive financial quarters following the conversion or the latest effective date of the qualifying business reorganisation, as applicable.
The proposal is intended to reduce variations in the effective waiting period arising from the date on which the conversion takes place.
Filing of financial statements with the ROC
The issuer would also be required to have filed at least one annual audited financial statement, or part thereof prepared after the conversion or business reorganisation, with the Registrar of Companies (ROC) before filing the draft offer document.
Qualifying business reorganisation
The proposed framework seeks to cover certain cases in which a company acquires, takes over or otherwise derives a substantial part of its business from a proprietorship concern, partnership firm or LLP.
The relevant proposal addresses cases where more than 50% of the revenue of the latest financial year is derived from the relevant predecessor business or businesses.
In such cases, the historical operating track record of the predecessor business may be considered in accordance with the proposed conditions.
Change in promoter control
The consultation paper also proposes a one-year seasoning requirement following a complete change in promoters or an acquisition of more than 50% shareholding by new promoters, subject to the detailed conditions in the proposed provisions.
These requirements are intended to prevent an entity from accessing the SME platform immediately after a material change in its underlying business or ownership without demonstrating an appropriate period of continuity.
