In the SME segment, a stock can have traded recently and still have little buying interest when an investor wants to sell. To reduce that problem, the Indian SME framework requires compulsory market making for a minimum period after listing. The rule gives investors an additional source of two-way quotes, but it does not create a price floor or guarantee that a position can be sold at a preferred level. Investors therefore need to understand what the market maker is required to do and what the live order book actually shows.
What a Market Maker Does in an SME Stock
A market maker posts both a bid and an ask. The bid is the price at which it is prepared to buy, while the ask is the price at which it is prepared to sell. The gap between the two is the spread. The basic mechanics are similar across different markets: a market maker provides quotes, trades against incoming orders and manages the inventory created by those trades.
In the Indian SME segment, that general role comes with specific regulatory duties. Regulation 261 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 requires compulsory market making for at least three years from the date of listing. The lead manager is responsible for ensuring that the arrangement is in place, and the details must be disclosed in the offer document.
The market maker also starts with inventory. Regulation 261 requires it to hold at least 5% of the securities proposed to be listed on the date of allotment. This gives the broker stock that can be offered to buyers once trading begins and makes the appointment a practical part of the stock’s trading structure during the compulsory period.
What the Current Rules Require
SEBI sets the broad framework, while NSE Emerge sets the operating requirements:
- two-way quotes for at least 75% of the trading day;
- minimum quote depth of ₹1,00,000;
- execution at the displayed price and quantity;
- up to five market makers in one stock, with competing quotes where more than one is appointed;
- market making from the listing date throughout the compulsory period.
Regulation 261 also restricts certain transactions during the compulsory period. The market maker cannot buy shares from promoters, the promoter group or persons who acquired shares from them. This keeps the compulsory mechanism focused on secondary-market liquidity rather than promoter exits.
Liquidity Does Not Mean Price Protection
The market maker has to remain active according to the applicable rules, but it does not have to defend a particular share price. Its quotes can move as market conditions change: if selling pressure increases, the bid can move lower, while stronger demand can shift quotes higher. A stock can therefore have an available buyer and still trade far below an investor’s purchase price. The spread matters as well. A wide gap between bid and ask can make entry or exit more expensive even when both sides of the market are visible, so current quotes and the quantity available at those levels are more informative than the last traded price alone.
| Investor question | What the rules say | Where to check |
|---|---|---|
| Is two-way liquidity required? | Yes. NSE Emerge requires market makers to quote both sides for at least 75% of the trading day | Live market depth and NSE information |
| Is a minimum selling price guaranteed? | No. The framework requires quoting and execution, not a fixed price floor | Current bid and ask |
| Who is the market maker? | The arrangement must be disclosed in the offer document | Prospectus and exchange information |
| How long does compulsory market making last? | At least three years from listing | Listing date and applicable exchange notices |
| Can a holding smaller than one lot be sold? | Yes. The market maker must buy the entire holding in one lot if it is below the minimum contract size | Your broker and the offer document |
Why the Framework Is Being Reviewed
The SME segment is now large: Business Standard, citing Prime Database, reported that 267 SME IPOs listed in 2025 and raised ₹11,455 crore. On 19 August 2026, SEBI Chairman Tuhin Kanta Pandey said the market-making framework was not working properly and was adding to costs for SMEs. He also pointed to underwriting, migration to the main board, paid-up capital requirements and trading lots as areas due for review.
Those comments describe a policy direction, not a new rule. Until revised regulations or exchange requirements are formally introduced, the existing SEBI framework and current exchange rules remain the reference point for investors.
What Investors Should Check Before Buying
The market-making arrangement can be reviewed before an investor applies for an SME IPO. The relevant information is already available in the offer document and can then be checked against exchange data after listing.
A practical review looks like this:
- Read the market-making section in the offer document.
- Identify the appointed market maker or market makers.
- Check the listing date and the period covered by compulsory market making.
- After listing, review the live bid, ask and available market depth.
- Compare the spread and quoted quantities with the size of the position you may want to trade.
- Follow exchange notices for any change in the appointed market maker or the applicable framework.
These checks do not show whether the underlying company is a good investment. They show how the stock is structured for trading once it reaches the market. The live order book is especially useful because conditions change during the session: orders can be added, executed or cancelled, and the quantity available near the current price can change quickly. A recent transaction therefore says less about current liquidity than the bid, ask and depth visible at the time an investor wants to trade.
What the Rule Means in Practice
Compulsory market making gives SME stocks a defined source of two-way quotes during the first years after listing. The current framework sets specific obligations around the duration of the arrangement, quote availability, minimum depth and the market maker’s starting inventory, while market risk remains with the investor. Prices can still fall, spreads can widen and available liquidity can change, so the market maker should be viewed as part of the trading infrastructure rather than protection against losses.
For current requirements, the most reliable references are the SEBI regulations, the relevant exchange rules and the offer document for the individual company. Those sources show what the market maker must do; the live order book shows what liquidity is actually available at a given moment.