SEBI Tightens Grip on SME IPO Market Amid Growing Concerns Over Misconduct

What’s in today’s article?

• Why in News?
• What is an SME?
• What is an SME IPO?
• Features of SME IPOs
• The Growing SME IPO Market
• Rising Concerns in the SME IPO Market
• SEBI’s Proposed Regulatory Measures
• Conclusion

Why in News?

• The Securities and Exchange Board of India (SEBI) has cancelled the SME IPO of Trafiksol ITS Technologies and mandated refunds to investors, citing alleged misuse of funds through a shell entity.
• This action comes as SEBI plans to tighten SME IPO norms amidst booming investor interest and rising concerns over market misconduct.

What is an SME?

• These are businesses that have their assets, revenues, assets, or number of employees lower than a specific cut-off level.
• In India, SMEs are significant contributors to the economy and can be in any segment, such as manufacturing or services.
• The biggest challenge an SME faces is access to capital. To solve this problem, they often use an SME IPO to raise capital from the stock market.

What is an SME IPO?

• SME IPOs are initial public offerings (IPOs) issued by SMEs.
• While a normal or mainboard IPO requires the company to follow certain guidelines in terms of the size of the company, those guidelines are more relaxed in the case of SME IPOs.
• This allows even smaller companies to access capital directly from the public in the stock market.
• Once the IPO allotment gets over, the SME stock gets listed and starts being traded in the stock exchange, but on a separate platform dedicated to SMEs.
• SME IPO is an extremely popular way for a company to gather funds from various investors and be listed.

Features of SME IPOs:

• An SME has to announce an IPO at an SME platform during an exchange before the stocks can get listed and traded or exchanged.
• The post-issue paid-up capital of the SME should not exceed ₹25 crore.
• Eligibility requirements for SME IPO company directors, promoters, investors, etc., remain the same as for a regular IPO.
  • This means that the said persons should not be defaulters, offenders or disqualified from accessing the capital markets.
• The SME platforms of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are NSE Emerge and BSE SME, respectively.

The Growing SME IPO Market:

• SME platforms overview:
  • NSE SME Exchange: 417 companies (Market cap: Rs. 1.31 lakh crore).
  • BSE SME Exchange: 328 companies (Market cap: Rs. 68,500 crore).
  • Total SME market capitalisation: ~Rs. 2 lakh crores.
• Market trends:
  • The SME IPO market is thriving, with multiple issues being oversubscribed and listed at significant premiums.
  • 29 out of 61 IPOs since September 2024 saw oversubscriptions of over 100 times.
• Record-breaking fundraising:
  • FY 2023-24: 196 IPOs raised over Rs. 6,000 crores.
  • FY 2024-25 (till October 15): 159 IPOs raised Rs. 5,700 crores.
• Key drivers of the SME IPO boom:
  • High market liquidity: Investors seeking quick returns have amplified trading activity in less liquid SME stocks.
  • Retail participation surge: Retail investors' fear of missing out (FOMO) has increased subscription rates dramatically.
  • Promising returns: Substantial gains post-listing have driven further interest in the SME segment.

Rising Concerns in the SME IPO Market:

• Misuse of funds and fraudulent practices:
  • Diversion of IPO proceeds:
    • SEBI identified instances of fund diversion to shell companies and related parties.
    • Trafiksol's Rs. 17.70 crore contract was linked to a questionable vendor lacking credible financial records.
  • Circular transactions: Companies inflated revenues through transactions with related entities to mislead investors.
• Governance and transparency issues
  • Promoter-driven structure: SME entities often have concentrated shareholding, with limited oversight from institutional investors.
  • High-risk related party transactions (RPTs): Half of SME listed entities engaged in RPTs exceeding Rs. 10 crores; one-fifth had RPTs exceeding Rs. 50 crores.

SEBI’s Proposed Regulatory Measures:

• Revised IPO framework:
  • Minimum application value to double to Rs. 2 lakhs.
  • Increase the minimum number of allottees for IPO success from 50 to 200.
  • Restrict Offer for Sale (OFS) limit to 20% of the issue size.
• Enhanced monitoring: Mandating monitoring agencies to oversee IPO fund utilization. Lock-in on minimum promoter contribution (MPC) extended to five years.
• Scrutiny of RPTs: Greater regulatory focus on RPTs to prevent fund diversion.

Conclusion:

• While SME IPOs present lucrative opportunities for investors, SEBI’s interventions highlight the importance of transparency and accountability.
• The proposed regulatory changes aim to safeguard investor interests, curb malpractices, and ensure sustainable growth in the SME segment.

Q.1. Who regulates IPOs in India?

The Securities and Exchange Board of India (SEBI) regulates Initial Public Offerings (IPOs) in India by setting eligibility criteria and legal framework. SEBI is a statutory body established in 1992 that monitors and regulates the Indian capital and securities market.

Q.2. What is the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)?

NSE and BSE are key stock exchanges in India. NSE holds the title of the largest stock exchange in India, whereas BSE is recognised as the oldest one. Notably, NSE boasts a higher trading volume compared to BSE.

Source: Why are SME IPOs flourishing amid regulator’s concerns over misconduct?