Due diligence certificate
Also written Due diligence certificate of the lead manager · DDC
The formal certificate a lead manager signs and files with SEBI at prescribed stages of an issue, confirming that it has verified the issuer's disclosures and that the offer document is compliant.
In plain language
The offer document is written by the issuer's lawyers. It is signed by the issuer's directors. So why should an investor believe it?
Because a SEBI-registered merchant banker has checked it. The banker has read the documents behind it and questioned the promoters. It then puts its own registration on the line with a certificate saying so.
That certificate is the due diligence certificate.
The law does not define "due diligence" itself. The workbook says this plainly. Instead there are three things:
- a duty to give the certificate;
- set formats for it in Schedule V of the ICDR Regulations;
- a list of points in time when it must reach SEBI.
The merchant banker's code of conduct sets out the duty. The banker must exercise due diligence, ensure proper care and exercise independent professional judgment. It must also make sure investors get enough information in good time. That way they can make an informed choice about investing.
How it works
When it is filed — a public issue.
| Stage | What is filed |
|---|---|
| With the draft offer document (Regulation 25) | A due diligence certificate, alongside a certificate confirming the issue agreement; plus, for convertible debt instruments, a due diligence certificate from the debenture trustee |
| Before the issue opens, at the time of registering the offer document | A due diligence certificate as per Form C of Schedule V |
| On a material development disclosed by public notice under para 4 of Schedule IX | A further due diligence certificate — Form D of Schedule V in the rights-issue chapter |
| After the issue | The final post-issue report together with a due diligence certificate, within seven days of the date of finalisation of the basis of allotment, or within seven days of refund of money where the issue fails |
A rights issue runs the same pattern with different forms — Part H of Schedule V with the draft letter of offer, Part C at registering, Form D on a material development. A REIT's draft offer document must likewise be accompanied by a due diligence certificate signed by the lead merchant banker, and in a public issue of debt securities or non-convertible redeemable preference shares the lead merchant banker furnishes one prior to filing the offer document with the Registrar of Companies.
What the diligence actually covers. Following the AIBI Due Diligence Manual, it includes discussions with the issuer's promoters, directors, key managerial personnel and other key employees; independent review of every document and piece of information provided; and briefing the issuer's representatives on their statutory responsibilities under the Companies Act 2013, ICDR, LODR, the listing agreement, the insider trading regulations and SAST. The named areas are promoter and promoter group, capital structure, capital built-up, risk factors, management, business, financial statements and litigations.
Who helps, and who signs. Legal counsel carry out legal documentary diligence and may issue legal and disclosure opinions; statutory auditors report on the financial information and issue comfort letters for periods after the last audited financials. None of that transfers the certificate — the workbook states that a merchant banker "shall not outsource its … merchant banking activities" (p86).
The file. Contracts including the issue agreement, the MOU with the registrar, the escrow agreement, the syndicate agreement, the underwriting agreement, the tripartite agreement with NSDL/CDSL, and the monitoring agency agreement; plus the memorandum and articles, board and shareholder resolutions, auditors' reports, annual reports, the tax benefit report, appraisal or valuation reports, initial listing approvals, correspondence with SEBI including the due diligence certificates themselves, legal opinions, and KYC documentation of promoters and key management personnel. Exchanges now run an online Document Repository platform on which merchant bankers upload and maintain these electronically.
A worked example
A mainboard IPO of Rs 1,500 crore, one lead manager, one co-manager.
| Date | Event | Certificate |
|---|---|---|
| 12 Jan | DRHP filed with SEBI | Due diligence certificate under Reg 25(2)(b) + issue agreement certificate |
| by 11 Feb | SEBI may specify changes or issue observations — within 30 days | — |
| 4 Aug | RHP registered with the Registrar of Companies | Form C of Schedule V |
| 9 Aug | An arbitration award of Rs 180 crore is passed against the issuer | Public notice under para 4 of Schedule IX + a further due diligence certificate |
| 11–13 Aug | Issue open | — |
| 22 Aug | Basis of allotment finalised | — |
| by 29 Aug | Final post-issue report | Due diligence certificate — within 7 days |
The 9 August event is the one that separates a real diligence process from a filing exercise. A Rs 180 crore award against a company raising Rs 1,500 crore is 12% of the issue size; it did not exist when the RHP was registered five days earlier; and the lead manager cannot simply let the issue run. It must cause the issuer to disclose the development by public notice and must certify again.
Had the issue failed for want of minimum subscription instead, the same final report and certificate would be due within seven days of the refund of money, not seven days of allotment — the obligation does not lapse because the issue did.
Why NISM asks about it
Chapter 5, sections 5.2.2 (Due Diligence and Preparation of Offer Document), 5.2.4 (Filing of Offer Document) and 5.2.5 (Documents to be submitted before Opening of the Issue) carry the public-issue chain, and Chapter 6 carries the rights-issue and QIP versions. The lead manager's post-issue duties at the end of Chapter 5 carry the seven-day final report.
Expect stage-matching questions — which certificate goes with which filing, and which Schedule V form — and expect the seven days and the 30 day SEBI observation period as numbers. The conceptual question worth knowing is that due diligence has no legal definition; what binds is the obligation and the prescribed format.
Common exam traps
- It is filed more than once. A single certificate with the DRHP is not the job: Form C at registration, a further certificate on any material development, and one with the final post-issue report.
- Seven days runs from finalisation of the basis of allotment — or from refund of money if the issue fails. It is not seven days from listing.
- Two different retention periods appear in the workbook. Chapter 5 says records and documents pertaining to due diligence in pre-issue and post-issue matters are kept for a minimum of five years; Chapter 3 says the books of account, records and documents under Regulation 14 — which include the due diligence records for issue management, takeover, buy-back and delisting — are kept for a minimum of eight years. Read which record the question is about.
- Legal counsel and auditors assist; they do not certify. A merchant banker shall not outsource its merchant banking activities.
- A convertible debt issue needs a second certificate from the debenture trustee, in addition to the lead manager's.
- The 30-day SEBI observation period runs from the later of the specified dates, not simply from the filing date.
- Due diligence is not the same as the merchant banker's underwriting obligation. One is about the truth of the document; the other is about the money.
Where this is taught
- Series V-A · Chapter 5: Scheme Related Informationintroduced here
- Series XXI-B · Chapter 6: Mutual Fundsintroduced here
- Series IX · Chapter 5: Issue Management – Process and Underwritingintroduced here
- Series V-D · Chapter 5: Scheme Related Informationintroduced here
- Series XIX-E · Chapter 9: Legal Documentations and Negotiationsintroduced here
Related terms
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- Red Herring ProspectusThe offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Post-issue reportsThe reports a lead manager files with SEBI after an issue — for a public issue a final report within seven days of the basis of allotment; for a rights issue an initial report in three days and a final one in fifteen.
- Document Repository platformAn online platform set up by the stock exchanges on which merchant bankers upload and maintain electronically the documents they relied upon while conducting due diligence in a public issue.
- Offer documentThe document inviting subscription to an issue — a red herring prospectus, prospectus, shelf prospectus or information memorandum in a public issue, and a letter of offer in a rights issue.
- Shelf prospectusA prospectus under Section 31 of the Companies Act, 2013 that covers securities issued in one or more offers over a validity period of up to one year, without a fresh prospectus for each offer.
- PromoterUnder the ICDR Regulations, a person named as promoter in the offer document or annual return, or who controls the issuer's affairs, or on whose advice the board is accustomed to act.
- Promoter groupThe promoter plus immediate relatives and the connected companies, HUFs and firms defined by 20% shareholding links — the circle whose holdings the ICDR Regulations treat together with the promoter's.
- Manager to the open offerThe SEBI-registered merchant banker, not an associate of the acquirer, appointed before the public announcement to run an open offer and answer to SEBI for its funding, disclosures and escrow.
- AIBIThe Association of Investment Bankers of India — the industry body for merchant bankers, recognised by SEBI as a self-regulatory organisation, founded in 1993 as the Association of Merchant Bankers of India.
- Investment bankingThe wider term for all capital market activity, fund-based and non-fund-based — merchant banking plus stock trading, market making, underwriting, broking, asset management and corporate advisory.
- Misleading advertisementAn issue advertisement that states the issuer's performance without the necessary qualifying statements, or portrays past performance inaccurately or as if past gains will be repeated in future.
- Information MemorandumIn AIF due diligence, the investee company's own document of representations and forecasts; separately, the document an AIF scheme files with SEBI through a merchant banker to enter a dissolution period.
- Intimation to SEBI modelThe PPM filing route for AI-only Funds and LVFs: filed directly with SEBI without a merchant banker or SEBI comments, so schemes can launch immediately on filing (a first scheme only once registered).
- GARUDASEBI's Green Channel: AIF Rollout Upon Document Acknowledgement — the fast-track route that lets an AIF launch a scheme and circulate its PPM 10 working days after filing.