SEBI is closely monitoring the utilization of funds from IPOs to prevent potential fraud, especially as many small and medium enterprises are turning to the primary markets to address their working capital needs.
Experts point out that while funds raised for capital expenditure can be tracked more easily, working capital usage is trickier to monitor and can be prone to mismanagement.
S Venkat, Founder of Practus, highlighted that while it is reasonable for companies to allocate a portion of IPO proceeds for working capital needs, a high allocation could raise concerns. He pointed to recent cases where SEBI intervened due to misuse of funds and wrongful disclosures.
Last year, SEBI intervened in the IPO of Trafiksol ITS Technologies and ordered a refund of ₹45 crore raised, citing fraudulent activities related to the use of funds. Similarly, Mishtann Foods was banned from equity markets after it was found to have negligible fixed assets and negative cash flow from operations.
Data from AIF manager Finavenue showed that out of the ₹8,822 crore raised by 242 companies through SME IPOs last year, 35% was allocated for working capital needs, 27% for capital expenditure, and 16% for general corporate purposes.
Abhishek Jaiswal, Fund Manager at Finavenue, suggested implementing an upper limit on the allocation of funds for working capital in SME IPOs to protect investor interests.
Investors were advised to scrutinize reported figures across income statements for consistency and to watch out for sudden spikes in working capital requirements, which could indicate potential discrepancies or fraudulent activities.
Venkat noted that while using equity to finance working capital needs can be justified to some extent as companies grow, excessive reliance on working capital funding could be a warning sign of financial mismanagement. He emphasized the importance of investors conducting thorough due diligence before investing in IPOs to mitigate risks.
