The first eight months of 2024 have yielded a bumper crop for small and medium-sized enterprises seeking to raise funds in the main market. Until September 2, 168 SMEs have raised cash through initial public offerings, with two-thirds, or 112 issues, oversubscribed.
Regulators are concerned about the investor demand for these relatively unknown enterprises, rather than the fact that the offerings have been oversubscribed.
A recent example is Resourceful Automobiles, a Delhi-based firm that wanted to borrow Rs 12 crore to support expansion and working capital, as well as pay off part of its debt. The issuance drew bids of more over Rs 5,000 crore, leaving the promoters and the street shocked.
Other SME street miracles include HOAC Foods India, which garnered offers of almost Rs 11,000 crore for their IPO of only Rs 5.5 crore. Kay Cee Energy & Infra received bids of over Rs 16,500 crore for its Rs 15.9 crore offering. Maxposure received offers totaling more than Rs 20,000 crore for its Rs 20.3 crore IPO in January 2024.
This 'irrational exuberance', a term originally used by former US Fed Chairman Alan Greenspan, has the Securities and Exchange Board of India (SEBI) closely watching the situation.
In another attempt to dampen excitement, SEBI has instructed 'intermediaries' assisting with SME listings to say "no" to potentially problematic issuers.
According to SEBI Whole Time Member Ashwani Bhatia, some SME promoters charge chartered accountants and merchant bankers as much as 25% of the first public offer issue size. "In the recent past, there has simply been no checks and balances," Bhatia said. She continued: "SME primary market avenue must know that if they take shortcuts, inflate their balance sheets, or any other such thing, then their relationship with the securities market will be short-lived."
Bhatia informed investors that, while the agency has lately issued enforcement orders in some situations, it will shortly announce new guidelines to strengthen the process.
"The market regulator will shortly issue a consultation document on the SME listing procedure. "The consultation paper will propose changes to SME IPO norms for stock exchanges, merchant bankers, and others," Bhatia added.
The matter was also recently addressed by Ashishkumar Chauhan, Managing Director and CEO of the National Stock Exchange (NSE). Speaking at the CII's Financing 3.0 Summit, Chauhan stated that the market must avoid a repeat of the 'vanishing companies' cases seen in the mid-1990s, when a slew of new listings were made on the main board of stock exchanges and the companies were later discovered to be missing from their registered office addresses.
"There is a perception that currently when the markets are doing very well, many of the fly-by-night or not so good business are still coming," Chauhan pointed out. He went on to say that it was difficult to strike a balance between allowing SMEs to fund themselves and expand through the capital market and worries about quality and investor protection.
In July, SEBI imposed a 90% listing gains ceiling on SME IPOs. This was followed by a two-page recommendation in late August, in which the regulator warned against unethical SME promoters.
Interestingly, according to statistics available as of September 2, SME IPOs in 2024 have not all been a losing proposition for investors. More than 80% of the 168 SME IPOs are still trading in the green. 68 firms' stock values are presently more than double its issue price, while another 37 have returned 50% or more.
The SEBI tightening may have had a minimal influence on the market. The S&P BSE SME IPO index, which increased by 143% this year, is down little more than 5% after the SEBI recommendation was released in the evening of August 28, 2024.
