SEBI probes 6 banks charging SMEs too much for IPOs

What is the story?

The Securities and Exchange Board of India (SEBI) is currently investigating six domestic investment banks for suspected unfair practices in the initial public offering (IPO) market.

The investigations, which began earlier this year, are into the fees these banks charge small and medium-sized enterprises (SMEs) during their initial public offerings.

Initial findings suggest that these banks are charging fees equivalent to 15% of the funds raised in an IPO, which is significantly higher than the standard Indian practice of 1-3%.

SME IPO Concerns

SEBI’s investigations are part of a broader effort to combat potential risks associated with investing in certain small companies and introduce stricter regulations for such IPOs.

In India, small and medium enterprises (SMEs) with an annual turnover between Rs 5 crore and Rs 25 crore are listed on separate sections of the BSE and NSE.

Disclosure requirements for these public offerings are less stringent than for larger IPOs.

High oversubscription fees

SEBI’s preliminary findings indicate that the inflated fees are aimed at ensuring oversubscription of the offerings.

The regulator is also investigating potential collusion between banks and some investors who break rules by placing large bids as both high-net-worth clients and ordinary retail investors.

These offers, often withdrawn at the time of allotment, may attract more offers and investments from other investors due to their perceived popularity.

SEBI Measures to Regulate SME IPOs

In response to these concerns, SEBI has taken steps to regulate the SME IPO market.

In July, the small company’s stock gain on its first day of trading was limited to 90%.

The regulator also urged auditors and stock exchanges not to allow companies to trade if there are doubts about the information contained in the IPO documents.