Economics · Merchant Banking
A large technology firm, 'Future-Tech Ltd,' wants to launch an IPO of 2000 Crore Rupees. They appoint 'Ace Merchant Bank' as the Lead Manager. During the due diligence, Ace Merchant Bank discovers that the company has a pending litigation in an international court that could potentially result in a liability of 500 Crore Rupees. The company management asks the banker to omit this detail from the prospectus as they believe the chance of losing the case is low and it might hurt the IPO valuation. What is the legally and ethically correct course of action for the Merchant Banker under SEBI guidelines?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Resign from the mandate immediately but do not report the litigation to SEBI to maintain 'Client Confidentiality.'
- 2Suggest that the company settle the litigation privately before the IPO, even if it means using the IPO proceeds to pay for the settlement.
- 3Include the detail in the 'Risk Factors' section of the prospectus, as the merchant banker is responsible for 'Full and Fair Disclosure' to the investors.✓
- 4Omit the detail as requested by the client, as the role of a merchant banker is to ensure the IPO is successful and the client gets the best valuation.
Correct answer
Include the detail in the 'Risk Factors' section of the prospectus, as the merchant banker is responsible for 'Full and Fair Disclosure' to the investors.
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