SEBI Launches Investigation Into More Than 12 Domestic Merchant Banks Over SME IPO Due Diligence

The Securities and Exchange Board of India—the Indian markets regulator—has initiated a probe into more than 12 merchant banks to investigate the alleged concerns in due diligence processes for initial public offerings of small and medium enterprises, according to people familiar with the matter.

SME IPO regulations are relatively lenient compared to those for mainboard listings. SEBI is now exploring whether these regulations could be tightened further, potentially requiring more disclosures, audits, and other checks to ensure compliance, the people cited above told NDTV Profit on Tuesday.

The development comes in the wake of earlier statements from SEBI Chairperson Madhabi Puri Buch, who in March warned about the "froth" in small and mid-cap stocks, describing it as "irrational exuberance" in the market.

Buch had also spoken on potential price manipulation in the SME segment and urged investors to exercise caution when investing in this high-risk area. While valuations in small and mid-cap companies have surged in recent months, certain areas in the market resemble bubbles, she highlighted.

In a related development, SEBI's whole-time member, Ashwani Bhatia, recently discussed the upcoming consultation paper on the SME listing process. Speaking at the Financing 3.0 Summit, Bhatia indicated that the paper will propose regulatory adjustments affecting exchanges, merchant bankers, and other entities involved in SME listings.

The regulator aims to make the listing process more robust while keeping investor interests in mind.