SEBI is reviewing its SME listing framework to resolve liquidity issues and high trading costs. The regulator plans to ease the migration process to the mainboard and introduce new guidelines for the responsible use of AI and machine learning in financial markets.
The Securities and Exchange Board of India (SEBI) has announced a comprehensive review of its listing framework for small and medium enterprises (SMEs). Chairman Tuhin Kanta Pandey stated that the regulator aims to remove significant obstacles that currently hinder growth, trading, and market-making for these companies. The proposed reforms seek to address structural inefficiencies that have made SME platforms difficult to navigate for both companies and investors.
One of the primary areas under focus is the issue of 'odd lots'—small trade quantities that often result in low liquidity and difficulty for investors to exit or enter positions. SEBI observed that current mandatory market-making and underwriting requirements are not functioning as intended. Instead of supporting SMEs, these rules have added substantial costs, making IPOs on the SME platform significantly more expensive than those on the mainboard.
To improve the ecosystem, SEBI is considering changes to the eligibility criteria for SME listings. Reports suggest the regulator may raise the market capitalization limit for SME IPOs to as much as ₹4,000 crore and revise paid-up capital requirements to streamline the process. Furthermore, SEBI intends to delink the current rigid requirements tied to paid-up capital that currently delay or complicate the migration of successful SMEs to the mainboard. These changes are expected to be detailed in a forthcoming consultation paper, where industry participants will have the opportunity to provide feedback.
New AI and ML Guidelines
In addition to the SME overhaul, SEBI is preparing strict guidelines for the deployment of artificial intelligence (AI) and machine learning (ML) tools within financial markets. The regulator emphasized that accountability must rest with the SEBI-regulated entities using these technologies, regardless of whether the tools were developed in-house or sourced from third-party vendors.
To protect investor interests, the proposed framework includes mandates for 'humans in the loop,' meaning that critical decisions cannot be left entirely to algorithms. The regulator is also exploring safety controls such as 'kill switches' to immediately halt AI-driven trading or operations in case of system malfunctions, alongside strict requirements for data privacy and security. These measures follow existing initiatives like Project Sudarsan and R(AI)DAR, which were launched to detect suspicious financial promotions and misleading advertisements.
Flexibility for REITs and InvITs
SEBI is also examining the regulatory framework for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The regulator is considering allowing greater flexibility for these trusts to invest in under-construction projects, provided these investments remain within defined risk limits.
The next important monitorable for investors and market participants will be the release of the official consultation paper, which will provide specific details on the proposed thresholds for SME listing and the technical requirements for AI implementation.