NSE tightens SME listing norms amid concerns over company quality

Due to concerns about the quality of companies raising funds, the National Stock Exchange (NSE) introduced new eligibility criteria for listing small and medium enterprises (SMEs) on its platform, NSE Emerge. The NSE now requires SMEs to have positive free cash flow (FCF) to equity for at least two of the three financial years before applying for listing. This criterion applies to all draft documents filed from September 1 onwards, with figures based on audited balance sheets.

NSE Emerge has seen over 500 listings as of July, with 22 new listings that month, raising Rs 1,030 crore. Recently, the NSE also set a cap on the opening price of SMEs at 90% above the issue price to standardize price discovery across exchanges during the pre-open session for SME IPOs. Additionally, a short-term surveillance framework, previously used only for mainboard stocks, was extended to SME stocks.

Concerns about SME stocks have arisen due to price increases on listing day and potential financial statement manipulations. While the Securities and Exchange Board of India (SEBI) has taken action against fraudulent activities, SME IPOs are approved by stock exchanges without SEBI's stringent scrutiny. Exchanges evaluate applications based on criteria such as a three-year track record, Indian-resident promoters, operating profit, management experience, and a clean regulatory history before approval.