Sebi pulls up merchant bankers for poor IPO due diligence

Flaying investment bankers for not carrying out due diligence on IPOs, Sebi chief UK Sinha on Wednesday asked merchant bankers to take measures which could instil confidence in investors, especially in retail investors.

"You can argue that you (merchant bankers) are not responsible for the listing price or for the general economy, but going by the data some amount of introspection is required," Sinha told an investment banking summit in Mumbai. "If we failed to do that then whatever efforts we make, we will not be able to draw retail investors into the market for that matter, even institutional investors," he said. The market regulator said today an investor, especially retail investor, is "thoroughly confused" about what he/she should expect from the primary market. "It has become a question of credibility and we have to make a very serious attempt to restore the credibility," the Sebi chief said. Stating that during the period between 2008-09 and 2011-12, there were 117 IPOs, of those 45 were/are trading at a level that was compared to the general decline of the market. "But two-thirds or 70 percent of these issues were trading not only below the issue price but also below the price even after adjusting the market decline," the Sebi chairman said. "There is something wrong if two-thirds of the issues during 2009-12 are trading below market decline levels...We noticed in some IPOs that due diligence wasn't done properly and assets mentioned were missing or weren't even mentioned at all," Sinha said. He further said in these issues, for five companies the decline was 25-50 percent (negative), in 21 it was a higher 50-75 percent. Stating call auction data, which shows that volatility on opening days have reduced considerably in the recent past, following stricter measures announced by the Sebi, Sinha said the regulator has not received any complaints for the last two-to-three issues. As another step to rein-in volatility, Sinha said "We need to reduce the timeline between issue date to listing date". On the proposed safety net to retail investors in the IPO market, he said: "The rationale behind the safety-net papers is to bring some amount of sanity. My feeling is that if there is a good pricing and the disclosures are correct, it should become a successful issue". Admitting that the general slowdown has impacted the market, Sinha said "in 2009-10 and this year, about Rs 60,000-crore worth of planned IPOs, were either withdrawn or allowed to lapse". "As much as Rs 48,000 crore worth of IPOs were allowed to lapse, while Rs 12,000 crore worth of issues were withdrawn. So this is a very challenging time where corporates are perhaps reluctant to make investments," he said. However, Sinha said the past two months have seen a couple of developments which raise hopes of renewing the upbeat sentiment. Picking holes in the due diligence processes of merchant bankers, Sinha said there were instances of them resisting the Sebi demand for showing good track record and the due diligence process. "These measures should be taken as ones that empower and not create problems or bottlenecks," he said, adding "bankers should treat us like partners keeping investors interest in mind and not as a mere regulator". Warning companies that do not follow the listing norms, the regulator said, many listed companies are either non-compliant with listing norms or no trading happens and the Sebi is looking into what to do with such companies.
"The question is what is the role of your association (merchant bankers) in helping revive the market. I would like to make a comparison of your industry with that of the traditional match-making industry in our country", Sinha said. "Can you imagine these match-makers will have a sustained business model? Maybe he can get away with a couple of deals, but after that he can't sustain the business. What does a match-maker do? He goes out and tries to sell all the good qualities of the bride, whether the bridegroom is ready or not ready. He is young or not does not matter to him," he added.