SEBI Raises Red Flags on Shares of These Firms; Here's What Investors Need To Know

In light of certain SME companies engaging in share price manipulation by presenting an overly optimistic view of their operations, SEBI on Wednesday warned investors about the risks of investing in the stocks of such firms.

SEBI stated that it has observed instances where, after listing, some Small and Medium Enterprises (SME) companies or their promoters have made public statements that paint an overly positive picture of their business activities.

Such announcements are followed by various corporate actions like bonus issues, stock splits and preferential allotments.

The actions create a positive sentiment amongst investors, which induces them to purchase such securities. Simultaneously, this also presents an easy opportunity to the promoters to offload their holdings in such companies at elevated prices.

“SEBI urges investors to be careful and watchful of the aforesaid patterns and exercise caution while investing in such securities. Further, investors are advised to not rely on unverified social media posts and not to invest based on tips/rumours,” the statement noted.

SEBI, in the recent past, has passed orders against such entities. It can be seen that the modus operandi of these entities follows a pattern that is by and large similar to what has been mentioned above.

The small and medium enterprises (SME) platform of the stock exchanges was operationalised in 2012 to serve as an alternative source of raising funds for emerging businesses. Ever since, there has been an increase in the number of SME issues as also the investor participation in such offerings.

During the last decade, more than Rs 14,000 crore has been raised through this platform, of which around Rs 6,000 crore was raised during FY24.

Resourceful Automobile SME IPO

More recently, a Rs 12 crore initial public offering (IPO) of Resourceful Automobile, a Delhi-based company with just two outlets and a workforce of eight, received bids worth close to Rs 4,800 crore.

The company’s IPO, which was open for subscription from August 22-26, saw an overwhelming response, with bids for 40.76 crore shares against the 9.76 lakh shares on offer translating into a subscription of 419 times on the third day of the bidding process.

This frenzy occurred despite regulators raising concerns about the risks associated with investments in SMEs.

Last week, SEBI’s whole-time member, Ashwani Bhatia, asked chartered accountants to be more diligent while auditing companies listed on the SME exchange platforms.

In March, SEBI Chairperson Madhabi Puri Buch had flagged concerns around “price manipulation” in the SME platform listings and trading and asked investors to be cautious.

Concerns About SME IPOs

• Price Manipulation: There have been instances where promoters of SME companies have artificially inflated the stock price before or after the IPO, leading to unfair gains for themselves and their associates.
• Misleading Information: Some companies may provide incomplete or inaccurate information in their IPO documents, misleading investors about their financial health and prospects.
• Lack of Transparency: Smaller companies may have less stringent disclosure requirements compared to larger ones, making it difficult for investors to assess their true financial condition.
• Limited Liquidity: SME stocks often have lower trading volumes, making it challenging for investors to buy or sell their shares easily and at fair prices.
• Higher Risk: SME companies are generally considered riskier investments due to their smaller size, limited resources, and greater exposure to market fluctuations.

(With PTI inputs)