sebi
Published on 3 July 2025
SEBI Tightens Oversight on SME IPOs Amid Merchant Banker Scrutiny
SEBI Tightens Screws on SME IPOs: A New Era of Accountability Begins July 1
India’s SME IPO market has seen an unprecedented boom. In 2024 alone, 240 SME IPOs raised ₹8,761 crore, with more on the way in 2025. But behind the headlines of record fundraising lies a growing concern: whether investor protection, due diligence, and capital market discipline are keeping pace.
Crackdown Mode: Merchant Bankers Under Fire
SEBI has recently taken stern action against two merchant bankers—Inventure Merchant Banking Services and First Overseas Capital—barring them from taking on any new IPO mandates. The charge? Negligence in due diligence and misuse of IPO funds.
The most striking example is Vaarya Creations, where SEBI discovered that 71% of the IPO proceeds—meant to fund the business—were instead allocated under vague “issue-related expenses.” This is not only well beyond industry norms, but raises uncomfortable questions about possible fund diversion and collusion.
Regulatory Shake-Up: What’s Changing from July 1, 2025
SEBI’s new rules, effective July 1, represent one of the most sweeping overhauls of SME IPO regulations to date. Here's a simplified breakdown of the most critical changes:
| Key Area | Old Rule | New Rule (from July 1, 2025) |
|---|---|---|
| Minimum Application Size | ₹1 lakh | ₹2 lakh (must apply for two lots, not one) |
| Investor Categorisation | Retail, NII, QIB | ‘Retail’ replaced with ‘Individual Investor’ (2 lots min.) |
| Bid Revisions | Allowed | No downward revisions or cancellations allowed |
| Cut-off Price Option | Available for some categories | Removed across the board |
| Bidding Timeline | Standard closing time | Closes 4:00 PM; UPI mandate allowed till 5:00 PM |
| EBITDA Requirement | No profitability criteria | ₹1 crore EBITDA in 2 of last 3 years now mandatory |
| Offer for Sale (OFS) | No restriction | Max 20% of issue; no shareholder can sell >50% of holding |
| Promoter Lock-in | 3 years for minimum contribution | Excess holding phased: 50% in 1st year, 50% in 2nd |
| Monitoring of Funds | Mandatory only if issue > ₹100 crore | Now lowered to ₹50 crore; below that, auditor certification required |
| General Corporate Purpose | No explicit cap | Max 15% of proceeds or ₹10 crore, whichever is lower |
| Market Making | Mandatory for 3 years | Unchanged |
SEBI Is Not Stopping at Rulebooks
Escrow Fund Abuse Is in the Crosshairs
The recent misuse of IPO proceeds—especially through premature transfers from escrow accounts—has revealed a regulatory gap. SEBI is now considering stricter dual authorisation protocols for all fund transfers from escrow accounts, potentially requiring sign-off by both a company official and the merchant banker.
New Restrictions on Fund Usage
- No repayment of promoter loans or related-party dues from IPO proceeds.
- Statutory auditor certification required until funds are fully utilised (if issue size is below ₹50 crore).
- QR codes on DRHP notices will help investors easily access and review offer documents during the mandatory 21-day public comment period.
Tighter Oversight of Related Party Transactions (RPTs)
Main-board disclosure norms for related-party dealings will now apply to SME IPOs—creating a uniform governance framework across listing segments.
The Larger Message: A Market Growing Up
This isn’t just regulatory housekeeping—it’s a course correction.
The SME segment, originally designed to support India’s smaller businesses, had started showing signs of becoming a speculative playground. SEBI’s tighter eligibility norms (e.g., EBITDA filter, two-lot minimum, removal of cut-off price bidding) aim to ensure that only credible, well-governed issuers can access public capital—and that investors know exactly what they’re buying into.
The Merchant Banker’s Wake-Up Call
For too long, some merchant bankers have operated with minimal scrutiny, acting as rubber stamps rather than fiduciaries. That era is ending.
From now on, merchant bankers will be:
- Held responsible for end-use of funds,
- Barred for serious violations, and
- Expected to conduct granular due diligence, including on issue-related expenses and fund flow timelines.
Investor Confidence: Rebuilding Brick by Brick
SEBI’s reforms are designed not to stifle the SME IPO boom, but to sustain it responsibly. By filtering out speculative listings and dubious intermediaries, the regulator hopes to:
- Restore credibility to the SME segment,
- Attract more serious long-term investors, and
- Ensure that capital raised from the public is used for actual business growth—not siphoned into unexplained accounts.
Bottom Line
SEBI has drawn a clear line in the sand. For issuers and intermediaries who’ve treated SME IPOs as a shortcut to easy money, this is a moment of reckoning.
Going forward, transparency, governance, and compliance won’t just be regulatory checkboxes—they’ll be prerequisites for access to public capital.
For investors, this is a welcome shift. For merchant bankers and SME promoters, it’s a loud and clear message: the regulator is watching, and the rules just got a lot stricter.