SEBI's IPO Rigging Investigation Fuels Fears Of A Stock Market Scam

It is early to say whether a scam has been perpetrated in the Indian stock markets, at least of the scale that we have seen before. But it is evident that many financial market players have played fast and loose with rules and have been already hauled up for it.

In a booming market investors and savers have bought into financial products of all kinds to find better returns. These range from non-bank finance companies disbursing gold loans, banks going all guns out on opening fresh savers accounts to now, investment banks helping small companies raise funds from the stock market.

Reuters has reported that it has found that at least half a dozen small investment banks have charged companies fees equivalent to 15% of funds raised through their IPOs. The problem is that the fee is much higher than the standard practice of 1-3% in India.

The modus operandi becomes clear if we work backwards. Companies and promoters have evidently paid a substantial sum to investment banks to coordinate the whole process, including bringing in the big subscriptions from high-net-worth entities and other investors and then raking in the retail subscription that follows.

SEBI has already been warning investors about the dangers of investing in some small businesses as well as plans for tighter rules for such IPOs. SMEs are companies smaller than Rs 250 crore in turnover and can be listed on the Bombay Stock Exchange and the National Stock Exchange. They need fewer disclosure requirements and the offerings are vetted by the exchanges and not the SEBI, which is focused on larger or what they call “mainboard issues”.

Reuters said that SEBI's preliminary findings suggest that the high fees are being charged to ensure the offerings are oversubscribed through huge bids. "These bids are not genuine and are cancelled at the time of allotment but the high subscriptions end up attracting more bids and investments from other investors," a source told Reuters.

In the last fiscal year that ended in March, 205 small firms raised Rs 6,000 crore, a sharp jump from the 125 companies that raised Rs 2,200 crore a year earlier, according to PRIME Database, a capital markets data provider.

Rigging prices or IPOs, in this case by cornering floating stock, is a methodology that seems as old as the market itself. Interestingly, it has returned in full glory, if that is what has happened here.

The worry is that if there is effective rigging happening in this segment of the market, could there be malfeasance in other segments of the stock market? Well we don’t know yet and can hope that is not the case. But, all bull markets usually see such signs before they start fizzling out if not crashing.

Indian markets have considerable genuine flows of capital both from domestic and international investors and that is keeping the markets up and away. But mini scams like this which expose chinks in the armour so to speak can shake confidence in the overall system and lead to questions elsewhere. Hopefully, the SEBI will act quickly and nail the offenders and make public the nature of the mischief that investment bankers have been upto.