Corporate Capital served show-cause notice for ‘abandoning’ merchant banking duty

The Securities and Exchange Board of India (SEBI) has issued a show-cause notice (SCN) against Corporate Capital Ventures (CCV), a merchant banker for small and medium enterprises (SME), for its failure to complete its obligation in underwriting an initial public offer.

The SEBI notice to the banker comes nearly two years after the alleged violation of norms.

SEBI has reasoned that the banker unilaterally withdrawing its underwriting obligation to the SME company risked investor faith in the process. It was a near-₹18-crore IPO where in the company ICL Multitrading India could not find enough buyers for its equity and subscription date had to be extended.

“We have not violated any provisions of law nor acted in defiance with any legal provisions. Our decision to withdraw was a well thought of action based on prudent judgement and primarily to protect the interest of investors,” the merchant banker said. .

During the extended period the banker said that it was withdrawing from its contract since it had found irregularities with the company’s disclosures.

“It is pertinent to note that underwriting involves determining the risk and price of the proposed security and it gives insurance to the proposed investors as well. Obligation cannot be withdrawn unilaterally without evidentiary proof and that to at the later stage of IPO,” SEBI said in its SCN, which is with the BusinessLine.

Wrong impression

According to SEBI, all the allegations made by CCV were based on research or findings after the closure of the issue and it defeats the purpose of underwriting, gave the wrong impression in the securities market and detrimental to the interests of the investors as well. The SCN was issued on November 18 last month.

CCV was a merchant banker to ICL but in November 2018 when the IPO of the company was on, the banker said it was withdrawing from its merchant banking contract as well as the company’s IPO advisor and banker.

The IPO of the company had opened on November 19, 2018, and was scheduled to close on November 22, 2018. However, since the company could not garner enough funds to close the IPO, the date of subscription was extended till December 3, 2018. During the extended period, the banker CCV informed the company and the stock exchange while meeting different investors, it got the information that ICL and its management were offering various cash discounts for subscription of the equity shares.

The merchant banker further submitted that it further came to know that ICL had suppressed various information / facts from CCV and was involved in kickbacks in cash for the subscription of the shares.

Vague response

However, SEBI has found that the issue regarding withdrawal of IPO was brought to the notice of NSE only on November 29, 2018. Even then the emails sent by ICL and CCV to NSE with regard to withdrawal of issue were seen to be vague and without any plausible reasons for withdrawal.

In a response to the issue, the merchant banker said: “We are glad that the market regulator has provided us an opportunity to explain the relevant facts and deal with all such allegations”.

It further added: “As a conscientious market intermediary, apart from our obligation towards the issuer who engaged with us, we have primary responsibility towards the investors which primarily weighed with us in taking the decision to withdraw. As the matter is sub judice, we do not wish to offer para wise comments to your queries. We believe that SEBI will understand the position when we place all facts on record and in perspective”.