The Core Question: How Much Checking is Enough?
In every IPO, one practical question arises for merchant bankers: how far must they go while checking disclosures? Is it enough to rely on documents, certificates and confirmations given by the issuer, or must they independently test the information before investors rely on it?
This article looks at what “reasonable due diligence” means in an IPO, who is responsible for it, what SEBI has said in key orders, and what merchant bankers should take away from these cases.
Due Diligence and Why It Matters
Due diligence means the reasonable care and effort expected from a person while satisfying a legal requirement or discharging an obligation[i].
An IPO is built on trust. Investors do not have direct access to the internal records of the issuer. They rely on the offer document, statutory disclosures and the assurance that the issue has gone through professional scrutiny. This is where the role of a merchant banker becomes critical.
Legally, the issuer remains responsible for the disclosures made in the offer document[ii]. However, SEBI’s regulatory framework does not treat the merchant banker as a mere compiler of information. The lead manager is expected to examine, question and satisfy itself that the disclosures are true, adequate and not misleading. At the DRHP stage itself, the lead manager must exercise due diligence and satisfy itself about the truth, adequacy and completeness of disclosures. Failure to verify or act on a material issue may lead to regulatory consequences under the Merchant Bankers Regulations[iii] and, if enacted, the proposed Securities Markets Code[iv].
Who is Responsible for Due Diligence?
Regulation 24 of the SEBI ICDR Regulations requires the draft offer document and offer document to contain all material disclosures which are true and adequate so that investors can make an informed investment decision. It also requires the lead manager to exercise due diligence and satisfy itself about all aspects of the issue, including the veracity and adequacy of disclosures.
The Merchant Bankers Regulations also require a merchant banker to exercise due diligence, ensure proper care and apply independent professional judgment. Therefore, the issuer’s responsibility and the merchant banker’s responsibility operate separately. One does not replace the other.
Due Diligence Does Not Mean Perfection
The difficulty lies in understanding the standard itself. Due diligence cannot mean that the merchant banker must discover every possible undisclosed fact or every concealed irregularity. That would make the obligation impossible. At the same time, it also cannot mean that the merchant banker may simply rely on management confirmations, certificates or undertakings without applying its own mind.
This balance was clearly brought out in the Veerkrupa Jewellers matter. SEBI relied on the Supreme Court’s decision in Chander Kanta Bansal v. Rajinder Singh Anand, where due diligence was explained as reasonable diligence, that is, doing everything reasonable and not everything possible. SEBI further observed that the degree of care expected from a merchant banker will differ from case to case and cannot be put into a straight-jacket formula.
The Real Test: What Would a Reasonable Merchant Banker Do?
That is the real test. The question is not whether the merchant banker discovered everything. The question is whether a reasonable merchant banker, placed in the same facts, would have made further enquiries, asked for more documents, issued a clarification, or escalated the matter.
SEBI’s approach in IPO matters shows that the obligation becomes stricter when there are red flags. If there are inconsistencies in documents, unusual routing of funds, unexplained related party arrangements, doubtful vendors, aggressive publicity, GMP-based promotion, or any other material fact which could influence investor decision-making, the merchant banker cannot remain passive.
What SEBI Has Said:
1. Lessons from PG Electroplast[v]
In the PG Electroplast matter, Almondz acted as the Book Running Lead Manager. The concern was that the offer document contained material gaps / misstatements, and the merchant banker did not go beyond the information and documents placed before it. SEBI found that Almondz had not exercised due diligence and proper care while acting as BRLM. SEBI also observed that filing an offer document through a merchant banker is not a mere ritual, and due diligence does not mean passively reporting whatever is reported to the merchant banker. SEBI therefore restrained Almondz and its concerned officials from taking up any new issue-related assignment till further directions.
Learning: A merchant banker cannot treat issuer-provided documents as final. It must independently test material disclosures, ask further questions and identify issues which may affect investors.
2. Lessons from Bharatiya Global Infomedia[vi]
In the Bharatiya Global Infomedia matter, the issuer argued that the documents were made available to the merchant banker and that the offer document was prepared on the advice of the merchant banker. It also tried to say that any misstatement, omission or non-disclosure should not be attributed to it. SEBI did not accept this argument. SEBI held that the issuer cannot escape responsibility by shifting the burden of preparation of the offer document to the merchant banker, because the issuer and signatories certify that the disclosures are true and correct.
Learning: Issuer responsibility and merchant banker responsibility run separately. The issuer cannot blame the merchant banker, and the merchant banker also cannot rely only on issuer confirmations as a substitute for its own diligence.
3. Lessons from Trafiksol[vii]: Verification of Objects of Issue
In the Trafiksol matter, the prospectus stated that ₹17.70 crore would be used for purchase of software from a third-party vendor. A complaint questioned the vendor’s financials and credentials. During examination, documents relating to the vendor were submitted through the company and merchant banker, but SEBI found serious concerns with the vendor’s profile, client list and capability. SEBI rejected the company’s defence that it merely forwarded documents without verifying their authenticity and directed refund of IPO money to investors. Importantly, SEBI clarified that the role of the merchant banker was being dealt with separately.
Learning: Objects of issue cannot be checked mechanically. If IPO proceeds are proposed to be used for a specific vendor, asset, software or project, the basis of that object must be verified with care.
4. Lessons from Veerkrupa Jewellers[viii]: Publicity and Post-Filing Conduct
Veerkrupa Jewellers adds another dimension: due diligence does not end with the filing of the offer document. In that matter, SEBI examined IPO-related publicity, including online articles and YouTube videos.
SEBI noted that public communications relating to an IPO must contain only information from the draft offer document or offer document, and such information must be truthful, fair and not misleading. SEBI also held that although a merchant banker may not be able to monitor and control every promotional activity, the lead manager ought to act promptly once misleading publicity comes to its knowledge.
SEBI found that failure to act promptly fell short of the merchant banker’s duties relating to due diligence and investor protection. This gives an important practical takeaway. A merchant banker’s role does not stop at checking the draft offer document. The obligation continues through the issue process and, in suitable cases, may require monitoring of public communications, market narratives and investor-facing content connected with the IPO.
The Three Layers of Reasonable Due Diligence
Reasonable due diligence has three layers.
First, the merchant banker must verify what is disclosed. This means checking documents, board approvals, financial records, related party disclosures, material contracts, objects of issue, litigations, group-company information and other material statements in the offer document.
Second, the merchant banker must test what is not clearly disclosed. If a fact appears incomplete, inconsistent or commercially unusual, the merchant banker must go beyond the checklist. The obligation is not satisfied merely because a certificate or undertaking is available.
Third, the merchant banker must act when new facts emerge. If misleading publicity, new litigation, regulatory action, vendor-related concerns or other material developments arise during the IPO process, the merchant banker must consider whether clarification, corrigendum, escalation or further disclosure is required.
Conclusion
Reasonable due diligence is a professional judgment standard. It asks a simple question: did the merchant banker act as a reasonable, careful and independent professional would have acted in those facts?
If the answer is yes, the merchant banker should be able to defend its conduct. If the answer is no, the issue may be viewed not as a missed fact, but as a failure of due diligence.
So, where does SEBI draw the line? SEBI does not expect a merchant banker to do the impossible. But it does expect the merchant banker to act like a careful professional. If an issue could have been identified through reasonable checks, and the merchant banker failed to ask, verify or act, the lapse may be treated as a due diligence failure.
In an IPO, that distinction matters. The offer document is not just a legal document. It is the basis on which public investors decide whether to part with their money. That is why SEBI expects merchant bankers to walk the fine line carefully, not to do everything possible, but to do everything reasonable.
[i] Balk’s Law dictionary
[ii] Refer Section 35(1) and Section 34 of the Companies Act, 2013; Regulation 24 of the SEBI ICDR Regulations, 2018.
[iii] SEBI (Merchant Bankers) Regulations, 1992 – Regulation 13 read with Schedule III, Code of Conduct for Merchant Bankers.
[iv] Section 92(e) of proposed Securities Market code
[v] https://www.sebi.gov.in/sebi_data/attachdocs/1325082567899.pdf
[vi] https://www.sebi.gov.in/sebi_data/attachdocs/1407493307381.pdf
[vii] https://www.sebi.gov.in/enforcement/orders/dec-2024/order-in-the-matter-of-trafiksol-its-technologies-ltd_89239.html
[viii] https://www.sebi.gov.in/enforcement/orders/may-2026/order-in-the-matter-of-m-s-veerkrupa-jewellers-limited-_101736.html