Rising speculation and investor frenzy in the SME market: Here are SEBI’s measures to safeguard investors

In a bold stride toward preserving market integrity and securing the interests of investors, the Securities and Exchange Board of India (SEBI) and the Exchanges have continually unveiled an array of proactive surveillance measures. Their latest endeavour, announced on Monday, is aimed at quelling speculative trading within the realm of small and medium enterprises (SMEs). Both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) jointly declared that SME stocks will be encompassed within the purview of the Additional Surveillance Measures (ASM) framework, coupled with trade-to-trade settlement procedures.

In accordance with the deliberations of the Joint Surveillance Meeting involving the Exchanges and SEBI, the existing Trade for Trade (TFT) Framework will be expanded to encompass SME stocks, albeit with certain modifications. A stock’s placement under additional surveillance measures hinges on specific criteria, including significant deviations between high and low prices and variances in trading volumes compared to monthly averages. Such shares also impose heightened margin requirements.

Under the trade-for-trade (TFT) framework, speculative trading is categorically disallowed, mandating the delivery of shares and the settlement of consideration amounts. These transformative frameworks are scheduled for implementation by October 3, 2023, as stipulated in the circulars. SEBI and the Exchanges have consistently demonstrated their commitment to fortifying market integrity and safeguarding investor interests through the strategic deployment of enhanced pre-emptive surveillance measures over time.

SEBI’s heightened concern for the SME sector arises from the remarkable surge in activity within this domain. To truly grasp the significance of this concern, we must delve into the recent uptick in SME activity.

Understanding the enhanced activity in SME

The SME Initial Public Offering (IPO) segment has witnessed a surge in activity, with SME firms consistently garnering substantial oversubscription due to their listings at significant premiums over the issue price. Despite the intrinsic challenges associated with this sector, including limited disclosure and certain concessions extended to the issuing companies, investors with a penchant for risk have eagerly embraced these opportunities.

In the year 2022 alone, a staggering 109 SME firms ventured into the realm of public offerings, collectively amassing approximately Rs 1,875 crore through their IPOs. This stands in stark contrast to the preceding year of 2021 when a more modest 59 SME firms went public, raising a total of Rs 746 crore. Moreover, as of August 31, 2023, the combined market capitalization (M-Cap) of the companies listed on the BSE SME platform has experienced a substantial surge, surpassing the significant milestone of more than Rs 85,000 crore

However, it’s essential to note that this surge in activity wasn’t without its downsides. Approximately 26 IPOs in 2022 resulted in significant wealth erosion for investors. Among the most notable disappointments were Pace E-commerce Ventures, Ishan International, Global Longlife Hospital, Silver Pearl Hospitality and Naturo Indiabull. These instances of wealth erosion underscore the need for increased surveillance and precautionary measures within the SME sector to protect the interests of investors and maintain market integrity.

What should investors do?

While the allure of substantial short-term returns in the SME sector is undeniable, it’s crucial to approach it with caution and recognize that market sentiment around these offerings can swiftly shift. Even a few lacklustre listings have the potential to dent investor confidence significantly.

Given the early stages of development that many of these enterprises find themselves in, diving into SME investments entails a substantial degree of risk. However, this risk also opens doors to the potential for significant profits. Assessing the potential of these businesses, evaluating the credibility of their promoters, and navigating the terrain of corporate governance can be a complex endeavour due to the limited operational history of these firms. This highlights the critical importance of conducting a thorough evaluation of these factors, as overlooking this step could lead to significant setbacks in the long run.

Investors should also be mindful that the minimum investment threshold for SME Initial Public Offerings (IPOs) is notably higher, typically around Rs 1 lakh, compared to the more typical range of Rs 15,000 for conventional IPOs. Furthermore, it’s essential to recognize that while SME IPOs may experience robust liquidity and substantial trading volumes initially, such momentum often tapers off over time.

The fervour echoing through the SME sector is undeniably electrifying, reaching astonishing heights. Consider, for instance, the remarkable story of Srivari Spices and Foods, a company specializing in spice and flour packaging and marketing across Telangana and Andhra Pradesh. This company garnered tremendous investor interest, with a subscription demand that exceeded expectations by a staggering 450 times the size of its SME IPO.

With such excessive speculation and exuberance prevailing in the SME market, SEBI’s objective is to rein in this exuberance and maintain a fair and level playing field for all retail investors. This remains their primary goal as they introduce measures like the Additional Surveillance Measures (ASM) framework and trade-to-trade settlement to ensure market integrity and safeguard investor interests in the ever-evolving landscape of SME stocks.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.