Mumbai: The Securities and Exchange Board of India Wednesday tightened rules for initial public offerings (IPO) of small and medium enterprises, and tweaked the framework for merchant bankers and custodians by raising their minimum net-worth requirements.The board of the capital-markets regulator approved a proposal to limit the offer for sale (OFS) by promoters in small and medium enterprises (SME) IPOs to 20% of an issue size. It also said they cannot sell more than 50% of their holding in an IPO."In order to strengthen the framework for public issues by small and medium enterprises and to facilitate that SMEs with a sound track record have an opportunity to raise funds from the public and get listed on stock exchanges, and to protect the interests of investors in the SMEs, the board approved amendments to the SEBI (ICDR) Regulations," the regulator said in a statement issued late Wednesday. It said that smaller firms would be eligible for an IPO only if they have operating profits of ₹1 crore from operations for any two out of three financial years immediately preceding the filing of the application.SME issues would also not be allowed where objects of the issue consist of repayment of loan from promoter or promoter group from the issue proceeds, Sebi said, aligning the issue objective with deployment of the funds garnered in the IPO.The regulator has also proposed to cap the amount for general corporate purposes in SME public offerings at 15% of the amount being raised, or ₹10 crore, whichever is lower.The change of rules comes in the wake of instances of diversion of issue proceeds to shell companies controlled by promoters and inflation of revenue by circular transactions through related parties.In the current financial year until October 15, 159 SMEs have raised more than ₹5,700 crore through IPOs. However, FY24 witnessed the highest number of SME public issues, with 196 firms tapping the market to mobilise more than ₹6,000 crore collectively.116453633Merchant BankersThe board of the regulatory body also approved a proposal to revamp rules for merchant bankers handling public issues. It increased the net worth requirement ten times to ₹50 crore, from ₹5 crore. Sebi proposed to introduce two categories of merchant bankers based on net worth and activities. Underwriting Limit Category-1 would maintain a net worth of Rs 50 crore and would be allowed to undertake all permitted activities, while category-2, would be required to maintain a net worth of Rs 10 crore and could undertake all permitted activities except main board issues.Further, it said merchant bankers must maintain 25% in liquid net-worth of their minimum net-worth requirement.Sebi said the underwriting limit for merchant bankers would be 20 times the liquid net worth.To curb conflict of interest and to ensure adequate due diligence, a merchant banker should not lead manage any public issue, if its directors and key managerial personnel or their relatives, individually or in aggregate holds more than 0.1% of the issuer's paid up share capital, or shares whose nominal value is Rs 10 lakh, whichever is lower, Sebi said.As on July 31, there are 224 merchant bankers registered with Sebi.The Sebi board has also approved a proposal to revise rules for custodians that offer services such as safekeeping of assets and maintenance of securities accounts for clients such as foreign portfolio investors and mutual funds.The regulator said a net worth of Rs 75 crore be maintained by custodians. It has given existing custodians three years to achieve the target.Sebi said a custodian may undertake activities incidental to regulated activities, such as fund accounting, provided there are effective controls in place to address potential conflicts of interest. They would also have to hive off activities that are not under the purview of any financial sector regulator to a separate legal entity within two years.Currently, there are 17 custodians registered with Sebi. Assets under the custody of custodians have increased more than hundred-fold to ₹278.50 lakh crore in September 2024, from ₹2.70 lakh crore in March 2002.NFO CorpusesSebi has also stipulated that Asset Management Companies (AMCs) limit their new fund offer (NFO) collections to amounts that can be reasonably deployed within 30 days. This is because open-ended funds allow investors to join at any time at current NAV.Revised guidelines give investors the flexibility to withdraw from a scheme without an exit load if the fund manager fails to deploy the funds within the specified time frame. Additionally, to prevent potential mis-selling in NFOs, distributors handling switch transactions will receive a lower commission rate between the two schemes involved in the switch.