Sebi seeks to ascertain whether Kotak Wealth officials were making guarantees on allotment
The market regulator has initiated a primary investigation into the recent spat between BharatPe co-founder Ashneer Grover and Kotak Mahindra Bank over the financing of Nykaa’s (FSN E-Commerce Ventures Ltd) initial public offering (IPO).
According to two people with direct knowledge of the matter, the Securities and Exchange Board of India (Sebi) has asked Kotak Wealth, the wealth management arm of Kotak Mahindra Bank, to furnish details of the IPO financing debacle with Grover.
“The regulator wants to understand whether the relationship managers at Kotak Wealth were making guarantees on allotment and whether there was any conflict of interest," said one of the two people, requesting anonymity.
“Internally, Kotak started an investigation on its two employees who were in touch with both Grover and (his wife) Madhuri Grover to secure IPO financing to subscribe to Nykaa shares. Kotak is trying to ascertain whether its employees had violated the ethical code of conduct or whether there were any instance of misselling," said the second person, also seeking anonymity. Emailed queries to spokespersons of Kotak and Sebi on Thursday, and subsequent reminders, did not elicit any response till press time.
IPO financing is a contract between an investor and a lender or financier under which the investor proposes to borrow money to buy during a public offer.
Under the ‘application supported by a blocked amount’ (ASBA) process, the money remains in the applicant’s account and is only debited once the shares are allotted. Typically, higher the size of the loan, higher the chances of allotment. Disagreements over the lack of funding or allotment are fairly common.
The recent spate of IPOs has increased the frequency of disagreements. The latest and most publicized is the one between Grover and Kotak Wealth, where the two exchanged three legal notices between the last week of October and the first week of November.
In one legal notice, the Grovers alleged that they were in communication with Rohit Mohan, senior director of ultra-high-net-worth individuals’ accounts at Kotak, to obtain the necessary internal approvals for subscribing to Nykaa shares worth ₹500 crore. Grover alleged that the funding did not come through despite assurances, and that he lost out on a profitable trade.
At an application size of ₹500 crore, the Grovers could have got an allotment of up to ₹5 crore worth of shares on the basis of the quota for ultra-high-net-worth individuals.
In the notice, Grover claimed that Kotak had informed them that it had completed the subscription formalities for the Nykaa IPO on their behalf.
“Kotak’s refusal to provide IPO financing to our clients for the Nykaa IPO constitutes a blatant violation of its legal obligations owed to our clients as their wealth managers," Grover’s legal notice added.
The dispute over IPO financing led to a war of words. In a leaked audio tape, a man thought to be Grover can be heard abusing and issuing death threats to the Kotak Wealth employee for allegedly failing to secure the IPO financing. Kotak, in a reply to the legal notice, alluded that Grover had issued threats to its employees and threatened legal action. Soon after the Kotak notice, Grover went on voluntary leave.
“The frenzy that one sees today and allegedly large financing arrangements in the nature of LASS (loan against securities and shares) or structured financing or by whatever name they are called is not surprising. One just hopes that the regulatory framework keeps evolving to ensure that large chunks are not cornered by a few savvy investors. Further slicing and dicing or ceilings may be mandated by category as the situation keeps evolving," said Chirag Shah, former vice president and head of commodities, Phillip Capital.
The Reserve Bank of India (RBI) is already moving in that direction. Starting next fiscal year, an investor wishing to subscribe to IPOs will not be allowed to borrow more than ₹1 crore per IPO from non-banking financial companies. These rules seek to prevent the malpractice of borrowing money to invest in IPOs and exiting on the first day after making listing gains.