Merchant bankers on SEBI hit-list

Ranjan said, “We have gone through the replies to our notices issued to these merchant bankers earlier. We found that in all these cases, the merchant bankers had not followed the code of conduct.” The entire process of inquiry and taking final action on the basis of its findings should be over in another two months, he added.

Ranjan had earlier given indications that Sebi would not allow underwriters to wriggle out of their commitments on one pretext or the other once the issue process was over. “Underwriters have the option to withdraw with reasons prior to the opening of the issue provided they inform Sebi,” he clarified.

In the past, underwriters have blamed devolvements on insufficient availability of issue prospectuses and application forms. Notable cases where the disputes remain unresolved are Pittie Cements, Girnar Fibres, among others.

Once the underwriters have entered into an agreement with the issuer, they are bound to fulfil their obligations and cannot take the plea that their liability is over with the payment of application money as was the bone of contention in the now famous Pittie Cement case.

Sebi’s contention that their liability was on the entire issue price as they were paid commission on that price was disputed by the underwriters who cited clause 20 of the underwriting agreement which explicitly states that the underwriting obligation stands fully discharged on payment of application money.

When asked whether Sebi could force underwriters to pay just because it is “ethically” wrong to renege on commitments, Ranjan pointed out that underwriters could not be equated with other investors for the simple reason that investors do not get commission on their applications. He, however, agreed that there was a case for suitable amendment of the underwriting agreement to plug certain loopholes.

MUMBAI: The Consumer Education and Research Centre (CERC), Ahmedabad, has contended that the existing laws are inadequate in protecting investors as they are penal and not restitutional in character.

CERC managing trustee Manubhai Shah has suggested this in his memorandum to the Dhanuka Committee for review of diverse laws relating to securities in India.

The memorandum said the interest of the investors would be well protected not by penal award against the defaulting company but by adequate relief in terms of interest, costs and damages suffered by investors on account of violation of regulations.