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The Securities and Exchange Board of India (Sebi) is currently investigating at least six investment banks involved in Initial Public Offerings (IPOs) of small and medium enterprises (SMEs). This investigation comes amidst growing concern over the recent surge in SME IPOs and the potential risks involved for investors. The focus of Sebi's probe centers around the fees charged by these banks, which have been found to be unusually high, exceeding the standard practice in India.
Sources familiar with the matter have revealed that some investment banks have charged companies fees amounting to 15% of the funds raised through their IPOs. This stands in stark contrast to the typical industry standard of 1-3% of the issue size. The investigation suggests that these banks may be overcharging to ensure heavy oversubscription of the issues, potentially benefiting themselves at the expense of both the issuing companies and investors.
Sebi's investigation is part of a broader effort to safeguard investors from potential risks associated with investing in some SME ventures. The regulator has previously issued warnings about the dangers involved and is working on tightening regulations for SME IPOs. These measures include a cap on the first-day share gain for small firms at 90% and increased vigilance from auditors and exchanges during the approval process. Sebi is also exploring additional safeguards by developing 12-15 action points aimed at improving the process by which smaller companies conduct IPOs.
The recent surge in SME IPOs has been significant. In the fiscal year ending March 2024, 205 small companies raised a total of Rs 6,000 crore through IPOs. This represents a substantial increase compared to the previous fiscal year, where 125 companies raised Rs 2,200 crore. The momentum has continued into the current fiscal year, with 105 SME players raising Rs 3,500 crore in the first four months, and more than two-thirds of these offerings being oversubscribed.
Source: Sebi probes find SME managers charged fee equal to 15% of IPO size: Report