Mumbai: Rising scrutiny on the flurry of small enterprises going public finally has Exhibit One: TrafikSol ITS Technologies Ltd.
On Tuesday, BSE postponed the listing of TrafikSol shares after investor complaints reached the market regulator, a person aware of the matter said. The complaints pertained to Trafiksol’s plans to use the ₹44.87 crore raised from the initial public offering (IPO). According to a second person, since the Securities and Exchange Board of India (Sebi) doesn’t play any role in the sanction or approval of IPOs of small and medium enterprises (SMEs), it had forwarded the complaints to BSE, which runs such IPOs.
Concerns around SME IPOs have been rising. Just last month, a modest motorcycle dealership in Delhi received IPO subscriptions of as much as 400 times for the ₹12 crore it wanted to raise. As recently as 29 August, Sebi had raised concerns about questionable practices in the SME market and warned investors about unrealistic projections by some SMEs. On 12 September, Bloomberg reported that Sebi is considering tighter oversight on SMEs selling shares to the public.
Both persons cited above said the grievances surfaced in a post on social media platform X regarding the company’s plan outlined in its red herring prospectus to use ₹17.7 crore—almost 40% of the gross issue proceeds—to buy a software for integrated command and control centre (ICCC) from one Oasis Corpcare. Oasis has a paid-up capital and authorized share capital of ₹1 lakh each.
Another investor post on X highlighted that Oasis, which provides auditing, legal and book-keeping services, had purportedly not filed any reports or made any filings since 2021.
Founded in 2018, TrafikSol specializes in intelligent transportation systems (ITS) and automation solutions, offering a range of services, including software development, consulting and delivery. To be sure, the company has demonstrated strong performance, with an 80% revenue growth and 153% increase in profit after tax in FY24, compared to the previous year.
What BSE said
BSE said in a circular on Monday that Trafiksol had been advised to retain the entire issue proceeds in the escrow account of the sponsor bank, until it “satisfactorily explains issues raised in a complaint and in a video on social media”. The next morning, though, the exchange issued another circular stating that “in view of certain queries that have been raised, the listing for trading of the scrip is postponed till queries are resolved by the issuer”.
“If you see, the first notice said the entire amount will be escrowed, and this morning they came out saying that (the listing) is postponed,” the second person cited above said. “This (postponement) gives a good signal to chartered accountants and merchant bankers to do their homework well.”
Neither BSE nor Sebi responded to Mint’s queries on the content of the complaint. Queries to Trafiksol on the nature of queries received also remained unanswered till press time.
After the postponement of the IPO, the grey market premium for Trafiksol’s shares shrank to zero from ₹95 a share on Monday, as per market sources. The listing had a price band of ₹66-70. The public issue was subscribed almost 318 times in the retail category.
In its 29 August advisory, Sebi had noted that after listing, certain SME companies or their promoters have been making public announcements that paint an overly positive picture of their operations. These announcements are often followed by corporate actions such as bonus issues, stock splits and preferential allotments.
As per a Zerodha report, from FY21 through Q1 FY25, 201 companies raised ₹4,292 crore via IPOs on BSE’s SME segment while 270 companies raised ₹8,126 crore on NSE’s SME segment. Against this, mainboard IPOs saw 208 companies raising ₹3.27 trillion over the same period.
On 12 September, Bloomberg reported that Sebi is considering tighter oversight on SMEs selling shares to the public, including monitoring the use of their funds and imposing stricter due diligence guidelines for merchant bankers.
Other potential steps
Mandating a longer track record of profitability and greater scrutiny of financial statements are the other potential steps under review, the report said. However, Sebi is not inclined to take over the listing approval process for SMEs from stock exchanges as requested by some investors, it added.
India’s market for micro-listings has boomed since the pandemic. Just two weeks ago, a $1.4 million IPO by a motorcycle dealership with only two outlets and eight employees was oversubscribed more than 400 times, raising concerns about the quality of the offerings in this niche market.