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Securities and Exchange Board of India

Due diligence records to be maintained by Merchant Bankers

1.0

Background

1.1

SEBI carries out the inspection of merchant bankers to ascertain pre-issue and post-issue due diligence exercised by them in the process of issue management which includes disclosures made in the offer documents, allotment, investor grievances, etc. Likewise, due diligence may also be checked during inspections in case of other activities handled by the merchant bankers like takeovers, buy back of securities and delisting of securities.

1.2

The merchant banker is required to submit Due Diligence certificates to SEBI at various stages of issue in accordance with the regulations governing issue of securities, takeovers and buy-back of securities. While the pre-issue merchant banker is responsible for disclosures in offer documents, promoter contribution, etc, the post issue merchant banker is responsible for dispatch/ demat credit of securities, refund of application moneys, timely listing of securities and redressal of investor grievances.

1.3

However, during the inspections of merchant bankers carried out during the year 2010-11, it has been observed that they have not been maintaining adequate supporting documents and records in respect of the due diligence exercised by them during pre-issue and post issue activities. Besides, it has also been observed that the merchant bankers follow different levels of standards of due diligence and maintenance of records. In the absence of proper records, we are unable to check the compliance of Regulations. In this regard, it may be mentioned that while the merchant banker is required to give due diligence certificate to SEBI based on

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examination of records and documents, there is no obligation on him to maintain the records.

1.4

Presently, the only books and records to be maintained by merchant bankers, as specified in Regulation 14 of the SEBI (Merchant Bankers) Regulations, 1992, are as follows: (i) (ii) (iii) (iv) Balance sheet, P&L account, Auditors report, and Statement of financial position

It is clear from the above that there is no mention of any records in relation to the important aspect of due diligence which is the core activity of merchant bankers.

1.5

We have checked the Regulations for other intermediaries. We find that in case of registrars to an issue and share transfer agents, bankers to an issue and underwriters, the Regulations clearly specify the records to be maintained for all of their core activities. Similarly, SEBI Credit Rating Agencies Regulations have prescribed the records in support of rating decisions. Further, SEBI Circular dated April 03, 2008 mandates the stock brokers to maintain proper records of due diligence carried out in relation to authorization of clients for providing Direct Market Access facility.

1.6

In the absence of records, we cannot collect evidence for any violation and hence cannot take action against the merchant banker. Recently one of the merchant bankers was exonerated by the adjudication officer vide his order dated March 17, 2011, while he observed that there was no regulatory requirement to maintain any records.

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1.7

Therefore, a specific provision for maintenance of records of due diligence will not only improve the compliance standards in the industry but also will strengthen the inspections conducted by SEBI.

1.8

We discussed the issue with Association of Merchant Bankers of India (AMBI) on April 13, 2011 and they agreed in-principle about the need to prescribe maintenance of books and records of due diligence exercised by the merchant bankers. AMBI, further added that they would work on the detailed due diligence guide for the benefit of their members.

2.0

Proposal

2.1

In view of the above, the Board is requested to consider and approve the proposal to amend Regulation 14 of the SEBI (Merchant Bankers) Regulations, 1992, which prescribes the books and records, to require the merchant bankers to maintain the records and documents pertaining to the pre-issue and post-issue due diligence exercised in relation to their core activities like issue management, takeovers, buy-back of securities and delisting of shares. Clause (e) may be added to Regulation 14 (1) of SEBI (Merchant Bankers) Regulations, 1992 which may read on the following lines:

Records and documents pertaining to due diligence exercised in preissue and post-issue activities of issue management and in the case of take over, buyback and delisting of securities.

2.2

The Board is also requested to authorize the Chairman to take necessary steps to amend the Regulations.

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