Investment bankers have urged the Securities and Exchange Board of India (Sebi) to dilute its proposed merchant banker rules flagging compliance concerns, people with direct knowledge of the matter have told Moneycontrol.
In a consultation paper floated on August 28, the regulator has proposed a slew of changes to merchant banking rules to avoid conflict of interest situations and ensure fair play in the capital market.
One of the proposals bars merchant bankers from taking mandates of companies where the banker’s directors or their relatives own shares worth Rs 10 lakh or a 0.1 percent stake, whichever is lower.
Sebi defines relatives as in the Income Tax Act, which has sparked concerns among the bankers as the definition is very wide and covers a range of connections.
The bankers’ concerns are threefold. First, they feel the condition could force them out of many mandates. Second, it is difficult to monitor compliance since the bankers must track a wide array of relatives. Third, the threshold specified is too low and should at least be Rs 1 crore or 1 percent equity, whichever is lower, the sources said.
Instead, bankers, in their representation, have suggested Sebi should use the definition of relative as specified in Sebi’s insider trading rules which limits the connections only to direct relatives, said the people cited above.
An email seeking Sebi’s comments remained unanswered.
‘Compliance difficult’
Two investment bankers aware of the industry’s representations confirmed the development.
“Several merchant banks had shared their inputs on the matter to AIBI (the Association of Investment Bankers of India) and the industry body has sent a compilation of these inputs to the regulator,” one of the bankers said on condition of anonymity.
The banker said the consensus was that the proposed change in the disclosure rules would be difficult to comply with, given the wide definition of relatives under the I-T act and could affect business.
According to the I-T Act, about 15 kinds of connections come under the purview of relatives. It not only includes immediate family but also extended relations. It covers siblings of the spouse and their partners. It also covers siblings of the parents and even third-generation connections including grandfather- and grandmother-in-law.
Sebi’s insider-trading rules define “immediate relative” as a spouse, parents, siblings, children and anyone else who is financially dependent on the person.
“The Income Tax Act definition of relative is too exhaustive and it is meant for a different purpose: to curb tax evasion. The same yardstick cannot be applied by Sebi to tackle conflict of interest issues,” said another person. “Since Sebi’s insider trading rules are fine covering only immediate relatives, the same should be applied to other market rules including the new merchant banking norms,” he added.
Another key challenge is ensuring compliance with these rules. “It is difficult to constantly track who in the extended family owns what shares. Also, what happens if the family was in compliance of the rule when the mandate was being taken up but during the filing process some relative buys shares more than Rs 10 lakh,” the banker said.
IPOs and pricing
In the consultation paper, Sebi has come out with several measures to tighten merchant banking rules. The move is aimed at improving the quality of the initial public offerings (IPOs) and their pricing.
In the recent past, the regulator has received numerous complaints from investors, especially those who subscribed to the IPOs of small and medium enterprises. Investors flagged steep prices and aggressive promotions such as inflating the demand schedule for the offering.
“It has been observed in the past that bankers bought stakes in a pre-IPO company and then took up the mandate for managing the IPO. These offerings were priced excessively and, in some cases, bankers even used out-of-book approaches to promote the IPOs,” one of the persons cited above said.
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