SEBI INTERMEDIARY - MERCHANT BANKERS

[Mr. M. GOVINDARAJAN]

Regulations

The Securities and Exchange Board of India (‘SEB I’ for short), with the approval of the Central Government made SEBI (Merchant Bankers) Regulations, 1992 and published the same in the Official Gazette vide Notification No. LE/11112/92, dated 22.12.1992.  The provisions of these regulations came into effect from 22.12.1992.

Merchant banker

The expression ‘merchant banker’ is defined under Regulation 2(1)(cb) as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.

Categories of Merchant banker

The merchant banker is of 4 categories as detailed below-

• Category I -

• to carry on any activity of the issue management, which will, inter alia, consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscriptions; and
• to act as adviser, consultant, manager, underwriter, portfolio manager;

• Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager;
• Category III - to act as underwriter, adviser, consultant to an issue;
• Category IV - to act only as adviser or consultant to an issue.

Registration

An application by a person for grant of a certificate of registration shall be made to the Board in Form A accompanying a fee of Rs.20 lakhs and a non refundable fee of Rs.50,000/-.  The said fee is to be paid within 15 days from the date of receipt of intimation from the Board.  With effect from 09.12.1997 the applicant has to apply for the Category I. 

The Board may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker for the purpose of disposal of the application.  The applicant or its principal officer shall, if so required, appear before the Board for personal representation.

The Board shall grant of certificate subject to the following-

• The applicant shall be a body corporate other than a non-banking financial company.
•  The applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities.
• the applicant has in his employment minimum of two persons who have the experience to conduct the business of merchant banker;
• The applicant fulfils the capital adequacy requirement - net worth not less than Rs.5 crores.
• The applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant;
•  The applicant, his director, partner or principal officer has not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence;
• The applicant has the professional qualification from an institution recognized by the Government in finance, law or business management;
• the applicant is a fit and proper person;
• grant of certificate to the applicant is in the interest of investors.

The Board, on being satisfied that the applicant is eligible, shall grant a certificate of registration in Form B.  The certificate of registration is valid unless it is suspended or cancelled by the Board.  From the date of receipt of the communication, shall not carry on any activity as a merchant banker:

Rejection of application

If the application is not complete in all respects and does not conform to the instructions specified in the form shall be rejected after giving the applicant a reasonable opportunity to remove the objections raised by the Board within the specified time.  The refusal to grant registration shall be communicated by the Board within thirty days of such refusal to the applicant stating therein the grounds on which the application has been rejected.   Any applicant may, being aggrieved by the rejection of certified apply within a period of 30 days from the date of receipt of such intimation to the Board for reconsideration of its decision.  The Board shall reconsider an application made and communicate its decision as soon as possible in writing to the applicant.

Any applicant, whose application for grant of a certificate of permanent registration has been refused by the Board, on and from the date of receipt of the communication, shall not carry on any activity as a merchant banker.   The Board may, in the interest of investors in the securities market, permit the merchant banker to carry on activities undertaken prior to the receipt of the intimation of refusal subject to such condition as the Board may specify.

Suspension of registration

Where a merchant banker fails to pay the required annual fees the Board may suspend the registration certificate, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists.

Obligations of merchant banker

The following are the obligations entrusted by the Regulations on the merchant bankers-

• No merchant banker, other than a Bank or a Public Financial Institution, who has been granted a certificate of registration under these regulations, shall after June 30, 1998 carry on any business other than that in the securities market.
• Every merchant banker shall keep and maintain the following books of account, records and documents namely-

• a copy of balance sheet as at the end of the each accounting period;
• a copy of profit and loss account for that period;
• a copy of the auditor‘s report on the accounts for that period 
• a statement of financial position.
• Records and documents pertaining to due diligence exercised in pre-issue and post –issue activities of issue management and in case of takeover, buyback and delisting of securities.

The merchant banker shall preserve the books of account and other records and documents maintained for a minimum period of 5 years.

• Every merchant banker shall intimate to the Board the place where the books of account, records and documents are maintained.
• every merchant banker shall, after the end of each accounting period furnish to the Board copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the Board.
• Every merchant banker acting as an underwriter shall also maintain the following records with respect to-

•  details of all agreements entered with a body corporate on whose behalf it is acting as an underwriter;
•  total amount of securities of each body corporate subscribed to in pursuance of an agreement;
• statement of capital adequacy requirements;
• such other records as may be specified by the Board from time to time.

• Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker.
• Every merchant banker shall abide by the Code of Conduct as specified in Schedule III.

Lead Managers

No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription.  Where there are more than one lead merchant bankers to the issue the responsibilities of each of such lead merchant bankers shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least 1 month before the opening of the issue for subscription.

A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue.

A merchant banker shall not lead manage any issue or be associated with any activity undertaken under any regulations made by the Board, if he is a promoter or a director or an associate of the issuer of securities or of any person making an offer to sell or purchase securities in terms of any regulations made by the Board: Provided that a merchant banker who is an associate of such issuer or person may be appointed, if he is involved only in the marketing of the issue or offer.

Underwriting obligations

The term ‘underwriting’ is defined under Regulation 2(1)(h) as an agreement to subscribe to or procure subscription for securities, issued or offered for sale, remaining unsubscribed.  In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs.25 lakhs, whichever is less.

A merchant banker acting as an underwriter shall not derive any direct or indirect benefit from underwriting the issue other than the commission or brokerage payable under the agreement for underwriting entered with client.   At any point of time, the total underwriting obligations under all the agreements shall not exceed 20 times of the net worth of the merchant banker.  Every merchant banker, acting as an underwriter, in the event of being called upon to subscribe for securities of a body corporate pursuant to an agreement for underwriting, shall subscribe to such securities within 45 days of the receipt of such intimation from such body corporate.

Agreements with clients

Every merchant banker acting as an underwriter shall enter into an agreement with each body corporate on whose behalf it is acting as an underwriter and the said agreement shall, amongst other things, provide for the following-

• the period for which the agreement shall be in force;
• the allocation of duties and responsibilities between the underwriter and the client
• the amount of underwriting obligations;
• the period, within which the underwriter has to subscribe to the issue after being intimated by or on behalf of such body corporate;
• the amount of commission or brokerage payable to the underwriter;
• details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations.

Prohibitions

No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives, enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.

Information to SEBI

Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of any body corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction.

Disclosures to SEBI

A merchant banker shall disclose to the Board, as and when required, the following information-

• his responsibilities with regard to the management of the issue;
• any change in the information or particulars previously furnished, which have a bearing on the certificate granted to it;
• the names of the body corporate whose issues he has managed or has been associated with;
• the particulars relating to the breach of the capital adequacy requirement;
• relating to his activities as a manager, underwriter, consultant or adviser to an issue, as the case may be.

Compliance Officer

Every merchant banker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors’ grievances.  The compliance officer shall immediately and independently report to the Board any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on/in the draft prospectus or the letter of offer as the case may be, do not recur.

Dispute Resolution   

All claims, differences or disputes between a merchant banker and its client arising out of or in relation to the activities of the merchant banker in the securities market shall be submitted to a dispute resolution mechanism that includes mediation and/or conciliation and/or arbitration, in accordance with the procedure specified by the Board.

Grievance Redressal

The Merchant Banker shall redress investor grievances promptly but not later than 21 calendar days from the date of receipt of the grievance and in such manner as may be specified by the Board.  The Board may also recognize a body corporate for handling and monitoring the process of grievance redressal within such time and in such manner as may be specified.

Inspection

The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of account, records and documents of the merchant banker for any of the following purposes -

•  to ensure that the books of account are being maintained in the manner required;
•  that the provisions of the Act, rules, regulations are being complied with;
• to investigate into the complaints received from investors, other merchant bankers or any other person on any matter having a bearing on the activities of the merchant banker; and
• to investigate suo motu in the interest of securities business or investors interest into the affairs of the merchant banker.

The Board shall give a reasonable notice to the merchant banker for that purpose.  During the course of inspection the merchant banker shall give access to the premises occupied by the merchant banker and also extend necessary facility for examining any books and documents.  The merchant banker shall also extend its assistance to the inspection authorities.

The inspecting authority shall, as soon as may be possible submit, an inspection report to the Board.   The Board or the Chairman shall after consideration of inspection or investigation report take such action as the Board or Chairman may deem fit and appropriate including action under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

The Board may appoint a qualified auditor to investigate into the books of account or the affairs of the merchant bankers.

Liability

A merchant banker who contravenes any of the provisions of the Act, Rules or Regulations framed there under shall be liable for one or more actions specified therein including the action under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.