SEBI tightens grip on SME IPOs, new norms aim to protect investors
Markets regulator-SEBI (Securities and Exchange Board of India), on Tuesday, proposed a series of reforms to strengthen the regulatory framework for SME initial public offerings (IPOs).
It includes increase in compliance requirement on companies, increasing the minimum SME IPO size to Rs 10 crore (currently, there is no minimum requirement) and raising the minimum application size for the IPOs of small and medium enterprises (SMEs) to Rs 2 lakh from Rs 1 lakh.
The regulator also sought views on whether the minimum application amount should be even higher at Rs 4 lakh. It is also contemplating setting up a compliance monitoring agency for SMEs that went public to keep a tab on the utilisation of the money taken from investors. The regulator has sought public comments on the proposals by December 4.
What prompted SEBI to review SME segment framework
In past, SEBI has observed that in some SME companies, the entity diverted money raised through IPO and subsequent rights Issue to shell companies controlled by the promoters.
In August this year, SEBI issued a warning to investors regarding the increasing presence of unethical promoters in the small and medium enterprises (SME) sector. These promoters are known to engage in illegal practices after listing their companies, such as artificially inflating stock prices by creating a misleadingly positive image of their business, attracting investors, and then exiting the market.
SEBI had recently taken action against several such entities, noting that their methods often follow a consistent pattern. For example, in August, SEBI took action against Debock Industries and three related entities, including its promoters.
Debock Industries, which was listed on NSE's SME platform in June 2018 and later moved to the main board in March 2022, was found to have engaged in extensive related-party transactions to artificially boost its business and revenue figures.
For instance, in May, SEBI barred Add-Shop E-Retail Ltd and White Organic Agro Ltd including their promoters, from accessing the capital markets after discovering that their financial statements were manipulated. In the same month, SEBI also banned Varanium Cloud Ltd from the markets due to the misuse of IPO proceeds.
Why there is a need?
The changes are being proposed after several of the SME IPOs in the past few years raised money at inflated valuation but soon left investors high and dry. The regulator detected several cases of misutilisation or diversion of funds by listed SMEs. Some of these companies were also penalised by the regulator.
So, considering increased activity (participation by retail investors) in SME segment, instances of misconduct, risks relating to siphoning of funds, promoter and investors exiting the company after listing, it is felt that to protect the interest of the investors and market as a whole.
"The retail individual participation has increased in the SME IPO over the last few years. Therefore, considering that SME IPOs tend to have higher element of risks and investors getting stuck if sentiments change post listing, in order to protect the interest of smaller retail investors, it is proposed that the minimum application size in SME IPOs to be increased from Rs 1 lakh to Rs 2 lakh as higher size will limit participation by smaller investors and shall attract investors with risk taking appetite, which will enhance the overall credibility of SME segment," SEBI said in its consultation paper. SEBI's proposals are towards making the SME sector healthier from markets perspective. However, some like increasing minimum subscription amount could become restrictive in raising capital and wider participation.
According to SEBI, there is a need to review SME IPO framework and applicability of corporate governance provisions to SME listed companies so that companies with sound track record make IPO or raise funds and get listed on stock exchanges and comply with post listing requirements.
SMEs listed on exchanges
Since operationalisation of SME Exchange on NSE and BSE, a total of 565 companies have listed on NSE and 524 companies have listed on BSE platform of which 322 SME companies have migrated to Main Board (140 from NSE SME Exchange and 182 from BSE SME Exchange)(as on October 15 2024).
Further, it is noted that on NSE out of 417 SME listed companies as on October 15, 2024, 12 companies are suspended and in 15 companies no trade is executed in last one month i.e. September 2024 to October 15, 2024 (includes 11 suspended and 4 others). While on BSE out of 328 companies as on October 5 2024, 28 companies are suspended and in 35 companies no trade is executed in last one month i.e. September 15, 2024 to October 15, 2024 (includes 24 suspended and 11 others).
