NSE tightens SME listing norms amid concerns over company quality

July sets record for SME listings, raising over Rs 1,000 crore

The National Stock Exchange (NSE) on Thursday prescribed eligibility conditions for the listing of small and medium enterprises (SMEs) amid concerns about the quality of companies raising funds through this route.

The stock exchange permits the listing of SMEs on its platform, NSE Emerge, from which firms can later migrate to the mainboard upon fulfilling certain conditions.

On Thursday, the NSE added the condition of positive free cash flow (FCF) as an eligibility criterion for listing on NSE Emerge.

“The company/entity should have positive FCF to equity for at least two out of the three financial years preceding the application,” said NSE in a circular outlining the computation methodology.

 

The additional criteria will be applicable to all draft documents filed from September 1 onwards. The exchange added that the figures will be considered from audited balance sheets.

The total number of listings on NSE Emerge had crossed 500 as of July, with 22 new listings in that month. July saw the highest number of listings in a month, with fund mobilisation of Rs 1,030 crore.

Last month, the bourse imposed a cap on the opening price of SMEs at 90 per cent higher than the issue price. The exchange said that this move was to standardise the opening price discovery across exchanges during the special pre-open session for SME initial public offerings (IPOs).

Last year, the short-term additional surveillance measure framework was applied to SME stocks, a framework that had previously only been implemented on stocks listed on the mainboard.

Concerns regarding SME stocks have emerged after an astronomical and irrational rise in the prices of SMEs on listing day and concerns about manipulations in financial statements. The market regulator, the Securities and Exchange Board of India, has, on several occasions, taken action against fraudulent players.

IPOs of SMEs are approved by the stock exchanges and do not undergo the strict scrutiny of the market regulator. The exchanges vet the applications based on the prescribed eligibility before granting in-principle approvals. These include a track record of at least three years, promoters residing in India, operating profit, management experience, and no regulatory or disciplinary actions.