SEBI’s proposed SME IPO overhaul: Fewer weak issuers, lower costs and a bigger test for investor demand

Ritaban Basu, CEO, B2K Analytics shared that 158 SME IPOs raised Rs 7,542 crore between January and September 2026, compared with 183 issues raising Rs 8,535 crore in the corresponding period of 2025 and 200 issues raising Rs 7,044 crore in 2024.

Higher entry barriers could improve issuer quality

SEBI has proposed to hike the average annual operating profit requirement to Rs 3 crore over the previous three years. However, for companies that do not meet this threshold, they can look to an alternative route wherein 75 percent of the offer would have to be allotted to qualified institutional buyers (QIBs).

According to experts, the tighter eligibility criteria can reduce the number of firms that qualify for an SME IPO. The higher threshold could exclude companies with uneven earnings or those whose profits have risen sharply just before listing.

“The three-year average is the harder part, because many companies show a sharp jump in profit just before listing,” said Tarun Singh, managing director and founder of Highbrow Securities.

However, Singh added that the regulator should clearly explain their definition of operating profit, including how depreciation is treated, so that asset-heavy manufacturing businesses don't see a disadvantage.

Gupta said a decline in the number of SME IPOs would not necessarily be a setback if the changes resulted in issuers that are better prepared and coming to market with more credible valuations.

Lower costs, but underwriting risks remain

One of the most significant proposed changes from the consultation paper is the removal of mandatory 100 percent underwriting.

According to B2K Analytics, underwriting fees accounted for around 50 percent of total issue expenses for NSE SME IPOs in FY25 and 38 percent in FY26. If this requirement was relaxed, it would significantly reduce fundraising costs for issuers.

Without mandatory underwriting, issuers may find it harder to complete a fundraise when investor demand falls short. “Although it may reduce the cost of raising capital, underwriting still plays an important role when an issue does not attract sufficient demand,” Gupta said. This would mean that realistic pricing would become more critical for companies.

Singh argued that some IPOs failing to meet subscription requirements would not necessarily be a bad outcome. Underwriting was triggered in only four IPOs over three years, he said, mostly because merchant bankers had worked to avoid having to absorb unsubscribed shares.

Will removing market makers hurt liquidity?

SEBI has also proposed to remove compulsory market making. The reason it was introduced was to facilitate trading in SME stocks by providing buy and sell quotes.

However, it has not always translated into meaningful liquidity. According to Basu, SEBI data shows market makers accounted for between zero and 10 percent of total turnover in 361 NSE and 268 BSE SME stocks between August 2025 and July 2026.

“A quote on the screen is not depth,” Singh said. He argued that genuine buying and selling interest, rather than market making, determines liquidity for the firm.

Further, the experts added that the introduction of a one-share trading lot, as proposed in the paper, could also make SME shares easier to trade, as it would remove the constraints that are associated with large trading lots.

However, the withdrawal of compulsory market making could also widen the bid-ask spreads in some stocks, especially those with limited investor interest..

Ultimately, the proposed changes in the consultation paper could shift the SME IPO market towards stronger issuers and more market-driven fundraising, instead of relying on market-making. The key challenges that the regulator has faced has been to improve investor protection without shutting genuine smaller businesses out of the capital markets.

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