Markets regulator Securities and Exchange Board of India (SEBI) on Tuesday (December 3) canceled the oversubscribed 345.65 times SME (small and medium enterprises) public offering of Trafficsol ITS Technologies and asked the company to refund the amount. Investors for alleged misappropriation of funds through a ‘shell entity’.
Even as SEBI contemplates stricter IPO norms for SMEs amid a series of misdeeds, the SME IPO market is booming with massive oversubscription and listings at high premiums. While many genuine SMEs have successfully raised money through IPOs, SEBI has expressed concern over the quality of some IPOs.
Who are the big movers?
Out of the 61 SME IPOs that came to the market, 29 have received more than 100 times oversubscription since September this year. Rajputana Biodiesel, which closed its IPO on November 28, was oversubscribed 718 times, Apex Ecotech 457 times, Lakshya Powertech 573 times, Thinking Hats 322 times, Shodhani Academy of Fintech Enablers Limited 438 times and Travels and Rentals 608 times.
Several small and medium IPOs have increased by 100 percent after being listed. Rajesh Power listed on December 2 rose 109 percent, C2C 99.49 percent (listed on December 3), Neelam Linens 159 percent, Danish Power 168 percent, Sahasra Electronics 136 percent.
What’s the concern?
In a consultation letter, Sebi has seen the issue process as a diversion Inflation of revenue by circular transactions through related parties, connected parties, shell companies and related parties, connected parties and shell companies. In some SMEs, the institution channeled the money raised through the IPO and subsequent rights issue to shell companies controlled by the promoters.
In another instance, a company booked fraudulent sales and purchases through circular transactions between related parties and connected parties. By doing so, such companies try to create a positive sentiment to induce investors to purchase their securities. SEBI has passed orders against such entities in the recent past.
SME listed entities are generally promoter-run or family business companies with high shareholding concentration among a few promoters, promoter group individuals or entities. There is also a limited presence of private equity investors and sophisticated investors who work to control promoter influence in such companies.
In the case of Trafficsol, SEBI concluded that the third-party vendor (TPV), which was awarded a Rs 17.70 crore software contract, was a ‘shell entity’ with questionable financials and failed to file its annual financial statements. During the site inspection the office of TPV was found to be locked, and the financial statements for FY22 to FY24 submitted in response to the allegations were obtained under suspicious circumstances.
According to SEBI, one in two SME listed entities have done related party transactions (RPT) of more than 100 crores and one in five SMEs have done RPTs of more than 500 crores.
What drives SME IPOs?
With the increase in the number of small and medium enterprises, the participation of investors in such offers has also increased. According to SEBI data, the applicant to allocated investor ratio has increased from 4 times in FY22 to 46 times in FY2023 and 245 times in FY2074.
“The recent rise in SME stocks and strong listing gains in some companies have been driven primarily by three key factors – high market liquidity has fueled exaggerated price movements in smaller, less liquid SME stocks as investors chase higher returns and ignore underlying risk. Fear of rapid loss of profits has encouraged continued investment in SME IPOs. The increased involvement of retail investors has increased interest in the SME segment,” said Vaibhav Porwal, co-founder, Deserve.
What does SME IPO data show?
Since the commencement of SME Exchange on NSE and BSE, a total of 565 specialty companies are listed on NSE and 524 specialty companies are listed on BSE platform out of which 322 SME companies have moved to the Main Board (140 exchanges from NSE SME and 182 from BSE SME Exchange on October 15, 2024.
As of October 15, 2024, a total of 417 companies are listed on the NSE SME Exchange with a market capitalization of Rs 1.31 lakh crore and a total of 328 companies are listed on the BSE SME Exchange with a market capitalization of Rs 68,500 crore. Thus, there are 745 SME companies with a market capitalization of around Rs 2 lakh crore.
Further, out of 417 SME companies listed on NSE till October 15, 2024, 12 companies are suspended and 15 companies have not been traded in one month – from September 15, 2024 to October 15, 2024 (11 suspended and 4 others included. ) . Out of 328 companies on BSE till October 15, 2024, 28 companies have been suspended and 35 companies have not had any trading in the last one month — September 15, 2024 to October 15, 2024 — including 24 suspended and 11 others.
How much money was raised by MSMEs in FY 23-24?
After the establishment of SME platforms, FY 2023-24 saw the highest number of SME public issues and highest fundraising with 196 IPOs tapping the market to mobilize over Rs 6,000 crore. Also, in the current financial year 2024-25, as of October 15, 2024, over Rs 5,700 crore has been raised through 159 SME IPOs.
What is SEBI’s plan to prevent misconduct?
Sebi has now proposed doubling the minimum application price to Rs 2 lakh, limiting the offer for sale (OFS) limit to 20 percent of the issue size, mandating the appointment of monitoring agencies to ensure that the money raised through the IPO is used properly. And many other measures.
Sebi has said in the consultation letter that it is considering increasing the current minimum number of allottees from 50 to 200 to declare the SME IPO successful. “It is proposed to increase the lock-in on minimum promoter contribution (MPC) in SME IPOs to 5 years. In addition, the lock-in on promoters’ holdings in excess of the MPC should be released in a phased manner,” it said.
The regulator said there is a need for more scrutiny of RPTs which may be misused as instruments for fund diversion. Keeping in view the increasing activities of the small and medium sector, incidents of misconduct, the risk of looting funds and the exit of promoters/investors from the company after listing, it is felt that it is necessary to protect the interests of investors and the market as a whole. Review SME IPO Framework, Sebi Says