Maintenance of due diligence records by merchant bankers

The latest board meeting of the Securities and Exchange Board of India took place on July 28, 2011. As per the press release about the board meeting, one of the issues that was discussed and decision taken was due diligence records to be maintained by merchant bankers.

SEBI noted that the merchant bankers are required to exercise due diligence in the pre-issue and post-issue activities of issue management, takeover, buyback and delisting of securities. However at present, they are not required to maintain any records as to how they exercised due diligence. As a result, the merchant bankers follow different standards of compliance and the level of due diligence cannot be checked during inspection of merchant bankers by SEBI. Accordingly, SEBI approved amendment to Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, requiring merchant bankers to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management, takeover, buyback and delisting of securities. These amendments are yet to be notified by SEBI.

The foregoing is a welcome step since it would clarify what the securities market regulator expects of the merchant bankers in matters of due diligence. Accordingly the merchant bankers can revise their internal policy on maintenance of records without being in a state of uncertainty. This would also assist the merchant bankers in establishing due diligence during SEBI inquiries. Due diligence by merchant banks in public offers, takeover and other similar capital markets transactions has been judicially well recognized and reference can be made to various orders of the Securities and Appellate Tribunal during the years 2004 and 2008.

Further recognition by SEBI that currently the merchant bankers are not required to maintain any records as to how they exercised due diligence also clarifies an uncertain aspect on due diligence which is whether there is currently a legal obligation to maintain such records. In the context of stock brokers, a similar issue was recently adjudicated upon by the Adjudication Officer, Securities and Exchange Board of India on July 27, 2011 in the matter of UBS Securities India Private Limited (UBS). SEBI had alleged that UBS had failed to provide required information (telephonic records, Bloomberg messages and emails) that SEBI had sought in relation to dealings in securities by UBS as a stock broker. UBS successfully argued that there was nothing under the Securities and Exchange Board of India Act, 1992 and the rules and regulations framed thereunder which required it to retain emails, messages and telephonic records for a particular period of time. Hence it would be guided by its internal policy which it had followed.