India’s small and medium enterprise, or SME, IPO market has grown at a fast pace in recent years. More small firms now see the stock market as a way to raise money, gain visibility and expand their business.
But this growth has also brought new concerns. The Securities and Exchange Board of India, or SEBI, now wants to take a close look at the rules that govern SME IPOs.
SEBI Chairman Tuhin Kanta Pandey said in August 2026 that the regulator was carrying out a broad review of the SME framework. He said the cost of market-maker support was a concern for small firms. He also said the current underwriting system was not working well and was adding to the cost of an IPO.
The key question is simple: if SEBI cuts these costs, will more small companies choose the IPO route?
The answer could be yes, but the effect may depend on how far the rules change.
Why SME IPO Costs Matter
An SME IPO is much smaller than a large mainboard IPO. A typical SME issue can range from about ₹10 crore to ₹25 crore.
This creates a major problem. Many IPO costs do not fall in line with the size of the issue. A small company may have to pay fees for merchant bankers, market makers, legal work, compliance and other services.
Business Standard reported that the total cost of capital raised by an SME, with merchant banking fees as a part of it, can reach 10-15 per cent of the issue size. For a small company, that is a very large share of the money it seeks from investors.
For example, if a company raises ₹20 crore and its total issue cost reaches 10 per cent, about ₹2 crore may go toward the cost of the issue. At a 15 per cent cost, the amount rises to ₹3 crore.
That can make a public issue less attractive for a smaller business.
The Market-Maker Cost Is Under Review
Market makers have an important role in the SME market. They provide buy and sell quotes for SME shares so that investors have a better chance to trade after an IPO.
The idea is useful. SME shares can have lower liquidity than mainboard shares. Without enough buyers and sellers, an investor may find it hard to exit a stock.
The problem is that SEBI now believes the cost of this system is too high compared with the benefit it provides.
Pandey said the market-maker framework was not working properly and that the cost was rising for small companies. He also raised concerns about the underwriting system. SEBI has said that a consultation paper on wider SME reforms will follow.
A lower cost could give small companies a stronger reason to choose an IPO.
The SME IPO Pipeline Is Already Strong
The case for reform becomes clearer when we look at the size of the market.
SME IPOs raised a record ₹10,955.1 crore in FY26, up from ₹9,119.9 crore in FY25. In May alone, 17 SME companies raised ₹733 crore.
SEBI data also showed that the average SME IPO size rose from ₹13 crore in FY20 to ₹44 crore in FY25 and ₹49 crore in FY26 up to February 2026. This shows that the SME market is not just larger in volume. The average size of the issues has also grown.
This matters because a lower cost structure could make the market more useful to a wider set of firms.
Some companies that now see an IPO as too expensive may decide that a public issue makes more sense if the cost falls.
Lower Costs Could Bring More Companies
The effect may be strongest for companies close to the edge of the IPO decision.
A business with strong sales, a good profit record and a clear expansion plan may still avoid an IPO if the cost is too high. The company may instead use bank loans, private investors or other sources of capital.
If SEBI reduces the cost of an SME IPO, some of these companies could change their plans.
This does not mean that every SME will rush to the stock market. An IPO still requires audits, disclosures, investor communication, compliance and a strong financial record.
But a lower cost can remove one major barrier.
That could create a wider IPO pipeline over time.
The Bigger Problem Is Liquidity
Cost is only one part of the SME market story. Liquidity is another major issue.
An investor may buy an SME share at the IPO stage but later find it difficult to sell. SEBI has also raised concern about odd lots, where an investor holds a number of shares that does not match the normal trading lot.
Pandey said such odd lots have left some investors unable to trade their shares with ease. SEBI is therefore looking at possible changes to lot sizes and the wider trading framework.
This is important because better liquidity can improve investor confidence.
If investors know that they have a fair chance to sell a stock later, they may be more open to SME IPOs. That can help good companies attract better demand.
So the real benefit may not come from lower costs alone. It may come from a better SME market as a whole.
SEBI May Also Raise the Quality Bar
There is another side to the reform.
SEBI does not appear to want simple growth in the number of SME IPOs. It also wants stronger investor protection.
Recent reports suggest that the regulator is looking at a larger role for qualified institutional buyers. Under one proposal, as much as 50 per cent of an SME issue could be set aside for qualified institutional buyers, with 35 per cent for retail investors and 15 per cent for non-institutional investors. Up to 60 per cent of the institutional portion could go to anchor investors.
SEBI may also change the profit test for companies that want to list on the SME platform. One proposal could require an average operating profit of ₹3 crore over the previous three years.
These changes show that the regulator wants a balance. It wants lower friction for genuine businesses, but it also wants to reduce the risk of weak companies or poor-quality issues.
The SME Market Is Already Large
The size of the SME market makes these reforms important.
On the BSE SME platform, 744 companies had listed, with 202 later moving to the mainboard. These companies had raised a total of ₹16,553 crore, while their combined market value, including firms that moved to the mainboard, stood at about ₹2.24 trillion.
On NSE Emerge, 731 firms had listed and raised more than ₹22,973 crore as of May 2026. Their market value stood at around ₹2.29 trillion.
These numbers show that the SME segment is no longer a small corner of the Indian equity market. It has become an important source of capital for smaller businesses.
What Could Happen to the IPO Pipeline?
If SEBI cuts market-maker costs and also fixes other problems, the SME IPO pipeline could grow.
The first effect could be lower costs for issuers. The second could be better liquidity after the IPO. The third could be greater investor trust.
These three factors can support each other.
A company may find an IPO more affordable. Investors may find the shares easier to trade. Better demand can then make the public market more useful for the next set of companies.
This could create a stronger cycle for SME capital access.
However, there is also a chance that stricter financial rules will remove some weaker companies from the pipeline. So the number of IPOs may not rise sharply at first.
That would not necessarily be a bad result.
Quality May Matter More Than Quantity
The main goal of SEBI’s review should not be a simple rise in SME IPO numbers.
A market with 500 weak IPOs is less useful than a market with 200 good companies that have strong financial records, clear disclosures and enough liquidity.
That is why the cost reform matters most when it comes with better market rules.
Lower market-maker costs can help small firms. Better lot sizes can help investors. More institutional participation can add stronger checks. Better disclosure can improve trust.
Together, these reforms can make the SME platform more useful.
A Possible New Phase for SME IPOs
India’s SME IPO market has already shown that there is strong demand for public capital among smaller companies. The record ₹10,955.1 crore raised in FY26 is clear evidence of that.
Now SEBI has a chance to make the system more efficient.
If the regulator can lower unnecessary costs without weakening investor protection, more companies may see the SME platform as a realistic path to the stock market.
The biggest change may not be a sudden jump in IPO numbers. It may be a shift toward a market where good SMEs can raise capital at a lower cost, investors can trade with greater ease, and successful companies have a clearer path to the mainboard.
In that sense, SEBI’s SME IPO review could do more than reduce one expense.
It could help shape the next stage of India’s small-company capital market.
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