Capital markets regulator Securities and Exchange Board of India (SEBI) may well be trying to strengthen the SME IPO arena with newer norms but market participants believe that the watchdog needs to take strict and tough measures to stem the activities that are bringing the segment under regulatory scanner at regular intervals.
While SEBI has issued a consultation paper while proposing a hike in minimum application size among other things, experts told Moneycontrol that the regulator should look at creating entry barriers in the segment while also bringing in lock-in clauses for all IPO investors and pushing for at least a five-fold rise in the minimum application size.
“The recent past has clearly shown that SME IPO segment is risky for small retail investors and hence SEBI should allow only accredited investors to invest and participate in the SME platform,” said an investment banker wishing not to be named as the discussions are yet internal.
“The concept of accredited investors was designed by SEBI and includes checks and balances to filter entities based on net worth, income and risk appetite. That concept should be used in the SME segment given the recent developments,” he added.
For an entity to be registered as an accredited investor, it needs to have a net worth of at least Rs 25 crore – for individuals the requirement is of a liquid net worth of Rs 5 crore and a total annual income of Rs 50 lakh. Further, there are other criteria as well including some years of experience and an existing portfolio.
Meanwhile, experts have also suggested that SEBI should bring in a minimum of 15 days of lock-in for all IPO investors so that entities who avail of margin financing only with the aim of listing gains can be eliminated or at least filtered.
“The recent trend on the SME platform has clearly shown that there is a lot of volatility and action in the stocks only on the first couple of days. It shows that investors are coming only for listing gains and such entities often depend on margin financing. If we need genuine investors then a lock-in of 10-15 days can be tried to see if that leads to more genuine investors coming in the segment,” said a source who has been part of the listed SME ecosystem.
Many in the market also feel that the regulator should impose a steep five-fold hike in the minimum application size in the SME segment. Currently, it is pegged at Rs 1 lakh, which was set more than a decade back.
To be sure, the SEBI consultation paper released last month to review the norms for SME segment did propose an increase in the minimum application size. It suggested an increase in the minimum application size to Rs 2 lakh per application, among other recommendations.
Market participants, however, say that mere doubling the limit to Rs 2 lakh will not achieve much as it is still not a significant amount to deter small investors.
The current calendar year has been the best ever in terms of the number of SME IPOs and the cumulative amount raised through such public issues. A total of 225 SMEs launched their IPOs till November with the total fund raising pegged at Rs 8,212 crore, as per data from Prime Database.
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