Price manipulation in SME IPOs? Sebi may soon tighten norms

Sebi Chairperson Madhabi Puri Buch says there is evidence of patterns of malpractices—both at the IPO stage and at trading post listing in SME segment. The regulator may soon crack the whip to mitigate risks for investors

By Nasrin Sultana

Published: Mar 11, 2024 06:36:46 PM IST

Updated: Mar 11, 2024 07:32:05 PM IST

Security and Exchange Board of India (SEBI) chairperson Madhabi Puri Buch Image: Ashish Vaishnav/SOPA Images/LightRocket via Getty Images

Markets regulator Securities and Exchange Board of India (Sebi) may soon clamp down on price manipulations or rigging and malpractices observed in the small and medium sized enterprises (SME) primary markets segment. According to Sebi Chairperson Madhabi Puri Buch, the market regulator has received feedback from the industry that a few entities in the SME IPO segment may be misusing the facilitative framework.

“We do see signs,” says Buch about price manipulation, both at the IPO stage and at trading post listing, of a few SME issues. She adds that safety filters or regulatory tools like additional surveillance measure (ASM) and graded surveillance measure (GSM) were introduced in the SME segment to mitigate such risks of price manipulation but more needs to done.

“The reality is that these are relatively small entities, the market cap is small, the free float is small, it is relatively easy to manipulate both at the IPO level and at the trading level,” she adds during a conversation with the media.

Buch explains that few disclosure norms in terms of risk factors need to be tightened in the SME IPO segment so that investors understand that the SME segment is different from the main board. “The regulations are different, the disclosures are different, and, therefore, the nature of the risk is different. I think it's important for Sebi to underline that in terms of disclosures to the investors,” she says.

With the help of technology, Buch continues, the regulator has been able to see certain patterns in manipulation in the SME IPO segment. “However, as per our regulation, the way that we need to construct the entire case... we do need to take some time to do that in a robust manner,” she explains.

She says there are a few isolated cases or a few cases which go bad, which will detract from the trust of the whole ecosystem. “So, I think that going forward, with the assistance of the industry itself, we should be able to mitigate some of the risks which are inherent in these cases.”

The SME IPO segment has been ballooning in the last few years. In fact, in 2023, there were more issues in the SME segment than mainboard. Last year, there were 182 SME IPOs, raising a total of Rs4,681 crore, a massive 150 percent surge from Rs1,875 crore in 2022. In 2022, there were only 109 SME IPOs, according to Prime Database. The largest SME IPO in 2023 was Spectrum Talent Management with an issue size of Rs99.99 crore.

Fund raising through the IPO route slowed down in 2023 as the overall stock markets stayed volatile during the year. A total of 57 companies raised Rs49,434 crore through main board IPOs in 2023, a decline of 17 percent from the previous year. In 2022, 40 companies raised Rs59,302 crore via IPOs, according to Prime Database. However, excluding the mega LIC IPO in 2022, IPO fund mobilisation in 2023 increased by 28 percent from the previous year. Of the 57 IPOs, 41 received more than 10 times subscription while nine were oversubscribed by more than three times. The remaining seven were oversubscribed between one and three times.

The largest IPO in 2023 was of Mankind Pharma, with an issue size of Rs4,326 crore. This was followed by Tata Technologies and JSW Infrastructure.

Also read: New listings face the threat of $21.1 bln drain-out with IPO lock-ins set to expire

Real time settlement

Real time settlement of trading is soon going to be a reality in India, much earlier and ahead of many matured markets. Buch says same day settlement or the T (trading day)+0 settlement will start from March 28. "The proposal to have stock trades settle on the same day will go into effect on March 28, on an optional basis for certain investors," she says.

The instant settlement of trade will be implemented from March next year, she adds. Currently, the market operates on a T+1 settlement cycle for all scrips, meaning a trade is settled after a day of its actual trading.

According to Buch, faster settlements will ensure Indian capital markets and equities remain competitive and attractive for all kinds of investors, including FPI, in the wake of other alternatives like cryptocurrency. “We want to ensure our regulated market is competitive and offers the same advantages to investors," she says.