In this 'Leading Questions' piece, Richa Bhansali discusses SEBI's evolving regulatory approach toward SME IPOs, the tightening of eligibility norms, and the practical realities of navigating public markets in a volatile environment.

Question: The SME IPO segment has seen tremendous activity over the past few years, but the regulatory environment has also shifted significantly. How would you characterise where things stand today?

Answer: The SME IPO market has matured considerably, but not without friction. According to NSE's FY26 market report, companies collectively raised Rs. 1.8 lakh crore through IPOs during the fiscal year, with 111 SME IPOs listed on the Emerge platform, even as the segment showed moderation, with issuances declining 32% and funds raised falling 25% year-on-year. The investor appetite has been real. But so have the governance concerns that accompanied the boom.

Between 2022 and 2024, SEBI observed recurring concerns relating to promoters using the OFS route to exit rather than raise growth capital, IPO proceeds being parked under the catch-all of general corporate purposes, related-party transactions being used to route funds back to promoter-linked entities post-listing, and, in some cases, manipulation of financials to meet listing conditions. These concerns reflected a structural gap between the ease of accessing the SME platform and the governance expectations that should accompany that access.

SEBI's response, formalised through the amended ICDR Regulations effective July 2025, was to raise the floor for who gets in. On entry conditions, a minimum operating profit of Rs. 1 crore in at least two of the preceding three financial years is now required; the minimum application size has been doubled to Rs. 2 lakh, and DRHPs must be available for a 21-day public comment period. On promoter discipline, the OFS component is capped at 20% of total issue size, individual selling shareholders may not offload more than 50% of their holdings, and funds raised cannot repay loans from promoters or related parties. On related-party compliance, mainboard RPT norms now extend to SME-listed entities, with materiality defined as 10% of annual consolidated turnover or Rs. 50 crore, whichever is lower.

These changes collectively signal a deliberate regulatory posture: the SME platform is for genuine businesses with a demonstrated track record, not for promoters seeking liquidity events under a light-touch regime.

Question: SEBI also issued two significant circulars in April 2026 that appear to move in the opposite direction, extending timelines and easing filing requirements. How do you reconcile that with the tightening you just described?

Answer: The April circulars are not contradictions. They are context-specific relief measures, and the distinction matters.

The April 7 circular extended the validity of SEBI's observation letters, ordinarily valid for 12 months, or 18 months under the confidential filing route, for all issuers with approvals expiring between April 1 and September 30, 2026, carrying them forward to September 30, 2026, subject to lead manager confirmation of ongoing ICDR compliance. Separately, SEBI permitted issuers to revise the fresh issue component by up to 50%, upward or downward, without refiling the DRHP, subject to prior SEBI approval, no change in the main objects of the issue, lead manager certification, and public disclosure through an addendum.

Both measures are directed at issuers who have already cleared SEBI's entry gate. They are not easing the criteria for who can access the market. They are giving companies already in the pipeline the operational flexibility to navigate a genuinely difficult environment, one in which geopolitical disruption sharpened market volatility, investor sentiment softened across categories, and several companies were forced into premature withdrawals or compelled to refile. SEBI adopted a structurally similar approach during COVID-19 in 2020. The principle is consistent: regulatory frameworks should be responsive to external shocks without abandoning the substantive standards that protect investors.

The right way to read these two sets of reforms together is this: SEBI raised the entry bar, and when the market turned, it gave those who had cleared that bar the room to execute on better terms.

Question: From your experience advising issuers through this cycle, what does navigating both regimes simultaneously actually look like in practice?

Answer: The honest answer is that it requires considerably more preparation at the front end than most promoters anticipate.

The profitability threshold is deceptively simple on paper. In practice, determining whether a company meets the EBITDA criterion requires a careful review of how operating profit has been computed in the audited accounts, whether any exceptional or non-operating items have been included in the EBITDA line, and whether management accounts are consistent with what the statutory auditors have signed off on. We have seen situations where a company genuinely meets the threshold, but the financial statements do not present the numbers in a way that satisfies the eligibility condition on its face. That reconciliation has to happen before the DRHP is filed, not during SEBI review.

The RPT framework creates a different kind of complexity. The extension of mainboard RPT norms to SME-listed entities means that transactions that were previously unremarkable are now potentially material events requiring shareholder approval. Due diligence on related-party arrangements needs to be built into the pre-IPO timeline as a substantive exercise, not treated as a disclosure checkbox.

The April relaxations have practical implications too. The ability to revise issue size by up to 50% without a DRHP refile provides meaningful flexibility in volatile conditions, but only within defined limits: the use-of-proceeds objective must remain unchanged, SEBI approval is required, and the revision must be publicly disclosed. A company that attempts to use this flexibility to fundamentally recast its fund deployment will not find that argument easy to sustain. It is a mechanism for quantum adjustment, not for reconsidering the transaction rationale.

Question: Where do you see the SME capital markets space heading in the next 12 to 18 months, and what should issuers be doing now to be ready?

Answer: The market will correct toward quality. That is already underway. The days of an underprepared company clearing the SME platform on the strength of a favourable market window are effectively over.

Well-structured issues, clean financials, credible use of proceeds, no large OFS component, continued to draw strong institutional participation even as the broader market softened through April 2026. The subscription patterns in those transactions were not accidental. They reflected investor recognition that the underlying businesses met the standards the regulatory framework is designed to enforce.

For companies 12 to 18 months away from being IPO-ready, the immediate priority is to treat regulatory compliance as a preparation exercise, not a filing exercise. That means reviewing related-party arrangements now. It means ensuring that financial statements for the preceding three years are consistent with the EBITDA eligibility condition, and that any gap between management and statutory accounts is reconciled early. It means engaging legal counsel at a stage where structural issues can still be resolved without derailing the transaction timeline.

The reforms of the past 12 months have made the SME route more demanding, but also more credible. For a well-prepared issuer, that is not a constraint. It is a competitive advantage.

Richa Bhansali is a Partner at Mindspright Legal.