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Informist, Tuesday, Nov. 19, 2024

 

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--SEBI issues consultation paper on SME segment framework review
--SEBI proposes extending select listing norms for main board cos to SMEs
--SEBI mulls extending related party deal norms for main board cos to SMEs
--SEBI mulls requiring listed SMEs to submit shareholding pattern every qtr
--SEBI proposes raising minimum allottees in SME IPOs to 200 from 50
--SEBI mulls SME with fresh issue over INR 200 mln to appoint monitoring co
--SEBI mulls allowing SME IPOs only if issue size over INR 100 mln
--SEBI mulls SME to have EBITDA over INR 30 mln in 2 of last 3 yrs for IPO

 

By Rajesh Gajra

 

MUMBAI – The Securities and Exchange Board of India Tuesday proposed sweeping changes to pre-listing and post-listing norms for companies coming out with public issues and seeking listing on the small and medium enterprise segment of the stock exchanges. The proposals are part of a consultation paper and SEBI has invited comments from investors and market participants by Dec 4.

 

The pre-listing proposals include raising the minimum application size for the SME initial public offerings to INR 200,000-INR 400,000 from the current INR 100,000, raising the minimum issue size to INR 100 million and allowing SME IPOs only if the company has a minimum operating profit of INR 30 million in at least two of previous three financial years.

 

The consultation paper also has suggested post-listing changes such as mandating key related party transaction requirements as applicable to other listed companies, disclosure of financial results, shareholding pattern and statement of deviation of IPO proceeds on a quarterly basis from the current half-yearly basis.

 

The consultation paper said there was a surge in investor interest in SME IPOs with the applicant-to-allottment investor ratio jumping to 245 times in 2023-24 (Apr-Mar) from 46 times in FY23 and just four times in FY22.

 

As of Oct 15, of 417 SME companies listed on the National Stock Exchange's SME segment, 12 have been suspended for trading and no trade was executed for the preceding month in 15 companies, data from the SEBI paper showed. On the BSE too, out of 328 listed companies in the SME segment, 28 companies have been suspended for trading and no trading has taken place in 35 companies in the preceding one month.

 

"SME listed entities are typically promoter-driven or family business companies with a high concentration of shareholding among a few promoter/promoter group persons or entities," the SEBI paper said. "In recent times, instances have been observed of diversion of issue proceeds to related parties/connected parties/shell companies and inflation of revenue by circular transactions through related parties/connected parties/shell companies," the paper said.

 

SEBI said it came across an instance where the listed SME had booked fraudulent sales and purchases through circular transactions among related parties. "By doing so, such companies try to create a positive sentiment to induce investors into purchasing such securities," it said.

 

SEBI said it analysed the related party transactions undertaken by listed SME companies and found that one out of two companies have done a related party transaction of more than INR 100 million and one out of 5 companies have done such transactions of more than INR 500 million. These findings, according to SEBI, indicated a build-up of systemic risks from the way some listed SMEs were managing the funds raised by them from the public.

 

Considering such happenings in the SME segment, the market regulator decided to carry out a comprehensive review of the "SME IPO framework and applicability of corporate governance provisions to SME listed companies."

 

Under SEBI's specific proposal on related party transactions, it said the applicability of related party norms for companies listed on the main board of stock exchanges should be extended to listed companies in the SME segment other than those that have paid up capital below INR 100 million and net worth below INR 250 million.

 

This will lead to increased stringency for SME segment companies. For instance, the companies will need to get the approval of shareholders for all material related party transactions. At present, shareholder approval is not required for related party transactions done in the ordinary course of business and on an arm's length basis.

 

SEBI said in the consultation paper its proposal to more than double the minimum application size in SME IPOs was based on two aspects. If the objective was only to deter smaller investors from participating in SME IPOs where the level of risk is higher, then raising the minimum application size to INR 200,000 from the current INR 100,000 would serve that purpose. But if it was to be considered that the limit of INR 100,000 was prescribed over 14 years ago and during that time, benchmark equity indices have grown by around 4.5 times, the minimum application size would need to be INR 400,000.

 

SEBI said its proposal on allowing an SME to make an IPO only if the issue size is more than INR 100 million was based on the rationale that normally, loans and alternative sources of funding are available for amounts smaller than INR 100 million and the minimum requirement "will ensure that companies which have potential to grow will tap the market". On its proposal for introducing a minimum operating profit requirement of INR 30 million in two of the last three financial years, SEBI said a minimum threshold would indicate "that the company has achieved certain level of profitability and is financially viable".

 

With regard to the proposal for increasing the minimum number of allottees in an SME IPOs to 200 from 50, SEBI said this "will ensure that companies where investors have interest shall only get listing" and a sizeable number of investors will help post-listing liquidity. For companies seeking listing on the main board, the minimum number of allottees is 1,000 in their IPOs.

 

SEBI has also proposed extending the draw of lot allotment methodology for non-institutional investors, which largely comprises retail and individual high net worth investors, as currently in place for main board IPOs to SME IPOs. Currently, the allotment procedure for such investors in an SME IPO is based on proportional allotment, which according to SEBI encourages "over-leveraging, over statement of interest and thus at times encourage mispricing". The pro-rata allotment also results in "unnecessary exuberance in NII (non-institutional investor) applicants just to get higher proportion in IPO allotment", SEBI said in the paper.

 

Touching upon the critical issue of monitoring of issue proceeds, SEBI said it received suggestions in respect of appointment of the monitoring agency. At present, for SME IPOs, a monitoring agency is required to be appointed only if the fresh issue size is more than INR 1 billion. SEBI has proposed cutting this threshold to INR 200 million to raise the number of cases where a monitoring agency will certify the use of funds and reduce "the risk of misuse or diversion."

 

The market regulator has also made other SME IPO-related proposals in the consultation paper, such as increasing the promoter lock-in period to five years from three years, and cutting the proportion of IPO funds used for general corporate purposes to 10% from 25% to reduce the risk of misuse of issue proceeds.  End

 

Edited by Saji George Titus and Avishek Dutta

 

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