Editorial. SME platforms seeing untenable levels of speculation

In this bull market, speculative excesses have been kept in check on NSE and BSE listed stocks, thanks to the Securities Exchange Board of India (SEBI) maintaining a close vigil on them and imposing pre-emptive norms such as peak margins and enhanced surveillance. But the SME platforms of the exchanges seem to have turned into a hotbed of speculation. Therefore, it is about time that stock exchanges — who are frontline regulators for SME platforms — took measures to rein them in.

This week, after a meeting with SEBI, the exchanges have announced that the short-term Additional Surveillance Mechanism (ASM) and trade-for-trade settlement, currently applied only to volatile stocks on the main board, will apply on the SME platforms too. ASM leads to margins of 50-100 per cent being levied on trading activity in SME stocks showing high price volatility, while trade-for-trade settlement discourages intra-day trading. Such curbs, though they may hurt liquidity and investor interest in SME stocks in the short run, seem necessary to protect retail investors.

There can be little doubt that the SME platforms have been witnessing untenable levels of speculation of late. In recent months, SME IPOs from companies engaged in ordinary businesses have attracted outsized subscriptions of between 400-700 times the equity offered. Though SME IPOs are supposed to target institutions and HNIs (which is why they have a minimum application amount of ₹1 lakh) it is retail investors who have been driving this bidding frenzy. For instance, the recent SME IPO of Kahan Packaging, a woven polymer packaging maker saw its ₹5.76 crore equity offer attract ₹4,200 crore in bids (730 times), with retail bids at 1,042 times. Retail bidders are perhaps unaware that SME IPOs unlike main board IPOs, are not vetted by SEBI and are not subject to pre-conditions such as positive net worth and operating profits imposed on mainstream IPOs. Retail investors seem to think of SME IPOs as sure-shot bets for listing gains. But an analysis by this newspaper of 85 SME IPOs in July showed that while a fifth of them gained more than 50 per cent on listing, an equal number bombed. Some SME stocks see wild price swings post-listing too, raising questions on whether low float and thin trading volumes make stock prices easier to manipulate. The BSE SME IPO index is up from about 1,400 to over 35,200 levels in the last three years while the NSE Emerge index is up from 1,480 to 9,100. The SME indices trade at stiff PEs of 41 and 51 times, compared to the Nifty50 PE of 22.

It may be counter-productive for the regulator to impose financial pre-conditions on SMEs tapping the markets or to take up scrutiny of offer documents. But SEBI can look at raising the minimum subscription and trading lot size for SME platforms from the current ₹1 lakh, set over a decade ago.

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