Most conversations about an SME listing begin with the question of when to file. The 2025 changes to SEBI’s ICDR Regulations quietly moved the more important question three years earlier, into the financial years a company is trading through right now. This note sets out what changed, what it means for a board that has a listing anywhere in its plan, and what is worth putting in order long before a merchant banker is appointed.
What changed, and when
SEBI’s board approved a tightened framework for SME IPOs on 18 December 2024. The amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations were notified on 4 March 2025, with corresponding changes to the Listing Obligations and Disclosure Requirements Regulations later the same month.
The package reads best as a single move rather than a list of rules. It asks an SME to demonstrate, from its own operations and its own records, that it was a real business before it became an issuer. None of it makes listing harder for a well-run company. It makes a listing slower to assemble at the last minute.
The profitability test, and the three words that do the work
Regulation 229(6) now provides that an issuer may make an initial public offer only if it 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”.
The three words that decide most cases are from operations. The test is not profit. It is operating profit produced by the business itself, measured before interest, depreciation and tax, in two years out of three.
| Counts towards the test | Does not count | Why it matters to a board |
|---|---|---|
| Operating profit earned from the business the company actually runs | Gain on the sale of land or another fixed asset | A single good disposal can flatter a year and still leave the test unmet |
| Margin measured before interest, depreciation and tax | Treasury and investment income | Surplus cash parked well is not evidence of an operating business |
| Performance in at least two of the three previous financial years | Insurance recoveries and one-off receipts | Exceptional items are exactly what the wording is written to exclude |
| Results that the audited accounts can separate cleanly | Favourable foreign exchange movements | A company that does not separate operating from non-operating income cannot prove its own case |
A comfortably profitable company can still fail this test. A business that sold a piece of land in a strong year, or carries meaningful treasury income, or books an insurance recovery, may find that the profit its accounts report and the profit the regulation asks for are two different numbers.
And because the test looks backwards across three financial years, it cannot be arranged in the year a company decides to file. The qualifying years are already running.
Where the money can go, and where it cannot
Three limits in the same package decide what an issue can actually be used for, and each of them is a board matter rather than a merchant banker’s problem.
- The offer for sale portion is capped at 20 per cent of the issue, and no selling shareholder may offload more than half of what they hold. The listing is for raising capital, not for arranging an exit.
- General corporate purposes are capped at 15 per cent of the issue or Rs 10 crore, whichever is lower. A vague use of proceeds no longer passes. If the money is for a plant, a working capital cycle or a specific acquisition, the document has to say so.
- Issue proceeds cannot be used to repay loans from promoters, the promoter group or related parties, whether directly or indirectly. This is the one most often missed in an Indian MSME, where promoter funding is ordinary and long-standing. If the plan quietly assumed the issue would clear the promoter’s own advances, the plan needs rewriting.
The parts that affect timing
Several of the remaining changes do not alter eligibility at all. They alter how long the process takes and who can participate.
- The draft red herring prospectus must sit publicly on the exchange and lead manager websites for at least 21 days for public comment before it can proceed.
- Promoter holding above the minimum promoter contribution is released in two tranches rather than all at once, half after one year and half after two.
- The allocation methodology for non-institutional investors has been aligned with the main board.
- The minimum application size has been raised from Rs 1 lakh to Rs 2 lakh.
- An SME may now raise further capital without being obliged to migrate to the main board on crossing the earlier paid-up capital threshold.
- Related party transaction norms that apply to main board companies now extend to SME listed entities, with a transaction crossing 10 per cent of annual turnover or Rs 50 crore treated as material.
Is the company ready? A quick check
None of these require a merchant banker to answer. If three or more are uncertain, the work to do this financial year is bookkeeping and governance, not deal preparation.
- Operating profit is reported separately from non-operating income in the audited accounts, without anyone having to rebuild it from the notes.
- Two of the last three financial years clear Rs 1 crore of operating profit from operations, on that separated basis.
- Every material related party transaction of the last eight quarters is documented, board-approved and priced on a stated basis.
- Promoter advances to the company, and the company’s advances to the promoter group, are identified and there is a plan to settle them that does not rely on issue proceeds.
- The intended use of proceeds can be described specifically enough to survive the general corporate purposes cap.
- The board minutes of the last three years record reasoning, not only resolutions passed.
- Statutory and labour compliances are evidenced rather than asserted, because a diligence team will ask for the evidence.
What not to do
Do not treat the qualifying years as something to arrange later. By the time a listing is on the agenda, two of the three years being tested are usually already closed and audited. Do not present a year lifted by an asset sale as the year that clears the test, because the wording is written to exclude exactly that. Do not leave the use of proceeds vague in the hope of flexibility later, since the general corporate purposes cap now removes it. And do not assume the issue can be used to retire promoter or related party lending, because it cannot.
What the market looks like
The appetite is not in doubt. NSE Emerge reached its 600th SME listing on 19 February 2025 and its 700th on 24 December 2025, both inside the same year. Companies on the platform have raised over Rs 21,252 crore in total, at a combined market capitalisation of approximately Rs 2,22,338 crore.
Read alongside the March 2025 amendments, that is the useful signal for a board. The route is open and active. What has changed is that the preparation now has to start in the years being measured, not in the year of filing.
Frequently asked questions
Does the Rs 1 crore test mean net profit or operating profit
Operating profit, measured as earnings before interest, depreciation and tax, and earned from operations. Net profit is not the test, and a company can report healthy net profit while failing it.
Which three financial years are counted
The three financial years immediately preceding the offer, with the threshold to be met in at least two of them. Because two of those years are usually already closed by the time a listing is discussed, the test is effectively decided before the decision to file is taken.
Can issue proceeds be used to repay a loan the promoter gave the company
No. Proceeds cannot be applied to repay loans from promoters, the promoter group or related parties, directly or indirectly. Where promoter lending is significant, a separate settlement plan is needed.
How much can existing shareholders sell in the issue
The offer for sale portion is limited to 20 per cent of the issue size, and no individual selling shareholder may release more than half of their holding.
Getting started
If a listing sits anywhere in the plan, the board conversation belongs to this financial year rather than the filing one. The first pieces of work are unglamorous and entirely within the company’s control: separate operating from non-operating income in the accounts, document the related party position, and make the board record show reasoning rather than only outcomes. The same discipline that carries a company through diligence is the discipline that makes it a better company to run in the meantime, which is why it is worth starting whether or not the listing happens.
Governance groundwork sits underneath all of it. What independent directors should know about HR risk covers the questions a board is expected to be able to answer, and the KRA and KPI design guide covers making performance evidenced rather than asserted. To have an IPO readiness position assessed properly against the current framework, get in touch to discuss your scope.
By Dr. Babu Balakrishnan, Independent Director (IICA registered) and management consultant to MSME boards. This note is general information on the regulatory framework as it stands in September 2026 and is not legal or investment advice. Confirm the current text of the regulations and take professional advice before acting.