Standardized Due-diligence norms for Merchant Bankers in a Public issue

Under regulation 64 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations), the lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents.  Further under schedule VI of the ICDR Regulations, the merchant bankers to the public issue are required to submit a due-diligence certificate (DD Certificate) to the Board.  In the DD Certificate, among other things, the merchant bankers are required to certify that they have examined various documents (including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators, etc. and other material) in connection with the finalisation of the draft red herring prospectus (DRHP) and the prospectus submitted with the registrar of companies.  There is no format prescribed by SEBI/ or guidance issued by SEBI on the issue of due-diligence.  In practice, the due diligence work is outsourced by the merchant bankers to legal counsels (for legal due diligence) and accountants (for financial due diligence), who further have their own due-diligence check lists to conduct due-diligence over the issuer.  Most of the due-diligence checklists of the legal counsels are similar and standard and caters very well to the requirements prescribed under schedule VIII of the ICDR Regulations.

However, if a reports published in Business Standard (8 July, 2011, http://www.business-standard.com/india/news/regulator-wants-due-diligence-norms-for-merchant-bankers/441957/) is to be believed, SEBI wants to put in place standard guidelines for the due diligence process carried out by the merchant bankers for public issues.  In my view this move of SEBI is guided by the fact that SEBI is receiving quite a few sub-standard drafts of the DRHPs being filed with it and is aimed to enhance the quality of information (both in terms of uniformity and greater clarity) available to the public before investing in the public issue.  In furtherance of this objective, Association of Merchant Bankers of India (AMBI), had been asked by SEBI to come up with the draft guidelines by September, 2011.

These due-diligence guidelines (if it becomes a reality) would certainly make the work of capital markets lawyers a lot more-easier.  Further, I believe, the AMBI should also come up with a concrete answer to the standard question on insider trading aspects of the public issue (as in, is the company really worth as is stated in the price-band of the red-herring prospectus?) amongst various other issues like eligibility of issuers, corporate records, promoters etc..