The Indian markets regulator has cautioned investors about unrealistic estimates made by certain SMEs and expressed worries about dubious practices in the nation’s small and medium enterprise (SME) market.
The Securities and Exchange Board of India (SEBI) observed in its advice that some promoters of small and medium-sized enterprises (SMEs) have been making public announcements that present an unduly favourable picture of their business after listing. Corporate activities such as bonus issues, stock splits, and preferential allotments frequently occur after these announcements.
“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 stated.
Nevertheless, many of these SME businesses are using deceptive tactics behind this booming façade. Promoters frequently take advantage of these fictitiously high valuations to sell their assets at a premium, which disadvantages gullible investors.
Sebi’s recommendation follows its chairperson Madhabi Puri Buch’s March statement regarding several SMEs’ cases of price manipulation during initial public offerings (IPOs) and trading.
She announced that as a first move towards increasing transparency in SME IPOs, the regulator plans to request additional information.
Sebi has already taken action against these businesses in the past, pointing out that their tactics frequently resemble the previously mentioned pattern.
For example, Add-Shop E-Retail Ltd’s promoter and management were prohibited from accessing the capital markets by Sebi in May after it was discovered that more than 46% of the company’s sales over the previous three years were fraudulent and that related-party transactions lacked the necessary permits.
Due to the misappropriation of IPO proceeds, Varanium Cloud Ltd. was also prohibited from the markets by the regulator in the same month.
“Earlier this year, Sebi took action against three other SME companies for similar violations, including the misuse of public funds, misstating facts in offer documents, and manipulating financial statements. These companies had inflated their operations to create false perceptions and boost investor interest, allowing promoters to offload shares at elevated prices,” said Nilesh Tribhuvann, managing partner at White & Brief Advocates&Solicitors.
Growth
According to the Sebi advisory note, the market has grown significantly since the SME platform was introduced on the stock exchanges in 2012. During the previous ten years, over ₹14,000 crore has been raised, with roughly ₹6,000 crore in 2023–2024.
The BSE SME IPO index increased by 214.08% so far this year and by 140.03% year over year, to 111,683.62 from 35,558.66 on August 28, 2023. However, this expansion has sparked questions about fairness and openness.
When purchasing SME securities, investors are advised to proceed with caution by Sebi. The regulator cautioned against investing based on tips or rumours or depending on unconfirmed social media posts. Instead, before investing, investors should carry out extensive due investigation and consult a specialist.
According to Tribhuvan, Sebi is thinking of enacting stricter regulations, like increasing the minimum amount for initial public offerings and demanding more thorough disclosures from businesses looking to list as SMEs. “By ensuring that only compliant businesses have access to the capital markets, these measures aim to safeguard retail investors and promote stability and trust within the SME sector.”
AMFI Regulations
Asset management companies (AMCs) and the Association of Mutual Funds in India (AMFI) have been in discussions over the implementation of processes or measures aimed at curbing front running.
Amfi has discussed implementing stronger measures to stop front-running with AMCs. However according to a Brokers Committee member who spoke with Mint, this is the routine operating procedure and a component of the risk management system.
An industry insider, who wished to remain anonymous, stated that Sebi and Amfi have been on high alert in recent months, particularly in light of the front-running cases involving mutual funds Axis and Quant. “Circulars calling for the establishment of institutional mechanisms, however, are not unusual.”
