Sebi to crack down on inflation of IPO subscription, spots such 3 cases

Regulator considering policy review and enforcement action against merchant bankers, says Madhabi Puri Buch

The Securities and Exchange Board of India (Sebi) has found three cases of inflation in subscription of initial public offerings (IPOs) by companies using mule accounts or inflated applications, said chairperson of the regulator, Madhabi Puri Buch.

The regulator is looking at policy review and enforcement action against merchant bankers in such cases, said Buch. The regulator has evidence and data on such inflation in subscriptions and found it to be more common with certain merchant bankers.

“There are applications which are made in a manner that it will get rejected,” said Buch at a summit on capital formation by Association of Investment Bankers of India (AIBI) in Mumbai.

Market experts said this can be done by submitting the wrong PAN number or by making multiple applications from the same account or by not honouring the UPI payment mandate.

Optically inflating subscription figures, they said, could be done with an objective of giving an impression that the issue is very sought-after. 

“Small investors take cues from early subscription numbers. If there is high demand, they also tend to apply. The regulator should put in a system to ensure that the subscription figures are genuine and cancellation is done only in exceptional circumstances,” said an expert.

The Sebi chief said that within the first week of a listing, more than 68 per cent of non-institutional investors (NIIs) exit from the company. Further, the number stands at 43 per cent for retail investors who exit within the first week.

The price discovery of IPOs is “imperfect” but no policy change is expected on it. “Retail investors should wait until price discovery is more efficient,” she said.

On the adoption of technology, Buch added that Sebi will use artificial intelligence to screen IPO dra­ft documents to reduce the dep­endence on officials by 80 per cent.

Sebi, along with AIBI, released a compilation of common issues seen in Draft Red Herring Prosp­ectus that merchant bankers may use to speed up processing time.

Typically, the time taken for Sebi to issue final observations on an offer document is two months. Industry players said with the new-age tools, this can reduce further, which will help companies to time their IPOs better and prevent delay due to market volatility.

The Sebi chairperson clarified that the regulator will not be taking up the proposal for overhauling the delisting framework in the regulator’s next board meeting.

She also said as Sebi would take up suggestions of Industry Standard Forum on rumour verification by listed companies, the timeline is set to be extended. As per previous timeline by Sebi, top 100 listed companies had to verify, confirm or deny market rumour reports from February 1.

Additionally, the market regulator may come with the draft suggestions on Mutual Fund Lite, a comprehensive and much lower regulatory requirement for passive funds, by March this year. However, clarity on a high-risk mutual fund category may come later in the year.