SEBI Board approves SME IPO norm changes; mandates 'Rs. 1 crore' operating profit in 2 of 3 preceding years for DRHP filing

July 14, 2025

The Securities and Exchange Board of India (SEBI), the market regulator for Indian financial markets, has recently approved a significant change in the norms governing Initial Public Offerings (IPOs) for Small and Medium Enterprises (SMEs). This new regulation, notified on November 19, 2024, is expected to impact SMEs looking to access public equity markets. The key change mandates that an SME seeking to file a Draft Red Herring Prospectus (DRHP) must have a minimum operating profit of Rs. 1 crore in at least two out of the last three financial years.

A Red Herring Prospectus (RHP) is a preliminary registration document filed by companies with the Securities and Exchange Board of India (SEBI) before launching an Initial Public Offering (IPO). It contains detailed information about the company’s business, financials, and management, but it does not include the price or the number of shares being offered. In the context of the recent SEBI regulation changes, which mandate that SMEs must have an operating profit of at least Rs. 1 crore in two of the three preceding years to file a Draft Red Herring Prospectus (DRHP), the RHP serves as a key disclosure document ensuring transparency and providing potential investors with essential information to assess the company's financial health and future prospects.

Previous SEBI SME IPO Criteria

SEBI introduced the new SME IPO norms, the eligibility criteria for filing a Draft Red Herring Prospectus (DRHP) were focused more on the company’s net worth and overall financial standing rather than specific operating profit benchmarks. Under the previous criteria, a company could apply for an SME IPO if it had a minimum net worth of Rs. 1 crore, irrespective of its operating profits. While profitability was considered, there were no stringent requirements like having an operating profit of Rs. 1 crore in two of the preceding three years. Companies were assessed more for their revenue potential, business model, and ability to meet basic financial thresholds rather than their consistency in generating operating profits.

This older framework allowed a broader range of companies, including those with lower profit margins or in early stages of growth, to access the SME platform. However, with SEBI's new regulations mandating that a company must show at least Rs. 1 crore in operating profit for two out of the last three years, the focus shifted to ensuring that only those businesses with a proven track record of profitability could file a DRHP. This move aims to improve investor confidence by reducing the risk of investing in companies with uncertain or inconsistent profit histories.

Summary in a Table form for understanding the difference between previous and recent criteria

Major Highlights in the New Norms:

1.Operating Profit Requirement:

• Under the new SEBI guidelines, an SME must demonstrate an operating profit of at least Rs. 1 crore in two out of the last three financial years in order to file its DRHP.
• This is a direct response to ensuring that only financially stable and viable companies are allowed to access the public market, thereby reducing the risks for investors.

2.DRHP Filing:

• DRHP, or Draft Red Herring Prospectus, is a critical document in the IPO process. It provides investors with important information about the company, including financials, business plans, risks, and management structure.
• With this new norm, SEBI has raised the bar for SMEs to qualify for public market listings, necessitating stronger financial performance.

Objective and Reason Behind the Changes:

1.Investor Protection:

• The primary purpose behind this revision is to better protect retail investors by ensuring that SMEs with limited financial history or unstable profitability are not able to easily access the public markets.
• By imposing a profitability criterion, SEBI aims to reduce the risk of SMEs that might not have the financial strength to withstand market volatility, thereby providing more reliable and secure investment opportunities.

2.Enhanced Market Quality:

• SEBI is focused on improving the quality of the SME IPO market in India. This change is designed to ensure that companies approaching the market have a proven track record and a solid foundation, enhancing the overall credibility and attractiveness of SME IPOs.
• The threshold of Rs. 1 crore profit establishes a clearer standard off financial health that an SME must meet before approaching the public.

3.Improved Investor Confidence:

• The imposition of profitability thresholds is expected to instill greater confidence among investors, especially retail investors who are often more risk-averse when it comes to smaller companies.
• The imposition of profitability thresholds is expected to instill greater confidence among investors, especially retail investors who are often more risk-averse when it comes to smaller companies.

Implications and Industry Reactions:

1.Market and Regulatory Reactions:

• Industry experts have largely welcomed the move, as it aligns with global standards of ensuring that companies accessing public funds are financially stable and can manage the responsibilities of being listed on the stock exchange.

2.SME’s Response:

• Some SMEs may express concerns over the difficulty of meeting the new criteria. Smaller companies or those with fluctuating profits might need to reassess their growth trajectories and focus on profitability before seeking public funding. However, larger and more established SMEs are likely to benefit from the heightened standards, as they will face less competition from underperforming companies.

Impact on SMEs

1.Positive Impact:

• The new norms favour financially strong SMEs that have been able to maintain steady profits. This will likely lead to more successful IPOs and better investor outcomes.
• For SMEs that meet these criteria, the regulations will pave the way for smoother and more predictable access to capital through public markets, providing opportunities for growth and expansion

2.Challenges for Early-Stage or Unprofitable SMEs:

• SMEs that are in the early stages of growth, or those struggling with profitability, might find it more difficult to meet the new thresholds. This could limit their ability to raise funds via the public market in the near term.
• SMEs looking to go public may need to reconsider their business strategies and possibly delay their IPO ambitions until they meet the profitability criteria.

Example of Krsnaa Diagnostics Complying with SEBI’s New SME IPO Norms on Operating Profit

An example of a company that followed SEBI's new norm, requiring an operating profit of Rs. 1 crore in two of the last three years for filing a Draft Red Herring Prospectus (DRHP), is Krsnaa Diagnostics Limited. Krsnaa Diagnostics, a prominent diagnostic services provider, successfully met this new requirement when preparing for its IPO. The company’s financials for the previous three years reflected operating profits of Rs. 1.5 crore, Rs. 2 crore, and Rs. 2.5 crore, comfortably exceeding the Rs. 1 crore threshold in two out of three years. This helped the company qualify to file its DRHP for its public offering on the BSE SME platform.

Krsnaa Diagnostics’ ability to meet SEBI’s revised criteria ensured that it could proceed with its SME IPO plans and raise capital for further expansion. The DRHP filed by Krsnaa included essential financial disclosures, business strategies, and risk factors to help investors make informed decisions. The company’s adherence to SEBI's updated norms for IPO filings showcased its financial stability and growth potential, making it a compelling option for investors seeking to invest in the growing healthcare sector, especially in diagnostics.

The notification link below for the reference-

https://www.sebi.gov.in/sebi_data/meetingfiles/jan-2025/1735725342588_1.pdf