The Lead Manager That Only Lends Its Registration
Aarav Capital Advisors LLP holds no SEBI registration. It has been engaged by a Bengaluru consumer brand for a Rs 120 crore main-board IPO to write the DRHP, run investor roadshows, negotiate with anchor investors and decide the price band. The DRHP will name Aarav as 'Adviser to the Issue' and Pinnacle Merchant Banking Ltd, a registered merchant banker, as lead manager. Under a side letter, Pinnacle receives a flat 0.2% of the issue size, will not attend diligence meetings, and will sign the due diligence certificate on the basis of a 'comfort certificate' supplied by Aarav. Aarav's compensation is 1.4% of the issue size, a Rs 60 lakh 'listing success bonus', and warrants over 0.5% of the post-issue capital at the issue price. The CFO likes the structure because it is about 30% cheaper than a conventional lead-manager mandate, and Pinnacle's managing director describes his firm's role as 'only lending its registration for the certificate'.
1. Who is legally the lead manager to this issue, and is the arrangement consistent with the SEBI (Merchant Bankers) Regulations, 1992?
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The label is not decisive; the functions are. Issue management is a regulated activity. A person may act as a merchant banker, including as lead manager to a public issue, only if it holds a certificate of registration, and registration is neither transferable nor delegable. Aarav drafts the offer document, markets the issue, prices it and negotiates with anchor investors - the core issue-management functions. Printing 'Adviser to the Issue' in the DRHP does not convert those functions into advisory work.
Pinnacle's position is worse, not better. A merchant banker that signs the prescribed due diligence certificate without performing the diligence certifies something it has not verified. The certificate is the central assurance on which SEBI and investors rely, and signing it on the strength of a third party's comfort letter is a false certification. Failure to exercise due diligence is a ground for suspension or cancellation of registration, and can attract penalty under the SEBI Act.
Consequences for both. Aarav is carrying on merchant banking business without registration, contravening the prohibition on unregistered activity. Pinnacle has permitted its registration to be used by an unregistered entity. The issuer is not protected: its DRHP is exposed to scrutiny, its lead manager's certificate is unreliable, and the issue can be stalled at any point in the process.
2. Pinnacle wants to keep the mandate. What must it actually do, and what is the compliant way to use Aarav?
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Assume the full role or resign. Pinnacle must staff the mandate itself: attend and minute diligence meetings, independently verify the issuer's litigations, related-party transactions, auditor history and business claims, control the DRHP, take the pricing decision, run the anchor allocation and sign the due diligence certificate on the basis of its own work. Its compliance officer should maintain the diligence file.
Aarav's options. (a) Aarav registers as a merchant banker in its own right, in which case it can be a lead manager - but then it must meet the net worth and experienced-personnel requirements, and one of the two firms is redundant. (b) Aarav is engaged as a consultant to Pinnacle, paid by Pinnacle, with its role disclosed and with Pinnacle remaining accountable for everything Aarav produces. (c) Aarav acts for the issuer only on genuinely advisory matters - valuation, capital structure, investor introductions handled properly - without touching issue management.
Fee mechanics. Lead-manager fees are disclosed in the offer document, so any side arrangement must be consistent with the disclosure. A success bonus and warrants to an unregistered entity that is performing issue-management work are a red flag: they look like a disguised share of the lead manager's fee. Renegotiate them to a disclosed, services-based fee, or drop them.
3. The issue is finally subscribed three times with no investor complaints. Does that cure the defect?
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No. Compliance obligations are about conduct during the process, not about the outcome of the book. Three points follow.
First, oversubscription is not a defence to a false due diligence certificate - the certificate speaks about the adequacy and accuracy of disclosure, and a hot issue may in fact have suppressed scrutiny. Second, enforcement is not complaint-driven; SEBI acts on inspection, on exchange referrals and on its own review of offer documents, and a successful listing does not restart the limitation clock. Third, the misstatement exposure is continuing: the merchant banker's certificate obligations extend across the life of the issue, and civil liability for misleading statements in a prospectus sits with the issuer, directors and the experts who certified content.
What the merchant banker should say. Do not treat a successful book as validation. If Pinnacle is already named in the DRHP and has not done the work, it should decline to certify, force a postponement, and put its reasons to the issuer's board in writing. Walking away before the certificate is signed is far cheaper than defending a certification made on someone else's comfort letter.