The SME IPO segment is back in the news but, once again, for reasons that the segment would want to avoid.
On Monday, the Securities and Exchange Board of India (Sebi) Chairperson Madhabi Puri Buch said that the regulator has seen “signs of manipulation in the SME segment”.
This assumes significance as the last couple of years have seen the arena achieve new records in terms of fund mobilisation, subscription and even listing gains – some of the very aspects that have now attracted the regulator’s attention.
The year 2023 was a record year for the SME IPO segment with as many as 182 companies cumulatively raising Rs 4,686 crore, as per data from Prime Database. Prior to that, 2022 saw Rs 1,875 crore being raised in all by 109 entities.
More importantly, however, that was also the period when some of the SME IPOs saw unusually high levels of subscription followed by extremely high levels of listing gains.
For instance, Mumbai-based SME Kahan Packaging launched an IPO in September 2023 to raise Rs 5.44 crore but the issue was subscribed more than 700 times. Similarly, Mcon Rasayan India, which hit the market in March 2023, saw its public issue being subscribed 380 times.
Other SMEs that saw their issues being subscribed over 300 times were Quality Foils (India), Srivari Spices & Foods, and Madhusudan Masala.
Incidentally, an analysis of all SME IPOs that hit the market since January 2020 till last year reveals that 10 of the top 20 in terms of oversubscription came in 2023. And, that’s not all. Even in terms of listing gains, 2022 and 2023 have seen the maximum instances where shares have more than doubled—even trebled in one particular instance—on the day of listing.
Many in the market believe that given the kind of oversubscription and listing premium that some SME IPOs have seen, it would not be completely wrong to say that in some cases there is collusion between promoters, their friends, and high net worth individuals, especially when many of these shares do not see huge trading traction.
People familiar with the dealings in the SME segment say that in the recent past, many of the so-called “operators” have entered the space guaranteeing the success of an SME IPO.
They do so in connivance with promoters, along with friendly brokers, bankers and investors.
This is how it works: The operators keep an eye out for SME promoters who are looking to list their companies. Once they zero in on a target, they approach company officials with a plan to make the SME’s capital markets foray a success—both in terms of getting the IPO highly oversubscribed, as well as huge listing gains.
In return, the operators ask for shares of the company that they, in turn, can allot in “friendly circles”. The operators then approach a Sebi-registered merchant banker that does all the required paperwork, though the control of the issue remains with the operator.
As and when the IPO is launched, the operator and their network ensures huge oversubscription, and, post-listing, the syndicate sees to it that volumes are artificially propped up, giving the public a false perception of genuine demand that, in turn, pushes up the share price.
Once the desired target price is achieved, the syndicate slowly starts exiting the SME, even as gullible investors get trapped as there is hardly any genuine demand for the shares that continue to move only in a narrow range once the entire operation is over.
Then there is the issue of anchor allocations as well. An analysis of the anchor allotments of various SME IPOs shows that there is just a small pool of entities—both, domestic and foreign—that features regularly in the list of anchor investors.
Data from Prime Database, a primary market tracker, shows that entities like Rajasthan Global Securities, Chhattisgarh Investments, LRSD Securities, Negen Undiscovered Value Fund, Moneywise Financial Services, Bengal Finance & Investment, and Authum Investment & Infrastructure are part of the anchor allotments in many SME IPOs in the recent past.