India’s market regulator, SEBI, has intensified scrutiny over the usage of funds raised through Initial Public Offerings (IPOs), especially among small and medium enterprises (SMEs). The regulator aims to detect potential fraud, as many SMEs are using IPO proceeds under the pretext of meeting working capital requirements.
Concerns Over Working Capital Usage
Unlike funds allocated for capital expenditure, which are used for fixed assets like infrastructure, working capital funds are more challenging to track. Experts believe this creates a loophole for misuse.
- S. Venkat, founder of business consulting firm Practus, noted that while some IPO proceeds can justifiably be used for working capital, excessive allocation can be a red flag.
Recent SEBI Actions Against IPO Misuse
SEBI has already taken action against companies suspected of misusing IPO funds:
- Traxsol ITS Technologies had its ₹45 crore IPO cancelled after SEBI discovered that the company planned to purchase software from a shell company with forged financials.
- Mishtann Foods was banned from equity markets after SEBI found negligible fixed assets and negative cash flow, despite raising ₹50 crore, with ₹37 crore allocated for working capital needs.
Rising SME IPOs & Potential Risks
The SME IPO market has been growing rapidly:
- 242 companies raised a total of ₹8,822 crore through SME IPOs in 2023.
- ₹3,091 crore (35%) of these funds were allocated for working capital, raising concerns about potential fund mismanagement.
Call for Stricter Regulations
- Abhishek Jaiswal, fund manager at Finavenue, suggested SEBI should introduce an upper limit on working capital allocations in SME IPOs.
- SEBI already caps “general corporate purpose” allocations at 15% for SME IPOs, and experts believe a similar cap on working capital usage could help protect investor interests.
SEBI’s increasing vigilance signals a stronger regulatory push to ensure transparency and accountability in India’s IPO market.