SEBI wants to know what Kotak Wealth did last autumn?

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 submit details of the IPO financing debacle with Grover.

“The regulator wants to understand whether the relationship manager of Kotak Wealth was giving guarantees on the allotment and whether there was any conflict of interest,” one of the two people said on condition of anonymity.

“Internally, Kotak launched an investigation on two of his employees, who were in touch with both Grover and (his wife) Madhuri Grover, to secure IPO financing for subscribing to Nykaa shares. Kotak is trying to ascertain whether its employees had violated the ethical code of conduct or there was any instance of misselling.’ No response received till press time.

IPO financing is a contract between an investor and a lender or financier whereby the investor offers to borrow money to buy during a public offering.

Under the ‘Application Backed by Blocked Amount’ (ASBA) process, the money remains in the applicant’s account and is debited only after the shares are allotted. Generally, the higher the size of the loan, the higher the chances of allocation. Disagreements over the lack of funding or allocation are quite common.

The recent round 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 a legal notice, Grovers alleged that he was in communication with Rohit Mohan, senior director of accounts of ultra-high-net-worth individuals at Kotak, to obtain necessary internal approvals for subscribing to Nykaa’s shares. 500 crores. Grover alleged that the money did not come despite assurances and he lost out on a profitable trade.

at an application size of 500 crores, Grovers could have got allocation up to 5 crore worth of shares on quota basis for ultra-high-net-worth individuals.

In the notice, Grover claimed that Kotak had informed him that he had completed the membership formalities for the Nykaa IPO on his behalf.

“Kotak’s refusal to provide IPO financing to our clients for the Nykaa IPO is a clear breach of the legal obligations owed to our clients as their wealth managers,” said Grover’s legal notice.

The controversy over IPO financing led to a war of words. In the leaked audio tape, a man believed to be Grover can be heard abusing and threatening to kill a Kotak Wealth employee after he allegedly failed to secure funding for the IPO. Kotak, in response to the legal notice, said that Grover had threatened his employees and threatened legal action. Soon after the Kotak notice, Grover went on voluntary leave.

“Today what we see as frenzy and large financing arrangements allegedly in the nature of LASS (loans against securities and shares) or structured financing or whatever they are called, is not surprising. One would just expect this. The regulatory framework continues to evolve to ensure that large portions are not captured by a few savvy investors,” said Chirag Shah, former Vice President and Head of Commodities, Philip Capital. Ceiling may be made mandatory by category.”

The Reserve Bank of India (RBI) is already moving in that direction. From the next financial year, investors wishing to subscribe to the IPO will not be allowed to borrow more 1 crore per IPO from NBFCs. These rules try to prevent the malpractice of borrowing money to invest in an IPO and exiting on the first day after earning a listing profit.