Moneycontrol Pro Panorama | TrafikSol IPO debacle puts the spotlight on SME listing scrutiny

This incident underscores a larger issue within India's SME segment—funds are being raised without sufficient oversight. While SEBI regulates capital markets, the exchanges have been entrusted with the task of scrutinising companies listing on the SME platform.

The onus falls on the exchanges, which are themselves in fierce competition to attract business. In this competitive landscape, it appears that proper vetting has taken a backseat.

In TrafikSol's case, red flags were raised when the company sought investors' funds. Around 40 percent of the issue's proceeds—Rs 17.7 crore—were earmarked for the acquisition of software from a company called Oasis Corpcare. Oasis, a firm with a paltry equity capital of Rs 1 lakh and a focus on auditing and book-keeping, had failed to file its own financial reports since 2021. Such glaring issues only came to light after being flagged on social media, which forced the BSE to take last-minute action to halt the listing.

This episode shines a harsh spotlight on the governance of SME IPOs. Companies looking to raise funds through the SME platform should at least pass the smell test. While it's true that the systems required for listing on the main board may be too stringent for smaller enterprises, a minimum level of due diligence is essential, particularly when it concerns the use of investor funds.

Recognising these issues, SEBI is now considering tightening the norms for SME listings. However, this could be a double-edged sword. While better scrutiny is needed, overly strict regulations could dissuade smaller companies from using the SME platform altogether.

For instance, the NSE recently introduced a rule requiring companies to show positive free cash flows for two out of the last three years. Such a stringent criterion may exclude many growth-oriented firms, particularly those still at the early stages of scaling up. Not many companies in the secondary market would meet this criterion.

A growth company at its early stages typically needs to allocate all available funds towards scaling and executing its business plans. As a result, only a limited number of companies will meet the stringent criteria set by the exchange for listing, as such requirements often demand financial metrics that young, fast-growing firms may not yet achieve.

There's no question that SME exchanges must better scrutinise the companies they list, but there's a delicate balance to strike. If regulations become too restrictive, they could undermine the very purpose of the SME platform—providing smaller companies with a viable means to raise capital. Tighter norms would likely drive these companies towards private equity or alternative financing routes, further limiting their growth opportunities.

The TrafikSol fiasco is a cautionary tale. It reveals the urgent need for a stronger regulatory framework that ensures basic governance standards are met while maintaining the flexibility necessary for smaller enterprises to thrive. In the end, the goal should be a balance between protecting investors and fostering a supportive environment for India's growing SME sector.

If stricter regulations are imposed, companies may have to rely on private equity funds or other forms of private financing to meet their capital needs. This shift would exclude retail investors from the opportunity to invest in small, high-growth companies at an early stage, thereby limiting their access to potentially lucrative investment opportunities that could generate substantial returns.

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Shishir Asthana
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