India’s securities regulator has uncovered a series of accounting frauds this month, posing a risk to the surging rally in shares of small businesses.
Varanium Cloud Ltd. and Add-Shop E-Retail Ltd., both listed on the small and medium enterprises platform, were found to have manipulated their financial statements to boost gains in their shares, according to initial orders from the Securities and Exchange Board of India (SEBI). As a result, both companies and their founders have been banned from dealing in the country’s capital market.
This crackdown follows earlier warnings issued by the regulator this year regarding price manipulation in small IPOs. Analysts anticipate further regulatory action, which could potentially temper the continued gains in the S&P BSE SME IPO Index, which has skyrocketed more than 5,000% since the beginning of 2021.
Varanium Cloud, a technology firm, was found to have misused funds raised from its 2022 public offering and manipulated its financial statements by recording fictitious sales and purchases, as per SEBI’s order dated May 10.
Add-Shop E-Retail was found to have engaged in passing fictitious sales transactions between related parties to inflate sales, according to a separate notice from SEBI dated May 6.
In both cases, the founders had reduced their stakes in the companies during the period under investigation, SEBI noted.
These findings highlight the vulnerability of millions of traders to price manipulation risks in this segment due to fewer compliance requirements. They also underscore the limitations of regulatory warnings aimed at curbing enthusiasm for tiny IPOs in India, where retail investors play a significant role.
Despite regulatory efforts to cool pre-IPO sale frenzy earlier this year, the market for first-time share sales in India remains vibrant, with 102 deals priced since the beginning of 2024, nearly three times as many as in China, according to Bloomberg data. The BSE SME IPO Index reached a record high last week.
