Bourses up vigil on SME IPOs: Mandate comprehensive financial disclosures

Stock exchanges have intensified vigil on Small and Medium Enterprise (SME) listings by mandating more comprehensive financial disclosures and enhanced monitoring of utilisation of issue proceeds from investment bankers, amid rising instances of dubious practices.

Bourses — responsible for vetting initial public offering (IPO) documents and granting approvals to SMEs — have tightened norms in recent weeks with further measures planned for new filings to safeguard investor interests, sources said.

A step in this direction was to pull the plug on the listing of Trafiksol ITS Technologies, whose IPO had garnered over 300 times subscriptions and bids worth over Rs 10,000 crore, following concerns surrounding its disclosures and plans to utilise the issue proceeds.

An email sent to the company seeking the specific queries raised by the exchange or market regulator remained unanswered till the time of going to the press.

“Had the company listed, it would have taken far more resources and time for the regulator to take enforcement action — which would have resulted in potential losses for investors.

"The move by the exchange sends out a strong signal to ensure best practices,” said an official.

Experts said while there is a case for more vigil, a similar level of disclosures and governance as followed by the mainboard cannot be expected.

“It is not fair to paint all SMEs with the same brush.

"While some of them are genuine and credible companies, there are a few bad apples too.

"These are extremely small companies.

"To expect governance to be at the same level as that of mainboard companies would not be correct,” said Pranav Haldea, managing director, PRIME Database Group.

“These are inherently riskier bets which is why a minimum threshold of Rs 1 lakh was kept to keep the small investors away.

"In my view, it is high time that this threshold, set in 2012, was at least doubled,” Haldea said.

Fund raises by SMEs this year have already surpassed last year’s record tally.

Until August, Rs 5,417 crore was raised by 165 companies.

However, it has slowed in recent months amid heightened surveillance.

SME IPOs raised Rs 659 crore in August, 36 per cent lower than in July.

Of this amount, 99 per cent was through new issuance of equity shares.

The total listings on NSE’s Emerge platform for SMEs touched 527 in August with a combined market capitalisation crossing Rs 2 trillion.

About 140 companies that were initially listed on the Emerge platform have moved to the mainboard.

The BSE, on the other hand, has seen a listing of 524 companies, of which 185 have migrated to the mainboard.

A move to the mainboard, where the regulatory compliance level is higher, is seen as a sign of good progression for smaller companies.

However, there have been instances of fraudulent practices -caught by the regulator - in certain SMEs that migrated to the mainboard, albeit with lower checks.

The disclosures and level of information available on IPO-bound SMEs are often poorer compared to companies listing on the mainboard.

Typically, investors apply for SME IPOs taking cues from the grey market.

In most cases, the stocks list at a huge premium, making it a profitable trade.

However, liquidity and prices tend to correct as the euphoria at the time of listing fades.

he exchanges have also recently capped the listing day gains of SMEs and introduced additional eligibility criteria.

“Retail investors would do well to remember that given the low stock on offer as also poor liquidity on the listing, these stocks are highly prone to manipulation, thus making these extremely risky and volatile bets,” Haldea said.

This year, the market regulator has taken stringent action against SME companies and their promoters who have been found to be indulging in fraudulent practices such as showing fictitious transactions on the books, pump and dump of shares, or diversion of funds.

The Securities and Exchange Board of India is also in the process of formulating a consultation paper to address the concerns in the SME listings — including tighter norms for disclosure and migration.

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