Buch warns bankers: No more bad companies in IPO markets

Sebi Chairperson Madhabi Puri Buch on Tuesday said the capital markets regulator has found "egregious misuse" of funds raised through initial public offerings (IPOs) by certain companies and urged investment bankers to desist from helping such entities access the capital markets.

Development of AI Tools for IPO Processing

Even before the term "agentic artificial intelligence" was coined, Sebi had been working on a tool based on that concept to process IPO documents faster, Buch said. Speaking at an event organised by the Association of Investment Bankers' of India (AIBI), Buch said the i-bankers know exactly when they are bringing a "pump and dump" company to the market.

Warning to Investment Bankers

"You (i-bankers) should not bring a bad company to the market," she urged the audience comprising rainmakers. There are markers like the high fees being paid to the banker, or the company having less or no staff at all or no visits by the bankers to the facilities of a company which speak loudly about the intent behind an issuance and it being a "pump and dump" issue, she said.

Concerns Over Pump and Dump Issuances

Speaking in the context of the SME board, Buch said in the case of a pump and dump issuance, an IPO sees high subscription that leads to the price of a stock going up and is typically followed by a share sale by the promoter to make a quick buck.

Apart from this, Buch said Sebi has also found "egregious misuse" of IPO funds by certain companies, which basically involves related party transactions to route the money to safe havens or entities related to the promoter. Many a time, fund routing is done to overseas markets that would include showing up a front like an acquisition or purchase of intangibles like a software or app, she explained.

Sebi's Role Compared to Medical Oversight

Comparing Sebi's role to a doctor in a hospital, Buch said the regulator has seen various wrongdoings by companies. Buch said Indian markets have matured in a way that the law is being followed in "letter", but added that efforts will have to be made to follow it in the "spirit".

There are plenty of companies with high corporate governance who can act as "role models" for the broader ecosystem, she said, adding that as the system transits to complying with legal requirements in spirit, it does not have to invent anything new and can learn from peers.

Shifts in Corporate Compliance Culture

There are a variety of reasons why companies are opting to become increasingly compliant, she said, specifying inter-generational shift in ownership as one among them. Younger promoters, who have inherited companies from their parents, are preferring to live life stress-free over fretting about operating in the grey zone that they saw their parents doing, she said. Additionally, the regulator's increased surveillance and investigation capabilities also deter some, while for many it is also the threat of an active whistleblower culture, Buch said. She rued that while whistleblowers are good, a large number of them speak out when it is convenient and not at the time of the wrongdoing.

Optimism for Future Governance Standards

A good, compliant culture that accords high priority on governance is rewarded both by the markets and employees, she said, describing the incentives of making a shift and urging entities to move to a place where they undertake efforts to being fit and healthy. Buch said overall, she is optimistic about the trajectory on adopting better governance standards by the capital markets going forward.

AI Tools for Enhanced IPO Processing

Elaborating on Sebi's use of AI, Buch said an internal tool developed by Sebi checks an IPO document for all the compliances and puts out a report to the officer which will flag discrepancies if any. Additionally, the algorithm also trawls the internet in search of information on the applicant to check if the company is making sufficient disclosures and points out shortcomings if any.

Sebi is already processing nearly all the IPO documents within three months, she said, promising that as it uses more technology, it will shorten further and help it meet the workload that will be generated out of i-bankers' estimate of 1,000 issues hitting the markets over the next two years.

(Except for the headline, nothing has been changed by All India News Network in the PTI copy.)