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The Securities and Exchange Board of India (SEBI) introduced reforms to the SME (small and medium enterprises) IPO process to make the market safer for investors, and enhance the framework for equity derivatives.

What Is an IPO?

An initial public offering (IPO) is when a private company sells its shares to the public for the first time on a stock exchange. The transition from private to public ownership is also known as "going public."

How Does an IPO Work?

Before an IPO, the company operates privately with a small number of investors, including founders, family members, and venture capitalists.

An IPO allows a company to raise capital from the market, which can be used for growth or debt repayment. It also allows early investors to profitably sell their stakes.

Investment banks manage the process by carrying out evaluations, preparing documentation, and marketing the offering to potential investors.

What changes SEBI is proposing to the SME IPO process?

SEBI has proposed several changes to make the SME IPO process safer for investors. These changes include increasing the minimum SME IPO size to Rs 10 crore, raising the IPO application size to Rs 4 lakh, limiting promoters' offers for sale to 20%, and establishing a compliance monitoring agency for listed SMEs.

These changes are introduced because many SME IPOs in recent years have raised funds at inflated valuations and then lost money for investors. SEBI identified cases of companies misusing or diverting funds, and some were penalized. These changes are intended to protect retail investors from such risks.

Increase in the minimum application size

SEBI proposes raising the minimum application size for SMEs' IPOs from Rs 1 lakh to Rs 2 lakh to protect smaller retail investors, as SME IPOs tend to carry higher risks.

More transparency in the IPO process

SEBI Plans to make IPO offer documents public for at least 21 days, as opposed to the current practice of making them public closer to the IPO opening. This allows investors more time to review the documents and make informed decisions.

Financial requirements for SMEs before IPOs

SEBI recommends that SMEs should have a minimum operating profit of Rs 3 crore in two of the previous three years before filing for an IPO. Currently, there is no such requirement.

Disclosure requirements for listed SMEs

SEBI recommends that listed SMEs disclose their shareholdings and financial results quarterly, similar to larger listed companies to increase transparency and accountability in the sector.

What kind of IPOs does SEBI propose to disallow?

SEBI proposes prohibiting IPOs where the main objective is to repay loans borrowed from promoters or the promoter group to prevent businesses from using public funds to repay personal debts.

Securities and Exchange Board of India (SEBI)

Before SEBI, the Indian securities market was regulated by the Controller of Capital Issues under the Capital Issues (Control) Act of 1947.

SEBI was established as a non-statutory body with no statutory powers by an executive resolution in 1988.

SEBI became an autonomous statutory body under the Securities and Exchange Board of India Act of 1992.

The Government of India appoints the Chairperson.

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Securities and Exchange Board of India (SEBI)

Stock Market Regulation in India

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Source:

Times of India

PRACTICE QUESTION

Q.Consider the following statements in the context of the Securities and Exchange Board of India (SEBI):

1. It was established as a statutory body under the Securities and Exchange Board of India Act 1992.

2. It functions under the Ministry of Corporate Affairs.

Which of the above statements is/are correct?

A) 1 only

B) 2 only

C) Both 1 and 2

D) Neither 1 nor 2

Answer: D

Explanation:

Statement 1 is incorrect:

The Securities and Exchange Board of India was established as the regulator of capital markets in April 1988 by an Executive Resolution of the Government of India. Thus, it initially functioned as a non-statutory body with no statutory authority. Later, with the passage of the Securities and Exchange Board of India Act in 1992, it became an autonomous and statutory body.

Statement 2 is incorrect:

The Securities and Exchange Board of India (SEBI) is administered by the Ministry of Finance. The chairman of SEBI is nominated by the Union Government, and the structure also includes two officers from the Union Finance Ministry.