MUMBAI : India’s securities regulator is reassessing the rules governing how small and medium-sized companies raise money through the stock market, with the cost of mandatory market making emerging as one of the central issues under review.
Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey said Wednesday that the regulator is conducting a comprehensive review of SME IPO regulations and the delisting process, flagging the market-making requirement specifically as a factor adding to the cost smaller companies face when pursuing a stock-market listing.
Market making is what sets the SME platform apart from ordinary share trading. A designated market maker must continuously provide buy and sell quotes, giving investors a counterparty to trade against in shares that might otherwise see limited activity.
Current SME prospectus documents filed under SEBI’s framework show market makers are generally required to provide two-way quotes for at least 75 percent of trading time, alongside minimum quote depth and spread requirements.
he purpose behind this is straightforward: smaller companies typically attract fewer buyers and sellers than heavily traded mainboard stocks, and a market maker fills that gap, supplying liquidity when natural buy or sell orders fall short. But that liquidity comes at a cost. Market makers must maintain inventory, quote both sides of the market continuously, and operate within exchange requirements throughout, obligations that can eat up a meaningful share of a small company’s overall listing expenses given how modest the capital raised often is.
That’s precisely the tension SEBI is examining now. Pandey’s comments signal the review is underway, not that a specific replacement framework has already been final. The trade-off is a market where liquidity runs thinner and price swings can be considerably sharper, which is exactly why the market-making requirement functions as more than a compliance checkbox, it’s core to making SME shares tradable once they list.
SEBI’s own documents spell out how demanding that obligation actually is. A recent SME prospectus requires the market maker to provide two-way quotes for 75 percent of the trading day, with a minimum quote depth of ₹1 lakh, and mandates the arrangement stay in place for three years from the date of listing. That leaves the regulator balancing two competing goals.
Cutting the burden could open public markets to more smaller businesses. But dialing back the liquidity mechanism too far risks leaving investors stuck holding shares they can’t easily sell, particularly where natural demand is already limited.
This review follows SEBI’s move to tighten SME IPO eligibility requirements earlier this year. A January 2026 SEBI document detailed new criteria around profitability and stricter limits on offers for sale within SME issues, part of a broader trend of the segment drawing closer regulatory scrutiny as investor interest in it has grown.
For investors, an SME IPO isn’t simply a scaled-down mainboard offering. Trading conditions, minimum application sizes, liquidity, and the ease of exiting a position can all differ substantially, and while the market-making system is designed to soften that gap, it doesn’t guarantee a buyer will always be available at an investor’s preferred price.
Pandey noted the SME framework isn’t being reviewed in isolation. SEBI is separately examining securities lending and borrowing mechanisms and short-selling rules as part of a broader push to deepen India’s cash equity market, alongside measures aimed at making the country more kattractive for global fund-management activity.
No final changes to the SME IPO rules have been announced.
