Due diligence required of exchanges, merchant bankers on SME IPOs is missing: Sebi Whole Time Member

“We should learn to say no. Perhaps this is one thing that has not been done. Very often and what we have seen in the recent past is the fact that the checks and balances are simply not there. Nobody is actually saying ‘no’ to the (SME) applicants,” Bhatia said at the CII Financing 3.0 summit.

“Maybe the diligence that is required of the chartered accountants (CAs), merchant bankers and exchanges, is possibly missing and they need to do some hard work over there,” he said.

Drawing an analogy of doctors prescribing medicine to patients, Bhatia said, “Leave good doctors to these (SMEs) companies. Don’t give them steroids when they can survive on paracetamol.”

“If you try to take shortcuts and inflate balance sheets, I think the relationships between the intermediaries and companies will be a very short one,” Bhatia warned.

Last week, Sebi said that it has noticed that, post listing, some of the SME companies and their promoters have been resorting to certain means that project an unrealistic picture of their operations.

Such companies or promoters have been seen to make 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 above actions create a positive sentiment amongst investors, which induces them into purchasing such securities. Simultaneously, this also presents an easy opportunity to the promoters to off-load their holdings in such companies at elevated prices,” Sebi had said.

Bhatia further said that the SME platforms of stock exchanges, which got operationalised in 2012, have been serving as an alternate source of raising funds for emerging businesses.

Ever since there has been an increase in the number of SME issues and investor participation.

During the last decade, more than Rs 14,000 crore has been raised from this platform, of which around Rs 6,000 crore was raised during FY2024.

In recent years, listing on the SME platform has seen increased traction. Annual listings on SME platforms through IPOs have increased four-fold over the last five years from 46 in 2019-20 to 196 in FY2024. The amount of funds raised through IPOs has increased 12-fold over five years from Rs 495 crore to Rs 6,096 crore. The market capitalisation of SME companies has grown to Rs 2 lakh crore at present, he said.