The Securities and Exchange Board of India (Sebi) is working on proposals to tighten norms around listing of small and medium enterprises (SMEs) amid investor frenzy and several cases of serious violations and fraudulent practices in the segment, said Ashwani Bhatia, a whole-time member of Sebi.
A consultation paper on the same is likely to be released in a few months, the official said, speaking on the sidelines of the Global Fintech Fest in Mumbai.
The market regulator may formulate rules on disclosure requirements, eligibility conditions, reserved portions for qualified institutional buyers (QIBs) and anchor investors, and audit-related scrutiny.
Several market participants have previously called for the removal of the quota for qualified investment banks and anchor investors in SME subscriptions. The response from institutional investors has also grown exceptionally in the SME segment.
While approval of initial public offerings (IPOs) of SMEs may remain in the hands of exchanges, the criteria for migration of listed SMEs to the main exchange may be revised and tightened.
The Sebi official added that the regulator wants good quality SMEs to list on the SME platforms of both exchanges and hence the norms have been kept lax. He added that SME exchanges offer a good platform to reduce the dependence of smaller companies on the banking ecosystem for funds and provide more transparency.
A light touch regulator refers to lower compliance compared to those listed on the motherboard and also lower cost to the company.
The regulator’s moves to tighten rules follow recent cases of SME promoters using this avenue to allegedly manipulate prices through fictitious sales and earnings on the books, offload stakes at higher prices and divert funds, among others.
In recent orders against such companies, Sebi had noted that in such cases public shareholding had increased after prices peaked, leaving public shareholders at the short end.
While the Sebi whole-time member cautioned auditors to be “good players” in the ecosystem, he added that the regulator is also referring cases of violations by auditors to the National Financial Reporting Authority (NFRA) for further action.
Exchanges have also taken steps to filter out SMEs with low revenues and profits with recent changes to eligibility and have also imposed a 90 per cent cap on listing profits to prevent astronomical increases.
Market participants said the regulator wants to curb challenges early on, before SMEs are granted approvals to list, rather than finding violations at a later stage and applying severe restrictions on orders that take longer to process.
First published: August 30, 2024 | 18:51 IS
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