SEBI Warns of SME Market Manipulation, Urges Investor Caution

India’s market regulator, SEBI (Securities and Exchange Board of India), has raised concerns about suspicious practices in the SME (small and medium enterprises) market. They have warned investors that some SMEs are making unrealistic claims about their performance after going public.

SEBI observed that these companies or their promoters often make overly optimistic announcements about their operations, which are then followed by actions like issuing bonus shares, splitting stocks, or preferential share allotments.

“Such companies/promoters have been seen making public announcements that create a positive picture of their operations. These announcements are typically followed up with various corporate actions such as bonus issues, stock splits, preferential allotments, etc.,” the two-page advisory stated.

However, behind this appearance of growth, many of these SME companies are involved in manipulative practices. Promoters often take advantage of these falsely increased valuations to sell their shares at higher prices, putting unaware investors at a disadvantage.

SEBI’s warning comes after its chairperson, Madhabi Puri Buch, raised concerns about some SMEs manipulating prices during IPOs and trading in March. She mentioned that SEBI plans to ask for more disclosures to increase transparency in SME IPOs. SEBI has taken action against such companies before, noting that they often follow similar patterns of behaviour.

For example, in May, SEBI prohibited Add-Shop E-Retail Ltd and its promoter and management from accessing the capital markets. This decision was made after discovering that over 46% of the company’s sales in the last 3 years were fake and related-party transactions did not have the necessary approvals. In the same month, SEBI also banned Varanium Cloud Ltd from the markets for misusing funds raised from its IPO.

“Earlier this year, Sebi took action against 3 other SME companies for similar violations, including the misuse of public funds, misstating facts in offer documents, and manipulating financial statements. These companies had inflated their operations to create false perceptions and boost investor interest, allowing promoters to offload shares at elevated prices,” said Nilesh Tribhuvann, managing partner at White & Brief Advocates&Solicitors.

Since the SME platform was introduced on stock exchanges in 2012, the market has grown significantly, with over ₹14,000 crore raised in the last 10 years, including around ₹6,000 crore in 2023-24, according to SEBI’s advisory.

Tribhuvan mentioned that SEBI is considering stricter regulations, like increasing the minimum size for public offers and requiring companies seeking SME listings to provide more detailed disclosures. These steps aim to protect retail investors and ensure that only compliant companies can access the capital markets, promoting trust and stability in the SME sector.

AMFI Vigilance

The Association of Mutual Funds in India (AMFI) has been discussing with asset management companies (AMCs) setting up measures to prevent front-running. AMFI has encouraged AMCs to adopt better practices to stop front-running. However, a member of the Brokers Committee told Mint that this is already considered a standard part of their risk management procedures.

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.