As part of its attempts to address some of the concerns around the IPO process especially in the context of the role of merchant bankers, the Securities and Exchange Board of India (SEBI) will soon unveil tighter regulations for bankers, said sources aware of the development.
People familiar with the matter say that SEBI will soon release the new set of rules on basis of the feedback it has received from the market.
In the recent board meeting of SEBI, held on September 30, a few changes were announced in the merchant banking regulations but those were more directed towards ease of doing business instead of structural changes in the overall regulatory framework governing investment bankers.
One of the concerns that the capital markets watchdog is looking to plug is related to conflict of interest especially when directors or key management personnel (KMPs) of the merchant banking entity take an exposure in the companies whose public issues they are managing.
This assumes significance as the regulator has found instances of such entities holding shares of the issuer company even as their firm is the lead manager to the company’s initial public offer (IPO).
“It is clearly a conflict of interest situation and hence SEBI is trying to plug it. Many in the industry are aware of it and proper feedback was given to the regulator through PMAC meetings as well,” said a person familiar with the matter.
PMAC refers to the Primary Market Advisory Committee, whose mandate, among other things, includes advising SEBI on “matters relating to regulation of intermediaries for ensuring investor protection in the primary market”.
“While there have been a few mainboard IPOs in which KMPs of the merchant bank were seen taking a stake in the company they were lead managing as bankers, it is more prevalent in the SME IPO arena,” said the person quoted above. He did not wish to be named as the deliberations are still ongoing.
Incidentally, Moneycontrol has earlier reported on the nexus between certain merchant bankers and so-called ‘IPO advisory firms’ in the SME IPO segment and how the collusion helps companies get unusually high levels of subscription in the public issue.
In August, SEBI had issued a discussion paper proposing changes to the SEBI (Merchant Bankers) Regulations, 1992. Among other things, it proposed capping the exposure of directors and KMPs of merchant banking firms in the companies that manage as lead managers.
“It is proposed that merchant banker shall not lead manage any issue or be associated with any permitted activity under SEBI Regulations, if its directors or key personnel or compliance officer or their relative(s), individually or in aggregate holds, more than 0.1% of the issuer's paid up share capital or nominal value of Rs. 10,00,000, whichever is lower,” stated the SEBI discussion paper.
Also Read: More than 100 merchant bankers could lose SEBI licence
The current regulatory framework for merchant bankers is silent on this issue and hence there have been instances of KMPs of merchant banking firms taking a sizeable stake in the companies they were managing as lead managers and thereby creating a conflict of interest situation.
The regulator, however, has proposed that any stake held through mutual funds would be allowed and not viewed as a conflict of interest scenario.
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