In an interview to ET Now, Pandey said that by increasing paper work or regulations, it will run a risk of committing Type-2 errors which happen as a result of over-regulation. He said that while it was incumbent upon the regulator to avoid Type-1 errors where a lot of risky things are allowed because of non-regulation, Sebi cannot commit Type-2 errors.
He was addressing concerns about SME companies going public, where retail investors bear most of the risk with minimal participation from institutional investors.
Pandey said that the regulator has delegated the IPO work of SMEs to exchanges and it will have to see how well the exchanges are doing their jobs. He said that the regulator was watchful of the situation.
“We have to see statistically, datawise whether it is an egregious kind of thing or more widespread. If it is an egregious kind of case , you cant really fix it with regulation. It is a super vision issue… it is a surveillance issue because regulations are there. We cannot simply increase paperwork and regulation on the ground that 1-2 cases have gone wrong. Even if you make the regulations so tight, still people can slip through,” Pandey said.
In his view, fraud can be done even under stringent regulations if the purpose is greed.”If you have a greed as a thing and want to have a fraud… the fraud can be done under the most watchful conditions,” he said.The market regulator in December cancelled the SME IPO of Trafiksol ITS Technologies while asking the company to refund the money to the investors. Sebi had received a complaint from Small Investors’ Welfare Association – SIREN’ alleging that the objects of the issue included purchase of software valued at Rs 17.70 crore from a vendor which had questionable financials and failed to file its annual financial statements with the Ministry of Corporate Affairs (MCA).
Prior to the Sebi order, BSE had put the IPO on hold.
Read More: Sebi cancels Trafiksol SME IPO, asks company to refund investors’ money
He also underscored the Sebi’s thought behind the lighter-touch model for SME IPOs. Pandey said that SMEs are important for the Indian economy and should be given easy access to funds.
Notwithstanding this, the regulator has tightened SME IPO rules, Pandey said.
Among the steps taken by the regulator, Sebi has made a stricter framework for merchant bankers and custodians by raising their minimum net-worth requirements. It has also introduced the profitability requirement while capping a 20% limit on offer-for-sale (OFS). It has also limited the use of proceeds from IPO up to 15% for general corporate purposes.
He also emphasised the responsibility of merchant bankers in managing the cost of raising capital through the IPO route. In his view, when the cost rises to 15% or 17% of the funds raised, it becomes burdensome for the company. He added that the regulator is mindful of this concern.
The question is that this is on the SME board and this is on the main board.
The second thing is that Sebi itself will look at the IPO which it has delegated to exchanges. “We have to see how exchanges are doing their jobs. We will be watchful of that situation.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
