The exchange has introduced a new eligibility requirement: companies must now demonstrate positive free cash flow to equity (FCFE) for at least two of the three financial years preceding their draft filing. IPO papers.
Additional criteria will apply to all DRHPs submitted on or after September 1.
The move is intended to foster financial strength before going public, which is likely to boost confidence in the SME market.
In recent years, SME IPOs have become a more mainstream asset class for investors, prompting regulators to implement additional controls. Recently, the NSE has capped the listing price of SME issues at 90% of the issue price, regardless of grey market trends. The increased scrutiny also follows a trend of frequent multibagger listings and staggering subscription figures. This year alone, more than 15 companies have seen subscription rates of 500 times or more, with some reaching 2,000 times. In the past two to three months, more than 10 listings were done at a premium of 100% or more before the NSE introduced the price cap. Earlier this year, market regulator Sebi issued warnings about price manipulation in SME IPOs, paving the way for stricter regulation.
SME IPOs typically have low trading volumes, making it relatively easy to inflate share prices and lead to significant overvaluations. “The SME IPO subscription numbers and listing gains are too good to be true. Overall, regulators are trying to regulate this market because they understand that it can no longer be ignored,” said Kush Gupta, director at SKG Investment & Advisory.
Analysts believe that the additional disclosure required for SME companies will lead to greater transparency and help investors make more informed decisions.
“Our advice is to invest only in those companies that have sound business models and a good track record of promoters. Avoid investing in SMEs to make quick money,” Atish Matlawala, Senior Analyst, SSJ Finance & Securities.
Given the increased scrutiny and potential for manipulation, investors may need to exercise greater caution and be very selective when considering SME IPOs.
(Disclaimer: The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of Economic Times)
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