Merchant bankers' work in focus

Top bankers gave due-diligence certificate saying all legal and disclosure requirements complied with

The order against realty major DLF by the Securities and Exchange Board of India (Sebi) has put the spotlight on the quality of due-diligence done by the merchant bankers and legal advisors who ran its jumbo Initial Public Offering (IPO).

A clutch of top merchant bankers, both domestic and foreign, operated as book running lead managers for the issue in 2007. Being registered intermediaries with Sebi, the merchant bankers are responsible for going through and ensuring the company filings in the prospectus are in order. They then give a due-diligence certificate with Sebi stating that the information furnished in the prospectus is correct. While DLF itself has in a statement referred to the role of merchant bankers and advisors, analysts also feel they could have done better. Most merchant bankers Business Standard reached out to declined to comment as the matter was sensitive.

Apart from the case of Sudipti Estates, which Sebi clearly established to be a related party of DLF by unearthing the holdings by wives of key managerial personnel, the regulator also found the submissions regarding Vikram Electric & Equipments incorrect.

"During September-October, 2006, Sudipti was funded by DLF's subsidiaries/associates through a series of transactions through an entity named Vikram Electric & Equipments Pvt Ltd ("Vikram"). These funds were used for purchase of land and creation of development rights on the land so acquired. As per the annual accounts of Sudipti for the year 2011-12, this amount is appearing as liability even after six years of claimed dissociation," the order said. Vikram was named after DLF founder K P Singh's sister Vikram Devi, who passed away recently.

However, in a communication addressed to Sebi in 2008, the merchant bankers had certified that Vikram was "never an associate or a group company". Business Standard has reviewed a copy.

Like all IPOs, the final red herring prospectus filed by DLF in June 2007 contained the following clause: "The book runners have certified that the disclosures made in the draft red herring prospectus are generally adequate and are in conformity with Sebi (disclosure and investor protection) guidelines, 2000 as for the time being in force. This requirement is to facilitate investors to take an informed decision for making an investment in the proposed issue."

It further added that, "It should also be clearly understood that while the company is primarily responsible for the correctness, adequacy and disclosure of all relevant information in the draft red herring prospectus, the book runners are expected to exercise due-diligence to ensure that the company discharges its responsibility adequately in this behalf and towards this purpose, the book runners have furnished to Sebi, a due diligence certificate dated March 29, 2007 in accordance with the Sebi (merchant bankers) regulations, 1992…"

However, despite this assurance and certificate, Sebi found the DLF disclosures inadequate.

Prithvi Haldea, chairman, Prime Database, said, "We moved from a merit-based regime to a disclosure-based regulatory regime, along with a free-pricing mechanism in 1992. Disclosures have to be taken more seriously. Lawyers, who are involved with vetting of offer documents, must be registered with Sebi. This will make them liable for inaccuracies in the offer document." He added that merchant bankers must be punished if they are working in connivance with promoters. "However they are dependent on promoters and auditors for information. They are not expected to be forensic experts or investigators."