Tighter regulatory norms fail to rein in SME IPO bandwagon

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Notwithstanding the market regulator SEBI’s move to tighten regulations for IPOs on the SME platform, the issuances have been buoyant, with one IPO hitting the market daily in the last 10 days, and another four set to open for subscription by the next weekend.

The SME exchanges — BSE SME and NSE Emerge — have opened the new year on a strong footing, with 14 companies set to raise ₹557 crore in the first 20 days of this month.

The year 2024 was also a bumper year for both the SME exchanges as 243 SMEs raised a whopping ₹9,428 crore, against 182 companies mopping up ₹4,967 crore in 2023, according to Chittorgarh, an online platform tracking corporate fund raising.

Last month, SEBI made it mandatory for SMEs to achieve an operating profit of ₹1 crore in any two out of three financial years immediately preceding the filing of the IPO application.

It also disqualified SMEs raising money to repay the promoter group’s loans and has capped general corporate expenses to 15 per cent of the funds raised or ₹10 crore, whichever is lower.

The change of rules comes in the wake of instances of diversion of issue proceeds to shell companies controlled by the promoters.

Deepak Sharma, Managing Director, Sarthi Capital Advisors, said the new SEBI norms are meant to safeguard investors from immature companies that might misuse investor sentiment.

With a track record of over a decade, SME exchanges have gained confidence and many small businesses are coming forward to raise funds for various business needs, he added.

Uday Nair, Director, FedEx Securities, said the recent amendments will strengthen the entire process, allowing only good companies to tap the market, and will boost investor confidence which, in turn, will translate into higher demand.

Bipin Bhanushali, President-Investment Banking, Marwadi Chandarana Intermediary Brokers’ Investment Firm, said India being a developing nation and home to a number of small-scale businesses, the growth potential for SME-listed companies remains strong in spite of the stricter regulations.

According to Government data, there are over 63 million MSMEs in the country, but only about 1,000 companies are listed on the stock exchanges, he said.

Puneet Singhania, Director, Master Trust Group, said the recent trend of massive oversubscriptions in SME IPOs underscores investor interest, largely driven by the potential for high returns, particularly significant listing-day gains.

Further, various government policies aimed at promoting SMEs have created a supportive environment for them, while the tightening of norms will enhance the credibility and resilience of the SME segment, he said.