Merchant bankers may become quasi regulators

Merchant bankers might well end-up becoming quasi-regulators with limited powers to regulate other intermediaries if the thinking within the Securities and Exchange Board of India (Sebi) is any indication.

A sub-committee of the Sebi umbrella committee, set up to look into book-built issues, has suggested that merchant bankers, which manage book running and are main advisors to the issuers, should be made responsible for all other intermediaries involved in the issue - such as banks, registrars and so on.

Merchant banking sources said at present each market intermediary has its own responsibility and ultimately reports to the Sebi. Putting the onus on investment bankers was just like identifying a scapegoat for any problems which could crop up later.

This has come out as a direct result of the Oil and Natural Gas Corporation sale of shares where there were errors at the registrars' end while crediting allotted shares, leading to confusion as well as loss of investors' money.

In the absence of specific regulation or direction, there was nobody on whom the responsibility for the lapses could be fixed and it was viewed as a system failure. Sebi chairman G N Bajpai said that the committee was discussing issues of scaleability to deal with huge issue sizes.

However, according to the committee members, if merchant bankers, which are the main intermediary since the process of an issuance starts with the appointment of a lead book runner, could be held responsible for the functioning of everyone down the chain, then it would simplify matters.

Incidentally, the committee is also looking into allotment of shares to qualified institutional buyers (QIBs) through discretionary quota, where there is no upfront payment of money.

Overseas institutional buyers are generally perceived to put in their bids under the guidance of merchant bankers and it is felt that QIB bids are manipulated to inflate the book.

While discretionary allotments are subjective in nature, some bankers with their own internal guidelines try to iron out anomalies so that one segment does not hog a major part of the allotment.

"We take a discreet call to diversify holding," said the chief compliance officer of a leading investment bank.