Unchecked fraud in initial public offerings (IPOs), especially listings by small and medium enterprises (SMEs) should set off loud alarm bells for retail investors, especially those hunting for multi-bagger in this segment. As many as eight out of 10 investors today have entered the markets only in 2021 and have no memory of the IPO frenzy of the 1990s—which ended in a spectacular bust that drove out retail investors for a whole decade. Alarmingly, those reckless days are back—with a vengeance.
The BSE SME IPO Index has shot up an astounding 5,000% since 2021, fuelled by a wave of SME listings. That retail investors are driving this boom, as is evident from the jump in the applicant-to-allottee ratio from 4x in FY21-22 to an astonishing 245x in FY23-24, according to a consultation paper of the Securities and Exchange Board of India (SEBI). Institutional participation is minimal, leaving unsuspecting individuals directly exposed.
Unlike the 1990s, SEBI today is alert and active, issuing repeated warnings and cracking down on a variety of fraudulent and collusive deals. But, in a disclosure-based regulatory system that depends on intermediaries to fulfil their fiduciary duties, it is easy to be a step ahead of the regulator. For retail investors, the investment motto must be: Caveat Emptor—buyer beware; being in a hurry to make quick money is not an investment strategy.
Pattern of Deceit
Let’s examine some of the brazen IPO frauds, aided and abetted by little known investment bankers that have come under SEBI’s radar.
Synoptics Technologies (listed July 2023): In early May, SEBI barred three of the promoters from the securities market for siphoning off over Rs19 crore from IPO proceeds through fake counter-parties and mis-classified expenses. It also docked the lead manager—First Overseas Capital (FOCL)—for failing to ensure proper use of proceeds. SEBI is also investigating 20 other SME IPOs managed by FOCL. (Read: Synoptics Technologies, 3 Promoters Banned for IPO Fund Diversion, SEBI Also Bars First Overseas Capital from Taking New Assignments)
Varyaa Creations (listed April 2024): Earlier this week, SEBI issued an interim order against the company on discovering that it has diverted 71% of its IPO proceeds on the very day of listing—into entities linked to its lead manager, Inventure Merchant Banking Services. Inventure has been barred from new assignments. Even more shocking: Varyaa, which had raised Rs20.10 crore through listing, had already applied for a Rs25-crore rights issue, likely to fuel a pump-and-dump operation. (Read: SEBI Cracks Down on Varyaa IPO Misuse, Freezes Promoters' Shares, Bars Inventure over Diversion of 71% of Proceeds). What was the Bombay Stock Exchange (BSE), the supposed gatekeeper, doing?
Trafiksol ITS Technologies (Trafiksol) had its IPO cancelled after SEBI discovered, via a whistle-blower complaint, that it planned to purchase expensive software from a shell company in what appeared to be a sham deal. It had also suppressed an undisclosed short-term borrowing to pay finder fees which it planned to repay from issue proceeds. The lead manager, Ekadrisht Capital Pvt Ltd, had no satisfactory explanation (Read: Trafiksol IPO: SEBI Orders Detailed Investigation, Halts Listing till Further Orders).
In 2024, SEBI banned the founders of Varanium Cloud Limited and Add-Shop E-Retail Limited from the capital market after catching serious manipulation of financial statements including fictitious sales, fraudulent announcements and related-party transactions.
These are not isolated incidents of misconduct, but a pattern of systemic abuse of the SME-IPO framework. SEBI has flagged 12 investment banks for extracting exorbitant fees (15%–71% of IPO proceeds), compared to the 2%–3% industry norm which may be the price for facilitating dubious listings.
You Have Been Warned: Repeatedly
The difference time around is that SEBI has repeatedly warned investors to be careful. In January 2024, the then SEBI chairperson Madhabi Puri Buch disclosed (SEBI Probing 3 Cases of IPO Malpractices Involving Merchant Bankers: Madhabi Puri Buch) investigations into IPO malpractices—including inflated subscription numbers and use of mule accounts (hired accounts) to rig listings. Gaming of IPO prices, through shady media reports citing grey market ‘premiums’, is an old trick. Today’s pump-and-dump ecosystem has added paid-promotions through influencers, YouTubers, and WhatsApp groups to the mix.
In his interim order against Varyaa, SEBI’s whole-time member (WTM), Ashwini Bhatia, is candid about the enormity of the fraud. “The task often feels Sisyphean—but when confronted with facts that strike at the very heart of investor protection and market integrity, SEBI’s hands are forced. Inaction is not an option,” he writes.
His order has also directed stock exchanges to act as responsible first-line regulators. This raises a troubling question: Are stock exchanges more focused on profit than their fiduciary responsibility? In the 2018–2020 broking crises, over 32 brokers defaulted on the National Stock Exchange (NSE) causing massive losses to investors. It certainly suggests that for-profit exchanges focussed on the bottom-line were reluctant to act against entities that generate frothy trading volumes.
In many cases, SEBI has been alerted to IPO fraud by whistle-blower complaints.
Rosmerta Digital Services, which had planned a Rs206-crore IPO in November 2024, has postponed its plans after SEBI began to investigate whistle-blower allegations of fraud.
Denta Water and Infra Solutions had to amend is prospectus to disclose an old cases and investigations against one promoter, although they were closed.
Smartworks Coworking Space disclosed actions by central investigation agencies against its promoters.
Sinking into Debt
Meanwhile, retail investors are losing heavily in derivatives trading as well. A SEBI study has revealed that nine out of 10 investors have incurred losses in the past three years and the aggregate losses over three years ending FY23-24 exceed Rs1.8 lakh crore.
“Consider what this would have meant for the economy if the money had gone into consumption,” says a senior regulator. Instead, we are seeing a sharp spike in requests to Moneylife Foundation, our sister entity, to help reschedule loans from individuals who have sunk into a debt spiral.
Way Forward
Today, SME IPOs are lightly regulated by stock exchanges, a deliberate move to ease access for legitimate businesses. But this has opened the floodgates to fraud. After repeated attempts to get the exchanges to be more vigilant, SEBI is reportedly planning to tighten IPO regulation and cap the offer of sale component to 20%. It is also toying with the idea of vetting IPOs itself. But history suggests caution, since SEBI vetting in the 1990s failed to prevent fraud or the rash of vanishing companies.
At that time, investor associations, which played an active role, had suggested IPO ratings—but SEBI deliberately killed the idea through flawed and half-hearted implementation. Instead of independent ratings funded/financed by investor protection funds available with all regulators, issuers were asked to pay for ratings themselves—making a mockery of the entire exercise. It was clear that rating agencies would primarily vet disclosures and not issue pricing. This was needlessly pilloried to dub the ratings as useless. Today, it is clear that better scrutiny of disclosures is an important check.
Now, with profit-driven exchanges as gatekeepers, there’s a built-in conflict of interest between investor protection and trading revenue. The IPO fraud epidemic underscores one reality: SEBI alone cannot protect you. Retail investors must invest time to read, research and think independently. There are no shortcuts. Until oversight improves and systemic incentives change, your best defence is scepticism and self-education. You have been warned.
Comments
adityag
2 months ago
Agreed.
Advisors should warn investors, not SEBI. SEBI has zero credibility at this point. It only warns AFTER something has happened.
SEBI needs to be scrapped out completely. It has zero spine, zero credibility, totally incompetent and a waste of taxpayer money. It will never happen because nobody has the balls to admit that it's been a failed regulator. Once the seed of regulation has been planted, it's very difficult to root it out. It's grown into a massive infested tree. I can only emphatise with previous incompetent chairpersons that they couldn't tame institutional rot within SEBI. It's beyond repair at this point. The new chairperson will be swallowed soon.
Unpopular opinion and my 2 cents: all laws should be under a single umbrella and enforcement entity: the police.
Investors have to hire good fiduciaries to protect them because not all of the investors are capable of protecting on their own. Period. If they don't, it's on them, not SEBI and certainly not the errant entities who have swindled them. At the end of the day, the buck stops with the consumers. Reality bites. Completely agree with you on this.
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Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
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Advisors should warn investors, not SEBI. SEBI has zero credibility at this point. It only warns AFTER something has happened.
SEBI needs to be scrapped out completely. It has zero spine, zero credibility, totally incompetent and a waste of taxpayer money. It will never happen because nobody has the balls to admit that it's been a failed regulator. Once the seed of regulation has been planted, it's very difficult to root it out. It's grown into a massive infested tree. I can only emphatise with previous incompetent chairpersons that they couldn't tame institutional rot within SEBI. It's beyond repair at this point. The new chairperson will be swallowed soon.
Unpopular opinion and my 2 cents: all laws should be under a single umbrella and enforcement entity: the police.
Investors have to hire good fiduciaries to protect them because not all of the investors are capable of protecting on their own. Period. If they don't, it's on them, not SEBI and certainly not the errant entities who have swindled them. At the end of the day, the buck stops with the consumers. Reality bites. Completely agree with you on this.