In recent years, the Small and Medium Enterprises (SME) Initial Public Offering (IPO) market has seen a significant boom. However, behind this surge, some investment bankers are exploiting the system by artificially inflating the valuations of SMEs to make illegal earnings. This practice, once limited to regions like Gujarat and Maharashtra, has now expanded across India as stock market activity soars, especially during festive seasons.
According to sources close to the matter, investment bankers are approaching small businesses, promising to bring them to the market at much higher valuations than their actual worth. They collaborate with promoters, offering to raise funds at valuations that are 10 or 20 times the company’s actual profit when the market norm would be around 5 times. In return, these bankers demand a share of the surplus funds raised.
SEBI Warns Investors Amid Rising SME IPOs
The Securities and Exchange Board of India (SEBI), aware of these manipulations, has been issuing warnings to investors about the risks associated with SME IPOs. On August 28, SEBI released a press statement highlighting a sharp increase in IPOs within this segment. According to SEBI, Rs 14,000 crore has been raised through SME IPOs over the last decade, and 43% of this amount—around Rs 6,000 crore—was raised in FY 2024 alone.
This rapid rise has drawn attention, with SEBI advising investors to carefully evaluate the financial health of these companies before committing any money. SEBI’s concern is that inflated valuations could lead to significant losses for unaware investors once the actual value of these companies is realized.
How the Manipulation Works
Investment bankers typically begin their scheme by working with chartered accountants in small towns, who help identify SMEs looking to raise funds. These bankers then approach business owners with promises of easy fundraising through an IPO. If the promoters show interest, the bankers move on to offer inflated valuations, claiming they can raise far more than the company is worth.
To execute this plan, bankers work with chartered accountants willing to manipulate financial statements or create fake receipts to justify the higher valuation. In exchange for their role, these bankers charge a hefty fee, which has now increased from the usual 1%-3% to around 7%. Some of the remaining funds are paid in cash, which can be used later to manipulate grey market prices, inflating the stock even further.
SEBI Tightens Regulations
With growing concerns over these fraudulent practices, SEBI is continually updating regulations to ensure that SME IPOs meet stricter financial health criteria. These new rules aim to protect investors from falling into the trap of inflated valuations and potential financial losses.
