Close on the heels of unearthing the IPO scam, capital market watchdog -- the Securities and Exchange Board of India on Tuesday warned merchant bankers against vetting bad quality offers so that investors interests could be protected.

Sebi chairman M Damodaran said in Kolkata that "if any IPO went wrong, then there will be no talking terms between the regulator and the merchant banker."

Damodaran said Sebi was attaching great importance to the quality of IPOs hitting the market. He said that if merchant bankers intend to do business in the long term, then they should not vet bad quality IPOs.

He said that it was Sebi's job to see that only good quality IPOs enter the market so that more and more retail domestic investors joined the equity cult.

"Retail investors must constitute the backbone of the market, not overseas investors," Damodaran said.

The Sebi chairman also said that more stocks should come to the market since at present, more money was chasing few stocks for which the markets were becoming overstretched.

He said Sebi was in favour of optional grading of IPOs to help the average investor understand the risk factors.

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