SEBI Raises Concerns Over IPO Trends: Investors Advised to Stay Cautious
In recent times, the primary market has been buzzing with Initial Public Offerings (IPOs), with as many as five to six companies launching their offerings each week. This has prompted the Securities and Exchange Board of India (SEBI), the market regulator, to issue warnings to investors. The primary focus of SEBI’s warning relates to the oversubscription of new shares, particularly in the MSME (Micro, Small, and Medium Enterprises) sector.
A Notice from SEBI
SEBI has highlighted a worrying trend of fraudulent promoters in the MSME sector. They are known to inflate their company’s growth figures post-listing to attract unsuspecting investors, luring them into a trap. These companies often resort to illegal practices to manipulate share prices and exit the market with profits, leaving investors at a loss. Consequently, SEBI urges investors to avoid basing their investment decisions on social media posts, tips, or rumors.
The Surge of MSME IPOs
Since the launch of a trading platform for SME shares in 2012, over ₹14,000 crores have been raised. Alarmingly, ₹6,000 crores were raised solely in the fiscal year 2024. Recently, the National Stock Exchange (NSE) tightened rules for SME IPOs, requiring that only companies with positive cash flow can be listed from September 1 onwards. Positive cash flow refers to the remaining cash after all capital and operational expenses have been covered.
How Companies Are Trapping Investors
SEBI has uncovered that some SMEs or their promoters leverage unrealistic portrayals of their operations after listing. Common practices include bonus issues, stock splits, and preferential allotments of shares, which create a positive sentiment towards the company and pressure investors to purchase its stock. This strategy also provides promoters an opportunity to sell their stakes at inflated prices.
Notable Case: The Shocking Oversubscription Example
A recent IPO case has caused a stir in the market. A company aimed to raise ₹12 crores through its IPO, and on the final day of bidding, it was not just oversubscribed two or three times but an astonishing 418 times. This unprecedented excitement around IPOs hasn’t been witnessed in recent history.
The company in question, Resourceful Automobile, operates two bike showrooms in Delhi and employs just eight people. It launched its IPO on August 22, inviting investments until August 26. The offering, which had a size of ₹11.99 crores, attracted bids worth ₹4,768.88 crores by the end of the bidding period. Out of these bids, retail investors contributed ₹2,825.11 crores, while other categories brought in ₹1,796.85 crores.
Conclusion: A Call for Vigilance
The sharp rise in IPOs, particularly from small and medium enterprises, presents both opportunities and risks for investors. SEBI’s warnings against potential fraud and the manipulation of share values underscore the necessity for investors to conduct thorough research and exercise caution. As the market continues to experience this surge, understanding the underlying business fundamentals will be crucial in making informed investment decisions.
