SEBI mulls stricter rules for SME IPOs amid fraud concerns
The Securities and Exchange Board of India (SEBI) is contemplating stricter regulations for micro-cap companies planning to go public, according to Bloomberg. The proposed measures include enhanced monitoring of fund usage and more rigorous due diligence requirements for merchant bankers. This move comes in response to recent fraud incidents in this market segment. The surge in investor interest in small, unproven companies has prompted SEBI to explore new measures to ensure investor protection and market stability.
SEBI's proposed measures for micro-cap IPOs
SEBI is also considering requiring a longer history of profitability from these companies, and intensifying scrutiny of their financial statements. However, the regulator has no plans to assume control over the listing approval process for small and medium enterprises (SMEs) from NSE and BSE, despite some investors advocating for direct oversight. These discussions are still in their early stages, with potential revisions expected before an initial draft is presented to SEBI's primary market advisory panel.
Micro-cap IPO market thrives amid economic growth
India's micro-listings market has experienced significant growth since the pandemic, fueled by investor interest in small businesses with expansion potential. A recent example is a $1.4 million initial public offering (IPO) by a motorcycle dealership with just two outlets and eight employees, which was oversubscribed over 400 times. This event has raised concerns about the quality of offerings in this niche market.
SEBI to release stricter listing rules by year-end
In August, SEBI requested BSE to suspend the IPO of plywood manufacturer Archit Nuwood Industries Ltd., due to concerns about its financial accounts. In July, NSE implemented a 90% cap on listing gains while SEBI has consistently advised investors to exercise caution when investing in SME firms. A discussion paper detailing stricter listing rules for SMEs is expected to be released by the end of this year, as revealed by Ashwani Bhatia, a whole-time member of SEBI.
'SEBI needs to strike the right balance'
Narinder Wadhwa, Managing Director at SKI Capital Services Ltd., suggested that "SEBI will be looking to strike the right balance between protecting investors and helping the market grow." He further proposed that the regulator could consider additional criteria like extending the lock-in period for anchor investors.
Most retail investors use IPOs for short-term bets
A recent study by SEBI revealed that most retail investors use IPOs for short-term bets rather than long-term investments based on fundamentals. The study found that about 54% of IPO shares by value, excluding those allotted to anchor investors, were sold within a week of listing. This trend underscores the need for more responsible behavior from merchant bankers and investment managers, as well as better-informed decisions from individual investors.
