I. Introduction

India’s SME IPO market has witnessed extraordinary growth rising over forty times from about ₹ 260 crore in 2015 to over ₹ 12,111 crore in 2025. In 2024, over 240 SMEs raised more than ₹8,700 crore, nearly double the previous year. Since 2021, the BSE SME IPO Index has soared a huge 5,000 per cent. But behind this euphoric feeling lies a profoundly disturbing reality. At present, some 65% of the SME listings in 2024 and 57% in 2025 are trading below their issue price. This article analyses the key shortcomings of the framework, assesses SEBI’s December 2024 reforms and concludes that the exchange review gate-keeping model remains structurally ill-suited for a market of this size.

II. A Framework Built for Access, Not Accountability

The SME IPO platform, which operates under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) and the BSE SME and NSE Emerge exchanges, was created to bring down the barrier of entry for smaller enterprises. Companies with post-issue paid-up capital of less than ₹25 crore were allowed to list on the SME platform, with no onerous requirements of the main board. In particular, the Draft Red Herring Prospectus (DRHP) was filed with the stock exchange – not SEBI – for scrutiny. This was a gate-keeping architecture that put primary scrutiny on entities with limited investigative capacity and structural incentives to approve listings.

A profitability threshold was not required until December 2024. The Offer for Sale (OFS) component was unrestricted, permitting promoters to exit freely at listing. General Corporate Purposes (GCP) could be as much as 25% of IPO proceeds, a wide, almost impossible to verify head of expenditure. Result: The ratio of the number of applicants to the number of allotments surged from 4x in FY 2021-22 to a whopping 245x in FY 2023-24, not because of fundamental analysis but on premiums in the grey market and expectations of listing-day gains. There was little institutional participation leaving unsophisticated retail investors as the dominant and most exposed participants.

“Fewer regulations were meant to attract good quality SMEs to the market, instead, it attracted the wrong ones” said Ambareesh Baliga, an independent market expert.

The exchange-review model also created perverse incentives for the middlemen. SEBI subsequently named 12 investment banks for demanding fees (15%–71% of IPO proceeds versus the industry norm of 2%–3%) – suggesting a few merchant bankers were not only negligent, but also complicit in facilitating dubious listings. The framework created the structural conditions under which gatekeepers had a financial incentive to keep the gate open.

III. The Anatomy of Systemic Abuse

But SEBI’s enforcement actions in the years 2024-2025 do not point to a lone incident of wrongdoing but a recurring pattern of structured abuse, from fictitious revenue inflation, to price rigging in concert, to outright diversion of IPO proceeds.

Varanium Cloud Ltd. & Add-Shop E-Retail Ltd. (May 2024)

SEBI Interim Order: https://www.sebi.gov.in/enforcement/orders/may-2024/interim-order-in-the-matter-of-varanium-cloud-limited_83309.html

SEBI Confirmatory Order (October 2024): https://www.sebi.gov.in/enforcement/orders/oct-2024/confirmatory-order-in-the-matter-of-varanium-cloud-limited_87809.html

The two companies inflated their financial statements through fictitious sales and purchases. During the period in question, the promoters systematically diluted their personal holdings. The capital markets were barred to both the companies and their promoters, with the ban on Varanium later confirmed in a confirmatory order.

Synoptics Technologies Ltd. (May 2025)

SEBI Interim Order: https://www.sebi.gov.in/enforcement/orders/may-2025/interim-order-in-the-matter-of-synoptics-technologies-limited_93822.html

SEBI had found that the company and its three promoters had siphoned more than 54% of the fresh issue proceeds of over ₹19 crore through fictitious counter-parties. The lead manager First Overseas Capital (FOCL) was also banned as SEBI is investigating 20 other SME IPOs managed by the same intermediary.

Varyaa Creations Ltd. (May 2025)

SEBI Interim Order: https://www.sebi.gov.in/enforcement/orders/may-2025/interim-order-in-the-matter-of-varyaa-creations-limited_93924.html

SEBI’s interim order revealed that 71% of IPO proceeds were diverted on the listing day itself to entities related to lead manager Inventure Merchant Banking Services, which was later barred from taking on fresh assignments.

SBL Infratech Ltd. (March 2025)

SEBI has levied penalties of ₹5 lakh on the company and ₹10 lakh on merchant banker Fast Track Finsec Pvt. Ltd. for false and misleading disclosures, one of the first enforcement actions directly punishing a merchant banker for SME IPO disclosure lapses.

The round-tripping syndicate unearthed by SEBI is particularly interesting because it ran for over a year, starting with preferential allotments before the IPO, moving on to coordinated funded subscriptions, and ending with sustained price manipulation after listing. This wasn’t opportunistic fraud. This was structural fraud, enabled by a structure which outsourced scrutiny to entities without the capacity, or incentive, to do so.

What is striking across all four cases is that the misconduct began well before listing, through preferential allotments, inflated financials, and intermediary fee structures, but the DRHP review at the exchange-level failed to flag any of it. The failure to gatekeep was not incidental, it was architectural.

IV. SEBI’s 2024–25 Reforms: Necessary, But Incomplete

SEBI announced the biggest reform of the SME IPO framework since the inception of the platform in its 208th Board Meeting (18th December, 2024) by way of amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) which will be applicable to DRHPs filed on or after 19th December, 2024.

The reforms are analytically significant in four dimensions. First, the introduction of a mandatory profitability threshold, minimum EBITDA of ₹1 crore in at least two of the three preceding financial years, directly dismantles the most dangerous feature of the prior framework: its indifference to financial viability. A history of profitability does not make fraud impossible, but it does temper the field of entities that can tap public funds solely on inflated or fictitious projections. The second is the OFS cap of 20% of the total issue size with no selling shareholder allowed to sell more than 50% of their pre-issue holdings which cuts off the most direct route for promoter exit at the cost of investors. At least in form, the cap brings back the expectation that promoters will have a stake in the enterprise they are asking the public to finance.

Third, the staggered promoter lock-in addresses post listing manipulation with 50% of excess holdings released after one year and balance after two.

In several enforcement cases, price inflation was fraudulent and sustained over months because promoters had no binding obligation to stay invested. Fourth, the cap on GCP (now reduced to 15 per cent of the issue size or 10 crore, whichever is lower) and the bar on using IPO proceeds to repay promoter loans shut two of the most misused routes for fund diversion documented in SEBI’s enforcement record.

But the reforms do not deal with a critical structural problem: the review of SME DRHPs at the exchange level is still the main gatekeeper. Given the documented intermediary complicity and the limited investigative capacity of exchanges vis-à-vis SEBI, this architecture is insufficient for the scale and risk profile of the market today. The 21-day public comment period is welcome, but is likely to be ineffective without a process that compels regulators to respond to material concerns raised. And the reforms are all forward-looking: a vast universe of pre-December 2024 listings is subject to the older, more permissive regime, with 37% of 2025 SME IPOs closing below issue price on their first day of trading.

V. Conclusion

The problem is not the SME IPO boom, per se. It is a legitimate policy objective to extend access to public capital to growing enterprises. BSE SME and NSE Emerge perform a genuine developmental function in India’s capital markets. The issue is regulatory lag, a system built for access that was never recalibrated as the market scaled, creating the conditions for systematic exploitation at the expense of retail investors who lacked both the information and institutional protection to recognise the risks they were taking on.

SEBI’s December 2024 reforms are substantive, they address the worst structural enablers of fraud. But the more fundamental question, whether the exchange-review model is structurally sound for a market of this size, complexity and demonstrated risk – remains unanswered. While the ICDR Regulations is still under review by SEBI, the central analytical question is not whether the rules are well-drafted – they increasingly are – but whether the institutions charged with enforcement are sufficiently empowered to do so before, not after, investors bear the costs of their failure.