In its upcoming meeting scheduled for tomorrow (December 18), the Securities and Exchange Board of India (SEBI) is likely to revamp norms on initial public offerings (IPOs) of small and medium enterprises (SMEs).
The tightening of regulations would come in the wake of irrational exuberance witnessed in SME IPOs and, in some cases, the manipulation in pricing and instances of promoters diverting funds raised through such issues to shell companies. Besides, the market regulator in the board meeting may also review frameworks related to unpublished price-sensitive information (UPSI) and angel funds.
Recent SME IPOs boom
There has been a surge in SME IPOs in recent years, particularly from 2022-23 onwards. Since the establishment of SME platforms, FY2023-24 witnessed the highest number of SME public issues and the highest SME fundraising, with 196 IPOs tapping the market to mobilise more than Rs 6,000 crore.
In the current financial year (till October 15, 2024), 159 SMEs went public, raising more than Rs 5,700 crore.
Prior to the recent surge, it is to be noted that in the past SME segment has witnessed growth in financial years 2017-2019, where in FY2017-18, 148 companies raised Rs 2,147 crore. However, between FY 2019-20 to FY2021-22, an overall sluggish trend was observed, mainly due to Covid-19, and therefore only 127 companies came out with SME IPOs.
Bumper listing
As many as 29 out of 61 SME IPOs that came to the market witnessed oversubscription of over 100 times since September this year. Rajputana Biodiesel, which closed its IPO on November 28, was oversubscribed 718 times, Apex Ecotech 457 times, Lakshya Powertech by 573 times, Thinking Hats by 322 times, Sodhani Academy of Fintech Enablers Ltd by 438 times and Travels and Rentals by 608 times.
Several SME IPOs have gained ground by over 100 per cent after listing. Rajesh Power (listed on December 2) has gained 109 per cent, C2C advanced by 99.49 per cent (listed on December 3), Neelam Linens by 159 per cent, Danish Power by 168 per cent, and Sahasra Electronics by 136 per cent.
Why are there concerns around SME IPOs?
With an increase in the number of SME issues, SEBI has noted that investor participation has also increased in such offerings. The applicant-to-allotted investor ratio increased from four times in FY2022 to 46 times in FY2023 and 245 times in FY2024.
SME listed entities are typically promoter-driven or family business companies with high concentration of shareholding among a few promoter or promoter group persons or entities. There is also limited presence of private equity investors or sophisticated investors, who act as a check on the promoter’s influence, in such companies, a recent consultation paper released by SEBI said.
Sebi has observed diversion of issue proceeds to related parties, connected parties, shell companies and inflation of revenue by circular transactions through related parties, connected parties and shell companies. In some SME companies, the entity diverted money raised through the IPO and subsequent Rights Issue to shell companies controlled by the promoters.
It has also been observed in another entity that a company has booked fraudulent sales and purchases through circular transactions amongst related parties/ connected parties. By doing so, such companies try to create a positive sentiment to induce investors into purchasing such securities.
Sebi said that one out of two SME listed entities have undertaken related party transactions (RPTs) of more than Rs 10 crore and one out of five SME listed entities have undertaken RPTs of more than Rs 50 crore.
Earlier this month, the market regulator cancelled the SME IPO of Trafiksol ITS Technologies, whose issue was oversubscribed 345.65 times. It also asked the company to refund the money to the investors for alleged misuse of funds through a ‘shell entity’.
SME IPO norms overhaul
The SEBI board is expected to revamp the rules for SME IPOs, amid concerns over various misconducts in such public issues. Some of the major changes that the SEBI board may bring in are:
*Hike the minimum application size for an SME IPO to Rs 2-4 lakh from the present Rs 1 lakh.
*Increase the requirement of minimum allottees for an SME IPO to 200 for such public issues to be successful, from the present 50 allottees.
*Raise lock-in on minimum promoter contribution (MPC) in SME IPO to 5 years from the existing three years. This will ensure that a promoter of an SME company continues to have certain skin in the game.
*Allowing an SME company to float an IPO only if the issue size is over Rs 10 crore and the operating profit is Rs 3 crore for at least any 2 out of 3 financial years preceding the IPO application.
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