SEBI probes six domestic investment banks over handling of small IPOs

The Securities and Exchange Board of India (SEBI) is currently investigating six domestic investment banks for charging extra fees while dealing with small businesses.

Small businesses with a yearly turnover ranging from Rs 5 crore to Rs 250 crore are listed separately on the BSE Sensex and the National Stock Exchange (NSE) of India. Since these businesses have fewer disclosures, the offerings are examined by the exchanges rather than SEBI.

However, India’s securities regulator SEBI stepped in to investigate a few months ago suspecting the possibility of malpractice in a frothy IPO market, characterised by overconfident investors willing to ignore market fundamentals and engage in overbidding.

In India, investment banks normally charge small businesses 1 to 3 per cent of funds raised via IPO as fees. However, initial probe by SEBI seems to indicate that fees as high as 15 per cent have been charged by the half a dozen transgressors in order to ensure that the offerings are oversubscribed, a source said, according to a report by the agency Reuters.

The agency quoted the source as saying the bids were not genuine and were cancelled before allotment, but owing to their high rate ended up attracting high bids and investments. The identity of the investment banks in question have not yet been revealed.

Over 60 investment banks work on IPOs for small businesses in India, and the sector is currently witnessing a surge. In the fiscal year 2023-’24, or FY24, a record 205 small businesses raised Rs 60 billion, compared to 125 companies raising Rs 2,200 crore in the previous year, according to PRIME Database.

In the five-month period from April to August in the fiscal year 2024-’25, or FY25, 105 small businesses have already garnered Rs 3,500 crore and over two-thirds offerings are oversubscribed, the report said. SEBI has directed auditors and exchanges to prevent businesses from being listing if there is any sort of ambiguity in information in IPO documents.