India’s securities regulator, the Securities and Exchange Board of India (Sebi), is investigating six domestic investment banks for their handling of initial public offerings (IPOs) by small businesses. The probes, which began earlier this year, focus on the unusually high fees charged by these banks, which have reportedly reached up to 15% of the funds raised—far above the typical 1-3% in the Indian market.
This scrutiny comes amid Sebi’s efforts to warn investors about the risks associated with investing in smaller firms and to implement stricter regulations for such IPOs. Small businesses in India, with annual revenues ranging from ₹50 million to ₹250 crore (approximately $600,000 to $30 million), typically list on separate sections of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), which have fewer disclosure requirements compared to larger IPOs that require Sebi’s approval.
Preliminary findings from Sebi suggest that the high fees are intended to artificially inflate demand for these offerings. The regulator is concerned about coordinated activities between banks and certain investors who manipulate bids—placing large orders as high-net-worth individuals and retail investors, only to cancel them at the time of allotment. This practice leads to inflated subscription rates, attracting further investments from genuine investors.
In the last fiscal year, 205 small firms raised ₹60 billion, a significant increase from the previous year, and in the first five months of the current fiscal year, 105 small firms raised ₹3,500 crore, with many offerings oversubscribed.
Ashwani Bhatia, a senior official at Sebi, acknowledged that IPOs for small and medium-sized enterprises have lacked adequate oversight. He indicated that Sebi is drafting proposals for tighter regulations and has already implemented a cap on first-day share price gains for small firms at 90%. The regulator is also collaborating with auditors and exchanges to ensure compliance and prevent companies from listing if there are concerns about the information provided in IPO documents.
Additionally, Sebi is developing 12-15 action points to improve the IPO process for smaller firms, reflecting its commitment to enhancing market integrity.
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