SME Exchange
Also written SME platform
A trading platform of a recognised stock exchange with nationwide terminals, permitted by SEBI to list securities of small and medium enterprises — distinct from the Main Board.
In plain language
A small company that wants public equity faces a mainboard IPO built for much larger issuers: SEBI observations on the draft, large distribution costs, and investors who will not look at a Rs 20 crore issue. The SME Exchange is a separate listing venue with its own, lighter entry route — and, in return, heavier protections of a different kind.
The trade-off is worth seeing clearly. SEBI does not issue observations on an SME offer document, but the issue must be fully underwritten, applications must be large, and a market maker must keep quoting the shares for three years. The design assumes the investor is sophisticated and makes sure there is always someone to sell to.
How it works
Definition. "A trading platform of a recognised stock exchange having nationwide trading terminals permitted by SEBI to list the specified securities issued in accordance with the regulations and includes a stock exchange granted recognition for this purpose but does not include the Main Board."
Who may issue (Chapters 4 and 6).
- post-issue paid-up capital up to Rs 10 crore; issuers with post-issue paid-up capital above Rs 10 crore and up to Rs 25 crore may also issue;
- track record and other eligibility conditions of the SME exchange;
- minimum operating profit (EBITDA) of Rs 1 crore from operations for at least two out of the three previous financial years;
- a former proprietorship, firm or LLP must have been a company for at least one full financial year before filing;
- after a complete change of promoter, or new promoters acquiring more than 50%, the draft offer document may be filed only one year after that change.
Promoters. Promoters must hold at least 20% of post-issue capital; any shortfall may be met by AIFs, FVCIs, scheduled commercial banks, FPIs or IRDAI-registered insurers up to 10% of post-issue capital without being identified as promoters; the requirement does not apply if there is no identifiable promoter.
The issue (Chapter 8).
| Rule | Figure |
|---|---|
| SEBI observations on the offer document | None — filed with SEBI on filing with the RoC |
| Due diligence certificate | Form A of Schedule V with the additional confirmations of Form G |
| Underwriting | 100% of the offer; lead manager at least 15% on own account; undertaking to SEBI one day before opening |
| Minimum application size | Rs 1 lakh per application, in multiples |
| Minimum payable on application | 25% of issue price (full price for an offer for sale) |
| Minimum allottees | Fifty |
| Anchor investor | Application of at least Rs 2 crore |
| Market making | Compulsory, for three years from listing; market maker's inventory at allotment at least 5% of the shares to be listed |
Moving between boards. A listed issuer with post-issue paid-up capital below Rs 25 crore may migrate to the SME exchange; an SME-listed issuer with post-issue paid-up capital above Rs 10 crore and up to Rs 25 crore may migrate to the Main Board on meeting listing eligibility. Either way it needs a special resolution through postal ballot in which non-promoter votes in favour are at least twice the non-promoter votes against.
A worked example
Illustrative figures. Nashik Precision Castings Ltd plans an SME IPO of 20 lakh shares at Rs 120 = Rs 24 crore. Post-issue it will have 80 lakh shares of Rs 10 — paid-up capital Rs 8 crore, inside the Rs 10 crore limit. Its EBITDA was Rs 1.4 crore, Rs 0.8 crore and Rs 1.6 crore in the last three years — two of three years at Rs 1 crore or more, so it qualifies.
| Requirement | Computation | Result |
|---|---|---|
| Underwriting | 100% × Rs 24 crore | Rs 24 crore underwritten |
| Lead manager's own underwriting | at least 15% × Rs 24 crore | Rs 3.6 crore |
| Application lot | minimum Rs 1 lakh, at Rs 120 | e.g. 1,000 shares = Rs 1,20,000 per lot |
| Payable on application (fresh issue) | at least 25% × Rs 120 | Rs 30 per share |
| Market maker's inventory at allotment | at least 5% × 80 lakh shares | 4 lakh shares ≈ Rs 4.8 crore at issue price |
| Allottees | at least fifty | an issue with 45 successful applicants cannot be allotted |
Four years later the company has grown to Rs 18 crore of paid-up capital and wants to move to the Main Board. At the postal ballot, non-promoter shareholders cast 42 lakh votes for and 19 lakh against. 42 ≥ 2 × 19 = 38 — the special resolution clears the non-promoter test, and the company may migrate if it meets the Main Board listing criteria.
Why NISM asks about it
Chapter 4 (Issue Management – Important Terms) introduces the SME exchange as an alternate capital market and sets out migration; Chapter 6 has the eligibility rules; Chapter 8 (Other Merchant Banking Activities – Disinvestment, Buyback of Equity Shares) has the role of the merchant banker in SME issues — underwriting, minimum application, allottees and market making.
Expect number questions on 100% / 15% underwriting, fifty allottees, three years of market making and the 2:1 non-promoter vote.
Common exam traps
- SEBI issues no observations on an SME offer document — the opposite of a mainboard issue.
- 100% underwriting, not minimum-subscription underwriting. The workbook says it "shall not be restricted upto the minimum subscription level".
- Fifty allottees, not one thousand.
- Three years of market making, with at least 5% inventory at allotment; the market maker may not buy from promoters or promoter group during that period.
- The Rs 10 crore / Rs 25 crore bands are post-issue paid-up capital at face value, not issue size or market capitalisation.
- Migration needs non-promoter votes for to be at least twice the non-promoter votes against — a ratio test within the special resolution, not a simple majority.
- Stale-figure warning. SEBI revised the SME public issue framework in 2025. The workbook states a Rs 1 lakh minimum application size; use that figure in the exam, and confirm the current minimum application size before relying on it in practice.
Check yourself
1.A company listed on the SME exchange with post-issue paid-up capital of Rs. 18 crore wishes to migrate to the Main Board. What is required?
- a)Only an application to the exchange
- b)A special resolution through postal ballot with non-promoter votes in favour at least twice those against, plus fulfilment of the listing eligibility criteria
- c)An ordinary resolution of the board of directors
- d)SEBI's prior written approval alone
Show the answer
Answer: (b) A special resolution through postal ballot with non-promoter votes in favour at least twice those against, plus fulfilment of the listing eligibility criteria
An issuer, whose specified securities are listed on a SME Exchange and whose post issue paid up capital is more than ten crore rupees and upto twenty-five crore rupees, may migrate its specified securities to Main Board (Main exchange) if its shareholders approve such migration by passing a special resolution through postal ballot and upon fulfilling the listing eligibility criteria.
Provided that the votes cast in favour of the special resolution by the non-promoter shareholders are at least two times the votes cast against it by non-promoter shareholders.
Rs. 18 crore sits inside the more than Rs. 10 crore and up to Rs. 25 crore range, so migration is available.
The two-to-one non-promoter test is the key safeguard — a special resolution alone would let promoters carry the vote, so the regulation adds a separate hurdle counting only non-promoter votes.
And the same test governs the reverse journey. A listed issuer with post-issue paid-up capital of less than 25 crore rupees may migrate to SME exchange if the shareholders approve by special resolution through postal ballot. Provided that the votes cast in favour of such proposal by non-promoter shareholders are at least two times the votes cast against it by non-promoter shareholders.
Why the company might stay put. The issue of specified securities under the SME platform is applicable to companies whose post-issue paid up capital will not exceed face value of Rs. 10 crores. However, companies whose paid up capital is between Rs. 10 crore and Rs. 25 crore are also eligible to make such issues if they decide to continue the SME exchange without migration to the Main Board.
What the SME exchange is: a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the SEBI to list the specified securities... but does not include the Main Board (Main Exchange).
And a continuing promoter obligation: the promoters shall continue to hold atleast 20% of such post-issue capital, with any shortfall met up to ten per cent of the post-issue capital by AIFs or FVCIs or SCBs or FPIs or insurance companies registered with IRDAI... without being identified as promoter(s).
2.Which statement about anchor investors in a main board book built public issue is correct?
- a)Anchor investors may withdraw if the discovered price is lower than their allocation price
- b)Up to sixty percent of the QIB portion may be allocated to anchor investors, bidding opens one day before the issue opens, and fifty per cent of their shares are locked in for 90 days and the rest for 30 days
- c)Anchor allocation is made on a proportionate basis
- d)The anchor entry threshold on the main board is Rs. 2 crore
Show the answer
Answer: (b) Up to sixty percent of the QIB portion may be allocated to anchor investors, bidding opens one day before the issue opens, and fifty per cent of their shares are locked in for 90 days and the rest for 30 days
Up to sixty percent of the portion available for allocation to qualified institutional buyers shall be available for allocation/allotment ("anchor investor portion") to the anchor investor(s).
The bidding for anchor investors shall open one day before the issue opening date.
There shall be a lock-in of 90 days on fifty per cent of the shares allotted to the anchor investors from the date of allotment, and a lock-in of 30 days on the remaining fifty per cent of the shares allotted to the anchor investors from the date of allotment.
Option A reverses the price adjustment, which runs one way only. If the price fixed because of book building is higher than the price at which the allocation is made to the anchor investors, the anchor investors shall pay the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors, the excess amount shall not be refunded to the anchor investors and the anchor investor shall be allotted the securities at the same price at which the allocation was made to it.
Option C is wrong on method: allocation to the anchor investors shall be on a discretionary basis — proportionate allotment applies to the retail and non-institutional categories after their minimum floors.
Option D gives the SME figure. An anchor investor makes an application for a value of at least ten crore rupees in a public issue on the main board or at least two crore rupees in case of a public issue on the SME exchange.
The numbers permitted: for allocations up to ₹250 crore, a minimum of two (2) and a maximum of fifteen (15) anchor investors, plus an additional fifteen (15) for every additional ₹250 crore or part thereof, with a minimum allotment of ₹5 crore each.
And the money: the same margin which is payable by other categories of investors on application, with the balance, if any... paid within two days of the date of closure of the issue.
3.What underwriting is required for an IPO on the SME exchange?
- a)Underwriting to the extent of minimum subscription only
- b)One hundred percent of the offer, not restricted to the minimum subscription level, with the lead managers underwriting at least 15% of the issue size on their own account
- c)Fifty percent of the offer
- d)No underwriting is required
Show the answer
Answer: (b) One hundred percent of the offer, not restricted to the minimum subscription level, with the lead managers underwriting at least 15% of the issue size on their own account
The initial public offer shall be underwritten for hundred percent of the offer and shall not be restricted upto the minimum subscription level.
The lead manager(s) shall underwrite at least 15% of the issue size on their own account(s).
Option A describes the main board rule. Chapter 5 provides only that where the issue is required to be underwritten, the underwriting obligations should at least be to the extent of minimum subscription — ninety percent, not a hundred.
The undertaking comes before the issue opens: the lead manager(s) shall file an undertaking to SEBI that the issue has been 100% underwritten along with the list of underwriters, nominated investors and sub-underwriters indicating the extent of underwriting or subscription commitment made by each of them, one day before the opening of issue.
And the lead manager is the ultimate backstop: if any of the underwriters fail to fulfill their underwriting obligations or the nominated investors fail to subscribe to the unsubscribed portion, the lead manager(s) shall fulfill the underwriting obligations.
The appointments: the issuer, in consultation with lead manager(s), shall appoint merchant bankers or stock brokers, registered with the Board, to act as underwriters and may enter into an agreement with the nominated investors indicating therein the number of specified securities which they agree to subscribe at the issue price in case of under-subscription.
And no trading on the position: underwriters and sub-underwriters other than the lead managers and nominated investors shall not subscribe to the issue in any manner except for fulfilling their obligations under their respective agreements.
All of it is disclosed: all underwriting and subscription arrangements made by the lead manager(s) shall be disclosed in the offer document.
Why the burden is heavier here. The board shall not issue any observation on the offer document on an SME issue, so the lead manager's money and its due-diligence certificate as per Form A of Schedule V including additional confirmations as provided in Form G carry the investor protection.
And the commitment continues after listing — compulsory market making... for a minimum period of three years from the date of listing, with inventory of at least 5% of the specified securities proposed to be listed.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Anchor investorA qualified institutional buyer allotted shares a day before a book-built issue opens — at least Rs 10 crore on the main board or Rs 2 crore on the SME exchange — under a discretionary, locked-in allocation.
- Designated Stock ExchangeThe one exchange, among those where an issuer seeks listing, that the issuer chooses to anchor the issue — holding the 1% security deposit and overseeing the basis of allotment with the lead manager and registrar.
- Minimum subscriptionThe least an issue must raise to go ahead — at least 90% of the fresh issue offered through the offer document; if it is not received, all application money is refunded within four days of closure.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- DevolvementThe part of an under-subscribed issue that falls on an underwriter to take up — its underwriting commitment less the applications it procured — notified by the lead manager within ten days of closure.
- Promoters' contributionThe minimum stake promoters must hold and lock in at a public issue — in an IPO not less than 20% of post-issue capital, locked in for 18 months (three years if most proceeds fund capital expenditure).