SME IPO merchant bankers under SEBI scanner for malpractices, violations of rules

The SEBI action assumes significance as the SME IPO segment is seeing a lot of action in the last few years. Last year was a record one in terms of both number of issues (240) and the cumulative fund raising (Rs 8,761 crore), as per data from Prime Database.

The Securities and Exchange Board of India (SEBI) is probing the conduct of some of the largest merchant bankers operating in the SME IPO segment, say sources.

While the recent past has seen the capital market regulator act against a couple of investment banking entities for alleged malpractices including abetting in siphoning of funds and violations of the merchant banking regulations, people familiar with the development say that orders are expected in the near future.

“SEBI has observed various unhealthy practices being done by some of the merchant bankers in the SME segment and is in the process of taking regulatory and enforcement action against them,” said a person familiar with the development.

“While SEBI has already acted against some entities, there is a bunch of actions in the pipeline. SEBI is of the view that it needs to act and act fast as first-level regulators are not showing a lot of initiative,” added the source.

On Wednesday, SEBI passed an interim order in the matter of Vaarya Creations, a listed SME entity, and among other directions, ordered Inventure Merchant Banking Services – that managed the IPO -- not to take new merchant banking assignment until further orders.

In another order, SEBI acted against First Overseas Capital, after an enquiry revealed that the merchant banker did not undertake independent due diligence in the case of three SME IPOs that it handled. The merchant banker was directed not to take any fresh assignment until further notice.

The SEBI action assumes significance as the SME IPO segment is seeing a lot of action in the last few years. Last year was a record one in terms of both number of issues (240) and the cumulative fund raising (Rs 8,761 crore), as per data from Prime Database.

In the current calendar year till April, 59 SMEs have launched their IPOs to raise a total of Rs 2,455 crore.

Meanwhile, in a recent interaction with Moneycontrol, SEBI chairman Tuhin Kanta Pandey had highlighted the fact that the role of a merchant banker is important in a SME IPO especially since the regulator chose “a relatively lighter touch regulation” for the segment to attract and promote SME listings.

“I think there the role of merchant bankers is also important because to some extent we find that the cost of raising fund is just a bit much higher,” he had said.

Incidentally, the SEBI order in the matter of Vaarya Creations highlighted the finding that showed that 71% of the IPO fund was utilised just for merchant banking and issue related expenses.

An email sent to SEBI remained unanswered till the time of publishing this story. The story will be updated if SEBI responds.