The SME IPO Segment: A Double-Edged Sword
The Small and Medium Enterprises (SME) Initial Public Offering (IPO) segment has recently found itself back in the spotlight, but not for the reasons that stakeholders would prefer. On Monday, Madhabi Puri Buch, Chairperson of the Securities and Exchange Board of India (Sebi), raised alarms about “signs of manipulation” within this burgeoning market. This statement comes at a time when the SME IPO segment has been experiencing unprecedented growth, raising concerns about the sustainability and integrity of this financial avenue.
A Record-Breaking Year
The year 2023 marked a significant milestone for the SME IPO segment, with 182 companies collectively raising an impressive ₹4,686 crore, according to data from Prime Database. This figure starkly contrasts with the ₹1,875 crore raised by 109 entities in 2022, showcasing a remarkable surge in interest and investment. However, this meteoric rise has also attracted scrutiny, particularly due to the unusually high levels of subscription and listing gains observed in several cases.
For instance, Kahan Packaging, based in Mumbai, launched an IPO in September 2023 aiming to raise ₹5.44 crore but ended up being oversubscribed by more than 700 times. Similarly, Mcon Rasayan India’s public issue in March 2023 was oversubscribed 380 times. Other notable mentions include Quality Foils (India), Srivari Spices & Foods, and Madhusudan Masala, all of which saw their issues subscribed over 300 times. Such figures raise eyebrows and prompt questions about the underlying dynamics at play.
The Dark Side of Oversubscription
The surge in oversubscription and listing gains has led many market participants to speculate about potential collusion among promoters, high-net-worth individuals, and operators. The concern is that some IPOs may be artificially inflated through orchestrated efforts, undermining the integrity of the market.
Insiders suggest that a network of so-called “operators” has infiltrated the SME segment, working in tandem with promoters and friendly brokers to ensure the success of IPOs. These operators identify SME promoters looking to list their companies and propose a plan to generate significant oversubscription and listing gains. In exchange, they often demand shares that they can distribute among their network, creating an illusion of genuine demand.
The Mechanics of Manipulation
The modus operandi of these operators is both strategic and deceptive. They collaborate with Sebi-registered merchant bankers to handle the necessary paperwork, while retaining control over the IPO process. Once the IPO is launched, the operators leverage their networks to ensure massive oversubscription. Post-listing, they manipulate trading volumes to create a false perception of demand, which subsequently drives up the share price.
As the price reaches a predetermined target, the syndicate begins to exit the investment, leaving unsuspecting retail investors trapped in a stock that lacks real demand. The shares often trade within a narrow range, further complicating the situation for those who believed they were making a sound investment.
The Anchor Allocation Dilemma
Another area of concern is the pattern of anchor allocations in SME IPOs. An analysis reveals that a limited pool of entities—both domestic and foreign—frequently appears in the anchor investor lists. Notable names such as Rajasthan Global Securities, Chhattisgarh Investments, and Authum Investment & Infrastructure have been recurrent participants in various SME IPOs. This raises questions about the transparency and fairness of the allocation process, as it appears that a select few are benefiting disproportionately from these offerings.
Conclusion: A Call for Vigilance
The recent comments from Sebi’s Chairperson serve as a wake-up call for all stakeholders involved in the SME IPO segment. While the growth and potential of SMEs in India are commendable, the signs of manipulation cannot be ignored. As the market continues to evolve, it is crucial for regulators, investors, and promoters to work together to ensure that the integrity of the SME IPO segment is upheld.
Investors are encouraged to exercise caution and conduct thorough due diligence before participating in these offerings. The allure of high returns should not overshadow the importance of transparency and ethical practices in the financial markets. As the SME IPO segment navigates these turbulent waters, the focus must remain on fostering a fair and sustainable environment for all participants.
Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.