SEBI raises red flags on SME IPOs, new norms to curb exuberance coming

The eight months of 2024 have seen a bountiful harvest for small and medium enterprises sowing their fund-raising dreams in the primary market. Till September 2, as many as 168 SMEs had raised funds via initial public offerings, of which two-thirds or 112 issues were oversubscribed.

For regulators, it’s not that the issues have been oversubscribed, it’s the investor appetite for these mostly unproven companies which is worrying.

A recent case is Resourceful Automobiles, a Delhi-based company which planned to raise Rs 12 crore to fund its expansion and working capital and retire some of its debt. The issue attracted bids of over Rs 5,000 crore leaving the promoters and the street stunned.

Other SME street wonders include HOAC Foods India which received bids of over Rs 11,000 crore against its IPO of just Rs 5.5 crore. Kay Cee Energy & Infra attracted bids of over Rs 16,500 crore for its Rs 15.9-crore issue. Maxposure got bids of more than Rs 20,000 crore for its Rs 20.3 crore IPO in January 2024.

This ‘irrational exuberance’, a term famously coined by former US Fed Chairman Alan Greenspan, has the regulator Securities and Exchange Board of India (SEBI) constantly monitoring the situation.

In another of its volleys to curb the enthusiasm, SEBI has advised ‘intermediaries’ aiding the SME listings, urging them to say “no” to potentially problematic issuers. According to SEBI Whole Time Member Ashwani Bhatia, some SME promoters offer chartered accountants and merchant banker fees as high as 25 per cent of the initial public offer issue size. “In the recent past, there has simply been no checks and balances,” Bhatia said, adding that, “SME primary market avenue must know that if they take shortcuts, inflate their balance sheets, or any other such thing, then their relationship with the securities market will be short-lived.”

Bhatia assured investors that while the regulator has passed enforcement orders in some cases recently, it will soon release new norms to tighten the process. “The market regulator will soon come out with a consultation paper on the SME listing process. The consultation paper will propose tweaks for SME IPO norms pertaining to stock exchanges, merchant bankers, and others," Bhatia said.

The issue had also been recently addressed by National Stock Exchange (NSE) Managing Director and Chief Executive Officer Ashishkumar Chauhan. Speaking at the CII’s Financing 3.0 Summit, Chauhan said the market must not see a repeat of the 'vanishing companies' cases seen during the mid-1990s when a spate of new listings took place on the main board of the stock exchanges and later the companies were not found at their registered office addresses. 

“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. He added that it was not easy to balance the need of allowing SMEs to fund themselves and grow through the capital market with quality concerns and investor protection.

SEBI had in July set a 90 per cent listing gains cap on SME IPOs. This was followed by a two-page advisory in the last days of August where the regulator warned of unscrupulous SME promoters.

Interestingly, as per information available till Sep 2, SME IPOs in 2024 have not all been a losing proposition for investors. More than 80 per cent of the 168 SME IPOs are still trading in the green. Stock prices of 68 companies are currently more than double their issue price with another 37 giving a return of 50 per cent or more.

The SEBI tightening may have had a little impact on the market. The S&P BSE SME IPO index, which jumped 143 per cent this year, is down a little more than 5 per cent since the SEBI advisory was issued in the evening of Aug 28, 2024.