Sebi cautions against investing in shares of SME cos resorting to price manipulation

Amid certain SME companies resorting to share price manipulation by projecting an unrealistic picture of their operations, Sebi on Wednesday cautioned investors against putting their money in the scrips of such firms. Sebi, in a statement, said it has come to its notice that post-listing, some of the SME companies or their promoters have been making public announcements that create a positive picture of their operations. Such announcements are followed by various corporate actions like bonus issues, stock splits, and preferential allotments.

The actions create a positive sentiment amongst investors, which induces them to purchase such securities. Simultaneously, this also presents an easy opportunity for the promoters to offload their holdings in such companies at elevated prices. "Sebi urges investors to be careful and watchful of the aforesaid patterns and exercise caution while investing in such securities. Further, investors are advised to not rely on unverified social media posts and not to invest based on tips/rumors," the statement noted.

Sebi, in the recent past, has passed orders against such entities. It can be seen that the modus operandi of these entities follows a pattern that is by and large similar to what has been mentioned above. The small and medium enterprises (SME) platform of the stock exchanges was operationalized in 2012 to serve as an alternative source of raising funds for emerging businesses. Ever since, there has been an increase in the number of SME issues as also the investor participation in such offerings.

During the last decade, more than Rs 14,000 crore has been raised through this platform, of which around Rs 6,000 crore was raised during FY24. More recently, a Rs 12 crore initial public offering (IPO) of Resourceful Automobile, a Delhi-based company with just two outlets and a workforce of eight, received bids worth close to Rs 4,800 crore.

The company's IPO, which was open for subscription from August 22-26, saw an overwhelming response, with bids for 40.76 crore shares against the 9.76 lakh shares on offer translating into a subscription of 419 times on the third day of the bidding process. This frenzy occurred despite regulators raising concerns about the risks associated with investments in SMEs.

Last week, Sebi's whole-time member, Ashwani Bhatia, asked chartered accountants to be more diligent while auditing companies listed on the SME exchange platforms. In March, Sebi Chairperson Madhabi Puri Buch had flagged concerns around "price manipulation" in the SME platform listings and trading and asked investors to be cautious.