In this photo taken on Nov. 17, 2010, Indian Rupee notes of different denomination lie inside the cash counter of a retail shop in Mumbai, India.Rajanish Kakade
India's stock market regulator has issued a wake up call to investment banks operating in the country by banning some prominent banks from new listings and warning that it will overhaul the rules governing initial public offerings.
The tough response to irregularities surrounding recent listings is unusual for a slow-moving regulator that has in the past taken years to act on investigations.
UK Sinha, the chairman of the Securities and Exchange Board of India, said the barring of seven small companies from capital raising activities this week had triggered a review of the "entire" IPO process to simplify future listings.
He told the Financial Times that the Mumbai-based regulator had evidence of a sharp deterioration in capital raising activities over the past six months in the world's fastest growing large economy after China.
"People are becoming very audacious and they are taking measures which are in complete conflict with the Sebi regulations," Mr. Sinha warned. "So we set up a crack team and they did a very fast but co-ordinated job [of finding out what was wrong]"
Sebi has suspended several investment banks from new share sales. These include PNB Investments, the investment banking arm of India's second-largest state-owned lender Punjab National Bank, D&A Financial, Artherstone Capital and Almondz Global Securities.
The investigation into listings over the past six months uncovered the diversion of IPO proceeds, inadequate documentation and trading violations on the day of listing among seven companies. Sebi said some companies and their financiers had a tacit understanding to defraud investors and "siphon off" funds.
Among the seven companies that Sebi banned from fresh capital raising activities were PG Electroplast, a Noida-based consumer electronics company, Brooks Laboratories, a pharmaceutical group, and Onelife Capital Advisors, a Mumbai-based financial services company.
Mr. Sinha said he was sending a signal that the regulator could "crack the whip very fast" to restore confidence in the equity market.
"The important thing is that we have also gone after the intermediaries, that is the merchant bankers," he said.
Sebi wants to cut the time span of an IPO and simplify procedures to encourage more participation by retail investors.
"The IPO process has undergone some minor changes over last three to four years, but by and large the structure is the same as eight to 10 years back," Mr. Sinha said.
"One of the important things we have in mind is to reduce the time lag between closure of an issue and actual listing."
Brokers said they expected this to be the start of tougher action by the regulator. Many were struck by the unusual speed with which Sebi had acted to censure irregular listings.
Deven Choksey, managing director at KR Choksey stockbrokers in Mumbai, said the system needed an overhaul to include safety nets put in place to protect investors.
"I think [Sebi]had to take this decision because it was long overdue. They have been finding such kind of notorious behaviour for long time now," he said.
"They don't have mechanism to prevent it, they only have mechanism to [deal with malfeasance in a]postmortem exercise."
Fraudulent listings have embarrassed India's equity markets in the past and cheated naive investors. Lax regulatory standards allowed serious market abuses in the 1990s, punishing investors who had put money into initial public offerings.
Two years ago, the Indian government launched prosecutions against more than 100 "vanishing companies" that listed on the country's stock exchanges in the 1990s and then disappeared after failing to meet regulatory filing requirements.
Then Sebi barred 100 companies and 378 directors from using the capital markets for five years.
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