Sebi Plans Stricter Rules On Micro-cap IPOs To Curb Rising Risks

India's securities regulator, the Securities and Exchange Board of India (Sebi), is weighing stricter regulations on micro-cap firms going public. The measures under consideration include closer monitoring of how these companies use their funds post-IPO and tightening due diligence requirements for merchant bankers involved in the listing process. This move follows several instances of fraud in this segment of the market, according to a media source.

Sebi is also evaluating other steps, such as mandating a longer track record of profitability for micro-cap companies and enforcing stricter scrutiny of their financial statements. These measures are part of efforts to enhance transparency and reduce risks for investors in a market that has seen a boom since the pandemic, driven by growing interest in small businesses seen as having potential for growth amidst India's accelerating economic development.

Despite calls from some investors for Sebi to directly oversee the listing approval process for small and medium enterprises (SMEs), the regulator is not currently inclined to take over this responsibility from the National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE). The discussions are still in the preliminary stages, and the proposed measures may be revised before being presented to Sebi's primary market advisory panel.

India's micro-listing market has witnessed remarkable growth, as seen in cases like the recent USD 1.4 million initial public offering (IPO) by a motorcycle dealership with only two outlets and eight employees, which was oversubscribed over 400 times. Another example is of a packaging company with just 64 employees, whose IPO drew bids worth Rs 1,073 crore, oversubscribing 136.21 times despite the issue size being only Rs 8 crore. These incidents have sparked concerns about the quality and transparency of such offerings in the micro-cap space.