SEBI Sounds Alarm: Inflated Valuations and Shady SME Tactics Put Investors at Risk

India’s markets regulator, the Securities and Exchange Board of India (Sebi), has raised concerns about dubious practices in the small and medium enterprise (SME) market. Sebi has warned investors about some SMEs making unrealistic financial projections and engaging in manipulative tactics.

Inflated Valuations and Questionable Tactics

In a recent advisory, Sebi pointed out that after listing on the stock exchange, certain SME companies and their promoters have made public announcements that overly exaggerate their business success. These announcements are often followed by actions like issuing bonus shares, stock splits, and preferential allotments.

Manipulative Practices Behind the Scenes

However, Sebi noted that behind these positive announcements, some of these companies are involved in manipulative practices. Promoters often use these inflated valuations to sell their shares at higher prices, leaving investors at a disadvantage.

Sebi’s Growing Concerns and Recent Actions

Sebi’s concerns are not new. In March, Sebi’s chairperson, Madhabi Puri Buch, highlighted issues of price manipulation during IPOs and trading by some SMEs. The regulator plans to enforce more disclosure requirements to increase transparency in SME IPOs.

Sebi has already taken action against several companies engaging in such manipulative practices. For example, in May, Sebi banned Add-Shop E-Retail Ltd and its promoter from accessing the capital markets after discovering that a significant portion of the company’s sales were fake. Similarly, Varanium Cloud Ltd was barred from the markets for misusing IPO proceeds.

Growth of the SME Platform and Rising Concerns

The SME platform on India’s stock exchanges has seen significant growth since its launch in 2012, with over ₹14,000 crore raised in the past decade. However, the rapid growth has also raised concerns about transparency and fair practices. The BSE SME IPO index has surged significantly, reflecting a sharp increase in market activity.

Investor Caution Advised

Sebi has advised investors to be cautious when investing in SME securities. The regulator urged investors not to rely on unverified information from social media or invest based on rumours. Instead, they should conduct thorough research and seek professional advice before making any investment decisions.

Stricter Regulations on the Horizon

Sebi is also considering implementing stricter regulations, such as increasing the minimum size for public offers and requiring more detailed disclosures from companies seeking SME listings. These measures aim to protect retail investors and ensure that only compliant companies can access the capital markets, thereby promoting trust and stability in the SME sector.

AMFI’s Role in Preventing Front-Running

In addition to Sebi’s efforts, the Association of Mutual Funds in India (AMFI) has been working with asset management companies (AMCs) to implement measures to prevent front-running, a practice where brokers or other insiders trade on confidential information before it is made public.

AMFI has been proactive in encouraging AMCs to adopt better risk management practices to prevent front-running, particularly in light of recent cases involving Axis and Quant mutual funds. While AMFI’s efforts are part of standard industry procedures, they reflect a broader push for greater vigilance and transparency in the financial markets.