Issue Management – General Obligations of Merchant Bankers and Due Diligence

Hint Common mistake: Confusing careful verification with a promise that no future problem can arise. Think about testing claims against records and evidence.

Hint Common mistake: Assuming preferential means every existing shareholder receives the same entitlement. Contrast this route with proportionate entitlements for every existing shareholder.

Hint Common mistake: Treating any private allotment as a QIP regardless of investor eligibility. Recall the eligibility category rather than the size of an individual application.

Hint Common mistake: Mistaking a depository receipt for a bank deposit receipt. Distinguish an IDR from an ordinary deposit and from a receipt issued abroad.

Hint Common mistake: Assuming transferring the entitlement also sells the shareholder’s existing shares. Separate the right to apply for shares from the shares already owned.

Hint Common mistake: Treating a management estimate as equivalent to independent evidence. Prefer evidence from the party that holds the matching financial claim.

Hint Common mistake: Reviewing only the invoice amount while overlooking who controls the counterparty. Consider whether the transaction may be influenced by a relationship outside normal bargaining.

Hint Common mistake: Ignoring a material claim solely because the company disputes it. Think about obligations whose final outcome remains uncertain.

Hint Common mistake: Using owns and may use as though they mean the same thing. Read what rights the contract actually grants rather than relying on its informal description.

Hint Common mistake: Treating different descriptions of the same money as a harmless drafting difference. Track where the money is actually intended to go.

Hint Common mistake: Using public-offer or takeover document names for a qualified institutions placement. Match the document with the fundraising route, not just the fact that shares are involved.

Hint Common mistake: Reversing the number of new shares and the number of existing shares in the ratio. Apply the new-share entitlement to each complete group of existing shares.

Hint Common mistake: Confusing entitlement-sale proceeds with the underlying rights subscription amount. Value the entitlement transaction separately from any later subscription for shares.

Hint Common mistake: Treating an optimistic management expectation as a verified commercial fact. Separate a possible future event from an established fact used in valuation.

Hint Common mistake: Comparing one receipt with one share without adjusting for the representation ratio. Divide the value of the underlying interest among the receipts that represent it.

Hint Common mistake: Assuming no debt exposure exists unless cash was borrowed directly by the issuer. Look beyond loans taken directly in the issuer’s own name.

Hint Common mistake: Taking a simple average of the two prices without considering the rights ratio. Combine the value of the existing shares and the subscription cash, then use the enlarged share count.

Hint Common mistake: Assuming reported revenue equals cash received during the period. Not every recorded sale has become cash by the end of the period.

Hint Common mistake: Ignoring convertible instruments when assessing post-transaction ownership. Count both issued shares and the shares assumed to arise from the specified conversion.

Hint Common mistake: Treating audited past revenue as proof that future revenue is legally assured. Separate historical performance and management forecasts from legally supported future rights.