SEBI Warns of Risks in SME Market: Investors Advised to Exercise Caution

India’s SME (Small and Medium Enterprise) market is drawing scrutiny as the Securities and Exchange Board of India (SEBI) raises concerns about questionable practices and unrealistic projections from some companies. SEBI is urging investors to be cautious in this rapidly growing sector, where increased activity has also led to manipulative behavior.

SEBI has observed that, after listing on the SME platform, some companies and their promoters make overly optimistic public announcements about their operations. These announcements often coincide with corporate actions like bonus issues, stock splits, and preferential allotments, creating a positive market sentiment and driving up stock prices. However, these moves often mask underlying manipulation, as promoters take advantage of inflated valuations to sell their holdings at premium prices, leaving unsuspecting investors at a disadvantage.

Earlier this year, SEBI Chairperson Madhabi Puri Buch expressed concerns about price manipulation in SME IPOs (Initial Public Offerings) and trading. In response, SEBI is now pushing for more disclosures to improve transparency in SME listings. This move comes after the regulator took action against companies involved in similar misconduct.

For instance, in May, SEBI barred Add-Shop E-Retail Ltd and its management from accessing capital markets after discovering that over 46% of the company’s sales were fabricated. Another company, Varanium Cloud Ltd, was banned for misusing IPO proceeds. These cases highlight a troubling pattern where companies inflate operations and manipulate financial statements to create a false impression of growth, allowing promoters to offload shares at inflated prices.

SEBI’s advisory warns investors not to be swayed by unverified social media posts or tips. Since its inception in 2012, the SME platform has raised over INR 14,000 crore, with INR 6,000 crore raised in FY24 alone. However, this growth has also attracted speculative behavior, as seen in the recent frenzy surrounding the INR 12 crore IPO of Resourceful Automobile, which received bids worth INR 4,800 crore despite the company’s modest size.

In light of these developments, SEBI is calling for increased diligence from auditors and urging investors to remain vigilant. While the SME market offers significant potential, it also carries risks that require careful consideration.