Capital markets regulator Sebi has recently approved a series of measures aimed at bolstering the SME IPO market, enhancing the quality of listings, and safeguarding the interests of investors.
The approved regulations are designed to address concerns relating to transparency, governance, and the potential misuse of funds within the thriving SME sector.
As per the new guidelines sanctioned by Sebi, companies aspiring to go public on SME exchanges must demonstrate an operating profit of at least Rs 1 crore in two out of the past three financial years. This requirement will serve to ensure that only financially robust and reputable businesses enter the market. Furthermore, the regulations now prohibit selling shareholders from divesting more than 50% of their holdings during the IPO process.
Sebi has enforced restrictions on the utilisation of IPO funds as well. Henceforth, companies are prohibited from utilizing the raised funds to repay loans borrowed from promoters, directors, or related parties. This measure aims to prevent any misappropriation of funds and guarantee that the capital raised is allocated for its designated objectives.
These regulatory changes are anticipated to enhance investor trust in SME IPOs, which have seen significant growth in popularity in recent years, and promote a more robust and transparent market environment.
Ahead of today's Sebi's meeting, experts expected similar regulations would be implemented as a response to the excessive enthusiasm seen in SME IPOs, along with reported cases of price manipulation and instances of promoters channeling raised funds to shell companies.
The number of SME IPOs has increased significantly in recent years, particularly from 2022-23 onwards. FY2023-24 saw the highest number of SME public issues and the highest fundraising, with 196 IPOs collectively raising over Rs 6,000 crore. In the current financial year (up to October 15, 2024), 159 SMEs have gone public, raising more than Rs 5,700 crore.
In recent months, there has been a strong trend of oversubscription in the SME IPO market. Out of 61 SME IPOs launched since September, 29 saw oversubscription rates exceeding 100 times. Rajputana Biodiesel, Apex Ecotech, Lakshya Powertech, Thinking Hats, Sodhani Academy of Fintech Enablers Ltd, and Travels and Rentals were among the companies that saw oversubscription rates as high as 718 times, 457 times, 573 times, 322 times, 438 times, and 608 times respectively.
Moreover, several SME IPOs have shown significant gains post-listing, with companies like Rajesh Power, C2C, Neelam Linens, Danish Power, and Sahasra Electronics experiencing jumps of 109%, 99.49%, 159%, 168%, and 136% respectively.