Just days after India’s stock market regulator warned against inflated valuations and shady activities by promoters of small and medium enterprises, similar warning bells have been set off by the National Stock Exchange.
Concurring with the Securities and Exchange Board of India (SEBI), NSE MD and CEO Ashishkumar Chauhan warned of high valuations in the SME market.
“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 said while addressing the CII Financing 3.0 Summit. He sought to assure investors saying the exchanges were taking cognizance of the issue. “SEBI has also over the weekend made a statement that it will come out with new regulations on SME which will be much tougher. NSE has already lifted the bar several notches and will continue to do that going forward as we see the euphoria building up”. But he added that “maintaining a balance is not easy because people criticise you whatever you do”.
SEBI had earlier issued an advisory flagging unethical behaviour by promoters of SMEs. The advisory, issued on Aug 28 had warned, “Such companies/promoters have been seen making public announcements that create a positive picture of their operations. These announcements are typically followed up with various corporate actions such as bonus issues, stock splits, preferential allotments, etc.”
The two-page advisory was followed by SEBI whole-time member Ashwani Bhatia’s statement on the sidelines of the Global Fintech Fest in Delhi on Aug 30 that the regulator will further tighten norms for SME IPOs. This could include better monitoring and tighter security of auditors.
As part of its efforts to rein in the exuberance around SME listings, SEBI had in July set a 90 per cent listing gains cap.
Meanwhile, the NSE MD & CEO recalled a similar froth in the SME market in the 1990s. “In 1994-‘95 a number of companies came, raised money and ran away. They were not to be seen. They were called the vanishing companies”, recounted Chauhan. He said that as a result both the NSE & BSE stopped accepting prospectus of such small companies. It was only after industry bodies including CII took up the matter with the government in 2007 that SME listings were permitted again. “Industry bodies said small companies legitimately needed to raise funds because when they go to banks to raise funds they are asked for a debt-equity ratio. If they have no equity, how do they give debt?” said Chauhan adding “so in 2010, the government came out with regulations on small companies raising funds and in 2012, finally the first small companies started getting listed. Now almost 1000 companies are listed in small markets.”
The SME platform on the stock exchanges has exploded with activity since then. Over Rs 14,000 crore has been raised in the last 10 years, including approximately Rs 6,000 crore in 2023-24. The BSE SME IPO index has surged nearly 140 percent in the past one year, fuelling a rush not only of profits but of concern over the market overheating and practices by SME promoters.