SEBI tightens norms for SME IPOs, merchant bankers

From tighter rules for SME IPOs to stricter checks on insider trading, the Securities and Exchange Board of India (SEBI) has approved a series of reforms in its protecting investors and streamlining market operations. The reforms, announced after SEBI's 208th board meeting on Wednesday, also include tougher criteria for merchant bankers and simplified norms for investment trusts.

Here’s a quick breakdown of what was discussed.

Stringent rules for SME IPOs

The amount raised for general corporate purposes (GCP) in SME IPOs has now been capped at 15% of the total issue size or ₹10 crore, whichever is lower. SME IPOs will also be prohibited from using proceeds to repay loans from promoters, promoter groups, or related parties.

The markets regulator had released proposal to overhaul the SME IPO framework in November and the Wednesday board meeting ironed out these proposals.

SMEs must report an operating profit of at least ₹1 crore in two out of the last three financial years when filing IPO papers.

In a bid to retain promoter accountability, SEBI has limited offers for sale (OFS) in SME IPOs to 20% of the total issue size, with no single shareholder allowed to sell more than 50% of their holding. Promoter holdings exceeding the minimum promoter contribution (MPC) will face phased lock-ins with 50% unlocked only after one year, and the remaining 50% after two years.

The allocation methodology for non-institutional investors (NIIs) in SME IPOs will now align with that of mainboard IPOs, ensuring uniform treatment. In a bid to combat the inflated valuations of SME IPOs, these small medium enterprises will be allowed to remain listed on SME platforms only if they comply with mainboard listing rules.

UPSI list now includes 17 more developments

Again, formalising what was given out in an October circular, SEBI has expanded the scope of unpublished price-sensitive information (UPSI) under its Insider Trading Regulations. The updated definition now includes 17 additional corporate developments. Companies can defer classifying certain external events as UPSI, with a two-day window for updates, and record them in a structured digital database.

PaRRVA Initiative

A much-needed change approved by the regulator is the creation of the Past Risk and Return Verification Agency (PaRRVA) to enhance transparency in marketing financial services. PaRRVA will verify the risk-return metrics for Investment Advisors (IAs), Research Analysts (RAs), Algorithmic Traders, and other SEBI-regulated entities.

A Credit Rating Agency (CRA) will serve as PaRRVA, with a recognised stock exchange functioning as the PaRRVA Data Centre (PDC). Initially, the initiative will run as a two-month pilot to assess its effectiveness.

REITs and InvITs

In a bid to ease operations, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) can now invest in unlisted equity shares of companies. Under certain conditions, these will now be able to offer services such as property management, maintenance, housekeeping, and project management for their assets. Further, SEBI has simplified disclosure norms for Small and Medium REITs (SM REITs) in scheme offer documents and simplified processes for public unit issues.

Merchant banking norms

Under the new rules, all merchant bankers (MBs), excluding banks, public financial institutions, and their subsidiaries, must engage solely in permitted activities. Engagement in any non-permitted activities should be transferred to a separate legal entity within two years. These separate entities must operate on an arm’s length basis from the MBs.

Further, the merchant bankers will be classified into two groups on the basis of their net worth and activities. With a net worth of at least ₹50 crore, category 1 MBs will be eligible to undertake all permitted activities, while Category 2 MBs having a net worth of at least ₹10 crore, will not be eligible for managing equity issues on the main board activity.