Latest SME IPO Allotment Rules (2025–26): Complete Guide

The SME IPO framework has undergone a major reset in 2025, fundamentally changing who can apply, minimum ticket size, and how allotment is done across investor categories. These reforms aim to curb speculative frenzy, improve quality of issuers, and align SME processes more closely with mainboard IPO norms.

In this post, we break down the latest SME IPO allotment rules in simple language, with practical implications for investors and advisors.

1. Background: Why SEBI Tightened SME IPO Rules

In the last couple of years, SME IPOs saw aggressive oversubscription, sharp listing gains, and frequent price manipulation, often driven by leveraged HNI funding and very low public float. SEBI and the exchanges (NSE Emerge, BSE SME) responded in 2025 with a comprehensive review of the SME framework under SEBI (ICDR) Regulations.

The key objectives behind the new rules are:

• Increase minimum skin‑in‑the‑game per investor to discourage pure lottery punting.
• Improve financial quality and disclosure standards of SME issuers.
• Align allocation and allotment methodology (especially for NIIs) with mainboard IPOs.
• Ensure wider and more genuine investor participation (higher minimum number of allottees).

2. New Investor Categories and Reservation Structure in SME IPOs

2.1 Replacement of “Retail” by “Individual Investor” Category

For SME IPOs, a key change is the effective removal of the classic “Retail Individual Investor (RII up to ₹2 lakh)” concept. Exchanges have introduced a broader “Individual Investor” category with a higher minimum application size.

As per the new SME IPO framework effective from July 1, 2025 (NSE/BSE circulars referencing SEBI amendments):

• Individual Investor (new category)
  • Minimum application: at least 2 lots.
  • Minimum investment: more than ₹2 lakh (approx.) based on lot size.
  • There is no upper cap like the earlier ₹2 lakh limit for retail.​
• Employees / Shareholders / Policyholders (where applicable)
  • Minimum application: 2 lots.
  • Investment range: more than 2 lots, up to ₹5 lakh.​

Institutional and non‑institutional buckets continue, but with revised sub‑categories and methodology for NIIs (discussed below).

2.2 Reservation Between QIB, NII and Individual Investors

In a book‑built SME IPO, the broad reservation structure is now aligned to mainboard patterns, with some flexibility at the issuer/exchange level:

• Qualified Institutional Buyers (QIBs) – up to 50% of net issue.
• Non‑Institutional Investors (NIIs / HNIs) – at least 15% of net issue.
• Individual Investors – at least 35% of net issue in book‑built issues (similar to earlier retail reservation, but with a higher ticket size per investor).

In fixed price SME IPOs, issuers often reserve a higher portion for non‑institutional/individual investors, but the dominant trend in recent SME IPOs has been book‑building with the above structure.

3. Minimum Application Size, Lot Size and Number of Allottees

3.1 Minimum Bid Size: Two Lots and ~₹2 Lakh Ticket

One of the most impactful changes is the increase in minimum bid size to two lots for all investor categories. Correspondingly, lot sizes are fixed such that the minimum investment in an SME IPO is now around ₹2 lakh or more.

Key points:

• Minimum application = 2 lots (not 1 lot as earlier).
• Combined value of 2 lots ≈ ₹2 lakh (or higher) as per issue price and lot size.
• This applies across investor categories (individual, NII etc.), making SME IPOs effectively a higher‑ticket product.

This directly eliminates the earlier phenomenon of small‑ticket retail punting with just one lot of ₹1–1.5 lakh or even lower in some issues.

3.2 Minimum Number of Allottees Increased from 50 to 200

Earlier, SME IPOs required only 50 allottees for a successful issue. Under the revised SEBI framework, the minimum number of allottees has been raised to 200.

Impact:

• Wider spread of shareholding from day one.
• Harder for a small group to corner supply.
• Greater market scrutiny and liquidity post listing.

4. Revised Allotment Methodology: Category‑Wise Rules

4.1 High‑Level Flow of SME IPO Allotment

Once the issue closes and bids are validated, the registrar prepares the Basis of Allotment (BOA) in consultation with the stock exchange. The broad sequence is:

1. Segregation of valid bids by category and sub‑category.
2. Determination of cut‑off price in book‑built issues (but note cut‑off option for investors is removed—explained later).
3. Calculation of maximum number of allottees by dividing shares available by lot size.
4. Application of category‑wise allotment rules (lottery or proportionate, as applicable).
5. Finalisation of BOA and credit of shares / refund.

4.2 Individual Investors (Earlier Retail)

For the Individual Investor category:

• In case of oversubscription, allotment is done lot‑wise, typically using a draw of lots (lottery system) to ensure each successful applicant gets one minimum application (2 lots) first, to the extent possible.
• If the number of applications is less than or equal to the maximum possible allottees, each valid applicant usually receives full applied quantity.

Example:

• Net shares for Individual Investor segment: 20,00,000 shares.
• Lot size: 1,000 shares; minimum application: 2 lots = 2,000 shares.
• Maximum allottees = 20,00,000 ÷ 2,000 = 1,000 investors.
• If 3,000 valid applications come, a lottery is conducted to identify 1,000 successful investors who each receive 2,000 shares (2 lots), and the rest get zero.

4.3 NII / HNI Category: New sNII and bNII Sub‑Buckets

A major reform is the alignment of NII allotment methodology in SME IPOs with mainboard IPOs, including the creation of small NII (sNII) and big NII (bNII) segments.

As per the revised SME framework:

• Sub‑category 1 – sNII (small NII):
  • One‑third of the NII portion reserved.
  • Application size: more than two lots and up to such lots where value does not exceed ₹10 lakh.
• Sub‑category 2 – bNII (big NII):
  • Two‑third of the NII portion reserved.
  • Application size: more than ₹10 lakh.

Earlier, allotment in SME NII was purely proportionate, which allowed aggressive leveraging and very large leveraged bids. Under the new regime:

• First, a draw of lots is done to allot the minimum bid lot to successful applicants in each NII sub‑category in case of oversubscription.
• Any remaining shares after minimum‑lot allotment are then allotted proportionately within that sub‑category.

This brings SME NII allotment closer to mainboard practice and discourages extreme over‑bidding solely to grab a larger proportionate share.

4.4 QIB Category

For QIBs, the allotment is typically done on a proportionate basis based on valid bids at or above the final issue price. In some issues, anchor investors may be allocated a portion prior to the issue opening, consistent with SEBI’s anchor investor framework.

If any category is undersubscribed (for example, if QIB participation is weak), the unsubscribed portion may be reallocated to other categories, subject to regulatory limits and exchange approval, to ensure full subscription of the issue.

5. Other Critical Rule Changes Affecting Allotment

5.1 No “Cut‑off Price” Option for Investors

In mainboard IPOs, retail investors can apply at “cut‑off price”. In SME IPOs under the new framework, the cut‑off option is no longer permitted for investors. Investors must explicitly bid at a particular price within the price band in book‑built SME IPOs.

Consequences:

• Bids at prices below the discovered issue price become ineligible for allotment.
• Investors and intermediaries must pay more attention to price discovery and demand trends during the issue.

5.2 Restrictions on Bid Revisions and Timings

The new norms prescribe tighter bid revision and timing rules for SME IPOs.

Key points:​

• Investors cannot revise or cancel their bids after submission.
• On the last day of issue, bidding normally closes by 4:00 pm, and UPI mandate confirmation must be completed by 5:00 pm.
• Failure to confirm the UPI mandate within the timeline results in bid rejection.​

These measures aim to reduce manipulative last‑minute bid modifications and improve the reliability of demand data.

5.3 Stricter Financial Eligibility and Use of Proceeds (Indirect Impact on Allotment)

While not “allotment rules” per se, the following changes materially impact the quality of SME IPOs that actually reach the allotment stage:

• Profitability requirement:
  • Issuer must have minimum EBITDA of ₹1 crore in at least 2 of the last 3 years, and other profitability/track‑record criteria, depending on the specific SME platform.
• Use of proceeds restrictions:
  • Spend on “general corporate purposes” capped at less than 15% of issue size or ₹10 crore, whichever is lower.
  • Repayment of loans to promoters or related parties out of IPO proceeds is prohibited.

These changes indirectly protect investors by ensuring better quality issues and limiting value‑transfer to promoters.

6. Practical Takeaways for SME IPO Investors

For serious investors and advisors, the new SME IPO allotment framework has several practical implications.

• Higher Capital Commitment:
  • Expect a minimum of ~₹2 lakh per application, as the smallest admissible bid is 2 lots. Impulse “small retail” participation is effectively gone.
• Reduced Leverage‑Driven HNI Bidding:
  • NII allotment now uses lottery + proportionate, with separate sNII and bNII buckets, which dampens the benefit of extreme over‑bidding using funding.
• Focus on Quality and Liquidity:
  • With minimum 200 allottees and stricter issuer eligibility, the average quality and breadth of shareholding is expected to improve over time, though stock‑specific risks remain high.
• Need for Better Price Judgement:
  • Without a “cut‑off” option, investors must choose realistic bid prices within the band, especially in tight or aggressively priced issues.
• Timeline Discipline:
  • UPI confirmations and bid submissions must be handled well before the cut‑off to avoid rejection.​
  • Allotment status is typically finalised and announced within a few working days of issue closing; many SME platforms and registrars provide a dedicated allotment‑status page.

7. Simple Numerical Illustration of SME IPO Allotment

Consider a hypothetical SME IPO with the following details (simplified):

• Total issue size: 50,00,000 shares.
• Price band: ₹100–₹110; final issue price discovered at ₹110.
• Lot size: 1,000 shares; minimum application = 2 lots = 2,000 shares (₹2,20,000).
• Reservation: QIB – 50%, NII – 15%, Individual Investors – 35%.

1. Shares for Individual Investors:
   • 35% of 50,00,000 = 17,50,000 shares.
   • Each minimum application = 2,000 shares; maximum allottees = 17,50,000 ÷ 2,000 = 875 investors.
   • If 5,000 valid applications are received, a lottery is held, and only 875 investors receive 2 lots each; the rest receive nothing.
2. Shares for NII (overall):
   • 15% of 50,00,000 = 7,50,000 shares.
   • Assume split between sNII and bNII as per 1/3 and 2/3.
   • Oversubscription within each bucket is handled first by lottery for minimum lot, then by proportionate allotment of remaining shares.
3. Shares for QIBs:
   • 50% of 50,00,000 = 25,00,000 shares, allotted proportionately among valid bids.

This illustration shows how the system prioritises fair distribution of minimum lots over large disproportionate allotments to a few heavily funded bidders.

8. Conclusion

The 2025 overhaul of SME IPO regulations has transformed SME allotment from a “retail lottery playground” into a higher‑ticket, more institutionally aligned segment with stricter issuer norms. For investors, SME IPOs now demand higher capital, deeper research, and realistic expectations about allotment probability and post‑listing volatility.

CA Ankit Gulgulia (Jain)

FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)

Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.