Zee Business Exclusive: Exchanges considering tighter norms for SME listing, say sources

To avoid overheating and the safety of investors, exchanges are considering increasing the minimum issue size for SME IPOs. According to sources aware of the discussions, exchanges are mulling increasing the minimum issue size for such issues. 

Currently, there is no minimum issue size for such issues. But, very soon, exchanges may set a minimum threshold anywhere at Rs 30-50 crore, depending on each exchange’s policy, and data of past listings and subscriptions. The idea is to ensure that only serious players tap the market.

Not just this, but the issue approval process will also be made stricter. So, the merchant bankers of SME issues may face more queries from exchanges. Objects of the issue and financials of the SME companies coming for fundraising will be specially scrutinised. Issuers may also be asked to give more upfront disclosures. The idea is to bring SME issues to par with mainboard issues in terms of disclosures.  

Another source aware of the discussion said: “The intent is very clear, that companies that are serious in business and tapping the market for genuine business needs should not face any difficulty in raising money. But at the same time, the exchange platform should not be misused by non-serious players.”

Exchanges are planning such tightening of measures and there is no diktat from the regulator. But in the recent past, the concerns raised by the SEBI Chairperson were a big hint for exchanges to ensure that things are in order and issues are not manipulated.

SME IPOs are approved by exchanges and are out of the direct approval process of SEBI. But in recent months, various issues have been flagged to the regulator, including manipulation of price at IPO and trading levels, and, more so, because of the small market cap and low free float. Huge subscriptions and the high listing gains thereafter attracted the attention of various market experts. A key concern of the regulator is that whether there are elements in the market that are artificially pushing the demand for such issues and also playing with the price, amid talks of certain operators who run businesses like a contract system with SME companies and charge fees to the tune of 30-40 per cent.   

Market regulator SEBI is already investigating the pattern of a few SME IPOs, and the role of merchant bankers and intermediaries involved.

Due to the high exuberance created for SME IPOs and possible misuse of the SME IPO route, the regulator is looking into the whole process. SEBI Chairperson Madhabi Puri Buch said last month: "We do see the signs of price manipulation; we have the technology to do it. We are able to see certain patterns. I'd say it is still on the kitchen table; it's not yet gone into the oven.”

It is expected that after gathering inputs on malpractices and other issues involved, SEBI may come up with a discussion paper on the issue in the second half of the year.
Experts believe that SEBI must review allotment norms, ensure tighter disclosure norms, and focus on a strong monitoring mechanism of fund usage like mainboard IPOs.

Some of the SME IPOs raised eyebrows when they attracted subscriptions of multiple hundred times. 

Kahan Packaging Limited had launched its issue to raise Rs 5.44 crore and was oversubscribed by more than 730 times. The Rs 80 per share issue was listed at Rs 152. 
Similarly, Srivari Foods and Spices’ issue size was Rs 9 crore. The IPO was oversubscribed by almost 450 times, wherein the stock was listed at a premium of almost 142 per cent, at Rs 101.5 as against the issue price of Rs 42. 

There were other issues also which were oversubscribed at unexpected levels.

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

In November last year, exchanges imposed Graded Surveillance Measures (GSM) on SME stocks. Under the GSM framework, financials of the companies are a crucial criterion for red flags.

In 2023-24, as many as 190 SME companies raised a record Rs 5,579 crore through SME IPOs, after 125 SME companies raised Rs 2,235 crore the previous year, according to reports citing Prime Database. 

Stock exchanges BSE and NSE did not respond to the Zee Business email seeking comments.