The Securities and Exchange Board of India (SEBI) on Wednesday raised concerns on the rosy picture painted by promoters of small and medium enterprises (SME) tapping the market for a public share sale.
“Post listing, some of the SME companies and/or their 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 and preferential allotments,” the regulator said in a note on Wednesday.
The above actions, the regulator added, create a positive sentiment among investors, inducing them into purchasing such securities, while allowing promoters to offload their holdings at elevated prices. SEBI urged investors to be watchful of these patterns, exercise caution and not rely on unverified social media posts or tips or rumours.
IPO frenzy
The recent ₹12-crore IPO of Resourceful Automobile, a Delhi-based company with two outlets and eight staff members created a buzz as it received bids worth close to ₹4,800 crore.
“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,” said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
SMEs have raised more than ₹14,000 crore in the past decade through the exchange platforms. Of this, 163 companies have raised about ₹5,400 crore this calendar year and 27 firms have clocked over 100 per cent gains on listing day.
Regulation Needed
According to SN Ananthasubramanian, a practising company secretary, the pre-and post-IPO processes of SMEs need to be reviewed by the regulator. A closer scrutiny of investor profiles, frequency and patterns of investments and their disposals, could be undertaken, he said.
Vaibhav Porwal, Co-founder of Dezerv, attributed the recent surge in SME stocks and strong listing gains to market liquidity and increased retail participation.
“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,” he said.