Sebi Plans Changes for SME IPOs, Insider Trading Rules

The Securities and Exchange Board of India (SEBI) will discuss updates to IPO rules for small and medium enterprises (SMEs), insider trading regulations, and frameworks for angel funds in its December 18 meeting. SEBI is considering increasing the minimum application size for SME IPOs from ₹1 lakh to ₹2-4 lakh. This change could potentially limit the involvement of retail investors, as the higher investment threshold may make these IPOs less accessible to smaller participants. This move comes as part of SEBI’s review of regulations surrounding SME IPOs to manage the growing investor interest. SME IPOs have surged since FY 2022-23, with ₹6,000 crore raised in FY 2023-24 across 196 issues. By October 2024, 159 SME IPOs had successfully raised ₹5,700 crore, marking a significant increase in funds generated through small and medium enterprise public offerings. This trend highlights the growing interest and participation in SME IPOs as a means of raising capital for emerging businesses.

As the number of SME IPOs has increased, investor participation in these offerings has also risen sharply, raising concerns for SEBI. The ratio of applicants to allotted shares has skyrocketed, from 4 times in FY22 to 46 times in FY23, and an astounding 245 times in FY24. This surge in demand is prompting SEBI to reassess its regulations.

SEBI may raise the minimum number of investors required for an SME IPO to 200, up from the current 50, to ensure the success of such public offerings. To ensure long-term commitment, SEBI plans to extend the lock-in period for the promoter’s minimum contribution from 3 years to 5 years. Additionally, SEBI may set requirements for SME IPOs to have a minimum issue size of Rs 10 crore and an operating profit of Rs 3 crore in at least 2 out of the past 3 financial years. SEBI is also reviewing the definition of Unpublished Price Sensitive Information (UPSI) to ensure clearer, more consistent compliance.

SEBI is considering broadening the definition of Unpublished Price Sensitive Information (UPSI) to include aspects like loan restructuring, forensic audits, enforcement actions against a company or its management, and control over fundraising and agreements. Additionally, SEBI is reviewing regulations for angel funds in the alternative investment space, proposing that only accredited investors—those meeting certain net-worth criteria—be allowed to invest. This move aims to ensure that only investors with the right risk tolerance are involved in start-up funding through angel funds.

SEBI is expected to update the investment limits for angel funds to encourage greater funding in startups. The minimum investment may be lowered to Rs 10 lakh from Rs 25 lakh, making it more accessible for investors. The maximum investment cap for angel funds is set to rise from ₹10 crore to ₹25 crore, enabling them to make larger investments in high-potential startups. This change aims to support growing businesses by allowing more substantial financial backing from angel investors. This change aims to improve the flow of capital into growing businesses while maintaining investor protection.