SEBI flags pattern’ in some SME founders rigging stocks

Last Updated30/08/2024

Post listing, some SME companies and/or their promoters have been resorting to certain means that project an unrealistic picture of their operations

The Securities & Exchange Board of India (SEBI) has issued a warning to investors regarding a deceptive pattern employed by promoters of certain companies listed on the Small and Medium Enterprises (SME) platforms of stock exchanges.
SEBI has observed that these promoters use strategies to artificially inflate the perceived value of their companies before offloading their shares at elevated prices, potentially leaving unsuspecting investors with overvalued stocks.

Promoters of some SME companies make public announcements that create an overly optimistic view of their business operations. These announcements can mislead investors into believing that the company's prospects are brighter than they actually are.

Bonus Issues: Distributing additional shares to existing shareholders.
Stock Splits: Increasing the number of shares by reducing the face value of each share.
Preferential Allotments: Issuing shares to select investors, often at favorable terms.
These actions create a positive sentiment in the market, encouraging more investors to buy the shares.

With the stock prices driven up by these actions, promoters then take advantage of the inflated prices to sell off their holdings. This can lead to a situation where the stock price drops sharply once the true value of the company is realized, leaving late-coming investors with losses.

SEBI has taken action against entities employing these tactics, with details of such cases available on its official website.
The market regulator has highlighted the similarity in the modus operandi across different cases, urging investors to recognize these patterns and exercise caution.

The SME platforms were launched in 2012 to provide an alternative source of funding for emerging businesses. Since their inception, these platforms have seen growing participation from investors, with over ₹14,000 crore raised in the last decade, including ₹6,000 crore during the fiscal year 2024 alone.