By Vikash Khanal — founder, Khanal Group; finance manager, trade finance/FEMA/GST/TDS practitioner · Published 18 October 2026
SEBI's consultation paper of 14 October 2026 proposes, and does not yet enact, a rewrite of the SME IPO chapter of the ICDR Regulations: a ₹3 crore average operating-profit test in place of ₹1 crore in two of three years, eligibility by post-issue market capitalisation (₹1,000 crore and ₹4,000 crore bands) in place of paid-up capital, a QIB-led route for issuers that fail the profit test, a ₹1 lakh minimum application in place of ₹2 lakh, 500 minimum allottees in place of 200, a trading lot of one share, removal of the ₹10 crore cap on general corporate purposes, shorter lock-ins, main-board-style underwriting and no compulsory market making. This note sets the proposals beside the current rule, each with the paragraph of the paper it comes from, so that a finance team can see what would move if the proposals were adopted as drafted. To test figures against the current rules, and against the proposed values as a what-if, use the SME IPO eligibility checker.
Status and comment deadline
The document is titled "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" and is dated 14 October 2026 on sebi.gov.in. It follows the March 2025 amendment that introduced the ₹1 crore operating-profit floor, the 20% OFS cap and the ₹2 lakh minimum application. Comments are due by 4 November 2026 (para 7.1 of the paper) through SEBI's public-comments form. A consultation paper becomes law only when SEBI's board approves the amendment and it is notified; the paper itself gives no implementation date.
The paper also sets out why SEBI is acting: as of 31 July 2026, 1,496 companies had listed on the SME platforms, 365 had migrated to the main board, ₹40,222 crore had been raised through SME IPOs, and the combined market capitalisation of SME-listed companies was ₹4,70,984 crore (section 3 of the paper, "Listing on SME Platform – At a Glance", pages 2–3).
Current rule vs proposed rule
"Current" is the ICDR Regulations, 2018, Chapter IX, as amended by the SEBI (ICDR) (Amendment) Regulations, 2025 (notified March 2025). "Proposed" is the consultation paper; the paragraph number is the paper's own. ₹ figures are as written in the paper.
| Area | Current (ICDR, March 2025) | Proposed (paper, 14 Oct 2026) | Paper para / regulation |
|---|---|---|---|
| Eligibility basis | Post-issue paid-up capital: up to ₹10 crore must use the SME platform; above ₹10 crore and up to ₹25 crore may | Post-issue market capitalisation at the offer price: up to ₹1,000 crore SME platform only; above ₹1,000 crore and up to ₹4,000 crore optional, with restated consolidated Ind AS financials for three years and any stub period | 5.1.1; Reg 229(1)–(2) |
| Re-test at RHP / prospectus | No equivalent | A main-board DRHP whose market cap falls to ₹1,000 crore or below is refiled under the SME chapter; an SME DRHP above ₹4,000 crore is refiled under the main-board chapter | 5.1.1.3.3–5 |
| Operating-profit test | Operating profit (EBITDA from operations) of ₹1 crore in any two of the three preceding financial years | Average operating profit of not less than ₹3 crore per year over the three preceding financial years, on restated consolidated financials | 5.1.3; Reg 229(6) |
| Route for issuers failing the profit test | None; the issue cannot proceed on the SME platform | New Reg 229(7): book-built issue with at least 75% of the net offer allotted to QIBs; full refund if the 75% is not met; other conditions of Reg 229(3)–(5) still apply | 5.1.4 |
| Track record after conversion | One full financial year as a company after conversion from a proprietorship, partnership or LLP | Four consecutive completed quarters from conversion or the latest business reorganisation, plus at least one audited annual statement filed with the RoC; extended to reorganisations where more than 50% of latest-year revenue came from a proprietorship, partnership or LLP, with the predecessor's track record counted | 5.1.2; Reg 229(4) |
| General corporate purposes | Lower of 15% of the amount raised or ₹10 crore | 15% only; the ₹10 crore absolute cap removed | 5.2; Reg 230(2) |
| Offer for sale | OFS at most 20% of the issue; each seller at most 50% of pre-issue holding | Both limits moved into a dedicated Reg 230A; QIB selling shareholders exempt from both, except in Reg 229(7) issues; one-year holding period for OFS shares | 5.3; Reg 230(1)(f)–(g), 230A |
| Lock-in | Minimum promoters' contribution 3 years (from allotment or commercial production, whichever is later); promoter holding above MPC 50% for 2 years and 50% for 1 year; non-promoter pre-issue capital 1 year | MPC 3 years from allotment; promoter excess holding 1 year; non-promoter pre-issue capital 6 months (VCFs, AIF Category I/II and FVCIs keep at least 1 year from purchase); promoter-group holding 1 year; depositories may mark the shares non-transferable | 5.4; Regs 238, 239 |
| Minimum application | Two lots, value above ₹2 lakh | Four lots of at least ₹25,000 each, so at least ₹1 lakh | 5.5; Reg 267 |
| Allocation of the net offer | Individual investors / NII / QIB split with the current "two lots" NII reference | Retail individual investors at least 35%, NIIs at least 15%, QIBs at most 50% (5% to mutual funds); in Reg 229(7) issues RIIs at most 10%, NIIs at most 15%, QIBs at least 75%; anchor investors up to 60% of the QIB portion; NII sub-buckets one-third for ₹2–10 lakh and two-thirds above ₹10 lakh | 5.5; Reg 253 |
| Minimum allottees | 200 | 500; every retail applicant receives at least one minimum lot subject to availability, remainder proportionately | 5.5; Reg 268 |
| Trading lot | Price bands under SEBI circular CIR/MRD/DSA/06/2012 (21 February 2012): 10,000 shares at prices up to ₹14 down to 100 shares above ₹1,000; IPO lot equals trading lot | Trading lot of one share; the 2012 circular to be rescinded | 5.5; circular of 21 Feb 2012 |
| Underwriting | 100% underwritten; lead managers underwrite at least 15% on their own account; closure announced only after the registrar confirms 90% subscription | Main-board model: only the unsubscribed portion is underwritten; a new minimum-subscription rule (Reg 265A) aligned with Reg 45; Reg 264(5) omitted; the 75% QIB portion in a Reg 229(7) issue not underwritten | 5.6.1; Regs 260, 264(5), 265A |
| Market making | Compulsory for at least three years from listing, with inventory of at least 5% of the securities listed | Reg 261 omitted entirely: no compulsory market maker, no inventory | 5.6.2; Reg 261 |
| Migration to the main board | Paid-up based: an SME-listed company with post-issue paid-up above ₹10 crore and up to ₹25 crore may migrate (Reg 277); must migrate if a further issue takes it above ₹25 crore unless it undertakes main-board LODR compliance (Reg 280(2)) | Market-cap based thresholds: optional at ₹1,000 crore to below ₹4,000 crore, mandatory above ₹4,000 crore, measured over 12 weeks; companies already SME-listed stay under the existing framework | 5.7, 5.9.2.8; draft Reg 277 (page 58); Regs 276, 280(2) |
Sourcing note. Every "proposed" cell was read from the SEBI PDF on 18 October 2026: paras 5.1 to 5.7.2 for the eligibility and issue-structure items, the draft Regulation 277 text (page 58) and para 5.9.2.8 (page 73) for migration and transition, and para 7.1 (page 73) for the comment deadline.
Issuers that are preparing on today's rules and want one place to track which of these would move their plan can set the paper up as a watch item in K-IPO, alongside the SME IPO readiness checklist. New to the site? Start here.
The profit test, worked on illustrative numbers
Round numbers, ₹ crore, restated consolidated operating profit (EBITDA from operations, excluding other income):
| Company | FY 2023-24 | FY 2024-25 | FY 2025-26 | Current test (₹1 cr in 2 of 3) | Proposed test (average ≥ ₹3 cr) |
|---|---|---|---|---|---|
| A | 2.1 | 3.4 | 5.6 | Passes (3 of 3) | Passes (average 3.70) |
| B | 1.2 | 1.1 | 2.5 | Passes (3 of 3) | Fails (average 1.60); only the proposed QIB-led route (75% to QIBs) would remain |
| C | 0.4 | 3.8 | 5.2 | Passes (2 of 3) | Passes (average 3.13) |
| D | −1.0 | 2.0 | 8.5 | Passes (2 of 3) | Passes (average 3.17); a loss year is averaged in, not ignored |
Two things change in character. The current test is a count of years; the proposed test is an arithmetic mean, so one strong year can carry two weak ones and one large loss can sink two profitable years. And the proposed test is stated on restated consolidated financials, which is where restatement adjustments and the exclusion of other income bite. The eligibility checker applies both tests to the same three inputs when the proposed toggle is on.
What the paper does not change
- Exchange criteria. NSE Emerge's positive free-cash-flow-to-equity test in two of three years (circular NSE/SME/73818, 20 April 2026) and BSE SME's net tangible assets, net worth and 3:1 leverage tests (notice 20231124-54) are set by the exchanges, not by ICDR. They are untouched by the paper and could be revised separately after any ICDR amendment. The side-by-side table is in SME IPO eligibility 2026: BSE SME vs NSE Emerge.
- Bars on the issuer. Debarment by SEBI, wilful-defaulter and fugitive-economic-offender status (Reg 228) are not revisited.
- Promoter-loan repayment. The March 2025 bar on using proceeds to repay loans from promoters, the promoter group or related parties is not listed among the proposals in the paragraphs read.
- Post-listing obligations. LODR obligations for SME-listed companies are outside the paper; see the SME LODR toolkit.
Timeline of the SME IPO rules
| Date | Event | Status |
|---|---|---|
| 24 Nov 2023 | BSE notice 20231124-54: revised BSE SME eligibility for draft offer documents filed from 1 Jan 2024 | In force (exchange criterion) |
| March 2025 | SEBI (ICDR) (Amendment) Regulations, 2025: ₹1 crore operating-profit test, OFS 20% / seller 50%, GCP lower of 15% or ₹10 crore, ₹2 lakh minimum application, promoter-loan repayment bar, staggered lock-in | In force |
| 1 May 2025 | NSE revised migration criteria from Emerge to the main board | In force (exchange criterion) |
| 20 Apr 2026 | NSE circular NSE/SME/73818: revised FCFE formula for Emerge, immediate effect | In force (exchange criterion) |
| 14 Oct 2026 | SEBI consultation paper on the SME IPO framework | Proposed — not law |
| 4 Nov 2026 | Last date for public comments on the paper (para 7.1, page 73 of the PDF) | Proposed — not law |
| Later | SEBI board decision, amendment regulations in the Gazette, exchange circulars aligning their criteria | Not yet dated; this page is updated when each happens |
What the paper touches in an IPO plan
The items below are the parts of a readiness plan whose numbers are tied to a proposed change. They are listed so that a team can see where a plan built on today's rules would need re-checking if the amendment is notified as drafted; whether to act on any of them before notification is a decision for the issuer with its merchant banker.
- Restated operating profit for three years, with other income stripped out: the input to both the current count test and the proposed average test.
- Expected post-issue market capitalisation at the offer price: the proposed basis for the SME / main-board boundary. Today the boundary is paid-up capital, which the company controls; market cap at the offer price is set late in the process.
- Objects of the issue: GCP sized against 15% today and against the ₹10 crore cap, which the paper would remove.
- OFS and selling-shareholder schedules: the 20% / 50% limits and the one-year holding period, with different treatment for QIB sellers.
- Lock-in registers for promoters, promoter group and pre-IPO investors, where the proposed periods are shorter.
- Issue-cost budget: the paper cites underwriting at about 38–50% and market making at about 1–4% of issue expenses on NSE and BSE in FY 2024-25 and FY 2025-26; both items would change under the proposals.
The SME IPO readiness course covers the finance workstream behind each item; the readiness checklist has the task list.
Frequently asked questions
Are the SEBI SME IPO proposals of October 2026 already in force?
No. The document dated 14 October 2026 is a consultation paper. The SEBI (ICDR) Regulations, 2018 as amended in March 2025 remain the law until SEBI notifies an amendment in the Gazette. Comments on the paper are invited until 4 November 2026.
What is the proposed profit test for an SME IPO?
An average operating profit of not less than ₹3 crore a year over the three preceding financial years, on restated consolidated figures, in place of the current ₹1 crore in any two of three years (paper para 5.1.3, Regulation 229(6)).
Would the ₹2 lakh minimum application go down?
The paper proposes four lots of at least ₹25,000 each, so a minimum of ₹1 lakh, in place of two lots above ₹2 lakh (Regulation 267). It also proposes raising the minimum number of allottees from 200 to 500.
Would market making still be compulsory?
The paper proposes omitting Regulation 261, which requires compulsory market making for three years with a 5% inventory. If adopted, no market maker would be mandatory for SME securities.
Does the paper change BSE SME or NSE Emerge criteria?
No. It proposes amendments to SEBI's ICDR Regulations. Exchange tests such as NSE Emerge's free cash flow to equity criterion and BSE SME's net tangible assets and leverage tests are set by the exchanges and are not part of the paper.
Sources
- SEBI, Consultation Paper on Recommendations pursuant to Review of provisions of SEBI (ICDR) Regulations, 2018 related to Initial Public Offer by Small and Medium Enterprises, 14 October 2026 (paras 5.1.1–5.7.2 read 18 October 2026)
- SEBI, ICDR Regulations 2018 and amendments (Chapter IX as amended by the SEBI (ICDR) (Amendment) Regulations, 2025, March 2025)
- SEBI circular CIR/MRD/DSA/06/2012, 21 February 2012 (SME trading lots), as cited in the paper
- NSE, Circular NSE/SME/73818, revision in FCFE criteria, 20 April 2026
- BSE SME eligibility notice 20231124-54, 24 November 2023, as summarised by TaxGuru