BSE Demands Stricter Due Diligence for SME IPOs to Address Concerns Over Malpractices and Discrepancies
The Bombay Stock Exchange (BSE) has issued a stern warning to merchant bankers, urging them to enhance their due diligence processes for Small and Medium Enterprise (SME) Initial Public Offerings (IPOs). This directive follows recent discrepancies and concerns over the listing process, as revealed by the Securities and Exchange Board of India (SEBI) guidelines.
BSE’s Call for Stricter Compliance: A Wake-Up Call for Merchant Bankers
On Tuesday, BSE held a crucial meeting with over 80 merchant bankers to reinforce the importance of comprehensive due diligence before submitting draft IPO documents. The meeting, aimed at discussing best practices, focused on ways to streamline and fortify the SME IPO listing process in light of emerging risks and inconsistencies.
Sources revealed that several issues were discussed during the meeting, including significant and unexplained increases in inventory levels prior to an IPO, questions around the stated objectives for raising funds, and the apparent lack of site visits and ground-level checks by merchant bankers. These concerns prompted the BSE to re-emphasize adherence to SEBI’s guidelines, highlighting the need for greater scrutiny during the pre-listing phase.
Delays in Approval Process: Exchanges Taking a More Cautious Approach
Experts have noted that these recent developments may result in extended timelines for the approval of SME IPOs, as stock exchanges prioritize robust evaluations to ensure compliance. Unlike mainboard IPOs, the draft papers for SME IPOs are reviewed and approved by the NSE and BSE, which also serve as regulators for the SME platforms. This added level of oversight aims to safeguard the integrity of the IPO process.
The call for more rigorous due diligence comes in the wake of BSE’s recent decision to hold off the listing of Trafiksol ITS Technologies. The exchange cited unresolved issues that the issuer needed to address, serving as a reminder that discrepancies will not be overlooked.
Merchant bankers attending the meeting acknowledged the gravity of BSE’s message. “The tone was very cognitive. The message was loud and clear,” said one banker, emphasizing the regulator’s expectations for thorough and compliant processes.
Rising Concerns Over Malpractices in SME Listings
SEBI has previously voiced concerns over malpractices involving some SME IPOs, leading to increased scrutiny from market participants. In recent months, SEBI has taken action against several SME issuers for creating misleading impressions of their operations and using such tactics to inflate their market valuations.
Last month, SEBI explicitly warned that some SME companies were employing deceptive means to generate positive sentiment around their stock, allowing promoters to sell their stakes at inflated prices. This unethical behavior has prompted regulatory authorities to push for a more vigilant IPO approval process.
A Message to Merchant Bankers: Compliance Is Key to Success
The merchant bankers involved in the SME IPO space are now being urged to tighten their processes if they wish to expedite approvals. “I believe the merchant bankers would understand quickly that if they want to fasten the approval process, they must follow due diligence. Ultimately, it is a business for us,” remarked a banker, acknowledging that adhering to compliance requirements is essential for smoother and faster approvals.
The increased scrutiny by BSE and SEBI, along with their calls for enhanced due diligence, are expected to serve as a deterrent to any attempts at manipulating the IPO process. By focusing on transparency and accountability, these measures aim to protect investor interests and maintain the credibility of SME listings.
Impact on the SME IPO Market
The developments come as SME IPOs continue to gain traction, with investors showing increased interest despite regulatory concerns. In 2024 alone, the average listing day gains for SME IPOs have doubled to 72%, highlighting the potential profitability of these offerings but also underscoring the risks involved.
With the BSE SME data showing a market capitalization of Rs 1.89 trillion for companies listed on the SME platforms to date, the stakes are high. Ensuring that these companies meet the necessary due diligence standards is crucial for maintaining market confidence and protecting investor capital.
Conclusion: A New Era of Accountability in SME IPOs
The BSE’s directive to merchant bankers marks a significant shift towards greater accountability and transparency in the SME IPO market. By mandating stricter adherence to due diligence standards, the exchange is sending a clear message that there is no room for complacency in ensuring the integrity of the IPO process.
As SEBI and BSE ramp up their efforts to crack down on malpractices and protect the interests of investors, merchant bankers must prioritize compliance and thorough evaluation of IPO candidates. The success and sustainability of the SME platform will depend on the collective efforts of regulators, exchanges, and market participants to uphold the highest standards of transparency and ethical conduct.
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