What measures SEBI has taken to curb the manipulation in SME IPOs.

The News

On 18th December, SEBI held its board meeting. Among many other things, it has issued nine measures strengthening the regulations for Small and Medium Enterprises (SMEs) IPOs.

These regulations are aimed at protecting investors’ interests by forcing SME entities willing to go public to have a more sound track record.

Why does it matter?

People invest in small-cap and micro-cap companies as they have the potential to deliver extraordinary returns but come with a higher level of risk.

These companies are even smaller than micro-cap companies and have delivered returns that may sound too good to be true.

For example, the Nifty SME EMERGE Index, in the past five years, has delivered 64.89% annual returns on average.

Remember, everything comes with a price tag. It would not be incorrect to say that it has the highest level of risk a listed security can have.

There have been 230 SME IPOs in 2024 so far, raising ₹8414 crore. Of these, about 126 IPOs were subscribed over 100 times, and a few of them were oversubscribed over 1000 times! Being loosely regulated, these figures raise some eyebrows.

Over the past few years, the rising trend of SME IPOs attracted certain entities that sought to exploit the system for illicit gains by manipulating their financials and projecting a fake picture of their company’s growth potential.

Vijay Kedia (a renowned investor) even went on to say that nine out of ten SME IPOs are sort of manipulated.

Well, throughout 2024, the SEBI and stock exchanges have been on alert, improving regulations to tackle any kind of wrongdoing in these IPOs.

Let’s look at what measures the SEBI has taken this time.

SEBI’s new rules for SME IPOs

1. Intent to go public

SEBI has made sure that companies raise money from the public for clear and genuine purposes.

Companies can now use only up to 15% of their IPO funds or ₹10 crores (whichever is less) for general business needs, ensuring that the majority of funds are used for growth or expansion.

Also, companies cannot use IPO funds to repay loans owed to promoters or related parties, preventing misuse of public money for personal gains.

2. Promoters must stay on

To ensure promoters remain committed to the company after listing, SEBI has put a limit that promoters cannot sell more than 20% of the total issue size or more than half of their total shares.

Moreover, any extra shares they hold beyond the mandatory minimum must remain locked in: 50% for one year and the rest for two years.

It discourages promoters from abandoning the company post-IPO and ensures they continue working towards its success.

3. Ensuring a sound track record
Only companies with a proven ability to earn profits are allowed to go public. SEBI requires SMEs to have earned at least ₹1 crore in operating profit in 2 of the last 3 financial years.

SEBI has also mandated that deals between companies and their related parties (like promoters, relatives of promoters, and group entities) are fair by capping the value of such deals and making them more transparent.

To Conclude

These measures are an attempt to filter out deceptive companies and ensure that SMEs going public have strong fundamentals, are transparent in their actions, and remain committed to their investors’ interests even after the IPO.

Though these measures seem effective, will they curb the manipulation in SME IPOs? Well, we will have to wait and watch.