Major concerns have been observed in the small-and-medium enterprises segment of the capital market and therefore the role of regulation is critical, said Ashwani Bhatia.
The Whole-time Member of the Securities and Exchange Board of India (SEBI) was speaking at the Corporate Governance Summit on November 21.
Bhatia, in his speech said, "There are major concerns that have been observed in this (SME) segment of the capital market."
He welcomed the growth of the segment--market capitalisation of the SME segments on NSE and BSE is Rs 2 lakh crore--and, at the same time, raised the issue of corporate governance in some of these companies.
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"Post listing, some of the SME companies and/or their promoters have been resorting to questionable means that project an unrealistic picture of their company and its operations. Typically, these companies follow this up with various corporate actions such as rights issues, bonus issues, stock splits, preferential allotments, etc. Such kite flying by SME companies when the ground reality is different has raised concerns. The above actions create a positive sentiment amongst investors, which induces them into purchasing such securities. Simultaneously, this also presents an easy opportunity to the promoters to off-load their holdings in such companies at elevated prices."
He added, "The quest for market capitalisation should not end up as a race to the bottom."
The market regulator has been raising concerns about practices in this segment. Recently, it even released a consultation paper to review the regulations that govern this segment.
In the paper, SEBI said that that there were systemic risks in this segment, with many instances of fund diversions to related parties and inflation of financials through circular transactions.
Bhatia spoke about the actions the regulator has taken to counter the bad practices in the SME segment.
He said, "SEBI has issued advisories cautioning investors about potential risks associated with investing in SME companies. SEBI has also taken strict actions against such companies involved in fraudulent and manipulative activities. This includes barring companies and their management from the securities market and impounding illegal gains."
He added, "The role of adequate regulation in SME companies is thus critical to protect the investments of the public in such companies. Yet, intermediaries do not get the message. This is unfortunate and avoidable as it hurts the system in the long run, especially the good SMEs that have potential."
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