The Securities and Exchange Board of India (SEBI) on Wednesday, 14 October 2026, released a consultation paper proposing a sweeping overhaul of the SME initial public offering (IPO) framework, including a valuation-based listing threshold, eased fundraising norms, and reduced compliance requirements. The proposals, if finalised, would fundamentally restructure how smaller companies access public capital markets in India.

Valuation-Based Listing Tiers

At the heart of the proposal is a three-tier listing structure tied to company valuations. Firms valued at up to ₹1,000 crore would be mandatorily required to list on SME platforms. Companies with valuations between ₹1,000 crore and ₹4,000 crore would have the flexibility to choose between SME and mainboard listings. Those exceeding ₹4,000 crore would be eligible only for mainboard listings. This tiering is designed to prevent large or mature companies from crowding out genuine small and medium enterprises on dedicated SME platforms.

Tighter Profitability and Subscription Norms

SEBI has proposed raising the profitability bar for SME IPO candidates, requiring an average annual operating profit of at least ₹3 crore. Loss-making companies, however, would retain market access provided that qualified institutional buyers (QIBs) subscribe to at least 75 per cent of the net offer — an alternative route intended to keep the door open for high-growth businesses that have not yet turned profitable.

On underwriting, the regulator has recommended scrapping the existing mandatory 100 per cent underwriting requirement. In its place, issues would need to achieve a minimum 90 per cent subscription; failing that threshold, investor funds would be refunded within four days. This change is expected to lower the cost burden on issuers and merchant bankers.

Liquidity and Investor Participation Reforms

SEBI has also proposed eliminating the compulsory three-year market-making requirement for SME-listed stocks — a compliance overhead that many smaller issuers have found costly. In tandem, the regulator suggested introducing one-share trading lots for SME stocks and reducing the minimum application size for SME IPOs to ₹1 lakh, both aimed at improving secondary-market liquidity. The minimum number of allottees in an SME IPO could be raised from the current 200 to 500, broadening the retail investor base for these issues.

Notably, SEBI has also proposed removing the existing ₹10 crore cap on funds that issuers can allocate for general corporate purposes, potentially giving companies greater flexibility in deploying IPO proceeds post-listing.

IPO Issue-Size Revision Relief Extended

The consultation paper follows SEBI's recent extension of a temporary relaxation allowing companies to revise their IPO issue size by up to 50 per cent without filing a fresh draft red herring prospectus (DRHP). Originally due to expire on 30 September 2026, the relief has been extended to 31 March 2027. Introduced in April, the measure allows issuers to increase or decrease the size of a fresh issue after filing draft documents, helping companies adapt to shifting market conditions without re-entering the full regulatory filing process.

The extension followed representations from investment bankers and issuers, who cited subdued investor participation and heightened geopolitical uncertainties — particularly in the Middle East — as factors complicating capital-raising plans and valuation assessments.

What Comes Next

The proposals are open for public consultation, and market participants including investment banks, SME issuers, and institutional investors are expected to submit their responses. If implemented, the framework would represent the most significant restructuring of India's SME capital markets in recent years, affecting hundreds of companies currently weighing public listings.