Frenzy investors jump over SME IPOs in a booming bull market. Neither they think of the business of company, nor the valuation. These crazy investors are hardly aware of terms like earning per share (EPS), book value, order books, profit margin and risk factors. Even if they are aware, they are not ready to listen. Most of them get trapped in an alley, where there is no provision of U-turn. Taking cognizance of SME IPOs, the capital market regulator SEBI capped the listing day gain to 90 per cent of the issue price. In a recent statement, SEBI Whole Time Member Ashwani Bhatia has said that SMEs are willing to pay even 25 percent of the issue size to CA (Investment Bankers). This trend is quite alarming.
Smaller the size, easier to inflate: SME IPO is smaller in size and therefore easier to manipulate. The size of business is small, margin is unknown, balance sheet is manageable and promoter is manipulable. Who cares? The investors are little concerned about all these factors. They fancy their investment getting doubled overnight. I remember the days of IT sector boom of late nineties. Even a pencil manufacturer used to add IT after company name and successfully raised huge amount from the market. In the name of Artificial Intelligence, Drone Technology and Blockchain technique many more companies are knocking at the door of regulator. There are investment bankers who know the ways of window dressing and meeting regulatory requirement for IPOs. A recent investigation by SEBI has found that six investment bankers charges around 15 percent of the IPO proceeds from the promoter. This is a warning sign. The company which is paying 15 percent as IPO fees is getting just 85 percent to invest into its business! This means that 15 percent of the margin being eaten away by the merchant banker.
Easier to pump and dump: There is growing trend of utilizing IPO proceeds for further inflating share prices. Overnight billionaires of SMEs get impatient once their shares start hitting lower circuits. Most of their friends and relatives would have bought shares. These relatives take one day fall as catastrophic event. They start making non-stop calls to the promoter. Very few promoters are capable in handling such pressure. There might be some close relatives who would ask for compensation in case of falling share prices. This converts promoters into full time stock market trader. He has to maintain price of his share anyhow, at any cost. This results into stake sale through private placement and using a part of that money for maintaining share price. If a promoter is not able in making private placement, he takes loan against share from banks/NBFCs. A part of this loan is used to maintain the price of share. Fall in share price results into pledging of more shares. This finally leads to debt trap.
Entry of operators into the scene: Operators are indispensable entities of stock market. They are hated by all and at the same time loved by all. Operators have an accomplished team of fundamental and technical analysts. They keep an eye on regulatory changes and devise their bypass routes. They always look for the companies with weak fundamentals and high stock prices. Companies with high percentage of share pledge and falling stock prices are their best prey. They start selling shares to put pressure on stock prices. They buy shares from the market to boost prices. They have money power and price jacking algorithm. Most of the companies hire operators to maintain share price in order to accommodate lenders. The operated shares of SMEs are a trap for investors. Nobody can predict the trajectory of operated shares. It all depends on the requirement of promoter and position of financers.
Order..order.. fake order: Fake order book is a big trouble. There are companies in India and overseas who place order for a commission. They credit advance for the order as well. It’s very difficult to differentiate between fake and genuine order. An order can be cancelled anytime. It’s like announcement of lakh of crores of investment during an investment summit. Most of these announcements are just protocols. News of huge order jacks ups the price and traps innocent investors. These are operators’ tools to manipulate shares at the whims and fancies of their masters. They are well aware of different parameters of surveillance department like geographical diversification, regulatory requirement of minimum number of PAN etc. to bypass the surveillance system.
The time has come to raise minimum standards for listing, stringent norms for use of IPO funds, random check of genuineness of order book and deterrent penal action for stock price manipulation. Till then, unsuspecting but greedy investors are bound to lose their hard earned money.
