SEBI's proposed steps are aimed at safeguarding the investors' interest and ring-fencing the IPO market from possible over-pricing of the public offers through a nexus between the company promoters and merchant bankers
New Delhi: Market regulator Securities and Exchange Board of India (SEBI) may soon ask companies and merchant bankers to limit any business transactions amongst them to bare minimum and to provide investors with a detailed analysis of how they discover the initial public offering (IPO) price range, reports PTI.
The proposed steps are aimed at safeguarding the investors' interest and ring-fencing the IPO market from possible over-pricing of the public offers through a nexus between the company promoters and merchant bankers, a senior official said.
SEBI has already made it mandatory for the merchant bankers to provide a track-record of the offers managed by them, while it has also announced steps like stricter eligibility criteria for tapping the capital markets through IPOs.
Besides, a proposal is already underway to ask the promoters and merchant bankers to provide a capital protection guarantee for certain period to part of shares allotted to retail investors in IPOs through a mandatory 'safety net' provision.
The SEBI is considering further IPO reforms as part of its efforts to revive this segment as a preferred investment route for the retail investors, which used to be the case till a few years ago, but the situation has changed after a dismal post-IPO performance of many companies in recent years, the regulatory official said.
While investigating certain cases of IPO-related irregularities, SEBI came across instances of some promoters and merchant bankers together manipulating the public offers, as well as the post-listing share trades.
In some cases, the IPOs were priced way above the fundamental value of the shares, but the companies managed to sell the shares with support from 'friendly' entities and later gave them an opportunity to exit by keeping the share price inflated for some time after listing. However, the shares came crashing down afterwards, leaving genuine investors in lurch and with heavy losses, the official said.
With an aim to check such unfair and fraudulent trade practices, SEBI is also considering checks against the companies and merchant bankers from IPO market if they are found to have had any direct or indirect business dealings beyond a permissible limit.
The companies aspiring to come out with IPOs would also need to make a full disclosure of all their related party transactions and the merchant bankers managing the deal would have to conduct a strict due diligence on such transactions, while certifying the extent to which such transactions contribute to the overall business profit of the issuer.
This follows instances of 'related party transactions' helping boost the profits of the companies, as profitability is one of the key criteria for the entities to be eligible for IPOs.
Among various options, it was considered to completely disregard any profits coming from such transactions, or cap them at 20%, for considering the profitability eligibility criteria of the IPO-bound companies.
However, it was found that business transactions with related entities indeed form part of legitimate and normal operations for many companies.
A stricter disclosure regime was found to be the best way to deal with this matter, and consequently, the onus would be on the merchant bankers to scrutinise the related party transactions of the issuer and to ensure adequate disclosure.
Current rules do not permit merchant bankers managing a public offer to invest in the same, but there are no such restrictions on the associate companies of these bankers.
Also, a merchant banker is allowed to market a public offer, even if it is an associate company of the issuer. In the recent past, instances have also come to notice where merchant bankers have been able to manage the public issue of their associate companies.
However, SEBI wants a merchant banker, which happens to be an associate firm of the issuer, to have a restricted role of marketing the issue, while declaring itself as a 'marketing lead manager' on the cover page of the offer document.
Besides, all the book-running lead managers (BRLMs) of an issue, including the marketing BRLMs would be held responsible for their due diligence role of the and the public offer and its issuer.
Besides, the investors would need to be provided with a detailed analysis for finalising the offer price or the price band well in advance.
SEBI wants the companies to issue a 'price band advertisement' at least five working days before the opening of the IPO, while detailing the basis upon which the issue price, the price band and other related ratios have been computed.
These details would need to be provided in the issue opening advertisements and on the website of the stock exchanges as well.