Proprietary Anchor Application and Premature RHP Sharing at a Merchant Banker
A SEBI-registered merchant banker is the lead manager to a ₹420 crore mainboard IPO. Its proprietary trading desk and an affiliated private equity fund together hold 9.8% of the issuer's pre-issue capital. The IPO includes an anchor book of 30% of the offer. Twelve days before the issue opened, the merchant banker's research arm published a report valuing the issuer at 22% above the upper price band. The compliance officer later learns that a draft red herring prospectus with unredacted comments was emailed to a large institutional investor before public filing, and that one of the underwriters withdrew its commitment after the anchor book closed. The merchant banker's own proprietary desk applied in the anchor book for ₹35 crore.
1. Identify the conflict-of-interest, Chinese-wall and disclosure issues raised by the pre-IPO shareholding, the research report and the proprietary anchor application.
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Conflict of interest. The merchant banker holds 9.8% of the issuer through its proprietary desk and an affiliated fund while acting as lead manager. That is not automatically prohibited, but it is a material conflict that must be identified, disclosed to the issuer and managed. The subsequent ₹35 crore anchor application by the same proprietary desk converts a passive holding into an allocation benefit obtained from a process the firm runs. That is the central governance problem: the firm is on both sides of the allocation decision.
Chinese wall. The research report published 12 days before the issue, valuing the issuer 22% above the upper band, sits awkwardly with the investment-banking mandate. Research must be independent, must not be used as marketing, and must not receive or leak price-sensitive information from the deal team. The compliance officer should examine the information flow between the deal team, the research arm and the proprietary desk.
Disclosure. The pre-issue holding, the affiliate relationship and the anchor application should have been disclosed in the offer documents and to the issuer's board. The unredacted DRHP email is a separate breach of confidentiality and of the pre-filing information controls.
2. Assess the anchor-book application and the underwriter's post-anchor withdrawal. What should the compliance officer do?
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Anchor application. The application should be assessed against the anchor-investor eligibility and conflict rules and against the firm's own conflict policy. Even if the letter of the allocation norms is met, the firm cannot run the anchor process and simultaneously bid through a proprietary desk that it controls. The prudent course is to withdraw the application and record the reason. If it has already been allotted, the compliance officer should escalate to the issuer, the exchange and SEBI, and consider unwinding the allotment.
Underwriter withdrawal. An underwriter's commitment cannot simply evaporate after the anchor book closes. The underwriting agreement, the offer document and the ICDR framework govern when and how a commitment may be reduced. The compliance officer should obtain the signed agreement, the withdrawal letter and its date, and check whether the withdrawal was disclosed to the issuer and the exchange and whether the offer remained fully underwritten.
Action. Constitute a conflict review, document the decision trail, sequester the deal team and proprietary desk communications, and make the necessary reporting to SEBI and the exchange. The compliance officer's own sign-off on the anchor process should be reviewed.
3. The chief executive says the research report was 'independent research' and the DRHP email was 'market sounding'. Evaluate both characterisations and state the control failures.
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'Independent research'. Independence is about process, not label. If the research arm had access to the deal team's valuation work, if the report was timed to support the issue, or if it was shown to the issuer or its bankers before publication, it is not independent. A 22% premium to the upper band, published 12 days before opening, is a strong indicator that needs evidence of information barriers, analyst sign-off and separation from investment banking.
'Market sounding'. Market sounding to select investors is not a licence to circulate an unredacted DRHP before public filing. The document is confidential, the comments are not public, and the recipient obtains information ahead of the market. Market sounding must use approved scripts and a record of recipients and information shared; a full draft prospectus with comments falls outside any legitimate sounding script.
Control failures. No effective Chinese wall between deal team, research and proprietary desk; no pre-clearance of the research report; no controlled-distribution log for the DRHP; no conflict register entry for the 9.8% holding and the anchor bid. The compliance officer should treat all three as linked evidence of a weak information-control culture.