Regulations On The Way: SME IPOs
Sebi could come up with guidelines like increasing the net worth criteria under eligibility of SME IPO, Increase in the lock in period, upper circuit limit on the listing day etc, says Expert
On 17 May 2014, Finelistings Technologies was listed as the 500th small and medium enterprise (SME) on the Bombay Stock Exchange (BSE) SME Platform.
BSE SME and National Stock Exchange (NSE) Emerge platform has facilitated SMEs to get access to public money, however, the platforms which empowered Indian SMEs and fostered their growth journeys came into the radar of the Securities and Exchange Board of India (Sebi).
Sebi chairperson Madhabi Puri Buch said ‘some issuers and bankers were misusing the framework provided for SME listing. Sebi is collecting evidence following complaints of price manipulation in the segment.’
Recently Sebi also barred three SME companies from capital markets on charges of misusing funds raised via public offers and warned that retail investors need to exercise a certain level of due diligence while investing in SME companies and not be swayed by ‘seemingly attractive returns that may quickly come their way.’
The matter seemed to escalate when some sources hinted that the regulator is seeking to tighten rules for SME IPOs. It was reported that Sebi is considering raising the minimum size of such public offers to Rs 30 to 50 crore later this year.
SME Inception
BSE SME which was established on 13 March 2012 meant to provide SMEs with easier access to equity funding through relaxed eligibility criteria and streamlined post-listing compliance requirements. With its 500th listing, BSE SME is estimated to raise Rs 6,581 crore through the platform.
NSE Emerge, which was also established in 2012 to promote SME growth in India, crossed Rs 1 trillion market capitalisation in December 2023.
Buoyed by India's surging equity markets, public issues by SMEs soared in the financial year (FY) 2024 to 205 companies raising Rs 60 billion compared to the 125 firms that raised Rs 22 billion in the previous year, according to Prime Database.com
Guide Book For SME
With NSE and BSE having different eligibility criteria for SME IPO, the bourses have the common ground that these companies' post-issue capital shouldn’t exceed Rs 25 crore.
While a company going for an SME IPO on NSE emerge should have a positive net worth in at least two out of three FYs, BSE SME has a condition that a company should have a net worth of at least Rs 1 crore for two preceding full FYs and the net tangible assets should be Rs 3 crore in the preceding FY.
Further both the exchanges have a condition that the minimum size for the application and trading lot should be Rs1,00,000 and the minimum number of shareholders should be 50. Underwriting is mandatory in the case of SME IPO where 15 per cent of it should be underwritten by a merchant banker
“Sebi’s restrictions in SME IPOs should not be considered as the end of the SME IPOs rally but as a positive development as these regulations will help the market survive longer keeping retail investors engaged,” said Kresha Gupta, Founder, Chanakya Opportunities Fund.
Gupta further reiterated that Sebi could come up with guidelines like increasing the net worth criteria under the eligibility of SME IPO, increasing the lock-in period of promoters, anchor investors or QIB investors, upper circuit limit on IPO on the listing day and restriction on the Valuation of a company to justify the IPO price.
Cheers On A Listing Day
Nowadays, investors find it easy to sell their allotted stocks not only on the listing day but also after a certain period. In 2018, the daily trading volume across BSE and NSE was just Rs 50 crore.
Today, this volume has surged to Rs 500 crore per day, with Rs 100 crore traded on the BSE SME platform and Rs 400 crore on the NSE SME platform. This significant increase has greatly encouraged retail investors to participate in SME IPOs.
As a result, these IPOs are now often oversubscribed by 200 to 1000 times. In 2023, 182 companies raised Rs 4967 crore, which brought the inflow of Rs 4.5 trillion through excess subscriptions in primary markets.
While commenting on the valuation standard, Amit Goel, Co-Founder and Chief Global Strategist, Pace 360 said, “If SME stocks are listing with two or three times premium, it doesn’t mean that the pre-IPO valuation was incorrect. It could also be due to investor interest that can inflate the price initially. Additionally, smaller issue sizes can lead to higher initial premiums.”
Alluring the high-growth potential of SMEs, the enticing possibility of quick profits and an alternative to traditional investment avenues are a few of the reasons which have invited the retail surge in SME IPOs, added Goel.
