Market regulator Securities and Exchange Board of India (SEBI) has proposed stricter rules for the initial public offering (IPO) of small and medium enterprises (SMEs) by setting a minimum issue size for companies getting listed, doubling the minimum application size and introducing a 'draw of lots' system for non-institutional investors (NIIs).
In its consultation paper, the market regulator proposed to increase the application size to Rs2 lakh from Rs1 lakh per application in SME IPOs to ensure that only informed investors with sufficient risk appetite and investment capacity can apply.
SEBI also invited public opinions on whether the minimum application amount should be increased further to Rs4 lakh. It says the limit of Rs1 lakh was prescribed in the SEBI regulations over 14 years ago. "In the past 14 years, Nifty and Sensex have grown by around 4.5 times. Thus in view of the same and considering the passage of time, the alternate proposal is that it would be fit to increase the threshold to the same ratio as the markets have grown. Therefore, application size may be increased from Rs1 lakh per application to Rs4 lakh per application."
In recent times, SEBI has observed instances of diversion of issue proceeds to related parties, connected parties, or shell companies and inflation of revenue by circular transactions through related parties, connected parties, or shell companies. SEBI says it observed that in some SME companies, the entity diverted money raised through IPO and subsequent rights issue was issued to shell companies controlled by the promoters. "It has also been observed in another entity that a company has booked fraudulent sales and purchases through circular transactions amongst related or connected parties. By doing so, such companies try to create a positive sentiment to induce investors into purchasing such securities. SEBI, in the recent past, has passed orders against such entities, which are available on the website."
According to SEBI's analysis of related-party transactions (RPTs) undertaken by SME-listed entities, one out of two SME-listed entities have undertaken RPTs of more than Rs10 crore and one out of five SME-listed entities have undertaken RPTs of more than Rs50 crore. In terms of the amount of the RPTs undertaken by SME-listed entities in proportion to their consolidated turnover, it was observed that one out of two SME-listed entities have undertaken RPTs of more than 10% of their consolidated turnover, and one out of seven SME-listed entities have undertaken RPTs of more than 50% of their consolidated turnover.
Considering increased activity in the SME segment, instances of misconduct, risks relating to siphoning of funds, promoters and investors exiting the company after listing, SEBI says it felt that to protect the interest of the investors and market as a whole, there is a need to review the SME IPO framework and applicability of corporate governance provisions to SME listed companies so that companies with a sound track record make IPOs or raise funds and get listed on stock exchanges and comply with post-listing requirements.
SME IPOs have witnessed a surge in recent years, mainly from FY22-23 onwards. Since the establishment of SME platforms, FY23-24 witnessed the highest number of SME public issues and the highest fundraising, with 196 IPOs tapping the market to mobilise more than Rs6,000 crore. Also, in FY24-25, as of 15 October 2024, more than Rs5,700 crore has been raised through 159 SME IPOs.
Since the operationalisation of the SME Exchange on NSE and BSE, 565 exclusive companies have been listed on NSE and 524 on the BSE platform, of which 322 SME companies have migrated to the main board as of 15 October 2024. It includes 140 from the NSE SME Exchange and 182 from the BSE SME Exchange.
As of 15 October 2024, a total of 417 companies are listed on the NSE SME Exchange, having a market-capitalisation of Rs1.31 lakh crore and a total of 328 companies are listed on the BSE SME Exchange with a market-capitalisation of Rs68,500 crore. Thus, there are 745 SME companies with a market-capitalisation of about Rs2 lakh crore.
Further, it is noted that on NSE, out of 417 SME listed companies as of 15 October 2024, 12 companies are suspended and in 15 companies, no trade has been executed in the past month i.e., 15th September to 15 October 2024, including 11 suspended and four other companies. While on BSE out of 328 companies as of 15 October 2024, 28 companies are suspended and in 35 companies, no trade has been executed in the past month i.e., 15th September to 15 October 2024, which includes 24 suspended and 11 other companies.
