The Securities and Exchange Board of India (Sebi) has observed signs of manipulation at both the trading and issuance levels in the small and midsize enterprise (SME) space. Sebi Chairperson Madhabi Puri Buch said on Monday that the market watchdog is working to introduce more disclosures to safeguard investors.
Her statement comes at a time when the market regulator is investigating investment banks regarding inflated subscriptions in SME initial public offerings, having referred the matter to the Reserve Bank of India.
According to sources, Sebi is scrutinising several instances of inflated subscriptions, noting a “misuse” of the SME route.
“The principal objective is to mitigate the risk of price manipulation… The first step is additional disclosures concerning risk factors. Investors need to understand that the SME segment differs from the mainboard; regulations and risks are distinct,” said Buch.
She added that thematic inspections on stock exchanges are ongoing to ensure appropriate disclosures on SME listings. Buch also mentioned that, with the use of artificial intelligence, the regulator aims to improve document examination and move towards automated supervision.
Stock exchanges have recently implemented additional surveillance mechanisms on SME stocks and tightened norms for migration to the mainboard.
‘Bubble’ in smallcaps and midcaps
Speaking at an event by the Association of Mutual Funds of India (Amfi), the Sebi chief announced that data from stress testing conducted for smallcap and midcap mutual funds (MFs) would be made public on March 15.
Stress testing will help identify challenges related to liquidity and redemptions in these segments. Increased disclosures will empower investors to make informed decisions.
“There are pockets of froth in the market; some call it a bubble. It may not be appropriate to allow that bubble to keep building because, when it bursts, it adversely impacts investors. MF trustees should formulate a policy to manage this risk,” said Buch.
She clarified that stress testing aims to determine how many days it will take for each scheme to exit from the underlying portfolio in the face of significant redemption pressure while safeguarding investors against the first-mover advantage. Sebi has developed a model based on three times the volumes in smallcaps to assess the number of days needed for MFs.
On February 29, Amfi instructed fund houses to undertake stress tests and disclose the report on their websites by March 15, along with information on standard deviation, trailing price-to-earnings ratio, and portfolio beta, among other disclosures.
Sebi has also urged MFs to establish an investor protection framework for those investing in smallcap and midcap schemes amid the “irrational exuberance” in the segment.
Regarding widening the definition of stocks in each category of smallcaps and midcaps, Sebi’s chairperson said, “There has been some discussion on this. We would be open to discussions based on data and logic supporting it. I don’t think there is any concrete proposal on it right now.”
Amid the call for higher disclosures, smallcap funds in February collectively totted up a net Rs 2,900 crore, 10 per cent lower than in January.
The National Stock Exchange Nifty Smallcap 100 has rallied nearly 55.6 per cent in 2023.
The Nifty Smallcap 100 closed 2 per cent down on Monday, extending its recent slide to over 8 per cent.
First Published: Mar 11 2024 | 7:38 PM IST
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