Amid concerns over the quality of issuances by small and medium enterprises (SMEs) and rising instances of violations, stock exchanges are sanitising investment bankers to improve scrutiny and ground checks before filing documents for the initial public offering (IPO).
The developments come close on the heels of the market regulator Securities and Exchange Board of India’s (Sebi) nudge to BSE to halt the listing of a recent SME firm following complaints from industry participants.
Also, as per the latest reports, six merchant bankers are under the scanner of Sebi for questionable practices on fee collection.
In a meeting held on Tuesday, BSE’s managing director and chief executive officer Sundararaman Ramamurthy apprised over 80 merchant bankers across India to conduct more checks on IPO-bound companies.
“Exchanges are asking merchant bankers to do thorough due diligence based on the checklist of the stock exchange, specified under the guidelines of Sebi. They are considered to have better financial acumen and have been asked to conduct more site visits and ground checks of the companies,” said a person familiar with the developments.
“The strictures come after several discrepancies have come to light at the stock exchange level and could have been easily detected by the merchant bankers before the filing of IPO documents. There have been cases where companies showed a need for working capital but had sudden jumps in inventories or jacked up their financial numbers right before the issue,” said sources.
Exchanges have informed bankers that they have better acumen and access to verify details provided by the company. They have also insisted bankers conduct on-ground checks to verify claims made by IPO hopefuls.
The discussions with merchant bankers follow the implementation of better filters by the exchanges to curb speculation and weed out poor-quality SMEs from being listed on the platforms.
The exchanges have started focusing on profitability and positive cash flow. The National Stock Exchange (NSE) last month changed the eligibility conditions, mandating positive free cash flow to equity for at least two out of three financial years preceding the application.
Additionally, the exchanges have also capped the listing day gains in the SME segment to 90 per cent.
Emailed queries to NSE on a possible increase in surveillance or steps towards sensitising investors about the SME segment remained unanswered till the time of press.
The market regulator has constantly cautioned investors about SME IPOs and called for better practices by auditors.
Sebi may also float a consultation paper later this year to tighten the norms around SME listings following instances of fraudulent practices by promoters and gross violations of the securities norms. These may include stricter norms on disclosure requirements, eligibility conditions, portions reserved for qualified institutional buyers (QIBs) and anchor investors, and audit-related scrutiny.
On the back of over 165 SME IPOs this year and heightened investor interest, the BSE SME IPO index has surged around 127 per cent in this calendar year. However, in the past month, it has cooled down by nearly 4 per cent following the cautionary statements and orders by the market regulator.
SMEs have raised over Rs 5,400 crore this year till August, and the market capitalisation of such firms is nearing Rs 2 trillion.
Around 31 companies have filed their draft documents with BSE in September. Not only the filings, but the issue size has also surged over the years. The IPO documents of the SMEs do not undergo the scrutiny of Sebi but are approved by the exchanges and thus are processed much faster.
First Published: Sep 25 2024 | 6:06 PM IST
