The Securities and Exchange Board of India (SEBI) has recently uncovered concerning practices surrounding the IPO market for small and medium enterprises (SMEs). According to sources, SEBI initiated an investigation earlier this year into the activities of six domestic investment banks. The primary focus of the investigation was to examine the fees charged by these banks for SME IPOs.
SEBI’s Findings: Excessive Fees Charged
During the investigation, SEBI discovered that some small investment banks charged exorbitant fees for managing IPOs of SMEs. In some cases, these banks took as much as 15% of the total funds raised through the IPOs. This is significantly higher than the industry-standard fee of 1-3% for such services.
While the specific names of the banks under scrutiny have not been disclosed, it is reported that at least half a dozen banks have been involved in these activities. India has more than 60 investment banks that actively participate in the SME IPO market, and SEBI’s findings have raised questions about their practices.
SEBI’s Concerns Over SME IPO Listings
In response to these irregularities, SEBI has issued alerts to auditors and stock exchanges, advising them to be extra vigilant when reviewing SME IPO drafts. Exchanges are now being asked to scrutinize the details of the IPO more closely, ensuring that any discrepancies are identified before approval. SEBI is reportedly working on strengthening 12-15 key areas related to SME IPOs to minimize investor risk.
SEBI’s actions are part of a broader effort to protect retail investors and prevent them from falling victim to risky IPOs that may not be backed by proper due diligence. This includes reviewing how much disclosure SMEs are required to make when filing for an IPO. Unlike larger companies, SMEs are listed on a separate platform and face less stringent requirements, which can sometimes lead to lapses in transparency.
Why Did SEBI Start the Investigation?
SEBI’s decision to investigate came after it noticed increasing risks to investors in the SME IPO space. Small businesses, with turnovers between Rs 5 crore and Rs 250 crore, are listed on the SME platform of BSE or NSE, requiring fewer disclosures compared to larger companies on the mainboard. This difference can sometimes result in inadequate information being presented to investors.
SEBI also found that some investment banks may have colluded with investors to create a false impression of demand for certain IPOs. This “nexus” between banks and investors leads to high subscription rates during the initial offering, only for large bids to be canceled later, misleading other investors who are attracted to the seemingly popular IPO.
Tighter Regulations Ahead for SME IPOs
To protect investors, SEBI is looking to implement stricter rules for SME IPOs. One such measure includes limiting the maximum premium at which SME shares can be listed—currently set at 90%. These steps aim to ensure greater transparency and accountability in the SME IPO process.
In addition, SEBI’s investigation has prompted discussions about standardizing fees for IPO management to prevent overcharging by investment banks. The regulatory body is expected to continue its efforts in safeguarding the interests of investors while promoting fair practices in the financial markets.
