Can a merchant banker ‘unilaterally’ withdraw from underwriting obligations when the IPO is open for subscription?

Market regulator SEBI has held Corporate Capital Ventures (CCV), a SME segment merchant banker, guilty of unethical, unprofessional conduct, misrepresentation, and failure to do due diligence as the banker ‘unilaterally’ withdrew from its underwriting obligations during the IPO.

But after investigations, SEBI did not impose any penalty or strictures against CCV, which the legal experts say could set a precedent for the merchant banking industry.

In November last year, SEBI issued a show cause notice to CCV for its failure to complete its obligation for underwriting an IPO and said the act had risked investor faith in the underwriting process. The IPO of ICL Multitrading India had opened on November 19, 2018 and was scheduled to close on November 22. However, since the company could not garner enough funds to close the IPO, the date of subscription was extended till December 3, 2018. CCV withdrew during the extended period.

“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 Obligation cannot be withdrawn unilaterally without evidentiary proof and that too at the later stage of IPO,” SEBI said in its notice to CCV, which is with the BusinessLine.

Allegations confirmed

The allegations were confirmed by SEBI on March 16 and the regulator said that the banker had violated merchant banking rules. “The apparent insistence by CCV for withdrawal of the IPO in order to avoid the development of underwriting obligation, was an unethical and unprofessional conduct and such a conduct was detrimental to the interest of investors in the securities market,” SEBI’s whole-time member Ananta Barua said in his order.

But on the punishment aspect, SEBI said, “ CCV has been restrained from taking up new assignments as merchant banker, since the passing of the interim order.

“Over 20 months have lapsed since these directions have been in force. Therefore, as sufficient period of restraint has already been undergone, no further directions under Section 11B of the SEBI Act, 1992 are called for in the present case.”

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