Markets regulator Securities and Exchange Board of India’s (SEBI) plans to bring in additional disclosures to curb price manipulation in SME initial public offerings (IPOs) and share trading may have a short-term bearing on SMEs’ sentiment looking to go public, according to experts.
SEBI Chairperson Madhabi Puri Buch speaking at the Association of Mutual Funds event on March 11 in Mumbai had highlighted instances of price manipulations in certain SME issues based on the feedback received from the market about some entities misusing the framework established to facilitate SME IPOs.
While SEBI enables a relatively lesser regulated SME listing environment than the mainboard to encourage SMEs to take the IPO route for fundraising, experts see a temporary impact in the market.
“If SEBI implements strict measures such as imposing maximum bidding limits, lock-in regulations, or volume and circuit limits, it could temporarily significantly impact demand in the market due to regulatory concerns. Investors may hesitate to participate actively until these regulations are formalized, leading to reduced interest in IPOs and fewer companies opting to go public,” Kresha Gupta, Founder, Chanakya Opportunities Fund told FE Aspire.
While large investors may still participate in the market, the overall sentiment may be reduced until there is clarity and stability regarding regulatory measures.
Echoing Gupta, Amit Goel, Co-Founder and Chief Global Strategist at asset management company Pace 360 said SEBI’s scrutiny and potential additional measures may introduce complexity to the IPO process for SMEs.
“It may result in delays in the IPO process, affecting SMEs’ fundraising plans and potentially impeding their growth strategies. SEBI’s investigation into inflated subscription numbers implies stricter scrutiny for future SME IPOs, exacerbating the resource constraints already faced by these SMEs,” Goel told FE Aspire.
However, as investors gain confidence in the regulated environment, companies will likely resume their IPO plans, and investor interest may rebound, said Gupta. Hence, it’s essential for SEBI to strike a balance between implementing necessary regulations to curb volatility and ensuring that these measures do not affect market activity or discourage companies from accessing capital markets.
SEBI already has measures such as Additional Surveillance Measure (ASM) and Graded Surveillance Measure (GSM) in place for SME IPOs to improve the market integrity, however, “the reality is that these are relatively small entities, the market cap is small, the free float is small, it is relatively easy to manipulate both at the IPO level and at the trading level,” Buch had said.
In October last year, SEBI had brought stocks in the SME segment under the Additional Surveillance Measures (ASM) and trade-to-trade (T2T) settlement framework to curb speculative trading in SME shares.
ASM is implemented on highly volatile stocks based on several criteria including high-low price variation, client concentration, price variation, PE ratio and market capitalisation. On the other hand, the GSM framework is for securities which witness an abnormal price rise not commensurate with financial health and fundamentals such as earnings, book value, fixed assets, net-worth, P/E multiple, market capitalisation etc. The list of such securities is available for market participants to be extra cautious.
According to Manick Wadhwa, Director, SKI Capital, the additional measures should not overly concern good quality entrepreneurs and SMEs looking to IPO.
“The market possesses sufficient liquidity to support solid SME businesses launching IPOs at reasonable valuations. Essentially, for well-run companies with robust business models, these enhancements in disclosure and compliance are steps toward ensuring a more transparent and investor-friendly environment, which in the long run, benefits everyone involved,” Wadhwa told FE Aspire.
The S&P BSE –SME IPO Index, which measures the performance of listed SMEs on the BSE SME platform, was down 9.9 per cent from 55,453.91 on March 11 to 49,940.50 on March 13.