Regulating SME IPOs – The Hindu BusinessLine
To enable small and medium enterprises (SMEs) to easily tap capital markets, the Securities and Exchange Board of India (SEBI) had in 2010 freed issuers looking to list on SME platforms from filing their offer documents with it (they were to file them with stock exchanges), announcing quarterly financials or complying with most of the governance norms contained in the LODR (Listing Obligations and Disclosure Requirements) regulations. However, the recent retail frenzy for SME IPOs, investor complaints about fraud and SEBI’s own investigations are now forcing a rethink.
In a recent consultation paper, SEBI has red-flagged some SMEs diverting issue proceeds, declaring manipulated numbers and undertaking out-sized related party deals. However, with SME IPOs on the two exchanges not raising even ₹10,000 crore a year, this segment does not seem to pose much of a systemic risk. Investors punting on SME platforms despite high entry barriers cannot claim to be unaware of the risks. Therefore, in trying to tighten SME regulations, SEBI must balance investor protection objectives with the needs of genuine SMEs.
SEBI is proposing three sets of changes. The first set seeks to raise entry barriers for investors participating in SME IPOs. Noting that the ₹1 lakh minimum application size was set 14 years ago, SEBI is considering whether to raise this to ₹2 lakh with a retail/HNI (high net worth investor) distinction, or to ₹4 lakh without any such distinction. As a ₹4 lakh application size may prompt retail SME punters to take even more concentrated bets, a ₹2 lakh application size may be better. It also seems desirable to retain the proportionate allotment system for HNIs in SME IPOs, so that those with higher risk appetite bag higher allotments. A second set of proposals relate to plugging misuse of IPO proceeds, and here SEBI needs to take a tough stance. Insisting on at least 200 allottees for SME IPOs, capping offer proceeds used for ‘general corporate purposes’ at 10 per cent and requiring explicit disclosure of merchant banker fees are welcome ideas. Insisting on a monitoring agency signing off on use of IPO proceeds post-listing is a very good move. As these may be adequate safeguards against siphoning, there is no necessity for SEBI to direct the end-use of IPO money. Barring SMEs from raising money for working capital or repaying promoter debt seems a little too harsh.
A third set of proposals relate to setting a higher governance bar. These include keeping out debarred promoter groups from SME IPOs and requiring a two-year track record of operating profitability after incorporation. As SMEs with over ₹10 crore in paid-up capital and ₹25 crore in net worth are eligible to migrate to the Main Board, SEBI’s idea of applying its LODR regulations on related party deals, board composition, etc., to these SMEs, seems just. To keep the compliance burden light, it may also be desirable to impose quarterly filings on results and shareholding patterns only on the larger SMEs.
