Introduction

The capital market is not merely a marketplace where securities are exchanged, it is an institution of trust, liquidity, and continuity. Each listing, particularly under the SME segment, represents not just a fundraising exercise but a social and economic contract between issuers and investors. When a company accesses public capital, it implicitly promises tradability, transparency, and confidence.

Regulation 261 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (the “ICDR Regulations”) embodies this philosophy through its robust framework on market making. A mechanism intended to preserve liquidity and safeguard the integrity of the SME platform.

Who is a Market Maker

A market maker is a registered trading member , empaneled with the SME exchange. Market Maker provides liquidity in SME-listed securities on platforms such as BSE SME and NSE Emerge. Their role begins from the first day of listing and ensures smooth trading even when investor participation is limited.

Market makers continuously place two-way quotes, both buy and sell orders around the prevailing market price. They do not trade exactly at the market rate; instead, they buy slightly below it and sell slightly above it. This price difference forms their profit margin (spread).

For example, if the market range is ₹100–₹102, the market maker may buy at ₹100 and sell at ₹102. If an investor’s order doesn’t find a counterparty in the market, the market maker steps in, executing the order from its own inventory, thus avoiding order imbalances and supporting fair price discovery. In simple terms, market makers ensure that buyers and sellers are always available, helping maintain liquidity and stability in SME stocks.

List of market makers: https://nsearchives.nseindia.com/emerge/participants/content/Securitywise_Market_Maker.csv
https://www.bsesme.com/MarketMakers/MemberList.aspx

Market Maker Reservation

In an SME IPO, a minimum of 5% of the issue size must be reserved for the Market Maker. This inventory enables the Market Maker to provide continuous buy-and-sell quotes. Once the permissible buy limit is reached, the Market Maker must first release some inventory before placing fresh buy orders, ensuring balanced liquidity.

Market Making Agreement

A Market Making Agreement is executed between the issuing company, the lead merchant banker, and the appointed market maker, outlining obligations for providing market-making services for a minimum period of three years from the date of listing. The agreement must comply with all applicable SEBI and stock exchange regulations.

The merchant banker must disclose the appointed market maker at the time of filing the offer documents and submit a copy of the executed agreement along with the prospectus to the SME Exchange.

The market maker is required to continuously provide buy and sell quotes for the company’s shares throughout the mandated period unless they voluntarily withdraw or become ineligible. In case of voluntary withdrawal, the market maker must give at least one month’s prior notice to the exchange, and the merchant banker must ensure that a replacement market maker is appointed within one month to continue the mandatory three-year market-making commitment.

Regulatory Framework under Regulation 261

Regulation 261 of the ICDR Regulations lays down a comprehensive framework for compulsory market making in SME public issues:

• Mandatory Appointment – The Lead Manager must ensure that the issuer appoints a SEBI-registered stockbroker (market maker) for undertaking compulsory market making on the SME exchange.
• Tenure – The obligation continues for a minimum period of three years from the date of listing (or migration from the Main Board).
• Inventory Requirement – The market maker must maintain a minimum inventory of 5% of the securities proposed to be listed, ensuring genuine financial participation and capability.
• Restriction on Promoter Transactions – The market maker cannot purchase shares from the promoters or promoter group during the market-making period, to prevent manipulation or disguised promoter exits.
• Odd Lot Protection – Where a shareholder holds shares smaller than the minimum tradable lot, the market maker must purchase the entire shareholding, protecting retail investors from illiquidity.
• Disclosure – The details of market-making arrangements, including the name, obligations, and incentives of the market maker, must be disclosed in the offer document to ensure transparency.
• Who Can Be a Market Maker?

The role of a market maker is not open to all intermediaries; it is reserved for regulated and financially sound entities capable of sustaining liquidity in SME scrips. Under SEBI’s framework, a market maker must be a SEBI-registered stockbroker holding a valid trading membership with the relevant SME Exchange.

The net worth requirement for the Market Maker as prescribed by NSE in the circular 65/2024 dated October 14, 2024 is as below:

Further, the said circular also prescribes net worth requirements for market makers managing more than 50 companies. The details provided above are only an illustrative example of the net worth requirement applicable to market makers managing up to 50 companies and are intended solely for understanding purposes.

Market Maker Inventory Levels

As per the SEBI circular dated November 27, 2012, specific limits have been set on Market Maker inventory based on the IPO size. When a Market Maker’s holding crosses the prescribed threshold, they are exempt from placing buy orders until their inventory falls back to the re-entry level.

These limits factor in the mandatory 5% market maker allocation. Any initial holding beyond this 5% is not considered towards the threshold limits.

Market Makers may place both buy and sell quotes until the upper threshold is reached. Once crossed, they can only place sell quotes until inventory reduces to the re-entry level, after which they may resume buy quoting.

Why Market Making is Not Applicable in Mainboard IPOs

Market making is primarily a feature of SME IPOs and is not mandated for companies listed directly on the Main Board. This distinction arises due to the structural depth of the Main Board market, which generally attracts higher investor participation, greater institutional interest, and wider analyst coverage. The natural liquidity generated through such market depth eliminates the need to mandate compulsory market making in the Main Board segment.

Role, Responsibilities and Obligations of Market Maker

• The Market Maker shall be required to provide a 2-way quote for 75% of the time in a day.
• The minimum depth of the quote shall be Rs.1,00,000/-. However, the investors with holdings of value less than Rs 1,00,000 shall be allowed to offer their holding to the Market Maker in that scrip provided that he sells his entire holding in that scrip in one lot along with a declaration to the effect to the selling broker.
• Execution of the order at the quoted price and quantity must be guaranteed by the Market Maker, for the quotes given by him.
• There would not be more than five Market Makers per scrip.
• The Market Maker may compete with other Market Makers for better quotes to the investors.
• The Market Maker has to start providing quotes from the day of the listing / the day for the respective scrip and shall be subject to the guidelines laid down for market making by the exchange.
• The Market Maker has to act in that capacity for a period of three years.

In conclusion, market making under Regulation 261 of the SEBI (ICDR) Regulations serves as an important mechanism to ensure liquidity and orderly trading in the SME capital markets. Its effectiveness depends on the consistent and responsible participation of all stakeholders in fulfilling their respective obligations.