India’s securities regulator is considering tighter oversight on micro-cap firms going public, including monitoring the use of their funds and imposing stricter due diligence guidelines for merchant bankers, according to a person involved in the discussions.
Mandating a longer track record of profitability and greater scrutiny of financial statements are the other potential steps under review, the person said, asking not be identified as the details are private. This follows incidents of fraud in this segment of the market, they added.
Even so, the Securities and Exchange Board of India is not inclined to take over the listing approval process for small and medium enterprises from the National Stock Exchange of India Ltd. and BSE Ltd., the person said. Some investors have been asking for the regulator’s direct oversight in this process. The discussions are still at a preliminary stage and measures may be revised before an initial draft is presented to the regulator’s primary market advisory panel.
India’s market for micro-listings has boomed since the pandemic, driven by investor interest in tiny businesses that are seen as having the potential to expand amid accelerating economic growth. Just two weeks ago, a $1.4 million initial public offering by a motorcycle dealership with only two outlets and eight employees was oversubscribed more than 400 times, raising concerns about the quality of the offerings in this niche market.
The surge in investor appetite for shares of firms with an unproven track record as well as some instances of stock-price manipulation have sprung Indian authorities into action. In August, SEBI asked the BSE to halt the IPO of plywood maker Archit Nuwood Industries Ltd. due to concerns over its financial accounts, the person said.
In July, the NSE set a 90% cap on listing gains, while the regulator itself has consistently urged investors to be cautious when investing in SME firms. A discussion paper outlining stricter listing rules for this segment will be released by year-end, Ashwani Bhatia, a SEBI whole-time member, told reporters last month.
An email sent to the regulator and calls made to its spokesman seeking comment went unanswered.
“SEBI will be looking to strike the right balance between protecting investors and helping the market grow,” said Narinder Wadhwa, managing director at SKI Capital Services Ltd. “The regulator could consider additional criteria like increasing the lock-in period for anchor investors,” he said.