MSMEs in India face a major challenge with credit gaps. Many entrepreneurs struggle to get funding because they lack collateral. SEBI has created a new complete framework that offers better-structured ways for MSMEs to access capital markets.

The new rules require companies that want SME IPO listings to show operating profits of Rs 1 crore in at least two of the past three financial years. The Ministry of Defence and National Stock Exchange have joined forces through the NSE Emerge platform. This partnership creates new ways for MSMEs to raise capital from a variety of investors. Serious investors must put in at least Rs 500,000, which helps protect market integrity.

This piece takes a closer look at SEBI's new framework. We'll learn about its core elements, who can qualify, and what it all means for MSME growth. The text also compares these changes with global platforms like London's AIM and Hong Kong's GEM to understand where MSME funding in India is headed.

Understanding SEBI's New Framework for MSMEs

SEBI has shown its dedication to boost the MSME sector through its latest regulatory framework. This move has made capital markets more accessible. The dedicated SME platforms, now 15 years old, have helped more than 1,089 companies successfully list. Among these, 322 companies moved to the main board.

Key Components of the Simplified Access Framework

• MSMEs seeking public funding must follow well-laid-out yet strict pathways.
• Companies need to show operating profits of Rs 1 crore in at least two of the previous three financial years.
• A 20% cap on the offer-for-sale component ensures promoters keep substantial skin in the game.
• Draft red herring prospectuses require a 21-day public comment period.
• Issuers must publish newspaper announcements with QR codes for easier DRHP access and improved disclosures.

Evolution from Previous MSME Regulations

• SEBI introduced SME trading platform guidelines in November 2008.
• A model SME Equity Listing Agreement followed in May 2010.
• Revised framework enabled nationwide trading terminals.
• FY 2023-24 saw 196 IPOs raise over Rs 6,000 crore.
• By October 15, 2024, SMEs raised Rs 5,700 crore through 159 IPOs.
• IPO proceeds cannot be used to repay loans from promoters or related parties.
• General corporate purpose allocation limited to 15% or Rs 10 crore, whichever is lower.

Comparison with International MSME Capital Market Models

SEBI's framework aligns with global standards while considering Indian market nuances.

• Progressive T+2 settlement cycles introduced for paperless trading.
• Ministry of Defence and NSE launched NSE Emerge for defence MSMEs with awareness drives such as:
  • MSME camps
  • Knowledge sessions
  • Road shows
  • Workshops
• NSE connects MSMEs with key intermediaries like:
  • Merchant bankers
  • Registrar and transfer agents
  • Depositories
• FY 2024: About 240 SMEs raised over Rs 8,700 crore (up from Rs 4,686 crore in 2023).
• Specialized advisory services for first-time MSME issuers.
• Enhanced investor protection through better disclosures and monitoring.

Eligibility Criteria for MSMEs Under the New Framework

Financial Requirements: Operating Profit Thresholds

• Operating profit of Rs 3 crore in any two of the last three financial years.
• SME IPO eligibility includes:
  • Minimum issue size above Rs 10 crore
  • Face value of Rs 10 for all shares
  • Post-issue paid-up capital not exceeding Rs 25 crore

Governance Standards for Capital Market Entry

• Entities converted from proprietorship/partnership/LLP need two full financial years before filing.
• Companies with over 50% promoter change must wait two years before filing.
• Disqualifications apply if:
  • Promoters/directors are barred from accessing markets
  • Involvement in banned companies
  • Listed as willful defaulters or fraudulent borrowers

Documentation and Compliance Simplifications

• Companies must maintain positive net worth.
• Key changes include:
  • Restated financials per Schedule III of the Companies Act, 2013
  • Company website and demat agreement with depositories
  • Confirmation of no:
    • Board for Industrial and Financial Reconstruction cases
    • Ongoing IBC proceedings
    • Active winding-up petitions
• Half-yearly short-format reporting for practical compliance.

Current MSME Classification

• Micro enterprises: Investment under Rs 1 crore, turnover below Rs 5 crore
• Small enterprises: Investment up to Rs 10 crore, turnover up to Rs 50 crore
• Medium enterprises: Investment up to Rs 50 crore, turnover up to Rs 250 crore

SEBI's structured framework balances investor protection with MSME growth, focusing on financial viability, compliance ease, and market integrity.
 

NSE Emerge Platform: Specialized Marketplace for MSME Funding

NSE Emerge serves as a reliable marketplace that connects sophisticated investors with emerging corporates in India. The platform allows informed investors to support businesses that show promising growth and innovative business models.

Platform Structure and Functionality

• The trading infrastructure works within NSE's capital market segment.
• SME securities have distinct identifiers on the NEAT trading system.
• Companies can pick between two trading options:
  • Normal Market: Continuous trading with price-time priority matching
  • Call Auction Market: Order pooling determines equilibrium price based on demand-supply dynamics.
• Market makers:
  • Provide two-way quotes with minimum depth during trading sessions
  • Must remain active for at least 75% of the trading time
  • Operate in a hybrid system to enhance liquidity

Success Stories and Case Studies

• By September 2024, 556 companies listed and raised about INR 14,145 crore.
• New issuers receive complete support through:
  • Awareness drives
  • Knowledge sessions
  • Road shows
  • Workshops
• Milestone: Prizor Viztech became the 500th listed company on July 22, 2024.
• 138 companies have migrated to the main board.
• Market value reached INR 1,45,385 crore by March 2024.

Cost Benefits Compared to Traditional Listing

• Funding via NSE board approval (not SEBI).
• Advantages include:
  • Fewer compliance requirements
  • Lower listing costs
  • Simple documentation
• Average IPO size increased from Rs. 13.44 crore (FY 2019-20) to Rs. 37.57 crore (FY 2024-25).
• NSE connects MSMEs with intermediaries:
  • Merchant bankers
  • Registrar and transfer agents
  • Depositories
• In July 2024 alone:
  • INR 11,186.02 crore raised from 23 listings
  • Total market value crossed INR 8,800 crore
• Special five-year agreement with Ministry of Defence benefits defence MSMEs.

Role of Intermediaries in Facilitating MSME Capital Access

• Merchant bankers guide companies through public listing and ensure regulatory compliance.

Merchant Bankers' Responsibilities Under New Regulations

• SEBI categories:
  • Category 1: Rs 50 crore net worth, all activities
  • Category 2: Rs 10 crore net worth, limited activities
• Responsibilities include:
  • Offer document accuracy
  • Compliance verification
  • Due diligence certification
  • Underwriting commitments
• Revenue requirements:
  • Category 1: Rs 25 crore over 3 years
  • Category 2: Rs 5 crore over 3 years

Technology Partners and Digital Infrastructure

• Account Aggregator Network (RBI-regulated)
• Digital Public Infrastructure:
  • Digital IDs
  • Digital payments
  • Public credit registries
• Benefits:
  • Transaction tracking
  • Improved credit assessment
  • Lower operational costs
• Blockchain and regulatory sandboxes foster innovation.

Advisory Services for First-time MSME Issuers

• Pre-listing Support:
  • Educate about regulations
  • Due diligence
  • Offer document prep
• Market Making Obligations:
  • 75% trading presence
  • 3-year support post-listing
• Underwriting Requirements:
  • 100% underwriting
  • 15% in own books
• Must disclose nominated investor arrangements.
• SEBI restricts merchant banker shareholding > 0.1% or Rs 10 lakhs.
• Ongoing reporting includes:
  • Post-issue monitoring
  • Grievance resolution
  • Compliance certification

Investor Protection Measures in MSME Securities

• SEBI ensures evaluations and monitoring systems.

Disclosure Requirements

• Report:
  • Regulatory actions
  • Disciplinary measures
  • Defaults
• Half-yearly abridged reports
• 21-day DRHP public review with QR code disclosures

Risk Assessment Framework

• ASM and T2T settlement rules:
  • Higher margins
  • Restricted trading
  • Monitoring protocols
• ESM for < Rs 500 crore stocks:
  • 100% margin
  • Weekly restrictions
  • Minimum monitoring periods

Regulatory Oversight

• Investor Protection Fund (IPF) structure:
  • 25% interest for admin
  • 70% reinvested
  • Depository interest returns to fund
• Proceeds limit:
  • Max 15% or Rs 10 crore for general purposes
  • No repayment of promoter-related loans
• Venture debt supports:
  • Working capital
  • Equipment purchases
  • Expansion
• Promoter sale cap:
  • Max 20% jointly
  • No individual > 50%

Impact on MSME Growth and Job Opportunities

• Capital Infusion:
  • Self-Reliant India Fund: Rs 10,000 crore corpus (Rs 50,000 crore potential)
  • ECLGS: Collateral-free loans
• GDP Contribution:
  • 27.3% (2020-21) → 30.1% (2022-23)
• Exports:
  • Rs 3.95 lakh crore → Rs 12.39 lakh crore
  • 45.73% of total exports
  • Exporters: 52,849 → 1,73,350

Employment Generation Through Funded MSMEs

• 25 crore people employed across 5.93 crore units
• PMEGP:
  • 8 million jobs
  • 9.65 lakh enterprises
  • Rs 25,263.33 crore in subsidies
• Jammu & Kashmir:
  • 3,56,336 jobs
  • 44,542 projects (2021-24)

Sector-specific Growth Projections

• Union Budget 2025-26:
  • Footwear & leather: 22 lakh jobs, Rs 4 lakh crore turnover
  • Toy sector: cluster & skills support
• Projected growth:
  • 6.38 crore → 7.5 crore MSMEs
  • 2.5% CAGR
  • 6.11% of manufacturing GDP
  • 24.63% of service activities GDP
• Skilling ecosystem supported by RAMP scheme and other programs

Phased Rollout Strategy

The regulatory body took a methodical approach to implement this framework. SEBI started public consultations on proposed amendments to SME provisions under ICDR and LODR regulations. These consultations followed recommendations from the Primary Market Advisory Committee and internal discussions. Most stakeholders supported these proposals, which led to systematic execution plans. SEBI created a structured timeline after careful review:

• Pilot Implementation Standard Formulation (ISF) entities got a six-month adaptation period
• Other qualifying entities saw immediate effects
• Implementation standards development received a three-month window

The framework's most important changes affect rights issue timelines:

• Board approval to closure now takes just 23 days
• Subscription windows stay between seven and 30 days
   

Technology Infrastructure Development

The MSME Ministry leads tech advancement through its MSME-TEAM initiative. This program invested Rs 277.35 crore to promote digital trade. Small and micro enterprises receive support for:

• Digital catalogue preparation
• Account management systems
• Logistics coordination
• Packaging solutions

The Hub and Spoke model features 20 Technology Centers and 100 Extension Centers that create a reliable nationwide support network. These centres provide:

• Technical assistance
• Skill development programs
• Incubation support
• Consultancy services

The Center for Rural Enterprise Acceleration through Technology (CREATE) shows regional implementation success. It offers specialized training in:

• Pashmina wool roving
• Essential oil extraction

This infrastructure supports import substitution initiatives and enables local component manufacturing in a variety of sectors.
 

Stakeholder Preparation Guidelines

Stock exchanges must identify eligible entities based on market capitalization criteria and distribute this information on their websites. Implementation Standard Formulation committees monitor progress continuously by:

• Working with SEBI to identify regulations
• Creating working groups for specific standards
• Meeting regularly to ensure timely formulation

SEBI approved timeline adjustments for Environmental, Social, and Governance (ESG) compliance:

• Value chain ESG disclosures moved to FY 2025-26
• Assessment requirements shifted to FY 2026-27
• Mandatory compliance changed to voluntary disclosure

Listed entities can now cross-reference between international reporting standards and Business Responsibility and Sustainability Reporting (BRSR) requirements. Companies that maintain sustainability reports under GRI, SASB, TCFD, or Integrated Reporting can utilize existing disclosures.
  The implementation strategy acknowledges industry-specific differences. Entities can explain why certain disclosures don't apply to them. Disclosure scope stays uniform across all documents. The framework offers flexibility through:

• Clear response requirements
• Web-link provisions for relevant documents
• Explanatory remarks for pending complaints
   

Challenges and Potential Solutions in Framework Adoption

MSMEs face several obstacles in adopting SEBI's new framework to simplify capital market access. These challenges need budget-friendly solutions that work and boost market participation.
 

Awareness and Education Gaps

Small enterprises don't understand capital market mechanisms and financing options well. The gap between regulatory requirements and MSME capabilities shows why one-size-fits-all approaches might not work. The framework offers solutions:

• Digital catalogue preparation support
• Account management systems training
• Logistics coordination assistance
• Packaging solutions guidance

The Ministry of MSME gives Rs 277.35 crore through MSME-TEAM for digital trade promotion. Many enterprises don't know about government-backed schemes that support MSME financing.
 

Compliance Capabilities of Smaller Enterprises

Smaller firms struggle with regulatory requirements because they lack equity-market compliance systems. The Rs. 500 crore threshold affects entities of different sizes, which creates unfair burdens for smaller issuers. The biggest compliance challenges are:

• Formation of multiple committees
• Meeting detailed disclosure requirements
• You retain control over governance norms
• Managing technological adoption costs

Smaller entities need more original investments to adopt new technology like XBRL filing systems. Both regulators and issuers must build capacity to apply changes successfully.
 

Market Liquidity Concerns for MSME Securities

Several factors limit trading interest in MSME securities. Market analysis shows each stock needs a minimum market lot, and investors must invest at least Rs 1 lakh for active trading. Low institutional buying creates major liquidity challenges. The main market constraints are:

• Limited institutional participation
• Fewer exit options for existing investors
• Complex entry restrictions for retail investors

The framework has special provisions to address these issues.
 

Enhanced Financial Support:

• Collateral-free loans through institutional provisions
• Specialized platforms like BSE SME for capital raising
• Streamlined working capital financing options
   

Technological Integration:

• Implementation of digital public infrastructure
• Account aggregator networks for secure information sharing
• Blockchain technology for transparent transactions
   

Market Making Mechanisms:

• Market makers must be present 75% of trading time
• Support extends for three years after listing
• Two-way quotes with minimum depth requirements
   

The framework recognizes unique risks for debt issuers and adapts governance approaches. Relying too much on debenture trustees to monitor related party transactions might create gaps, especially when trustees lack resources or authority. ESG disclosures' voluntary nature could create uneven adoption patterns. This might disadvantage enterprises investing in sustainability. SEBI approved timeline changes and pushed value chain ESG disclosures to FY 2025-26.

Conclusion
SEBI has created a complete framework that changes how MSMEs can access capital markets. The framework fills crucial funding gaps through well-laid-out paths and strong investor safeguards that protect market integrity. MSMEs now enjoy simpler paperwork, expert advice, and access to specialized platforms like NSE Emerge.

The numbers tell a success story. Companies have thrived on NSE Emerge with 556 listings that raised INR 14,145 crore. About 138 businesses grew enough to move to the main board. MSMEs now power 30.1% of India's GDP in 2022-23 and support over 25 crore people in 5.93 crore registered units.

Some businesses don't deal very well with compliance rules and market liquidity. SEBI's step-by-step rollout gives them time to adapt. The MSME-TEAM initiative builds better technology systems while support centers help companies meet these requirements.

The framework strikes the right balance between market access and investor safety. Market making rules, better disclosure standards, and risk assessment systems create a secure space for everyone involved. SEBI's steadfast dedication to boost the MSME sector through careful market reforms helps these businesses grow sustainably and contribute more to the economy.