“It has come to SEBI's notice that, post listing, certain SME companies and/or their promoters are engaging in certain practices which present an unrealistic picture of their operations. Such companies/promoters have been observed making public announcements which present a positive picture of their operations. These announcements are usually followed by various corporate actions such as bonus issues, stock splits, preferential allotment, etc,” SEBI said.
The regulator said such corporate actions create positive sentiment among investors, thereby prompting them to buy these securities. Also, it provides an easy opportunity to promoters to sell their stake at higher prices.
Urging investors to be cautious and vigilant about the above pattern and to exercise caution while investing in SME stocks, Sebi said one should not trust unverified social media posts and invest on the basis of tips and rumours.
The advisory comes after the SME IPO of Resourceful Automobiles, which has just two Yamaha dealership showrooms and eight employees, managed to garner bids worth Rs 2,700 crore for an issue size of just Rs 12 crore. Evolved as an alternative source of fund raising for emerging businesses, the SME platform of stock exchanges has garnered over Rs 14,000 crore of funds in the last decade, of which Rs 6,000 crore was raised during FY24. SME IPOs are being preferred on Dalal Street by both small and HNI investors as many of them have delivered multibagger returns in recent times. Some SME stocks doubled on the day of listing itself until NSE imposed a 90% cap recently. The recent surge and strong listing gains in SME stocks are driven by high market liquidity, FOMO effect and retail participation.
Vaibhav Porwal, co-founder of Deserv, said, “While this trend may sustain in the short term, risks such as market correction and regulatory intervention could dampen the market frenzy. Investors should be cautious and focus on fundamentals as SME stocks could correct sharply if sentiment changes.”
While SMEs, which contribute to India’s GDP and job creation, getting access to capital markets is a positive and desirable development, IPOs of SMEs with no track record and strong financials are often oversubscribed, driven by retail investors looking for listing gains.
“These are the excesses that need to be curbed. Experience shows that speculative excesses lead to tears,” said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.