More scrutiny for SME IPO applications, SEBI’s directive to exchanges to deal with inflated demand

Capital market regulator Securities and Exchange Board of India (SEBI) has directed exchanges for tighter scrutiny of investor applications received for SME public issue subscriptions. The idea is to reject all such subscription applications that are filed to show fake demand and mislead investors. In a communication to the exchanges, SEBI has asked to reject applications that are duplicates or where PAN and DP IDs do not match. Regulator SEBI has also asked exchanges for rigorous validation of applications in reserved categories. SEBI has termed it a systematic improvement in the bidding process of SME public issues.

As per the communication from SEBI, "Multiple bids in different categories, the same category, or different application numbers with the same PAN shall be rejected upfront on the Exchange platform with the appropriate remark."

But this is also subject to a few exceptions, in the case of the individual category.

As per the exchange, “bidding by individual investors in the reserved categories like employee category, shareholder category, or policyholder category, in addition to the individual category with the same PAN, shall be allowed”.

For the QIB category, multiple bids with the same PAN and the same category but different demands will be allowed.

For PAN validation, it has been decided that all applications with P or H as the fourth letter shall be allowed in individual, employee, shareholder, and policyholder categories, for all other categories, applications with PAN having the fourth character as P or H shall be rejected.

It has also been communicated to remove such applications from live demand data, in which their DP ID/client ID doesn’t match the PAN.

Also, such applications will not be counted for the Final bid book to Registrar and Transfer Agents (RTAs).

In such cases, modification can be allowed for either of the two DP ID/Client ID, or the PAN, but not both. It will be allowed only during the bidding period for applications with mismatch status.

Exchanges have been directed for strict monitoring of reserved category eligibility applications.

As per communication from SEBI, the Exchange book-building platform shall verify the eligibility of the applicant prior to acceptance of a bid for the reserved categories like employee, shareholder, policyholder, etc. based on the details shared by the company or the issuer.

To familiarise all intermediaries and stakeholders, a mock bidding session was conducted by NSE between June 13 and June 21.
  
Due to the high exuberance created for SME IPOs and possible misuse of the SME IPO route, the regulator is reviewing the whole SME IPO process.

The regulator is considering strengthening the mechanism from a primary as well as secondary market point of view.

As per people aware of the matter, “SEBI has inputs on how the issues are played in the market before and after listing. Some recent orders passed by SEBI give a clear pattern post listing how corporate actions unfold to keep the momentum alive in stocks, so it is expected that some curbs on such patterns are expected in review”.

Eyebrows were raised when some of the SME IPOs were subscribed multiple hundred times during the issue.

In recent times, One Kahan Packaging Limited launched its issue to raise Rs 5.44 crore, and it was oversubscribed by more than 730 times.

The Rs 80 per share issue was listed at Rs 152.

Similarly, the Srivari Foods and Spices issue size was Rs 9 crore, and it was oversubscribed by almost 450 times.

Against the issue price of Rs 42, the issue was listed at Rs 101.50, a gain of almost 142%.

Similarly, there were other issues that were oversubscribed at unexpected levels.

In September last year, exchanges, after consultation with the regulator, announced the norms for secondary market trading by enhancing Additional Surveillance Measures (ASM), which means tougher margin requirements for trading in such stocks, and also that such stocks can be put in the Trade 2 Trade (T2T) segment, where intraday is not allowed and all buy-sell transactions will have to be compulsorily delivered.

The intent is to curb the speculation activity.

In November last year, exchanges imposed Graded Surveillance Measures (GSM) also on SME stocks.

Under the GSM framework, the financials of the companies are a crucial criterion for red flags.

As per reports citing the Prime Database, in the year 2023-24,190 SME companies raised Rs 5,579 crore through SME IPOs, which is a record.

In the financial year 2022-23, a total of 125 SME companies raised Rs 2,235 crore. 

SEBI may come up with a discussion paper on the issue in the second half of the year.

Experts say that SEBI must review allotment norms, ensure tighter disclosure norms, and focus on a strong monitoring mechanism of fund usage like main board IPOs.

Exchanges at their level have also started entry-level restrictions based on the size of such issues.

Exchanges have communicated to SME merchant bankers that they will not encourage issues below the level of Rs 30 crore.