Under pressure from the regulator, the Association of investment bankers of India (AIBI), the industry body for investment bankers (i-bankers), has issued guidelines for its members to follow while conducting due diligence of companies planning to raise money through public issues.
It has been a long-standing demand from experts to tighten norms governing investment bankers after several initial public offerings (IPOs) came under cloud since 2008. Nearly 80 per cent
IPOs out of the 173 that hit the market since 2008 are trading below their issue price, show data compiled by BS Research Bureau. Also, promoters and manipulators are under regulatory scanner for trying to siphon off money from the companies.
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Some of the procedures listed in the manual that bankers will have to follow:
- Interviews with employees of the issuer company
- Site visits
- Background check of promoters
- Appointment of experts for carrying out checks and verifications
- Proper documentation of all the records
- Material disclosures to help take proper investment decisions
The move to have uniform due diligence norms is aimed at protecting investors and enhancing the quality of companies coming to the capital markets.
“This manual will establish a high and uniform standard of diligence across the industry and thereby enhance the credibility of the issuer and the investment banking community,” said AIBI.
The framework is designed to help investment bankers make meaningful disclosures while drafting offer documents. It will also be a reference point for officials of the Securities and Exchange Board of India (Sebi), while probing investment bankers. Proper disclosures will help investors take informed investment decisions.
The due diligence manual prepared by AIBI lays emphasis on physical verification of documents, cross checks and also focuses on material evidence. For instance, merchant bankers are advised to make calls to employees of the issuer company, conduct background checks of promoters and check their profile with rating agency CIBIL.
Madhu Prasad, vice-chairman of AIBI, said, “This will ensure that merchant bankers follow a uniform set of rules while conducting due diligence. At present, due diligence procedure differs in every organisation.”
While Sebi's code of conduct seeks bankers to conduct due diligence of a company, it does not specify any criteria. In a due diligence process, a merchant banker collects material information about the issuer company and discloses it in the offer document. On several occasions, the due diligence data published in the prospectus of companies has been faulty and misleading investors.
Thus, as a self-regulatory initiative, the AIBI has prescribed certain basic rules to be followed by bankers while conducting due diligence. However, observers doubt the success of this initiative as only 59 of the 170-odd Sebi registered merchant bankers are members of AIBI.
Sebi chairman U K Sinha told Business Standard in an interview this week that the regulator will keep up the pressure on investment bankers. “We are trying to put pressure on investment bankers and have asked them to be careful on pricing the IPOs,” Sinha had said.
The manual lays a lot of emphasis on verification of issuer company documents to ensure credibility.