Mumbai, Oct 6: Merchant bankers have started expressing reservations on the two-tier underwriting system recommended in the latest book-building guidelines issued by Sebi.

The regulatory authority has recommended a system whereby the syndicate member enters into an underwriting agreement with the book-runner who, in turn, again signs an agreement with the issuer to take up the liability in case of default by the underwriters.

Theoretically speaking therefore, the book-runner should be in a position to take on the liability of all the syndicate members in case of default. According to a leading merchant banker, no book-runner would be able to take such a huge exposure on any issue.

The Sebi guidelines also stipulate that there should be at least 30 bidding centres, with the syndicate members being present at each centre.

This does not mean that 30 syndicate members will necessarily have to be appointed. However, since the syndicate members have to be brokers, merchant bankers do not expect that many of them will have large networks.

They therefore think that it will be unlikely that they will be able to cut down on the syndicate size. This large-size requirement is also being resented by the merchant bankers, as they would have to do a thorough due diligence for more members.

Internationally, the practice followed is that the book-runner appoints a syndicate comprising only 5-6 members.

The regulatory authority has already circulated a draft copy of the guidelines among the leading merchant bankers to seek their views for the same.

The guidelines also say that 10 per cent of the issue be earmarked for investors who have not been able to come through the book-built process. Merchant bankers are expressing doubts on the benefits of this move. Some feel that this procedure will cause a delay in the issue process.

This will involve the distributing of forms which means losing out on both time and the advantage of book-building. This dual system of application would also increases the risk of double application, merchant bankers say.

Merchant bankers have otherwise welcomed the move to introduce 100 per cent book-building in public issues as one that will perk up the primary market and assure appropriate pricing.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.