SEBI SME IPO Consultation Paper 2026: Rs 1,000 Crore Market Cap Test, Rs 3 Crore Profit and One-Share Trading Lot Proposed

Quick Summary

What happened: SEBI published a consultation paper dated 14 October 2026 proposing a review of the SME IPO provisions in Chapter IX of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). Comments are open until 4 November 2026.
Status: these are proposals only. The current SME IPO rules in the ICDR Regulations continue to apply until SEBI amends them.
Main proposals: eligibility based on post-issue market capitalisation (up to Rs 1,000 crore must list on the SME platform; above Rs 1,000 crore and up to Rs 4,000 crore may choose it), an average operating profit test of Rs 3 crore a year over three years, and a new alternative route under a proposed Regulation 229(7) for issuers that do not meet the profit test.
Issue mechanics: minimum application of Rs 1 lakh (four lots of Rs 25,000), a one-share trading lot, removal of 100% underwriting and compulsory market making, and shorter lock-ins for some shareholders.
Transition: the paper proposes that the revised framework apply mandatorily to draft offer documents filed three months or more after it is notified in the Gazette, with a choice of framework during those three months.

The SEBI SME IPO consultation paper 2026 proposes the widest review of the SME listing framework in years. Released on 14 October 2026, it follows the recommendations of a SEBI Working Group, the Primary Market Advisory Committee (PMAC) and SEBI’s own later deliberation. For founders planning an SME IPO, the proposals would change who can list on the SME platform, the profit test, how much of the issue can go to general corporate purposes, how promoters and investors can sell, and how long their shares stay locked in. This note sets out what SEBI has proposed, how it compares with the current rules, and what founders and their advisers can do before the 4 November 2026 comment deadline.

What is the current SME IPO framework?

Under the ICDR Regulations as they stand (consolidated text amended up to 21 March 2026):

Regulation 229(1) and (2): an issuer with post-issue paid-up capital up to Rs 10 crore is eligible for an SME IPO; an issuer with post-issue paid-up capital above Rs 10 crore and up to Rs 25 crore may also use the SME route.
Regulation 229(4): an issuer that was a proprietorship, partnership firm or LLP before conversion may make an IPO only if the company has existed for at least one full financial year before filing the draft offer document.
Regulation 229(6): the issuer must have had minimum operating profits (earnings before interest, depreciation and tax) of Rs 1 crore from operations for at least two out of the three previous financial years.
Regulation 230(1)(f) and (g): the offer for sale cannot exceed 20% of the total issue size, and a selling shareholder cannot offer more than 50% of its pre-issue shareholding on a fully diluted basis.
Regulation 230(2): the amount for general corporate purposes cannot exceed 15% of the amount raised by the issuer or Rs 10 crore, whichever is less.
Regulation 267(2): the minimum application size is two lots, and above Rs 2 lakh.

What has SEBI proposed on SME IPO eligibility?

Market capitalisation instead of paid-up capital

SEBI proposes to replace the paid-up capital test in Regulations 229(1) and (2) with a post-issue market capitalisation test:

Post-issue market capitalisation	Proposed route
Up to Rs 1,000 crore	SME platform only
Above Rs 1,000 crore and up to Rs 4,000 crore	SME platform or Main Board, at the issuer’s option
Above Rs 4,000 crore	Main Board

The test would be applied again when the Red Herring Prospectus (book-built issue) or Prospectus (fixed price issue) is filed. A Main Board applicant whose estimated market capitalisation falls to Rs 1,000 crore or below at that stage would have to re-file under the SME framework. An SME applicant whose market capitalisation rises above Rs 4,000 crore would have to re-file under the Main Board framework.

SEBI’s internal deliberation adds one condition: an issuer in the optional Rs 1,000 crore to Rs 4,000 crore band that chooses the SME platform would have to present restated consolidated financial statements prepared under Ind AS for the last three financial years and any stub period.

Rs 3 crore average operating profit

The paper proposes to replace the current Regulation 229(6) test with an average operating profit of not less than Rs 3 crore a year over the preceding three financial years, calculated on restated consolidated financial statements.

A new route for issuers that miss the profit test

A proposed Regulation 229(7) would let an issuer that does not meet the Regulation 229(6) profit test still make an SME IPO if:

it meets the other eligibility conditions in Regulations 229(3), 229(4) and 229(5);
the issue is made through book building;
at least 75% of the net offer is allotted to Qualified Institutional Buyers (QIBs); and
the entire subscription money is refunded if the 75% QIB allotment is not achieved.

In such an issue, the paper proposes allocation of not more than 10% of the net offer to Retail Individual Investors, not more than 15% to Non-Institutional Investors and not less than 75% to QIBs, and that the QIB portion not be underwritten.

Conversions and business reorganisations

For issuers formed from a proprietorship, partnership firm or LLP, the Working Group recommends replacing “one full financial year” with four consecutive completed quarters from conversion, requiring at least one audited financial statement filed with the Registrar of Companies before the draft offer document, and extending the rule to business reorganisations where the issuer earns more than 50% of its revenue from the business taken over.

What changes are proposed for use of funds and offer for sale?

General corporate purposes: remove the Rs 10 crore absolute ceiling and keep the 15% ceiling.
A dedicated OFS regulation (proposed Regulation 230A): only fully paid-up equity shares held for at least one year before filing the draft offer document could be offered for sale, with exemptions modelled on the Main Board rules.
QIB sellers: the 20% issue-size cap and the 50% per-seller cap would not apply to a selling shareholder that is a QIB, except in an issue under the proposed Regulation 229(7). Both caps would continue to apply to other selling shareholders.

How would SME IPO lock-in periods change?

Shareholding	Current position (as the paper describes it)	Proposed
Minimum promoters’ contribution	Three years from IPO allotment or commencement of commercial production, whichever is later	Three years, without the link to commercial production
Promoter holding above the minimum contribution	50% for two years and 50% for one year	One year from allotment
Pre-issue capital held by non-promoters	One year from allotment	Six months from allotment

The paper also proposes a one-year lock-in from the date of allotment for specified securities held by the promoter group. The paper proposes that issuers already listed on the SME platform when the revised framework is notified keep their existing lock-ins until those periods expire.

What is proposed for application size, allotment and trading?

Minimum application: four lots of Rs 25,000 each, a minimum of Rs 1 lakh, in place of the current two lots above Rs 2 lakh.
Anchor investors: express recognition of anchor allocation in Regulation 253, up to 60% of the QIB portion in a book-built issue.
Allottees: minimum number raised from 200 to 500.
Trading lot: one share for securities on the SME platform, in place of the price-based lot sizes under SEBI Circular CIR/MRD/DSA/06/2012 of 21 February 2012.
Underwriting: remove 100% underwriting and the lead manager’s 15% own-account underwriting; apply the Main Board underwriting framework and a minimum subscription requirement aligned with Regulation 45.
Market making: remove compulsory market making, including the market maker’s inventory requirement.

How would migration to the Main Board work?

Migration from the Main Board to the SME platform would be removed.
An SME-listed company with market capitalisation of Rs 1,000 crore or more but below Rs 4,000 crore could migrate to the Main Board with board approval, subject to the Main Board exchange’s criteria.
Migration would be mandatory where market capitalisation exceeds Rs 4,000 crore.
The current requirement to migrate when post-issue paid-up capital is “likely to exceed” Rs 25 crore after a further issue (Regulation 280(2), as the paper quotes it) would be dropped.
For migration, the paper proposes market capitalisation equal to an “Applicable Market Price” (based on weekly high and low closing prices over the twelve weeks before the application) multiplied by the shares outstanding on the date of application. The paper states that market capitalisation for migration is to be calculated in the manner specified by SEBI.
Companies already listed on the SME platform when the revised framework is notified would stay under the existing paid-up-capital-based migration rules.

When would the new SME IPO rules apply?

The paper’s transition proposals are:

The revised framework would apply mandatorily to draft offer documents filed on or after the expiry of three months from its notification in the Official Gazette.
For a draft offer document filed within those three months, the issuer could choose the existing or the revised framework and must state its choice in the draft offer document.
An issue whose RHP or Prospectus is filed on or before the notification date would continue under the existing framework.
A Main Board DRHP filed before notification would continue under the existing Main Board framework.
The one-share trading lot and the end of compulsory market making would apply from a separate SEBI circular rescinding the current trading-lot circular.

The paper uses 31 December 2026 only as an illustrative notification date to show the arithmetic. SEBI has not set a notification date.

What should SME IPO aspirants do now?

Plan on the current rules. Any IPO filed today is governed by the existing ICDR Regulations, including the Rs 1 crore EBITDA test in two of three years and the paid-up capital limits.
Test your company against both frameworks. Compute post-issue paid-up capital and an estimated post-issue market capitalisation, and check the three-year profit record under the current and the proposed tests.
Review pre-IPO share transfers. The proposed one-year holding period for OFS shares would count back from the filing of the draft offer document.
Consider Ind AS readiness if your expected market capitalisation is above Rs 1,000 crore and you want the SME route.
Submit comments by 4 November 2026 through SEBI’s public comments page, or by email to [email protected] if the web form fails, as the paper sets out.

Founders raising pre-IPO capital from funds should also read our note on SEBI’s accredited investor decisions of September 2026 and our explainer on the SEBI GARUDA circular for AIF scheme launches.

Sources

Source: Securities and Exchange Board of India, “Consultation Paper on Recommendations pursuant to Review of provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 related to Initial Public Offer by Small and Medium Enterprises”, 14 October 2026, sebi.gov.in.
Source: Securities and Exchange Board of India, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, consolidated text amended up to 21 March 2026, Regulations 229, 230 and 267, sebi.gov.in.

Talk to an expert

Planning an SME IPO and want to see how your company fares under the current rules and SEBI’s proposals? Tax Update India can help. Schedule a strategy session.

Disclaimer: This article is for general information only and reflects the law as on the date of publication. It is not legal or tax advice. Please consult a qualified professional before acting on it.

Author
Recent Posts

CA Adityavikram Banka

Founder at A S Banka Advisors Private Limited

The author is Founder of A. S. Banka Advisors Private Limited & Partner at Dhiraj & Dheeraj.

You can reach out to the author on : [email protected]

www.asbanka.com

Latest posts by CA Adityavikram Banka (see all)

Flash News