'Unrealistic picture': SEBI asks SME stock investors to be watchful, says this 

Market regulator SEBI on Wednesday asked SME (small  and  medium  enterprises) stock investors to be careful and watchful of practices by some of the SME companies and their promoters,  which are projecting an unrealistic picture of their operations. Such companies or promoters have been seen making public announcements that create a positive picture of their operations, SEBI said adding that these announcements are typically followed up with various corporate actions such as bonus issues, stock splits and preferential allotments. 

"The above actions create a positive sentiment amongst investors, which induces them into purchasing such securities. Simultaneously, this also presents an easy opportunity to the promoters to off-load their holdings in such companies at elevated prices," SEBI said.

The advisory came a day after the Rs 12-crore SME IPO by Resourceful Automobile, which reportedly has eight employees, received 500 times or Rs 4,800 crore worth of subscription, raising concerns over investor frenzy in the SME space. 

"SME stocks can be highly volatile post-listing, with prices that may not sustain the initial surge. An extreme demand may signal market overexuberance, often leading to sharp corrections. Investors should approach SME IPO with caution, checking promoters businesses fundamentals considering the speculative nature and potential volatility in the SME market," said Narinder Wadhwa, Managing Director of SKI Capital. 

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said the recent developments in the SME space indicates excesses.

"IPOs of SMEs without any track record and sound financials are getting oversubscribed many times, driven by retail investors chasing listing gains. These are excesses that need to be checked. Experience tells us that speculative excesses lead to tears," he said.

Vaibhav Porwal, Co-founder at Dezerv said while this trend might persist in the short term, risks like market corrections and regulatory interventions could temper the frenzy in the market. Investors should exercise caution and focus on fundamentals, as the SME stocks could correct sharply if sentiment shifts, Porwal said.

SEBI recently passed orders against such entities, which are available at its website. It can be seen that the modus-operandi of these entities follows a pattern that is by and large similar to what has been mentioned, SEBI said, as it cautioned investors of the aforesaid patterns while investing in such securities.

It also advised stock investors to not rely on unverified social media posts and not to invest based on tips or rumours.

The  SME platform has been operationalised since 2012. It serves as an alternative source of raising funds for emerging businesses. Ever since, there has been an increase in the number of SME issues and also the investor participation in such offerings. During the last decade, more than Rs 14,000 crore has been raised through this platform, of which around Rs 6,000 crore was raised in FY24.