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Six domestic investment banks are the subject of an inquiry by India’s securities regulator, the Securities and Exchange Board of India (SEBI), regarding their handling of small and medium-sized businesses’ (SMEs’) initial public offerings (IPOs). The excessive costs these banks demand to manage SME initial public offerings (IPOs) are the regulator’s main concern. These fees have reportedly reached 15%, which is far higher than the 1-3% range found in larger IPOs.
Probes Target SME IPO Practices
As a part of a larger initiative to address malpractices in the SME sector of India’s burgeoning IPO market, SEBI launched the probe earlier this year. Sources with firsthand knowledge of the situation claim that the investigation is mainly focused on the fees charged by the six investment banks. The regulator is concerned that the inflated fees are being used to manipulate demand for SME IPOs by encouraging coordinated actions between banks and certain investors.
Sources confirmed that these smaller investment banks have been charging companies fees far higher than the industry standard, with some companies paying as much as 15% of the total funds raised through their initial public offerings (IPOs). The identities of the six banks have not been disclosed due to the confidential nature of the investigation.
Higher Fees Linked to Oversubscription
According to preliminary research, these banks’ attempts to artificially boost demand for SME initial public offerings (IPOs) may be linked to the exorbitant fees. There are rumors that the banks collaborated with specific investors who put in big bids as retail and high-net-worth investors, only to withdraw them after the bids were allocated. Because of the manipulation, there is an oversupply of IPOs, which piques the curiosity of more sincere investors.
SEBI’s investigation is around this approach, which enhances the perception of a successful initial public offering (IPO). Through manipulatively boosting the quantity of bids, banks may deceive investors into investing in companies without conducting adequate due diligence.
Booming SME IPO Market Under Scrutiny
In recent years, the SME IPO market in India has grown at a rate never witnessed before. According to data from PRIME Database, 205 small businesses raised ₹60 billion in the fiscal year that ended in March 2023. This represents a significant increase from the 125 businesses that funded ₹22 billion in the previous year. 105 small businesses have already raised ₹35 billion in the first five months of the current fiscal year, with most initial public offerings (IPOs) significantly oversubscribed.
SEBI is paying attention to this fast increase, especially since smaller offers (SME IPOs) are exempt from certain of the disclosure rules that apply to bigger offerings. In India, small enterprises having yearly sales between ₹50 million and ₹2.5 billion ($600,000 and $30 million) are listed on the National Stock Exchange and the Bombay Stock Exchange’s dedicated SME sections.
SEBI’s Efforts to Stricter Regulations
SEBI has started a number of measures to control the SME IPO market in response to mounting concerns. In an effort to curb speculative trading, the regulator set a 90% maximum on share gains for SMEs on their first day of trade in July 2023. Furthermore, SEBI is developing new standards with the goal of improving openness and limiting the opportunity for manipulation in SME initial public offerings.
Senior SEBI official Ashwani Bhatia agreed that there haven’t been enough checks and balances in the IPO market for SMEs and that fresh ideas for stricter regulations will be presented shortly. To ensure that smaller businesses execute their initial public offerings (IPOs) fairly and that investors receive better treatment, SEBI is drafting 12–15 action points.
Attention to detail from Exchanges and Auditors
SEBI has directed stock exchanges and auditors to be more proactive in screening companies that want to list as part of its larger measures to uphold the integrity of the SME IPO market. Exchanges should halt listings where there is dissatisfaction or inconsistency in the information provided in initial public offerings (IPO) paperwork, as stressed by the regulator.
With more oversight, investors will be shielded against deceptive financial statements and exaggerated values, and only honest and open companies would be permitted to trade on public exchanges.
IPOs by SMEs: A Growing Concern
The SME IPO market is growing more and more appealing to companies and investors at the same time that SEBI is stepping up its crackdown. The financial community has received a strong message from SEBI’s probe that unethical practices would not be allowed, while over 60 investment banks are currently working on initial public offerings (IPOs) for small businesses.
The inquiry may result in major legislative adjustments that transform the way SME initial public offerings (IPOs) are carried out in India, guaranteeing reasonable fees and protecting the interests of investors and companies alike.
Forward-Looking
The results of SEBI’s ongoing inquiry could have a significant impact on the Indian initial public offering (IPO) market, especially given the increasing number of small and medium-sized businesses looking to go public. When taking part in SME IPOs, investors are recommended to exercise caution and complete due diligence until the regulatory landscape is more definite.
In order to minimize abuses and foster confidence in India’s thriving SME sector, SEBI wants to make the market fairer and more transparent for all players by strengthening laws and tackling malpractice.
