Investment bankers will soon have to follow a uniform rule book while conducting due diligence of companies that plan to tap public funds.
The Association of Investment Bankers of India (AIBI), the industry body of investment bankers in the country, has already finalised a due diligence manual and given it to market regulator Securities and Exchange Board of India (Sebi) for vetting, according to sources familiar with the development.
The framework is designed to help investment bankers make meaningful disclosures while drafting offer documents. It will also be a reference point for Sebi officials while probing investment bankers. Proper disclosures will help investors take informed investment decisions.
In the past, investment bankers have faced the regulator’s wrath for not making proper disclosures and pricing public offerings expensively. The Sebi chairman has also demanded the use of simple language in the prospectus of public issues.
According to AIBI board members, the manual lays a lot of emphasis on verification of issuer company documents to ensure credibility.
The framework requires merchant bankers to undertake a lot of independent and physical verification of documents provided by the issuer. This includes detailed discussions with the management to understand the company’s business activities and risks. The framework also envisages the use of assistants from external parties, such as legal counsels and auditors.
“The framework is aimed at avoiding situations (as happened last year), where merchant bankers were charged with several irregularities,” said a person familiar with the development, on condition of anonymity. “The onus will be on each and every player in bringing out quality issues.”
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In December, Sebi had cracked down on promoters and key officials of issuer firms as well as merchant bankers for alleged involvement in several irregularities in seven initial public offerings (IPOs).
Adherence to the due diligence manual, however, will not be mandatory but would largely be self-regulatory in nature.
At present, of the 170-odd merchant bankers registered with Sebi, only 59 are members of AIBI. But according to AIBI insiders, investment banks active in the market have already joined the association.
New identify
The industry body for investment bankers recently underwent an identity change with a new name and logo. It was earlier known as the Association of Merchant Bankers of India. Under its new avatar, AIBI plans to actively involve itself with the regulator to develop and evolve industry standards. It also plans to participate in the overhaul of the IPO process, currently underway at Sebi.