Signs of price manipulation in IPOs of SMEs, share trading: Sebi chief Madhabi Buch

After the SEBI chief’s comments, the BSE SME IPO fell 3.28 per cent, or 1878.33 points to close at 55,453.91. The benchmark Sensex also plunged by 617 points, or 0.83 per cent, to 73,502.64.

The Nifty Smallcap 100 index fell 2 per cent after the Sebi chief warned that the regulator can’t allow bubbles to build up in the small-cap segment.

“In terms of actual price manipulation (in the SME segment) both at the IPO level and the trading level, we are working to evidence that, and we do see the signs. We have the technology to do it, so we are able to see certain patterns. However, as per the regulations, the way we need to construct the entire case, we do need to take some time to do that in a robust manner,” Buch said at an event organized by the Association of Mutual Funds in India (AMFI).

She said SEBI has received feedback from the market on price manipulation in the listing of SMEs. The regulator has also been advised by the market participants on ways to identify such cases and deal with them.

In 2023, there were 182 SME IPOs, raising a total of over Rs 4,600 crore, a rise of 150 per cent from Rs 1,800 crore in 2022. Moreover, in the first two months of 2024, as many as 30 SME IPOs collectively raised over Rs 1,000 crore. There’s separate platform for listing and trading in SME shares on both the NSE and the BSE.
In January, Buch had mentioned that SEBI was probing cases of mule accounts and inflated IPO applications that were meant to jack up share sale subscription numbers. She said that three cases had come to the notice of the regulator, without giving any details.

Buch further said the regulator wants to be a facilitator and have a listing environment which is not as regulated as the main board because SMEs find it hard to comply with many of those requirements. However, it was found that some entities are misusing that facilitator framework.

“The reality is that these (SMEs) are relatively small entities, the market is small, the free float is small, it is relatively easy to manipulate both at the IPO level and the trading level,” she said.

Buch said many of the surveillance measures such as Additional Surveillance Measure (ASM) and Graded Surveillance Measure (GSM), which were earlier not applicable on the SME board, have now been made applicable in the segment so as to try and mitigate the risk of price manipulation.

She said some more disclosures in the SME IPO segment in terms of risk factors are required for investors to understand that the SME segment is different from the main board, the regulations and the disclosures are different, and therefore, the nature of the risk is different.

On the timeline for additional disclosure norms in the SME IPOs, Buch said the regulator is still working with advisors to try and understand the dimensions and analyze the data.

When asked about small and mid-cap funds, where some concerns have been raised, Buch said the market regulator cannot allow bubbles to build up and has asked mutual fund trustees to formulate policies in order to protect the interest of investors.

“Some people call it a bubble; some may call it froth. It may not be appropriate to allow that bubble to keep building because if it keeps building, then when it bursts… by definition bubbles burst, and when they burst, they impact investors adversely, which is not a good thing,” Buch said.

The Nifty Smallcap 100 index fell 2 per cent and Nifty Midcap 100 also ended 0.39 per cent down on Monday, following the SEBI chief’s comments.

Recently, AMFI had written to mutual fund trustees to take measures to protect the interest of investors of small and mid-cap schemes, which have seen heavy inflows in the recent past.

Small and mid-cap funds have seen a surge in inflows from investors led by higher-than-expected performance of companies in these segments. Many analysts have raised concerns over the valuation of small and mid-cap stocks which poses risks for investors.

To a query on whether SEBI will ask mutual fund houses to cap lump-sum flows into any scheme, Buch said the regulator would not mandate anything without floating public consultation.

“However, we have suggested that the trustees should have a policy in place because it sounds like a prudent thing to do to protect the investors so they should look at it and formulate their own policy,” she said

On the facility for clearing and settlement of funds and securities on T+0 (same day), Buch said it will be started from March 28 on an optional basis. The instant settlement cycle will begin in March 2025, on an optional basis.