SME platform reforms: Sebi focuses on safeguarding retail investors

The Securities and Exchange Board of India (Sebi) has done well to initiate a review process of initial public offerings (IPOs) and post-listing regulation of small and medium enterprises (SMEs). This week, the regulator published a consultation paper with proposals to strengthen the framework governing SME listings. There has been concern regarding the conduct of some SMEs, and the review is necessary also because the terms for going public were kept liberal to contain the compliance burden for relatively small companies. But now that the market has been functioning for a while, reviewing the processes and strengthening the system makes sense. Given that SME IPOs have attracted considerable interest from retail investors, it is incumbent on the regulator to protect their interests.

 

The regulator had in May 2010 prescribed a revised framework for setting up a stock exchange or a trading platform (by the existing stock exchanges) with terminals across the country for SMEs. The process started in November 2008. The data provided by Sebi shows that by October this year, 565 companies were listed on the National Stock Exchange platform exclusively and 524 on the BSE platform. A total of 322 companies from both platforms have migrated to the main board. The market capitalisation of the listed SMEs is about Rs 2 trillion. Thus, based on the activity, it is fair to argue that the idea of facilitating SMEs to approach the market and go public had merits. The biggest benefit of having a vibrant financial market is that savings in the economy can be channelised into productive investment with minimal friction. The SME platform enables even smaller companies to access risk capital. However, the regulator, aside from facilitating market development, is also responsible for protecting investor interests.

 

It is in this context that Sebi has proposed several changes in the rules governing the SME platforms. Among those, the regulator has suggested increasing the application size from Rs 1 lakh to Rs 2 lakh. The shift is expected to bring relatively informed investors. It has also suggested increasing the minimum number of allottees to 200 from 50. This will help increase liquidity and also spread the risk. The issue size is proposed to be increased to Rs 10 crore. Further, the proportion of offers for sale is proposed to be restricted to 20 per cent of the issue size. Besides, it has been proposed that the utilisation of proceeds should be monitored for fresh issues above Rs 20 crore. Further, the regulator has suggested extending the disclosure requirements for related-party transactions under the Listing Obligations and Disclosure Requirements for companies above a certain threshold. An analysis by the regulator showed that 50 per cent of the top 50 listed SMEs have undertaken related-party transactions of over Rs 10 crore.

 

Therefore, there is a greater need for scrutinising such transactions, which can be used to divert and misuse funds. There are several other related proposals, which will help improve the process of listing and regulating listed SMEs by improving transparency. Risk appetite tends to increase significantly after the markets witness sharp up moves as has been the case in recent years — though the markets have seen a correction over the past few weeks. Regulations must ensure that unscrupulous elements don’t take advantage of the platform and that investor interests are adequately protected.