The Securities and Exchange Board of India (SEBI) may turn on the heat on investment bankers, with more frequent inspections of past deals, said two people in the know.
All back-up documents for deals, including initial public offerings and qualified institutional placements, may now be required to be uploaded on a cloud-based repository maintained by exchanges 10-15 days after the draft prospectus is filed. These are essentially documents that support claims made in the offer documents about the capital structure, promoter disclosures, objects of the issue and company’s order books, among other things.
This will allow the regulator to carry out inspections more often — may be after one or two deals — rather than wait out several months. The regulator may also refuse to greenlight an offer document if the back-up documents are not as per its expectations.
Also read: Front-running charge: SEBI crackdown on Quant MF can ‘undermine investors trust’
At present, the law firms send a soft copy of the back-up documents to the merchant bankers only after the deal is completed. This is accessed by the regulator only during inspections, which are done every year or two at bankers’ premises. “The new system will enable the regulator to carry out its inspections on a more ongoing basis. The matter is under discussion and the details are yet to be worked out,” said a banker.
‘Bigger responsibility’
“The timelines are being moved up and the responsibility of the bankers and lawyers will increase. It shows that the regulator is serious about maintaining certain standards of due diligence,” added a lawyer.
An email sent to SEBI did not immediately get a response.
Lead managers have to certify that the disclosures made in the offer document are in conformity with SEBI regulations. The regulator, however, reserves the right to take up, at any point of time, any irregularities or lapses in the offer document with the managers. The filing of offer documents does not absolve the company from any liabilities under section 34 of the Companies Act, 2013.
Inspections try to ascertain if the rules governing merchant banking were adhered to and adequate due diligence was done on past deals, especially with regard to issue objectives, capital structure and litigation.
Also read: SEBI rolls back diktat to end special rights before IPO
What used to be an ad-hoc process, has now become far more stringent and streamlined in the past two years, with several banks coming under the regulatory glare, said industry officials.
Inspections can result in warning letters being issued to bankers, penalties or even show-cause notices. In case of gross negligence or wilful misconduct, the regulator can cancel the registration certificate of the investment banks.
In March, ICICI Securities, for instance, received an administrative warning related to the inspection of its books and records pertaining to its merchant banking activities.