Adv. Adithya Karthik K, BBA, MBA, LL.B., LL.M. (Corporate & Commercial Law), PGD IP Law
Transactions, Capital Markets & Regulatory
Published [DD Month 2026]. Last reviewed [DD Month 2026]. Law stated as at this date.
Since 4 March 2025 an SME issuer cannot file a draft offer document unless it has earned operating profit of INR 1 crore from operations in two of the last three financial years. That single number, written into regulation 229 of the SEBI (ICDR) Regulations, 2018, moved the IPO conversation out of the merchant banker's office and back into the finance function, because it is an accounting test before it is a capital markets test. Everything else in the same notification follows from one idea: the platform is for companies that already trade profitably, not for companies that intend to.
The SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2025, notified under F. No. SEBI/LAD-NRO/GN/2025/233 and published in the Gazette on 4 March 2025, rewrote most of Chapter IX. They came into force on publication, and the offer document changes apply to draft offer documents filed after commencement, so companies that had already filed were not pulled back.
Six changes matter operationally. Regulation 229 carries the operating profit condition. Regulation 230 caps offer for sale at twenty per cent of total issue size, bars a selling shareholder from selling more than fifty per cent of its holding, caps general corporate purposes at fifteen per cent of the amount raised or INR 10 crore, whichever is lower, and prohibits an issue whose objects include repaying a loan from a promoter, the promoter group or any related party, directly or indirectly. Regulation 238 releases promoter holding above minimum promoters' contribution in two tranches, fifty per cent after one year and the balance after two. Regulation 262 drops the monitoring agency trigger from INR 100 crore to INR 50 crore of fresh issue. Regulation 247 puts the draft offer document in public for at least twenty one days for comments. New regulation 281A gives dissenting shareholders an exit under Schedule XX where the stated objects are later varied.
A further amendment followed on 16 March 2026, under F. No. SEBI/LAD-NRO/GN/2026/299. It is procedural. A draft abridged prospectus must now go in with the draft offer document, not only at the final stage, and the printed abridged prospectus gives way to a QR code and link. Regulation 17 now also allows a depository to record securities as non-transferable where a lock-in cannot physically be created, which matters where pre-issue shares sit under a pledge.
The dividing line is paid-up capital. Regulation 229 routes an issuer with post-issue paid-up capital of up to INR 10 crore to the SME exchange. Regulation 280(2) is the boundary at the other end: where a further issue is likely to take post-issue capital beyond INR 25 crore, the issuer may now do that issue without migrating to the main board, provided it complies with the LODR Regulations as applicable to main board companies. That proviso separates raising money from migrating.
A mainboard issuer is tested under regulation 6(1): net tangible assets of at least INR 3 crore in each of the preceding three full years, average operating profit of at least INR 15 crore over those three years, and net worth of at least INR 1 crore in each of them. A company failing that can still go to the main board under regulation 6(2) by book-building with at least seventy five per cent of the net offer allotted to qualified institutional buyers. Chapter IX has no equivalent escape route. The INR 1 crore test is absolute.
The exchange adds its own layer. NSE Emerge requires post-issue paid-up capital not exceeding INR 25 crore, a three year track record, the INR 1 crore operating profit test, positive net worth, promoter holding of at least twenty per cent of post-issue capital, and positive free cash flow to equity in two of the three preceding financial years. By circular dated 20 April 2026 NSE revised the FCFE formula to add proceeds from issuance of capital, including securities premium, for all DRHP filings from that date.
Take a precision components manufacturer planning a INR 30 crore issue at INR 100 per share.
Test, Reg 229 Operating profit (EBIDT) from operations,
INR 1 crore, in 2 of last 3 FYs
FY24 FY25 FY26
Revenue from operations INR 41.20 cr 48.60 cr 55.00 cr
Profit before tax INR 0.42 cr 0.66 cr 1.10 cr
Add: finance cost INR 0.71 cr 0.68 cr 0.60 cr
Add: depreciation INR 0.55 cr 0.61 cr 0.74 cr
Earnings before int, dep, tax INR 1.68 cr 1.95 cr 2.44 cr
Less: other income INR 0.35 cr 0.30 cr 0.28 cr
EBIDT from operations INR 1.33 cr 1.65 cr 2.16 cr
Result Met in 3 of 3 years. Eligible.
Issue size INR 30.00 cr
OFS cap, Reg 230 (20%) = INR 6.00 cr, i.e. 6,00,000 shares
Promoter pre-issue holding 30,00,000 shares
50% of holding cap = 15,00,000 shares
Binding constraint the 20% issue size cap, not the 50% cap
Fresh issue 30.00 - 6.00 = INR 24.00 cr
GCP cap, lower of 15% and 10 = INR 4.50 cr
Monitoring agency, Reg 262 24.00 cr < 50.00 cr, not triggeredThree points fall out of the arithmetic. The company clears the gate on depreciation and finance cost add-backs, not on profit before tax, which is the ordinary position for an asset-heavy issuer. Other income has to come out, and in most SME accounts that is where scrap sales, treasury interest and written-back liabilities are parked. And the twenty per cent cap, not the fifty per cent cap, limits promoter monetisation at this issue size; the fifty per cent rule binds only a promoter with a small holding in a large issue.
Less than founders expect, and more than they plan for. Regulation 15(2) of the LODR Regulations keeps the corporate governance provisions in regulations 17 to 27 switched off for an SME listed entity, and regulation 33(3)(e) reads every reference to a quarter as a half year, so results are half yearly.
The exception is related party transactions. By the LODR amendment of 27 March 2025, F. No. SEBI/LAD-NRO/GN/2025/239, regulation 23 applies from 1 April 2025 to an SME listed entity whose paid-up equity capital exceeds INR 10 crore or whose net worth exceeds INR 25 crore as on the last day of the previous financial year. Materiality is INR 50 crore or ten per cent of annual turnover, whichever is lower. For a company with turnover of INR 55 crore that threshold is INR 5.5 crore, which a single year of promoter-entity job work can exceed without anyone noticing. The approval machinery needs to exist before the first such transaction, not after.
Manufacturing is helped by the form of the test. Because it is earnings before interest, depreciation and tax, a plant-heavy issuer with thin profit before tax often clears comfortably. Where it gets caught is the general corporate purposes cap, because working capital and capital expenditure now have to be named as specific objects with quantified deployment, and fifteen per cent is not headroom.
Technology and services companies face the opposite problem. Depreciation is small, so EBIDT sits close to profit before tax and the add-backs do not rescue a marginal year. The NSE Emerge free cash flow to equity condition then bites a second time on a company funding customer acquisition or receivables out of operating cash. The April 2026 change to that formula helps a company that took a pre-IPO round and does nothing for one that did not.
Infrastructure and real estate feel the loan repayment prohibition most sharply. Promoter and group funding is the ordinary working capital of that sector, and an issue whose objects include retiring it is not permitted. The restructuring has to happen before filing, and has to survive scrutiny as something other than an indirect repayment.
Three points genuinely divide practitioners.
First, the statutory phrase is earnings before interest, depreciation and tax. Amortisation is not named. For an issuer carrying capitalised development cost or acquired customer relationships, the question is whether amortisation is added back. Our position is that it is not, on the plain words, and an issuer relying on that add-back to reach INR 1 crore should expect the exchange to ask.
Second, other income. The condition speaks of operating profit from operations, so we treat non-operating income as excluded and compute on a restated consolidated basis consistent with the offer document financials. Some advisers compute on standalone audited figures where the difference is favourable. That position is worth taking only if it is disclosed.
Third, the fifty per cent selling shareholder cap is not stated to be computed on a fully diluted basis. Where an issuer has outstanding options or convertibles, the difference is real. We compute the cap on actual holding as at the date of filing and disclose the diluted position alongside, which is the conservative reading and the one we would defend.
The twenty one day comment window under regulation 247 is not a formality. Comments are visible, they are frequently made by competitors and former employees, and the issuer answers them in the same weeks it is answering exchange observations.
LinkedIn | X | WhatsApp | Email
Juris Eagle, Advocates & Legal Consultants
Bengaluru | Mumbai | Delhi
www.juriseagle.com
Adv. Adithya Karthik K, BBA, MBA, LL.B., LL.M. (Corporate & Commercial Law), PGD IP Law
Transactions, Capital Markets & Regulatory
Published [DD Month 2026]. Last reviewed [DD Month 2026]. Law stated as at this date.
This note is intended solely for informational purposes and does not constitute solicitation or advertisement under applicable Bar Council regulations. The transmission or receipt of information through this note does not create an advocate-client relationship. Legal advice is rendered only upon formal written engagement with the firm.