Regulator wants due diligence norms for merchant bankers

Umbrella body of investment bankers asked to frame guidelines; standard norms for public issues likely by Sept.

Market regulator Securities and Exchange Board of India (Sebi) wants to put in place standard guidelines for the due diligence process carried out by merchant bankers for public issues. The move is aimed to protect investors and enhance the quality of companies coming to the capital markets.

Sebi has asked the Association of Merchant Bankers of India (Ambi), the umbrella body of investment bankers, to frame the due diligence guidelines for its members, according to two persons familiar with the matter, who spoke on the condition of anonymity. Ambi is expected to come up with these guidelines by September.
 

STANDARD DUE DILIGENCE NORMS

• Guidelines to involve verification of issuer eligibility, corporate records, the issue’s objectives, among other things
• Specific instructions on how to conduct due diligence of company management, promoters and group companies
• Move aimed at protecting investors’ interest and enhancing the quality of companies coming to the market

“As of now, there is no standard set of due diligence guidelines for merchant bankers. The idea is to have uniformity and greater clarity,” said one of the persons cited earlier. “The guidelines will help merchant bankers while conducting the due diligence and also serve as a reference point for Sebi while conducting the inspection of merchant bankers.”

Sebi’s code of conduct for merchant bankers requires a conduct of due diligence of a company while bringing it to the capital market. However, the regulatory framework does not specifically define what constitutes due diligence.

In a due diligence process, a merchant banker collects material information about the issuer company which needs to be disclosed in the offer document.

Ambi’s due diligence guidelines for its members are likely to involve the verification of things like the eligibility of the issuer, corporate records, objectives of the issue, latest information related to the issuer’s industry, various business operations of the issuer, etc.

The guidelines may also include detailed instructions on how to conduct due diligence of the company management, promoters, group companies, financial information, and litigation involving the issuer and its subsidiaries.

Sebi’s latest move for standard due diligence guidelines comes as it is negotiating with merchant bankers on how to disclose their track record at managing issues. The regulator wants the bankers to list the share price movement of all issues they managed in a specified period. They need to disclose the issue price and the price as on a particular date to ascertain the returns generated.

The regulator’s concern stems from the fact that investors are making losses in a majority of the public issues that have come in the last few years. For example, of the 144 initial public offerings (IPOs) that have come since January 2008, 87 are trading below their issue price, according to BS Research Bureau data.