India’s SME (small and medium enterprise) capital market is heading for a regulatory reset. Recently, Tuhin Kanta Pandey, Chairman of the Securities and Exchange Board of India, indicated that the regulator is preparing a comprehensive consultation paper to overhaul the SME listing framework after noticing ongoing issues with trading liquidity, market making, underwriting costs, and migration to the main board.
The real test for SEBI, however, will not be whether it can make the segment stricter, but whether it can make it smarter, more liquid, and more credible without shutting genuine small companies out of public markets. Striking that balance will be no easy task.
The review comes at a critical moment for India’s SME ecosystem. While the platform has emerged as an important fundraising avenue for smaller businesses, it has also drawn scrutiny regarding its governance practices, speculative trading, and inadequate investor protection.
At the heart of the debate is a contradiction. Rules introduced to protect investors, especially higher application sizes and larger trading lots, may have inadvertently reduced liquidity by limiting participation in the secondary market. The challenge before SEBI, therefore, is not simply to tighten regulation but to redesign the market so that investor protection and capital formation reinforce, rather than undermine, each other.
Liquidity is the first test of reform
Liquidity is the biggest structural weakness in the SME market, according to experts. Large trading lots, limited participation, and shallow secondary-market trading make it difficult for investors to buy or sell without moving prices. SEBI has flagged odd-lot trading and poor liquidity for review. For participants, thin liquidity can distort price discovery, raise volatility, and increase manipulation risk. A market where even small trades can swing prices sharply may struggle to build long-term investor confidence.
