India’s market regulator and stock exchanges are planning to make rules stricter for small and medium businesses looking to go public. This comes after complaints about the misuse of a special listing platform introduced in 2012 to help small businesses raise funds from the capital markets.
The Securities and Exchange Board of India (SEBI) is thinking about increasing the minimum size of public offers for these businesses to between Rs 30 crore and Rs 50 crore ($3.59 million-$5.99 million), according to two sources familiar with the discussions. The new rules are expected to be announced later this year after the regulator and exchanges talk to people who are involved, they added.
New Rules Planned for Small Business Listings
Currently, there’s no set minimum size for companies going public, but they must have at least Rs 25 crore after issuing shares. One source mentioned that introducing a minimum offer size will ensure that only serious companies join the capital markets, protecting investors’ interests. The sources preferred to stay anonymous as they weren’t allowed to talk to the media.
The regulator and exchanges, responsible for implementing policies, didn’t respond to media requests. With India’s rising stock markets, small business public offerings surged in the financial year ending March 2024, with 205 companies raising Rs 60 billion, compared to 125 firms raising Rs 2,200 crore the previous year, as per PRIME Database, a capital markets data provider.
Regulatory Measures Planned for Indian SME Listings
Small and medium-sized enterprises (SMEs) in India are companies with yearly earnings ranging from Rs 5 crore to Rs 250 crore. Some of these companies received subscriptions 500-1000 times more than their offer size, raising concerns about the platform’s misuse, according to the sources. To address this, besides setting a minimum issue size, these companies will have to provide more information, the sources added. “Merchant bankers will need to disclose more upfront details about the purpose of the issue, financials of the company, and potential risks,” explained the first source.
Earlier this year, Sebi chairperson Madhabi Puri Buch mentioned that some companies and bankers were exploiting the SME listing framework. Sebi is investigating complaints of price manipulation in this segment, Buch stated.
SEBI Takes Action Against SME Companies for Fund Misuse
Recently, Sebi stopped three SME companies from accessing capital markets due to allegations of misusing funds raised through public offers. These companies reportedly used the funds for different purposes than what was stated, provided incorrect information in offer documents, and possibly manipulated financial statements, according to the regulator. Sebi emphasized that retail investors should be cautious and do proper research before investing in SME companies, rather than being tempted by high returns that might not be sustainable.
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