Sebi probes six local investment banks over handling of small IPOs
According to one of the sources, Sebi’s preliminary findings suggest the high fees are being charged to ensure the offers are oversubscribed | (Photo: Shutterstock)
India’s securities regulator is concerned about malpractices in the buoyant IPO market and is investigating six domestic investment banks that worked on initial public offerings by small companies, two sources with direct knowledge of the matter said.
The investigation by the Securities and Exchange Board of India (Sebi) began earlier this year and is focusing on the fees charged by the banks, sources said, requesting anonymity because the investigations are confidential.
They found that at least half a dozen small investment banks have charged firms fees equivalent to 15% of the funds raised through their IPOs, they added, much higher than the standard practice of 1-3% in India.
Reuters could not identify the banks under investigation. Sebi did not respond to requests for comment.
The investigations come amid Sebi’s efforts to warn investors about the dangers of investing in certain small companies and plans to tighten rules for such IPOS.
In India, smaller companies with annual revenues of Rs 50 million to Rs 250 crore ($600,000-$30 million) are listed on separate sections of the BSE and the National Stock Exchange of India (NSE). There are fewer disclosure requirements and the listings are monitored by the exchanges, unlike large IPOs that must be approved by Sebi.
According to one of the sources, Sebi’s preliminary findings suggest that the high charges are being levied to ensure that the offers are oversubscribed.
The regulator wants to put an end to coordinated activities between banks and some investors who break the rules and make large bids, both as wealthy individuals and ordinary retail investors, the second source said.
“These bids are not authentic and are cancelled at the time of allocation, but the high subscriptions ultimately attract more bids and investments from other investors,” the source said.
India has over 60 investment banks actively engaged in small business IPOs. This segment, like the rest of the Indian IPO market, is growing tremendously.
According to PRIME Database, a provider of data on the capital markets, 205 small companies raised Rs 60 billion in the fiscal year ended March, up from 125 companies that raised Rs 2,200 crore a year earlier.
During April-August this year, 105 small businesses raised Rs 3,500 crore, with more than two-thirds of the offerings oversubscribed.
Ashwani Bhatia, a senior Sebi official, said this month that IPOs for small and medium-sized companies lack checks and balances. The regulator will soon come out with a proposal for stricter rules, he added.
As part of the stricter measures, the regulator in July imposed a 90% cap on share gains on a small company’s first day of trading.
The sources also said that Sebi has asked auditors and stock exchanges to be vigilant and disallow companies from going public if there is dissatisfaction with the information in the IPO documents.
According to one of the sources, Sebi is also working on 12-15 action points that would change the way smaller companies approach their IPOs.
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First publication: Sep 24, 2024 | 2:38 PM IST