Merchant bankers (MBs) are entering into murky business alliances with unregistered entities who falsely claim to be MBs themselves to dupe unsuspecting and small businesses trying to list in the competitive securities market, Moneycontrol has unearthed.
These unregistered entities are in a win-win situation: they are making a killing from both the MBs, who are looking for new clients, and the companies that are planning to list in the capital market.
According to legal experts, the MBs are authorised to take help from third parties. But for this, they have to follow the Securities and Exchange Board of India's (SEBI) guidelines on outsourcing. As per the norms, the MBs are not allowed to associate with entities that lack competence and integrity.
Market insiders, including investment bankers and legal experts, on condition of anonymity, told Moneycontrol that there are 'agents' who fraudulently portray themselves as investment bankers and make a fast buck owing to their association with registered MBs.
"They earn mostly from those companies that are looking to come out with an initial public offering [IPO]," said a market insider.
"There are several owners of small businesses who want to raise capital but are unsure how to go about the task. There are many such business people, who do not know how to ascertain whether a person is a genuine investment banker," added the insider.
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The SEBI lists registered entities, including investment bankers, on its website. But there are several business people, who are ignorant of this vital information, according to the insider.
Typically, these business people may be running enterprises that are looking to raise sums, say, between Rs 50 crore and Rs 100 crore. They are hesitant to approach established entities because of the relatively small sum that they need to raise from the capital market.
Agents, who carry business cards and have websites that identify them as MBs, approach these business people and offer to help them in listing their IPOs.
Such arrangements put the small businesses as risk since the 'agent' can vanish overnight with the 'investment banking' fee. The 'agent' can also put retail investors at risk because he/she is willing to fudge numbers and obtain fake clearances for the IPO.
According to the insider, there is a person well known in the industry for his power to arrange fake documents that give clearances and no-objection certificates. That person is confident that no one will scrutinise documents of smaller IPOs and is carrying out his nefarious activities with impunity.
A 'go-between' speaks
Moneycontrol spoke to an entity that acts as a go-between. We found that the entity's website and social-media profile pages describe this entity as an experienced investment banker and a global consultant.
The spokesperson for this entity told Moneycontrol that they earn 75 per cent of their earnings from investment banking, which includes helping companies looking to list and the rest of their income come from post-merger compliances.
The spokesperson explained their 'investment banking' business. It involves largely connecting companies who are looking to raise funds either from investors or the MBs who will help them list. The spokesperson said that they have a dedicated list of the MBs they have worked with the past. The entity's recommendation makes it easier for the company to get an appointment with the MBs. Depending on the services, the agent gets paid either a fixed one-time fee or by the hour by the company. According to the spokesperson, they get paid between Rs 5 and Rs 75 lakh, if they are helping a start-up to raise funds. They can get paid between Rs 2,500 and Rs 25,000 per man hour, if they are helping a company with compliance and financial management as part of the listing process.
While this entity gets paid a fixed fee, there are agents/fake MBs who get paid a commission by the listing aspirants. The fee is paid for connecting them to 'MBs'.
"Investment banking is a highly competitive business. So they will tap various channels to get their business [by hook or by crook]," said a veteran investment banker.
Quid pro quo
The MBs, who are hard pressed for time or who want to reward these 'agents', also direct businesses to them.
The agent/consultant Moneycontrol spoke to earns when the 'associate' the MBs direct them to companies that are looking to list but need to plug gaps in compliance requirements such as getting necessary documents or clearances, and to make the financials look more appealing. To be sure, this agent/consultant is not a registered company secretary or a chartered accountant (CA).
This arrangement is done to save time and resources, especially amid a boom in the small and medium enterprise (SME) segment.
Apurva Kanvinde, Partner at Juris Corp, said that the MBs' dependence on third-parties, including legitimate entities, have gone up in the recent past.
"There are entities whose services are used by the MBs to reduce both cost and time overruns. These could be for compliance requirements, which include services offered by legal practitioners, company secretaries, or CAs to check financial statements. These arrangements are more pronounced in the booming SME segment. However, there been many instances in the recent past of the regulator returning the draft offer document for an IPO/SME listing [asking for more documents or information]."
Outsourcing rules
The MBs are allowed to outsource some functions, if they follow the SEBI's guidelines.
Kanvinde, an expert in capital market regulations, explained, "Guidelines for outsourcing by the MBs stipulate that they have to have a risk management programme, which shall include regulatory status of the entities they associate with including their fitness and probity. Any association that do not meet these requirements can invite regulatory action. For example, any MB knowingly outsourcing its activities to an entity that is defrauding people by falsely claiming itself to be a regulated entity [such as an investment banker] may lead to stringent SEBI action."
The MB will also be pulled up by the SEBI, if these business arrangements lead to poor compliance or reporting of fraudulent financials or any such shortcomings, she added.
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