SME mainboard migration norms tightened: What stock market analysts say

The National Stock Exchange (NSE) has revised the eligibility criteria for the companies who can migrate to the mainboard from its SME platform. The list of revised norms include measures like average market capitalization of more than Rs 100 crore, minimum bar of revenue, profitability for two years among others.

These stricter norms have been lashed out by the leading exchange on the heels of the Gensol Engineering fiasco, which was migrated to the mainboard in 2023. The stock delivered spectacular returns since its IPO in October 2019, but has wiped out about 92 per cent of investors' wealth amid the alleged financial misconduct.

The average market capitalization requirement has been raised from Rs 25 crore to Rs 100 crore, limiting eligibility to more sizable SMEs. Under the new norms, smaller companies must have a minimum revenue of Rs 100 crore in the preceding financial year and report positive operating profits in at least two of the last three years.

Also, promoters must hold at least 20 per cent of the company’s equity at the time of application and retain at least 50 per cent of their original holding from the SME listing date. Also, they must be listed on the SME platform for at least three years and have a minimum of 500 public shareholders at the time of application, to ensure only relatively seasoned and widely held firms qualify.

Applicants must have a clean regulatory record—no insolvency proceedings, winding-up petitions, SEBI debarments, material regulatory actions, or unresolved investor complaints. SMEs emerging from surveillance or trade-to-trade restrictions must observe a 60- day cooling-off period before applying for migration are some of the other norms.

Kranthi Bathini, Director of Equity Strategy at Wealthmills Securities said that the regulator has laid out stringent norms post the recent fall out of a SME company from EV space, which was migrated to the mainboard. "This action is aimed to safeguard the interest of gullible retail investors, who often fall prey after an astounding rise in SME companies and their migration to mainboard," he said.

Echoing the similar notion, Narinder Wadhwa, MD and CEO at SKI Capital Services said that the revised framework follows recent regulatory tightening by SEBI, particularly around merchant bankers and IPOs for smaller firms.

"It also comes in response to concerns over financial misconduct by certain companies that had previously migrated to the main board. The new rules represent a substantial shift toward more stringent norms, designed to filter only credible and mature SMEs for main board listing," he said.

Post its migration to the mainboard, shares of Gensol Engineering soared to nearly 2,392.05 per share in October 2023. The company launched its Rs 17.93 crore IPO in September 2019 selling its shares for Rs 83 apiece. The company gave two bonus issues in 1:3 ratio (in October 2021) and 2:1 ratio (in October 2023).

Adjusting these corporate actions, shares of Gensol Engineering soared 6,550 per cent to Rs 1,330 in February 2024. The stock has crashed nearly 95 per cent from its all-time peak. The total market capitalization of the company has slipped below Rs 350 crore from Rs 5,000 crore at its peak.

Every time the rules are tightened, the level of scrutiny on investments increases, ultimately helping to identify strong, high-quality companies, said Kresha Gupta, Founder & Director at Steptrade Share Services. The revised criterion shall ensure that only fundamentally sound companies make it to the main board, she said.

"These measures strengthen a company’s foundation and enhance the integrity of the capital markets in the eyes of investors. While it may become more challenging for companies to raise capital or achieve higher valuations, it builds investor trust in the long term," Gupta added.