India's markets regulator on Wednesday proposed tightening profitability requirements for smaller companies seeking to go public, while allowing those that fall short of the threshold to list if they secure strong institutional participation, as part of a broader overhaul of rules governing their IPOs.

A Securities and Exchange Board of India (SEBI) working group also proposed to give qualified institutional buyers (QIBs) greater flexibility to sell their holdings through IPOs, while revising listing eligibility in small- and medium-sized enterprise (SME) IPOs. Here are the key proposals: Introduce market capitalisation-based listing criteria, requiring companies valued at up to 10 billion rupees ($105.10 million) after the issue to list on the SME platform; allow those valued between 10 billion and 40 billion rupees to choose between the SME and main boards. Those valued above 40 billion rupees can list on the main board.

Raise the minimum profitability requirement for SME IPOs to an annual average operating profit of 30 million rupees over the previous three financial years, from at least 10 million rupees in two of the past three years.

Allow companies that fail the profit test to list if at least 75% of the net offer is allotted to QIBs. Allow 60% of the portion reserved for QIBs to go to anchor investors.

Allow QIB shareholders to sell shares worth more than 20% of the total IPO size through the offer-for-sale route and more than 50% of their pre-issue shareholding, provided the shares have been held for at least one year. Exemptions would not apply to IPOs using the alternative route for companies that fail the profit test.

Other proposals include raising the minimum number of IPO allottees to 500, easing caps on funds for general corporate purposes and revising shareholder lock-in rules. SEBI has sought comments from the public by November 4.