India’s markets regulator has proposed shifting SME listing thresholds to market capitalisation, lowering the minimum application size and tightening profitability tests as higher borrowing costs increase the appeal of equity funding.
India’s capital markets regulator has proposed a sweeping rewrite of the rules governing small and medium enterprise initial public offerings, arguing that the changes could give growing companies a more realistic funding choice just as borrowing costs remain elevated. The move comes at a time when the Reserve Bank of India has shifted to a tighter stance, after inflation risks from higher oil prices and a patchy monsoon prompted it to raise the repo rate for the first time in nearly four years. For smaller businesses, that backdrop matters: when debt gets dearer, equity can become a more attractive way to finance expansion, especially for firms with thin margins and uneven cash flow.
According to The Hindu, the Securities and Exchange Board of India wants to replace the existing paid-up capital approach with a framework based on post-issue market capitalisation. Under the proposal, companies valued at up to ₹1,000 crore would be channelled to the SME platform, while those worth between ₹1,000 crore and ₹4,000 crore could choose either the SME route or the main board if they meet the relevant conditions. Firms above ₹4,000 crore would have to go directly to the main board, a shift designed to stop larger businesses from using the SME segment as a stepping stone before moving elsewhere.
The regulator is also seeking to tighten the quality of offerings while widening access. Several reports, including those by Business Standard and Upstox, said the minimum application size would be cut to ₹1 lakh from ₹2 lakh, while the minimum number of allottees would rise to 500 from 200. SEBI is also proposing a stricter profitability test, requiring an average operating profit of ₹3 crore a year over three years, rather than the current standard of ₹1 crore in at least two of the previous three years. If a company misses that benchmark, it could still come to market through book-building if at least 75 per cent of the net offer is taken up by qualified institutional buyers.
The proposed overhaul goes beyond entry requirements. SEBI has suggested scrapping mandatory market making for SME-listed shares, along with related inventory obligations, and removing the rule that underwriters cover 100 per cent of the issue, including the lead manager’s 15 per cent commitment. It also wants SME shares to trade in single-share lots, which would let investors buy and sell smaller quantities after listing. The regulator has separately outlined new rules for shareholding lock-ins and the use of IPO proceeds, with a distinct framework for offer-for-sale deals.
The policy shift lands at a moment when the gap between large and small market fundraisings has become stark. The Hindu reported that main board IPOs raised about ₹1.73 lakh crore in the latest financial year, while NSE’s SME platform brought in just ₹5,363 crore. That contrast does not mean SME listings are unimportant. The country’s official MSME registration data shows a huge base of potential issuers, but many of those firms are too small, informal or lightly governed to meet public-market standards. The government’s Economic Survey said more than 1,380 companies have listed on the BSE and NSE SME platforms since inception, including 217 in FY26 up to December 2025.
The deeper question is which businesses will actually use the revised route. The Hindu noted that the opportunity is most relevant for manufacturers, engineering groups, technology companies, defence suppliers and specialised service providers, where investment needs can be heavy long before cash flows become stable. For such firms, equity may do more than raise money: it can improve balance sheet strength, reduce leverage and eventually make bank borrowing easier. But for micro-enterprises, the costs of compliance, disclosure and governance may still be too high. The broader aim, in SEBI’s telling, is not to make equity cheaper than debt, but to create a more balanced funding system in which viable small companies can choose the structure that best fits their business model without compromising investor protection.
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