Sebi plans to tighten SME IPO norms, migration regulations: Ashwani Bhatia

Paper to review eligibility, disclosure, and institutional portion

The Securities and Exchange Board of India (Sebi) is preparing proposals to tighten the norms around the listing of small and medium enterprises (SMEs) amidst a surge of investor interest and multiple instances of gross violations and fraudulent practices in the segment, according to Sebi whole-time member Ashwani Bhatia.

A consultation paper on the matter is expected to be floated within a few months, Bhatia said while speaking at the Global Fintech Fest in Mumbai.

The market regulator may formulate new norms for disclosure requirements, eligibility conditions, and portions reserved for qualified institutional buyers (QIBs) and anchor investors, as well as audit-related scrutiny.

Several market participants have previously called for the removal of the quota for QIBs and anchor investors in SME subscriptions. The participation of institutional investors in the SME segment has also grown exceptionally.

While the approval for SME initial public offerings may remain with the exchanges, Sebi is reviewing and likely tightening the criteria for migrating listed SMEs to the mainboard.

Bhatia added that the regulator aims to attract high-quality SMEs to the SME platforms of both exchanges by maintaining ‘light-touch’ regulations. He observed that SME exchanges provide smaller companies with a good platform to reduce their reliance on the banking ecosystem for funds and increase transparency.

A ‘light-touch’ regulatory approach refers to lower compliance requirements compared to companies listed on the mainboard, along with reduced costs for the companies.

Sebi’s move to tighten norms follows recent instances of SME promoters allegedly manipulating pricing through fictitious sales and revenue on the books, offloading holdings at inflated prices, and siphoning off funds.

In recent orders, Sebi observed that in such cases, public shareholding surged only after the prices had peaked, leaving public shareholders at a disadvantage.

While Bhatia urged auditors to be “good players” in the ecosystem, he also said that Sebi is referring cases of violations by auditors to the National Financial Reporting Authority for further action.

Exchanges have also taken steps to filter out SMEs with poor revenue and profit, including recent changes in eligibility criteria and a 90 per cent cap on listing gains to prevent astronomical surges.

Market participants believe Sebi aims to address challenges at the outset, before granting SMEs approval for listing, rather than addressing violations at a later stage when enforcement actions can be more complex and time-consuming.