The nation's two stock markets, the BSE and the NSE, each introduced specific sections in 2012 for listing small and medium-sized businesses, or SMEs. Twelve years later, the category, which has far laxer disclosure and listing requirements than the main board or exchange, has seen the listing of about 950 SMEs, with a total fundraising estimated at close to Rs 14,700 crore.
Based on statistics from Prime Database, 2023 set records for the number of initial public offerings (IPOs) and the value raised (a staggering <4,686.11 crore). This indicates how vibrant the market is.
Although the platform offers a much-needed launchpad for the nation's large SME population, it has also drawn the attention of the Securities and Exchange Board of India (Sebi), the capital markets regulator, although for the wrong reasons.
Madhabi Puri Buch, the chairperson of Sebi, has stated that the regulator has grounds to suspect that some firms are abusing the segment with the specific goal of manipulating prices. Are there any organizations that could be abusing the structure for facilitation? At an event earlier this month, Buch stated, "We have received input indicating that is the case.
In actuality, the market capitalization and free float of these businesses are rather minor. Both at the IPO and trading levels, it is quite simple to manipulate," she continued.
This assumes relevance since the SME IPO category has produced shocking figures in the previous several years, including extraordinarily high levels of oversubscription and listing gains that are similarly significant.
It's worth noting that out of all the SME initial public offerings (IPOs) that were released between 2020 and 2023, ten of the top twenty issues in terms of oversubscription occurred in the previous year.
The September 2023 IPO of Mumbai-based SME Kahan Packaging raised a little Rs 5.44 crore, yet the offer was subscribed more than 700 times. On a similar vein, Mcon Rasayan India, which debuted on the market in March of last year, had 380 subscribers to its public issue. The fact that 2023 set records for the number of initial public offerings (IPOs) (182) and the total money raised (a staggering <4,686.11 crore), according to statistics from Prime Database, indicates how vibrant the market is.
Although the platform offers a much-needed launchpad for the nation's large SME population, it has also drawn the attention of the Securities and Exchange Board of India (Sebi), the capital markets regulator, although for the wrong reasons.
Madhabi Puri Buch, the chairperson of Sebi, has stated that the regulator has grounds to suspect that some firms are abusing the segment with the specific goal of manipulating prices.
Are there any organizations that could be abusing the structure for facilitation? At an event earlier this month, Buch stated, "We have received input indicating that is the case.
In actuality, the market capitalization and free float of these businesses are rather minor. Both at the IPO and trading levels, it is quite simple to manipulate," she continued.
This assumes relevance since the SME IPO category has produced shocking figures in the previous several years, including extraordinarily high levels of oversubscription and listing gains that are similarly significant.
It's worth noting that out of all the SME initial public offerings (IPOs) that were released between 2020 and 2023, ten of the top twenty issues in terms of oversubscription occurred in the previous year.
The September 2023 IPO of Mumbai-based SME Kahan Packaging raised a little Rs 5.44 crore, yet the offer was subscribed more than 700 times. on a similar vein, Mcon Rasayan India, which debuted on the market in March of last year, had 380 subscribers to its public issue.
Similar to this, SMEs Quality Foils (India), Srivari Spices & Foods, and Madhusudan Masala each have more than 300 subscribers to their public offerings. Regarding listing gains as well, the most recent two years—2022 and 2023—have witnessed the highest number of cases in which shares have more than doubled—in one case, trebled - on the day of listing itself.
Market participants think that investors are experiencing a form of FOMO, or fear of missing out, as a result of the recent events in the SME IPO category. Despite potential hazards, a lot of investors carry out extensive due diligence by evaluating the advantages and disadvantages of companies through the examination of papers such as the Draft Red Herring Prospectus (DRHP).
Kresha Gupta, the founder of the Alternative Investment Vehicle Chanakya Opportunities Vehicle 1, stated, "This trend, where IPOs are oversubscribed by around 500–1,000times and subsequently listed at a 100–300% premium, suggests irrational valuation."
Retail investors’ sincere involvement cannot be disregarded, even in the event of fake demand and price manipulation. And exchanges have to devise some countermeasures whenever there is price manipulation. Furthermore, Gupta states that in order to preserve market appeal and protect investors' interests, both exchanges must strike a balance between encouraging participation and preventing manipulation. She also emphasizes how high net worth individuals (HNIs) and institutional investors now have a new investing choice on SME markets. The exchanges, which are also first-level regulators, and the capital markets watchdog are contributing to resolving the mounting worries and defending investor interests.
"The main goal is to attempt to reduce the possibility of price manipulation," stated Buch.
According to people with knowledge of the developments, the regulator is also looking into whether unfair market practices have permeated the SME space. This is because there is growing discussion about operators and unregistered entities working with promoters to get the issues significantly oversubscribed and to guarantee that the shares list at a steep premium.
Additionally, the exchanges are contributing. The two exchanges said in September of last year that they would be implementing more surveillance measures in the SME segment, which would include bringing stocks under the trade-to-trade settlement mechanism. This mechanism prohibits non-delivery trades, which tries to reduce speculative trading and also comes with higher margin requirements.
Due to the fact that most recent occurrences of issues being subscribed to multiple hundred times and stock prices experiencing an abrupt and sharp increase occur in the absence of supporting growth in the company's fundamentals, market participants feel that these measures are essential for the SME IPO segment.
Buch, on the other hand, is adamant that the regulator must take action and that the measures must involve both regulatory adjustments and observation.
Does this mean that there is still work to be done? As a preliminary step, I believe it is evident that further risk factor disclosures [are required], as Buch had stated earlier this month. Experts agree that one thing is certain to occur. The capital markets watchdog will undoubtedly tighten the requirements for SME initial public offerings in the near future, so those involved in the specialized market should be ready for a somewhat stricter regulatory environment.
