The Securities and Exchange Board of India (SEBI) is investigating the actions of three to four "[IPO] advisory firms" that operate in the small and medium business (SME) sector. The statutory regulatory agency launched the investigation after receiving reports that unregistered organizations are "helping" companies generate enormous replies to their IPOs while also "assuring" them of windfall listing advantages.

What is wrong?

According to persons acquainted with the matter, the capital market regulator is investigating the acts of three to four consulting companies located in Mumbai or Ahmedabad that have been active in the SME IPO space.

The SME IPO segment has made headlines for public issues receiving abnormally high levels of subscription - many were subscribed hundreds of times - followed by a similar degree of listing profits.

"The SME IPO segment has seen the entry of many such IPO advisory firms that operate outside the purview of Sebi and are not registered with the regulator." As a result, these firms are not subject to any norms or regulations," said one individual familiar with the investigation.

"Three-fourths of these enterprises are headquartered in Mumbai or Ahmedabad. They have gained a significant market share and assist SMEs with their IPOs by using their network of brokers and [high networth individual] HNI investors. They are essentially doing commercial banking activities without obtaining a merchant banking licence from Sebi. They are functioning outside of any regulatory constraints," the individual added on the condition of anonymity. He commented on how these dodgy firms operate. They contact SMEs that are preparing IPOs and promise them a large subscription, which will lead to a successful listing.

These businesses employ the assistance of a trustworthy network of friendly brokers and investors to deliver the items for them. The firms also have the assistance of a network of institutional investors, who act as anchor investors in such flotations.

Significantly, the businesses rely on "friendly" merchant bankers to assist them with all regulatory compliances. "The Sebi-registered merchant banker functions as a rubber stamp because an IPO requires a registered banker. The advising business conducts basic merchant banking activities without needing to comply with SEBI regulations. A merchant banker stated that Sebi laws prohibit investment bankers from outsourcing their core merchant banking duties.

'Oversubscription' Raises Suspicions

The Sebi examination comes after the SME IPO category received a lot of attention due to huge oversubscription and listing profits.

Furthermore, as per the Prime Database, HOAC Foods India's Rs 5.10 crore IPO, which was issued in May, was subscribed 1,963 times. It was soon followed by Magenta Lifecare's Rs 6.64 crore IPO, which received 1,002.56 subscriptions.

This year, more than a half-dozen more SME IPOs have received at least 600 subscriptions. Eight of the top ten SME IPOs with the highest oversubscription rate were launched this year. In March, Sebi chairwoman Madhabi Puri Buch issued a warning about the SME IPO category.

"We see signs of manipulation in the SME (small and medium enterprises) segment..." We can observe some trends. However, according to our regulations, we need to take some time to build the full case in a strong manner," Buch stated.

According to Prime Database, SME IPOs set a record this year for raising the most money from the capital market. Between January and July, 144 SMEs raised Rs 4,800 crore through initial public offerings (IPOs). Last year, 182 SME IPOs raised Rs 4,686 crore.