Most conversations about going public start with the upside: the capital raised, the valuation, the credibility of a listed company. The risks get a paragraph near the end, usually phrased as boilerplate about market conditions.
That order is backwards.
An SME IPO is close to irreversible, expensive whether or not it succeeds, and it changes the obligations of the business permanently. The founders who come through it well are the ones who priced the risks before filing rather than discovering them after listing.
What follows is the risk side of the decision, set out as a checklist a founder can work through honestly.
1. The Entry Bar Has Moved, and the Market Has Cooled
The first SME IPO risk is the simplest: the company may not qualify, and the rules changed recently enough that older advice is misleading.
The SEBI (ICDR) Amendment Regulations 2025, notified on 3 March 2025 with exchange-level changes effective 1 July 2025, require operating profit of at least Rs 1 crore in two of the three preceding financial years. This replaced the older positive net worth test, which a loss-making company could satisfy through an equity infusion.
Several other thresholds moved at the same time:
- Minimum application size rose from Rs 1 lakh to Rs 2 lakh, across all investor categories.
- The minimum number of allottees rose from 50 to 200.
- The draft offer document must stay open for public comment for 21 days, advertised in the press within two days of filing.
Market conditions have shifted alongside the rules. NSE’s Market Pulse for March 2026 records 105 SME issues on the Emerge platform in FY26 to date, raising Rs 5,121 crore, against 163 issues that raised over Rs 7,000 crore in FY25. Average issue size moved the other way, rising to roughly Rs 50 crore from Rs 44 crore in FY25 and Rs 13 crore in FY20.
The segment is consolidating around fewer, larger issues. A cooling market is not a reason to abandon a listing, but it does mean a founder cannot assume the subscription levels of two years ago.
Testing whether the market will support the intended raise, before committing to the cost, is the sort of pre-filing judgement Lorvet works through with promoters.
2. The Cost Is Front-Loaded and Largely Fixed
An SME IPO costs money whether or not it completes, and most of the spending happens before a rupee is raised.
| Cost head | What it covers |
| Merchant banker | Usually the largest professional fee, commonly a broadly fixed Rs 25 lakh to Rs 30 lakh |
| Registrar | IPO administration and investor-facing processes |
| Legal | Transaction documentation and regulatory work |
| Audit | Restated financials and diligence support |
| Sponsor bank | Issue-related banking arrangements |
| Printing and marketing | Offer documentation and investor communication |
| Market making | A three-year obligation beginning on the day of listing |
Taken together, the total cost of going public commonly runs to 12 to 16 per cent of issue size on a smaller SME IPO. That proportion falls as the issue grows, because most of the underlying costs are broadly fixed rather than scaled to the amount raised.
Two cost items particularly catch founders out.
First, termination fees. Merchant bankers commonly charge a termination fee if the issue is withdrawn, often around half the negotiated amount. An abandoned SME IPO is not a cost-free retreat.
Second, the arithmetic of a small raise. Because the cost base barely moves with issue size, a company raising Rs 8 crore can surrender a double-digit share of the proceeds to the process itself, while a larger issuer surrenders far less. The economics of listing improve materially with scale, which is part of why average issue sizes have risen.
3. The Obligations Do Not End at Listing
An SME IPO is the start of a permanent compliance regime, not the end of a project.
Market making is compulsory for three years under Regulation 261 of the ICDR Regulations, an obligation that begins on the listing day and is frequently left out of pre-IPO budgets. Annual listing fees, periodic filings, audits and investor communication continue indefinitely, typically costing a few lakh rupees a year before management time is counted.
The governance load is heavier than many promoters expect, and it is the part Lorvet finds is most often underestimated at brief stage.
What a listed SME has to carry:
- Related-party transaction disclosure and approval requirements
- Periodic financial reporting and event-based disclosures
- Monitoring of issue proceeds, with a monitoring agency mandatory above Rs 50 crore
- Promoter lock-in, with the minimum promoter contribution of 20 per cent locked for three years and excess holdings released in phases
- Dematerialisation of the full promoter holding
- Continuing audit, secretarial and investor communication obligations
Constraints on the use of proceeds bind before listing as well. General corporate purposes are capped at the lower of 15 per cent of the fresh issue or Rs 10 crore, general corporate purposes combined with unidentified acquisitions at 25 per cent, and issue proceeds cannot repay loans taken from promoters, the promoter group or related parties. Any deviation from the stated objects requires shareholder approval, with dissenting shareholders entitled to an exit offer.
For a founder used to deciding quickly, this is the real adjustment. Decisions that were once internal become disclosable.
4. Promoter Liquidity Is Capped, and the Market Is Watching
A founder hoping to take significant money off the table through an SME IPO should recalibrate. Two separate limits apply:
- The offer for sale component is capped at 20 per cent of the total issue size.
- An individual selling shareholder may not offload more than 50 per cent of their pre-issue holding.
These rules exist because SEBI concluded that some promoters were treating the platform as an exit rather than a growth route, and the enforcement record supports that reading.
SEBI barred Varanium Cloud, listed on NSE Emerge, and its managing director in May 2024 after finding the company had recorded fictitious sales and purchases while the promoter realised gains of around Rs 122 crore. Add-Shop E-Retail was restrained the same month over fictitious transactions between related parties. BSE halted the listing of Trafiksol ITS Technologies in 2024, despite oversubscription of roughly 345 times, after questions about a vendor contract disclosed in the offer document.
The risk runs to the choice of adviser as well. In May 2025, SEBI restrained Varyaa Creations, a BSE SME listing, after finding that more than 70 per cent of its Rs 20 crore issue proceeds had been transferred to third parties on the day of listing, and barred the lead manager from new mandates. It was the second merchant banker restrained that month. Diligence on the intermediary matters as much as diligence on the company.
5. The Share Price May Not Behave as Expected
Perhaps the least anticipated risk is what happens to the stock after the first week.
A study by RBI staff, published in the October 2025 RBI Bulletin, found a pattern of sharp listing gains followed by negative returns within a short period, with the reversal more pronounced where retail interest had been strongest. Comparing the price-to-earnings ratios of 100 companies listed across FY24 and FY25 against their industry averages, the authors found roughly 20 per cent trading at excessive multiples relative to peers.
The scale of the demand distortion is visible in the allotment data. Applicants per allottee in the SME segment rose from about four in FY23 to roughly 245 in FY25. Prices set by that kind of scramble are not a considered valuation of the business.
Structural factors reinforce the pattern. SME counters are thinly traded, which can make exit at a fair price difficult and leaves prices open to manipulation. Regulators have added guardrails, including a 90 per cent cap on listing-day price discovery introduced by NSE in July 2024 and a 20 per cent pre-open price floor from August 2025, but these limit volatility rather than remove it.
For a founder whose personal wealth sits in locked-in shares, the practical point is narrow. The listing price is not necessarily a realisable valuation.
6. Where the Risks Are Worth Accepting
None of this argues against listing.
For a genuinely profitable company with clean records and a real use for the capital, an SME IPO still offers something no private round does:
- Permanent capital with no repayment obligation
- A public currency for future acquisitions
- A valuation set by the market rather than a single negotiating counterparty
- A governance discipline that makes the next transaction easier
The tightened rules have arguably improved the segment by filtering out companies that were never suited to it. The risks above are manageable for a business with the governance maturity to absorb them. They become severe only when a company lists before it is ready.
7. A Founder’s Checklist Before Filing
Work through these questions honestly, and prefer a documented answer to an assumed one.
Eligibility and market
- Can the company evidence operating profit of at least Rs 1 crore in two of the last three financial years, on audited numbers?
- Would the current market support the intended issue size, on evidence rather than optimism?
- Is there enough runway to start 12 to 18 months before the intended listing?
Financial preparation
- Has a full budget been prepared, including the termination fee payable if the issue is withdrawn, and three years of market making?
- Is the use of proceeds specific enough to survive the general corporate purposes cap?
- Do the accounting records, tax positions and statutory filings withstand third-party diligence without remediation?
Governance and compliance
- Are related-party transactions identified, documented and capable of surviving disclosure?
- Is the full promoter holding dematerialised?
- Is there management bandwidth for quarterly reporting alongside running the company?
Promoter expectations
- Is the promoter group prepared for a 20 per cent lock-in over three years rather than an exit?
- Has the merchant banker been diligenced, including its regulatory record?
8. Weighing the Decision Properly
The honest position is that an SME IPO suits fewer companies than the enthusiasm of recent years suggested, and suits those companies very well.
The risks are knowable in advance. That is precisely why they should be priced before a merchant banker is appointed rather than discovered during diligence.
A founder who can answer the checklist above without flinching is probably ready. One who cannot may be better served by spending another year getting the house in order, and testing that judgement with advisers such as Lorvet before the cost clock starts.
Frequently Asked Questions
- What are the main risks of taking an SME public?
The main risks are failing the eligibility tests, absorbing upfront costs that are payable whether or not the issue completes, and carrying permanent compliance and governance obligations afterwards. Promoter liquidity is also capped, and post-listing share prices have frequently reversed after initial gains.
- How much does an SME IPO cost?
The total cost of going public commonly runs to 12 to 16 per cent of issue size on a smaller SME IPO, with merchant banker fees the largest single line. Founders should also budget for termination fees if the issue is withdrawn and three years of compulsory market making.
- Can promoters use an SME IPO to exit?
No. The offer for sale component is capped at 20 per cent of the issue size, no individual seller may offload more than half their pre-issue holding, and the minimum promoter contribution is locked in for three years.
- What compliance continues after listing?
Periodic filings, audits, investor communication and related-party transaction requirements continue indefinitely, with a monitoring agency required for issues above Rs 50 crore. Market making is compulsory for the first three years.
- How can a founder tell whether the company is ready?
Readiness rests on audited profitability against the Rs 1 crore test, clean tax and statutory records, a specific use of proceeds, and the management bandwidth to handle quarterly reporting. The judgement should then be tested against actual market conditions rather than assumptions about demand.
