Market regulator SEBI has mandated all merchant bankers to disclose the performance of the companies (whose public issues they have managed) on various parameters, in a move that will allow investors to weigh their investment decisions based on the track record of the respective banker handling the issue.
The track record shall be disclosed on the website of the merchant banker and a reference to this effect shall be made in the offer documents of the public issues managed in the future. In case more than one merchant banker is associated with a public issue, all merchant bankers who have signed the due diligence certificate, as disclosed in the offer document, shall disclose the track record.
The idea is to broaden the information available to investors, not just about the company in which they may put in their money but also about the merchant banker/s or the intermediary to the issue.
According to SEBI, a merchant banker is required to exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosures in the offer documents. “Therefore, it is necessary for investors to evaluate the post-issue performance of the issuer in terms of disclosures made in the offer documents. This will also enable them to understand the level of due diligence exercised by the merchant bankers,” it added.
As per the SEBI circular which has become effective immediately, merchant bankers shall disclose the track record of the performance of the public issues managed by them. The track record shall be disclosed for a period of three financial years from the date of listing for each public issue managed by the merchant banker/s.
In case of previous public issues managed during the past three years, the track record shall be disclosed latest by March 31, 2012.
Equity issue: The disclosures for equity issue would include aspects such as type of issue (IPO/FPO), its size, issue grade and the name of the rating agency, subscription levels, QIB holding of the scrip (after allotment, end of first quarter post-listing and end of each three financial years thereafter), key financials of the issuer for three financial years, frequency of trading of the scrip, change in directors of issuer post-listing, status of implementation of project as mentioned in the offer document and also the status of utilisation of money raised from the issue.
In addition, merchant bankers also need to add comments on any monitoring agency (on the use of funds, if applicable), price movement of the scrip post-listing on the stock exchange along with sectoral index and the main index, valuation ratios such as EPS, P/E and RoNW of the issuer firm, and its peer group and industry average for three financial years.
Debt issue: The disclosures for debt issue are on similar lines. The stock price-related parameters have been replaced by other factors to help investors judge the past performances of bankers. These include aspects such as rating of the debt instrument as disclosed in offer document and changes for three financial years thereafter, whether security created provided 100 per cent cover for debt securities, subscription levels, key financials of the issuer, status of dent at the end of three fiscal year-ends, change in board of directors of the issuer, utilisation of the proceeds and delay or default on payment of interest or principal amount associated with the debt instrument.
What Does It Mean?
For merchant bankers, this will mean not just washing their hands off a client after getting their issue management fees. They would have to track the performance of those companies for three years on various parameters and make relevant disclosures.
The disclosures might chaff out bankers whose hard-selling tactics just managed to see through public issues from those who went about giving a fair-price advice to their clients.
So if an issue was a blockbuster but the company’s share price tanked thereafter and the financial performance went haywire post-listing, an investor can take a call on the merchant banker/s who managed the issue. If there is a pattern and a banker seems to be using the same tactics in majority of the cases, an investor can be more cautious in betting on future issues being managed by that firm.
These are certainly significant disclosures for investors that will help them in their decision to bet on or skip an equity or debt issue. But the question is: How many investors would actually check the information on the merchant bankers’ websites?
Another option that SEBI could have explored was asking the banker/s to make the same disclosures in the offer document of an issue. Considering that offer documents mostly run into hundreds of pages, another set of pages would not have made much difference in terms of quantum of information being provided to investors.