MC Exclusive : Be extra cautious while approving SME IPOs, Sebi tells exchanges

In March, Buch had said that the capital market watchdog has observed signs of manipulation in trading and issuance in the SME space.

As part of its attempts to address the concerns around the SME IPO segment, the Securities and Exchange Board of India (Sebi) has directed the stock exchanges to be extra cautious while approving the documents for initial public offers of small and medium enterprises.

According to persons familiar with the development, the capital market watchdog has told the bourses to enhance the level of due diligence done while vetting these documents even if it leads to a slowdown in terms of the pace of approvals for SME IPOs.

“The exchanges are now asking additional questions related to objects of the issue and capex plans, among other things,” said an investment banker who has managed a few SME IPOs.

“The last couple of months have even the quantum of correspondence between the exchanges and bankers managing SME IPOs increasing manifold to seek clarity on various disclosures made in the IPO document,” he added wishing not to be named.

This assumes significance as the Sebi directive comes close on the heels of concerns raised by none other than the Sebi chairperson Madhabi Puri Buch.

In March, Buch had said that the capital market watchdog has observed signs of manipulation in trading and issuance in the SME space. She had further said that Sebi is working on to introduce additional disclosures in the SME space.

“We do see signs of manipulation in the SME (small and medium enterprises) segment… We are able to see certain patterns. However, as per our regulation, the way that we need to construct the entire case, we do need to take some time to do that in a robust manner,” Buch had said in March.

Incidentally, the regulator is already working on strengthening the eligibility criteria for the segment to ensure that fundamentally strong companies enter the market through the SME platform, which was launched in 2012.

Also read: A Budget proposal that could help Sebi address SME IPO concerns

“One of the things that Sebi is exploring is allowing only cash flow positive companies to apply for raising money via the SME route,” said a banker in the SME IPO segment.

Currently, any SME making an operating profit in two out of the three years preceding to the IPO document filing is eligible for listing in the SME space.

Another investment banker who has been managing SME IPOs for many years said that while earlier most of the queries were around the pricing and valuation, now questions are asked about working capital, loan repayment, and disclosures around business model.

“The exchanges are now questioning the necessity of raising public funds for loan repayments. They, at times, ask if the interest rate the company is paying on its loans is equal to or less than the industry average," said the banker.

The latest move, however, is another step towards the joint efforts of the regulator and the exchanges to address concerns related to the unusually high level of subscription and listing premiums that have become the norm in the segment.

In July, the National Stock Exchange (NSE) said it will place an overall cap of 90 percent over the issue price for SME IPOs during special pre-open session.

The frenzy in the SME IPO segment, however, has continued unabated amidst all the regulatory monitoring.

Recently, the SME IPO of HOAC Foods was subscribed 2013 times. The public issues of Kayce Energy & Infra and Medicamen Organics was subscribed 1,052 times and 993 times, respectively.

Further, 49 SME IPOs have filed their draft documents with the exchanges since June, as per data from Prime Database.

In the current calendar year till June, as many as 117 SME IPOs have hit the markets with the cumulative fund raising pegged at Rs 3,644 crore.

Emails sent to BSE, NSE, and Sebi remained unanswered till the time of filing this story. Moneycontrol will update the story once they respond.

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