SEBI Cancels Trafiksol ITS Technologies IPO Amid Concerns Over Misuse of Funds
On December 3, 2023, the Securities and Exchange Board of India (SEBI) made headlines by canceling the public issue of Trafiksol ITS Technologies, a small and medium enterprise (SME) whose IPO was oversubscribed by an astonishing 345.65 times. The cancellation came after SEBI raised serious concerns regarding the alleged misuse of funds through a ‘shell entity.’ This move highlights the growing scrutiny of the SME IPO market, which, despite its flourishing state, is facing increasing regulatory challenges.
The Flourishing SME IPO Market
Despite the cancellation of Trafiksol’s IPO, the SME IPO market has been experiencing a remarkable surge. Since September 2023, 29 out of 61 SME IPOs have been oversubscribed by over 100 times. Notable performers include Rajputana Biodiesel, which closed its IPO on November 28 with an oversubscription of 718 times, and Apex Ecotech, which saw an impressive 457 times oversubscription. Other companies like Lakshya Powertech and Travels and Rentals also reported significant oversubscriptions, indicating a robust appetite for SME investments.
Moreover, several SME stocks have seen substantial gains post-listing, with companies like Rajesh Power and Neelam Linens recording increases of over 100%. This trend reflects a growing interest among retail investors, who are increasingly drawn to the potential high returns offered by SME IPOs.
Regulatory Concerns and Misconduct
However, the rapid growth of the SME IPO market has not come without its challenges. SEBI has expressed concerns regarding the quality of certain IPOs, particularly in light of misconduct allegations. In a recent consultation paper, SEBI highlighted issues such as the diversion of issue proceeds to related parties and shell companies, as well as fraudulent transactions designed to inflate revenue.
In the case of Trafiksol, SEBI identified a third-party vendor involved in a Rs 17.70 crore software contract as a shell entity with questionable financials. The vendor’s office was found locked during a site inspection, and its financial statements were obtained under dubious circumstances. Such findings have raised alarms about the integrity of the SME IPO process, prompting SEBI to take decisive action.
The Landscape of SME IPOs
The SME segment has seen a significant increase in investor participation, with the applicant-to-allotted investor ratio skyrocketing from 4 times in FY 2022 to 245 times in FY 2024. This surge can be attributed to several factors, including high market liquidity, the fear of missing out on quick gains, and increased retail investor involvement.
As of October 15, 2024, there are 745 SME companies listed on the NSE and BSE, with a combined market capitalization of around Rs 2 lakh crore. However, the market is not without its pitfalls; a notable number of these companies have faced trading suspensions or have not executed trades in recent months, raising questions about their viability.
SEBI’s Proposed Measures
In light of the increasing instances of misconduct, SEBI is contemplating a series of measures aimed at tightening the regulatory framework for SME IPOs. Proposed changes include doubling the minimum application value to Rs 2 lakh, limiting the offer for sale (OFS) to 20% of the issue size, and mandating the appointment of monitoring agencies to ensure proper use of funds raised through IPOs.
Additionally, SEBI is considering increasing the minimum number of allottees required to declare an SME IPO successful from 50 to 200. The regulator also plans to extend the lock-in period for minimum promoter contributions to five years, thereby enhancing accountability and reducing the risk of fund diversion.
Conclusion
The cancellation of Trafiksol ITS Technologies’ IPO serves as a stark reminder of the need for vigilance in the rapidly evolving SME IPO market. While the sector shows immense potential for growth and investment, the recent misconduct allegations underscore the importance of regulatory oversight. As SEBI moves to implement stricter norms, the future of SME IPOs will depend on balancing investor enthusiasm with the integrity of the market. The coming months will be crucial in determining how these changes will shape the landscape of SME investments in India.