Fraud Risk Casts Shadow Over India's Booming SME IPO Sector: Report

Accounting frauds discovered by the Securities and Exchange Board of India (SEBI) are posing a threat to the rising IPO market in India, as reported by Bloomberg. 

Listed on the small and medium enterprises platform, Varanium Cloud Limited and Add-Shop E-Retail Limited are the two companies that manipulated their financial statements to fuel their shares, as per SEBI. Both the companies and their founders have been banned from participating further in the capital market, according to the report. 

Add-Shop E-Retail and White Organics Agro were found to have participated in irregularities relating to related party transactions, fraudulent announcements regarding supply orders, etc. by SEBI in an interim order. Furthermore, SEBI found that appropriate audit committee approval was lacking for large related-party transactions. 

Found to have misused funds that were withdrawn from its public offering in 2022, Varanium Cloud had “manipulated its financial statements by recording fictitious sales and purchases,” as per the SEBI. The promoter entities exited the company "at the cost of gullible investors" as a result, according to the May 10 SEBI order. Following the publication of specific newspaper articles and social media posts, as well as the receipt of specific complaints expressing concerns about the company's published financial statements and corporate announcements, the financial market regulator SEBI launched investigations into the business. 

Recently, warnings were issued by the authorities about price manipulations in IPOs. As per analysts, this indicates that additional regulatory action is coming, which could limit future gains in the S&P BSE SME IPO Index of micro listings, which has increased by more than 5,000 percent since the beginning of 2021, says the report. 

Amid the increasing scams, taking to X (formerly known as Twitter), Harsh Goenka, Chairman, RPG Enterprises, said, “Promoters are inflating profits (through profit entry) and in nexus with Gujarati-Marwari brokers, driving their stock prices to unrealistic levels. It's time for @SEBI_India and @FinMinIndia to step in and investigate before small investors suffer severe losses.” 

For small IPOs in India, where retail investors have emerged as the major source, this news highlights the risk of being exposed to price manipulation by millions of traders.