The Securities and Exchange Board of India (SEBI) is probing six domestic investment banks over allegations of charging small and medium enterprises (SMEs) exorbitant fees for their initial public offerings (IPOs).

Recent findings indicate that these banks have charged fees as high as 15% of the funds raised, significantly surpassing the standard industry practice of 1-3%.

This investigation is part of SEBI’s broader efforts to ensure fairness and transparency in the IPO market, especially concerning small businesses.

SEBI’s Concerns Over the IPO Market

The investigation comes amid growing concerns regarding the practices surrounding IPOs in India’s bustling market.

SEBI has observed that the high fees levied by some investment banks may be a tactic to manipulate subscription rates.

The aim appears to be to ensure that these IPOs are oversubscribed, which can mislead investors into believing there is a high demand for the offerings.

According to insiders, the probe began earlier this year and is focused on revealing whether these fees are part of coordinated efforts between investment banks and select investors.

These arrangements allegedly allow investors to place substantial bids using different identities, both as high-net-worth individuals and regular retail investors.

However, many of these bids are canceled at the time of allotment, which raises red flags about the legitimacy of the subscription figures reported.

The Landscape of SME IPOs in India

In India, SMEs with an annual turnover between ₹5 crore and ₹250 crore can list their offerings on specialized segments of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Unlike larger IPOs that undergo thorough scrutiny by SEBI, SME offerings have fewer disclosure requirements, making them more susceptible to manipulation.

In the fiscal year ending March, 205 small firms successfully raised ₹6,000 crore, compared to just ₹2,200 crore raised by 125 companies the previous year.

Despite the booming interest in SMEs, SEBI’s Ashwani Bhatia has emphasized that the current regulatory framework lacks adequate checks and balances.

In response, SEBI is developing a set of new rules aimed at tightening the IPO process for smaller companies. Recent actions have already included capping share gains for small firms on their first trading day at 90%.

As part of its initiative to protect investors, SEBI is urging auditors and stock exchanges to enhance vigilance against questionable practices.

The regulator plans to implement 12-15 action points designed to reshape the IPO landscape for SMEs in India. This approach aims to foster a fairer and more transparent environment for both issuers and investors.