The Securities and Exchange Board of India (Sebi) is probing the activities of three to four initial public offering “[IPO] advisory firms” that are active in the small and medium enterprise (SME) segment.
The regulator initiated the probe after it received complaints that unregistered entities are “helping” companies gather massive responses to the IPOs and also “assuring” them of windfall listing gains.
What’s the wrongdoing?
According to people familiar with the development, the capital market regulator is looking into the actions of three-four advisory firms that are either based in Mumbai or Ahmedabad and have been quite active in the SME IPO segment.
The SME IPO segment has been in the news for public issues getting unusually high levels of subscription – many got subscribed multiple of hundred times – followed by an equally high level of listing gains.
“The SME IPO segment has seen the entry of many such IPO advisory firms that operate outside the purview of Sebi as they are not registered with the regulator. Consequently, these companies are not bound by any rules or regulations,” said a person, who is privy to the probe.
“Three-fours such firms are based either in Mumbai or Ahmedabad. They have captured huge market share and help SMEs with their IPOs by using their network of brokers and [high net-worth individual] HNI investors. They are basically doing merchant banking activity but without getting a merchant banking licence from Sebi. They are operating without any regulatory restrictions,” the person said on condition of anonymity.
The modus operandi
He weighed in on these shady companies’ modus operandi.
They approach SMEs that are planning IPOs and assure them a massive subscription, which, in turn, will lead to a strong listing.
These firms enlist the help of a trusted network of friendly brokers and investors to deliver the goods for them.
The companies also enjoy the support of a network of institutional investors, who come in as anchor investors for such flotations.
Significantly, the firms rely upon “friendly” merchant bankers who help them with all the regulatory compliances.
“The Sebi-registered merchant banker is playing the role of a rubber stamp as you need a registered banker for an IPO. The advisory firm is doing core merchant banking activities but without having to comply with Sebi norms. Sebi regulations stipulate that investment bankers cannot outsource the core merchant banking activities,” said an investment banker.
‘Oversubscription’ raises suspicion
The Sebi probe comes as the SME IPO segment draws attention owing to massive oversubscription and listing gains.
Data from Prime Database shows the Rs 5.10 crore IPO of HOAC Foods India, which was launched in May, was subscribed a whopping 1,963 times.
Soon, it was followed by the Rs 6.64 crore IPO of Magenta Lifecare, which got subscribed 1,003 times.
There have been more than half a dozen other SME IPOs this year that got subscribed at least 600 times or more.
Of the top 10 SME IPOs on the basis of oversubscription, eight were launched this year.
In March, Sebi chairperson Madhabi Puri Buch raised the alarm on the SME IPO segment.
“We do see signs of manipulation in the SME (small and medium enterprises) segment… We are able to see certain patterns. However, as per our regulation, the way that we need to construct the entire case, we do need to take some time to do that in a robust manner,” Buch had said.
Data from Prime Database shows that SME IPOs created a record this year by raising maximum money from the capital market.
Altogether, 144 SMES launched their IPOs between January and July, raising Rs 4,800 crore.
Last year, 182 SME IPOs collected Rs 4,686 crore.
