Stricter regulatory standards fail to curb SME IPO movement

Notwithstanding the market regulator SEBIs take steps to tighten regulations regarding IPOs on the SMEs platform, issuance has been vibrant, with one IPO hitting the market daily over the past 10 days, with four more expected to open for subscription by next weekend.

The SME exchanges – BSE SME and NSE Emerge – opened the new year on strong footing, with 14 companies set to raise ₹557 crore in the first 20 days of this month.

The year 2024 was also a bumper year for the two SME exchanges, as 243 SMEs raised a whopping ₹9,428 crore, compared to 182 companies that raised ₹4,967 crore in 2023, according to Chittorgarh, a platform in line that tracks corporate fundraising.

Last month, SEBI made it mandatory for SMEs to earn an operating profit of ₹1 crore in two out of three financial years immediately preceding the filing of the IPO application.

It also disqualified SMEs raising funds to repay loans from the promoter group and capped the company’s overhead costs at 15 per cent of the funds raised or ₹10 crore, whichever is lower.

This rule change follows cases of diversion of proceeds from shows to shell companies controlled by promoters.

Deepak Sharma, managing director at Sarthi Capital Advisors, said the new SEBI norms aim to protect investors from immature companies that might abuse investor sentiment.

With an experience of over a decade, SME exchanges have gained confidence and many small businesses are coming forward to raise funds for various business needs, he added.

Uday Nair, director of FedEx Securities, said the recent amendments will strengthen the entire process, allowing only good companies to tap the market, and will boost investor confidence, which, in turn, will result in a higher demand.

Bipin Bhanushali, president of investment banking at investment firm Marwadi Chandarana Intermediary Brokers, said that India being a developing country and home to a number of small businesses, the growth potential of listed companies remains strong despite stricter regulations.

According to government data, there are more than 63 million MSMEs in the country, but only about 1,000 companies are listed on the stock exchange, he said.

Puneet Singhania, director, Master Trust Group, said the recent trend of massive subscriptions in SME IPOs highlights investor interest, largely driven by the potential for high returns, particularly large gains on the day of the rating.

Furthermore, various government policies aimed at promoting SMEs have created an enabling environment for them, while strengthening standards will enhance the credibility and resilience of the SME segment, he added.