Review underwriting rule: SAT to SEBI

The Securities Appellate Tribunal (SAT) has asked the Securities and Exchange Board of India (SEBI) to review the regulations for underwriting of a public issue, the model agreement for which was framed back in 1993 and has since been in operation.

Underwriting is the mechanism by which a merchant banker gives an undertaking that in the event of an initial public offer (IPO) remaining undersubscribed, the banker would subscribe to unsold shares. The underwriting clause, mandatory in all SME IPOs, ensures the issue does not fail due to low demand from investors.

“We deem it proper to bring to the notice of SEBI that there is no clarity between the ICDR (Issue of Capital and Disclosure Requirements) Regulations and the model underwriting agreement prescribed by SEBI in the year 1993 (which is still in operation) in relation to the obligations to be discharged by the underwriters,” said the order by SAT.

“Therefore, it would be just and proper that SEBI addresses itself on the... issue expeditiously and ensure that there is clarity in relation to the obligations to be discharged by the underwriters,” it added. The root of the matter is the manner in which an entity can perform its role as an underwriter.

Inventure Merchant Banker Services was the investment banker for Penta Gold, whose SME IPO was subscribed only 55.42% when it closed on March 27. While the merchant banker ensured that unsold shares were subscribed to by eight investors, the National Stock Exchange did not approve the basis of allotment saying Inventure itself had to subscribe to the shares.

Precedent with BSE

The company filed an appeal against NSE at the SAT and said that in the past, the BSE had allowed such allocation in the case of Powerhouse Fitness & Realty. It further said the model underwriting agreement allowed external investors to be brought on board for underwriting.

The SAT bench, comprising Presiding Officer Justice J.P. Devadhar, Presiding Officer and member Dr. C.K.G. Nair, highlighted the fact that while regulation 106P(2) of ICDR Regulations require a merchant banker to underwrite at least 15% of the issue size on his own account, the model underwriting agreement prescribed by SEBI in 1993 allows underwriters to procure applications from investors.

Market participants are divided on the issue. “The underwriter’s responsibility is to ensure fulfilling his objective in case of devolvement by subscribing or procuring subscription towards discharge of underwriting obligations,” said Uday Patil, director, Investment Banking, Keynote Corporate Services.

Requesting anonymity, another banker, who has managed many SME IPOs, said ICDR Regulations supersede any model agreement and hence should be the guiding principle in determining such cases. An email query sent to SEBI remained unanswered till the time of going to press.