A loophole lets retail investors bid for some small-business IPOs
Regulations barring retail investors from the high-risk initial public offerings of tiny businesses have failed to prevent the category from participating in at least a few such issues. The reason: a loophole in the rules.
National Stock Exchange and BSE Ltd, in consultation with the Securities and Exchange Board of India (Sebi), amended rules to raise the minimum bid for the IPOs of small and medium enterprises (SMEs) to more than ₹2 lakh for offers filed with the exchange after 8 March. The change in Regulation 267 of the Issue of Capital and Disclosure Requirements (ICDR) effectively prevents retail or small individual investors from such issues, since they cannot invest more than ₹2 lakh.
However, IPOs approved before the 8 March cut-off can still offer small investors a chance to bid below ₹2 lakh. That's because exchanges give companies a window of one year from the date of approval to launch their maiden offer.
Also read: Sebi's co-investment plan wins fund favour; lawyers warn of tax, legal cracks
Unless the bourses issue circulars offering clarity, retail investors may be unable to participate in fresh SME IPOs but may be able to bid in older offers, according to analysts.
'A handful of SME IPOs that filed their prospectus before March 2025 are yet to open for subscription. These IPOs still allow applications for around ₹1 lakh to ₹1.2 lakh amounts that are significantly more accessible for individual investors," said Rohit Jain, managing partner at law firm Singhania & Co. 'However, it's a narrow window, as most of these IPOs are expected to hit the market in the next few weeks."
Small firms whose IPO prospectuses were filed before the cut-off include 3B Films Ltd, LGT Business Connextions Ltd, Mahendra Relators and Infrastructure Ltd, and Everstims Technologies Ltd.
3B Films' offer, which is open for subscription from 30 May to 3 June, has received 177 applications from the retail category and is planning to raise ₹33.75 crore from the offer. Its minimum bid quantity is 3,000 shares, which means a minimum investment of ₹1,50,000 as the offer price is ₹50.
Nikita Papers and Blue Water Logistics' offers, which closed on 29 May, also received bids from retail investors.
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Around 348 companies have announced their intention to raise money on the SME platform, according to Prime Database. However, exchanges reveal the names of the companies launching offers a couple of days before an issue opens.
Sebi rules
Sebi tweaked the rules as retail participation surged in SME IPOs even as the regulator found cases involving misuse of proceeds and misconduct. Small businesses raised ₹9,120 crore through IPOs in FY25 against ₹5,971 crore in FY24, ₹2,235 crore in FY23, and ₹965 crore in FY22, according to data shared by Prime Database. That mirrors the record ₹1.62 trillion mop-up from the main board IPOs in FY25.
Sebi regulates the mainboard IPOs, while exchanges oversee the SME segment in consultation with the regulator.
'We are still seeing DRHPs getting filed, which have a quota for retail applications. However, it will depend on the exchange to either accept or reject the retail quota," said a senior executive at an investment management firm, speaking on the condition of anonymity.
The exchanges are said to be working to address this gap, according to a person aware of the development, who spoke on the condition of anonymity.
Queries emailed to the NSE and BSE on this loophole remained unanswered.
Retail investors were excluded from the IPO of NR Vandana Tex Industries Ltd., with a minimum bid amount of ₹2.44 lakh. The cotton textile company filed its red-herring prospectus on 21 May.
Unlike the other SME IPO bids, the company's offer, which closed for subscription on Friday, received bids from 33,597 individual investors who are not retail investors.
'…the rules (barring retail investors applying in SME IPOs) only apply to companies filing their prospectus after March 2025," Mohit Mehra, vice president of primary markets and payments at Zerodha, said in a post on X (formerly Twitter). 'Since prospectuses remain valid for a year, companies going public now may still allow retail participation if they filed before March 2025."
Also read: Asset manager Abakkus plans mutual fund foray to ride retail demand
Sebi, ahead of amending the rules, had cited increased retail participation in SME IPOs for its decision. 'Considering that SME IPOs tend to have a higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors, the limit was increased," the regulator had said in a consultation released on 19 November.
'In recent times, instances have been observed of diversion of issue proceeds to related parties and shell companies and inflation of revenue was shown by circular transactions," Sebi had said.
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