India’s market regulator, the Securities and Exchange Board of India (SEBI) has warned that some small and medium enterprises (SMEs) are painting an unrealistic picture of their business operations to create a positive sentiment, inducing investors into purchasing such securities.
This presents an easy opportunity to the promoters to off-load their holdings in such companies at elevated prices, the market watchdog says.
The SEBI advisory comes after a Delhi-based two-wheeler dealership with only 2 Yamaha showrooms and 8 employees received bids worth ₹4,800 crore for its ₹12 crore initial public offering (IPO).
“It has come to the notice of SEBI that, post listing, some of the SME companies and/or their promoters have been resorting to certain means that project an unrealistic picture of their operations. Such companies/promoters have been seen to make 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 market regulator says.
SEBI urged investors to be careful and watchful of these patterns and exercise caution while investing in such securities. “Investors are advised to not rely on unverified social media posts and not to invest based on tips/rumours,” says SEBI.
The Small and Medium Enterprises (SME) platform of the stock exchanges was operationalised in the year 2012 to serve as an alternative source of raising funds for emerging businesses.
Ever since, there has been an increase in the number of SME issues as also the investor participation in such offerings. During the last decade, more than ₹14,000 crore has been raised through this platform, of which around ₹6,000 crore was raised during FY24.
The Indian stock market has seen a record jump in Small and Medium Enterprises (SMEs) initial public offerings (IPOs), a trend that shows investors' growing appetite for SME stocks. In the first seven months of the calendar year 2024 (till July), as many as 144 SME companies raised ₹4,800 crore via the IPO route, which is the highest amount raised in any calendar year since the launch of the BSE's SME platform and NSE Emerge in 2012. Last year, 182 SME companies had raised ₹4,686 crore via the IPO route.
Amid growing concerns of a bubble in the SME space, both SEBI and stock exchanges have recently increased scrutiny against SMEs. The National Stock Exchange (NSE) tightened eligibility conditions for the listing of SMEs by including positive free cash flow to equity (FCFE) as a criterion. The new norms will apply to all draft documents filed from September 1 onwards.
