India’s securities regulator has uncovered a series of accounting frauds this month, adding risk to the rapid rise in shares of small businesses.
Varanium Cloud Ltd. and Add-Shop E-Retail Ltd., both listed on the small and medium enterprises platform, manipulated their financial statements to boost their share prices, according to initial orders from the Securities and Exchange Board of India (SEBI). The authorities have banned both companies and their founders from participating in the country’s capital market.
This crackdown follows earlier warnings this year about price manipulation in small IPOs. Analysts believe this signals more regulatory action, which could slow the impressive gains in the S&P BSE SME IPO Index. This index has surged over 5,000% since the start of 2021. “This is just the tip of the iceberg,” said Ambareesh Baliga, an independent market expert with over two decades of experience in Indian equities. “Fewer regulations were meant to attract high-quality SMEs to the market, but instead, it has attracted the wrong ones.”
SEBI found that technology firm Varanium Cloud misused funds from its 2022 public offering and manipulated its financial statements by recording fictitious sales and purchases. Similarly, Add-Shop E-Retail inflated its sales by passing fictitious transactions between related parties, according to a SEBI notice dated May 6.
In both cases, the founders reduced their stakes during the investigation period, highlighting the risks of price manipulation due to fewer compliance requirements. This also shows the limitations of regulatory warnings aimed at curbing enthusiasm for small IPOs in India, where retail investors are a significant force.
Earlier this year, regulators tightened equity market financing to cool the pre-IPO frenzy. Despite this, the market for first-time share sales remains active, with 102 deals priced since the start of 2024, nearly three times as many as in China, according to Bloomberg data. The BSE SME IPO Index hit a record high last week.
“Another 10 cases like this and this bubble will burst,” Baliga warned, noting that many investors are blindly putting their money into these small public offerings.
