Fraud concerns raise red flags for India’s booming SME IPOs

“This is just the tip of the iceberg,” said Ambareesh Baliga, an independent market expert who has been tracking Indian equities for over two decades. “Fewer regulations were meant to attract good quality SMEs to the market, instead it has attracted the wrong ones.”

Technology firm Varanium Cloud was found to have misused funds raised from its public offering in 2022, and “manipulated its financial statements by recording fictitious sales and purchases,” SEBI said in its order dated May 10.

Add-Shop E-Retail has been “passing fictitious sales transactions between its related parties” to inflate sales, the regulator said in a separate notice dated May 6.

In both cases, the founders had reduced their stakes in the companies during the period under investigation, according to SEBI.

The findings underscore the vulnerability of millions of traders to the risks of price manipulation in this segment due to fewer compliance requirements. They also highlight the limitation of regulatory warnings aimed at curbing enthusiasm for tiny IPOs in India, where retail investors have emerged as a major force.

Earlier this year, regulators clamped down on equity markets financing to cool pre-IPO sale frenzy. Still, the nation’s market for first-time share sales remains vibrant, with 102 deals priced since the start of 2024. That’s nearly three times as many as in China, data compiled by Bloomberg show. The BSE SME IPO Index surged to a record last week.

“Another 10 cases like this and this bubble will burst,” Baliga said. The veteran investor and investment advisor warned that majority of the investors are putting their money in such small public offerings with their eyes closed.