India’s market regulator, the Securities and Exchange Board (SEBI), has launched an investigation into six domestic investment banks over their handling of initial public offerings (IPOs) by small businesses.

What Happened: The investigations began earlier this year, with a focus on the fees these banks have been charging, Reuters reported, citing sources. The report revealed that these banks have been levying fees equivalent to 15% of the funds raised through IPOs, a significant deviation from the standard 1%-3% practice in India.

Initial findings from SEBI indicate that high fees are being imposed to ensure these offerings are oversubscribed. The regulator is also investigating potential collusion between banks and certain investors who may be violating rules to submit large bids.

These investigations are a part of SEBI’s initiative to warn investors about the potential risks of investing in certain small businesses and to enforce stricter regulations for such IPOs.

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In India, smaller businesses with annual turnovers between ₹5 crore and ₹250 crore can list on designated sections of the BSE and National Stock Exchange of India (NSE). These listings come with fewer disclosure requirements, and the offerings are vetted by the exchanges rather than undergoing the extensive clearance process mandated by SEBI for larger IPOs.

In the last fiscal year ending in March, 205 small firms raised ₹6,000 crore, a significant increase from the 125 companies that raised ₹2,200 crore the previous year, the report said. During the April-August period of this year, 105 small firms secured ₹3,500 crore, with over two-thirds of these offerings being oversubscribed.

SEBI has now reportedly instructed auditors and exchanges to remain vigilant and prevent companies from listing if there are concerns about the accuracy of the information provided in their IPO documents. It is also developing 12 to 15 action points aimed at refining the IPO process for smaller firms.

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