SEBI bans merchant banker Gretex Corporate Services from taking new Assignments for 21 days

SEBI bans merchant banker Gretex Corporate Services from taking new Assignments for 21 days

Market regulator Securities and Exchange Board of India (SEBI) has barred Gretex Corporate Services Limited, a SEBI-registered merchant banker, from taking up any new assignments, contracts, or launching new schemes for a period of 21 days. The enforcement action follows findings of multiple regulatory violations during an inspection covering the period from April 2021 to January 2023.

SEBI order stated, “The Noticee is prohibited from taking up any new assignment or contract or launching a new scheme, in so far as maybe applicable to it as a SEBI Registered Merchant Banker, for a period of Twenty-One (21) days”.

The market regulator’s inspection evaluated Gretex’s compliance with due diligence obligations and post-issue responsibilities under the SEBI (Merchant Bankers) Regulations, 1992. The inspection revealed that the firm had breached key regulatory provisions, including minimum capital adequacy requirements.

According to SEBI’s order, Gretex failed to maintain the mandatory minimum net worth of Rs 5 crore during the financial year 2019–20.

SEBI order stated, "Financial soundness is the bedrock of investor confidence in the securities market. The Merchant Banker’s ability to underwrite issues, honor commitments, and safeguard investor interest depends squarely on its capital adequacy. A lapse in maintaining the minimum net worth directly impacts the regulatory protection to investors and issuers regarding the stability of intermediaries operating under its framework”. The company attributed this shortfall to temporary adverse market conditions and claimed it restored compliance within six months.

However, SEBI observed that maintaining financial adequacy is a continuous obligation and considered the lapse a substantive violation rather than a technical one.

The regulator also found lapses in Gretex’s due diligence during the initial public offering (IPO) of Jayant Infratech Limited. The deficiencies related particularly to the verification of the office property for which nearly 40 percent of the IPO proceeds were earmarked as a security deposit. SEBI noted that the property was still under construction at the time, a fact inadequately disclosed to investors.

SEBI order said a diligent merchant banker was expected to ascertain, through independent verification, whether the property was complete or under construction at the time of filing, and to ensure that the inherent risks of delay, non-possession, or extended timelines were transparently reflected under the ‘Objects of the Issue’ and ‘Risk Factors’ sections of the prospectus.  SEBI order further said, “A merchant banker’s duty is not discharged by mechanical compliance. The very purpose of due diligence is to convert representations into verified facts”.

In addition, inconsistencies in financial data between the offer document and company records were cited as further evidence of insufficient verification processes.

While Gretex submitted that the discrepancies were minor and that corrective measures had been implemented, SEBI concluded that the failures reflected weak due diligence standards inconsistent with the responsibilities of a registered merchant banker.

Taking into account the restoration of net worth and subsequent compliance improvements, SEBI opted for a limited 21-day prohibition rather than a harsher sanction.