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Merchant Banking

Merchant banking, although a non-banking financial activity, resembles


banking function. The functions of merchant banking which originated, and grew in
Europe, was enriched by American patronage, and these services are now being
provided throughout the world by both banking and non-banking institutions. The
word “Merchant Banking” originated among the Dutch and the Scottish traders, and
was later on developed and professionalized in Britain.

Definition:

A set of functions and services rendered by a merchant banker may be


termed as ‘merchant banking’.

1. According to Random House Dictionary, “merchant bank is an organisation


that underwrites securities for corporations, advises such clients on mergers and is
involved in the ownership of commercial ventures. These organizations are
sometimes banks which are not merchants and sometimes which are not banks and
sometimes houses which bare neither merchants nor banks.

2. According to Charles P. Kindleburger, “merchant banking is the


development of banking from commerce which frequently encountered a prolonged
intermediate stage known in England originally as merchant banking”.

3. According to the Securities and Exchange Board of India (Merchant


Bankers) Rules, 1992, management either by making arrangements regarding
selling , buying or subscribing to securities or acting as manager, consultant,
adviser or rendering corporate advisory services in relation to such issue
management”

Merchant Bankers

A set of financial institutions that are engaged in providing specialist services,


which generally include the acceptance of bills of exchange, corporate finance,
portfolio management and other banking services, are known as “merchant
bankers’. It is not necessary for a merchant banker to carry out all the above-
mentioned activities. A merchant banker may specialize in one activity, and take u
other activities, which may be complementary or supportive to the specialized
activity.

Functions

Merchant banking being a service oriented industry renders the same


services in India as merchant banks in UK and other European countries. In the U.S.,
investment bankers cater to the needs of business enterprises carrying out
merchant banking functions. Merchant banks in India carry out the following
functions and services:

1. Corporate Counseling

2. Project Counseling

3. Pre-investment Studies

4. Capital Restructuring

5. Credit Syndication and Project Finance

6. Issue Management and Underwriting

7. Portfolio Management

8. Working Capital Finance

9. Acceptance Credit and Bill Discounting

10. Mergers, Amalgamations and Takeovers

11. Venture Capital

12. Lease Financing

13. Foreign Currency Finance


14. Fixed Deposits Broking

15. Mutual Funds

16. Relief to Sick Industries

17. Project Appraisals

A brief description of these functions is presented below:

I. Corporate Counseling

Corporate counseling refers to a set of activities that is undertaken to ensure


efficient running of a corporate enterprise at its maximum potential through
effective management of finance. It aims at rejuvenating old-line companies and
ailing units, and guiding existing units in locating areas/ activities of growth and
diversification.

A merchant banker, as a managerial economist, guides the client on aspects


of organizational goals, locational factors, organization size and operational scale,
choice of product and market survey , forecasting for a product, cost reduction and
cost analysis, allocation of resources, investment decisions, capital management
and expenditure control pricing methods and marketing strategy, etc. As a financial
and investment expert, a capital management, financial requirements and sources
of finance, evaluating financial alternatives, rate of return and cost of capital,
besides providing basic corporate services such as financial rearrangement,
reorganization, mergers and acquisitions, etc.

Following are the activities which form part of corporate counseling:

1. Providing guidance in areas of diversification based on the government’s


economic and licensing policies.

2. Undertaking appraisal of product lines, analyzing their growth and


profitability and forecasting future trends.
3. Rejuvenating old-line companies and ailing sick units by appraising their
technology and process, assessing their requirements and restructuring their
capital base.

4. Commissioning of diagnostic studies

5. Assessment of the revival prospects and planning for rehabilitation through


modernization and diversification and revamping of the financial and organizational
structure.

6. Arranging for the approval of the financial institutions/bank for schemes of


rehabilitation involving financial relief, etc.

7. Providing assistance in getting soft loans from financial institutions for


capital expenditure and the requisite credit facilitates from the bank.

8. Monitoring of rehabilitation schemes.

9. Exploring possibilities for takeover of sick units and providing assistance in


making consequential arrangements and negotiations with financial
institutions/authorities involved.

2. Project Counseling

Project counseling is a part of corporate counseling, and relates to project


finance. It broadly covers the study of the project, offering advisory assistance on
the viability and procedural steps for its implementation.

Following are the activities forming part of the Project counseling:

1. Undertaking the general review of the project ideas/project profile.

2. Providing advice on procedural aspects of project implementation

3. Conducting review of technical feasibility of the project on the basis of the


project prepared by own experts or by outside consultants.
4. Assisting in the selection of a Technical Consultancy Organization (TCO) for
preparing project reports and market surveys, or review of the project reports or
market survey reports prepared by TCO

5. Assisting in the preparation of the project report from a financial angle,


advising and acting on various procedural steps including obtaining government
consents for implementation of the project

6. Assisting in obtaining approvals/licenses/permissions/grants, etc from


government agencies in the form of letter of intent, industrial license, DGTD
registration, and the government approval for foreign collaboration.

7. Providing guidance to Indian entrepreneurs for making investment in Indian


projects in India and in Indian joint venture overseas.

8. Identification of potential investments avenues

9. Carrying out precise capital structuring and shaping the pattern of


financing

10. Arranging and negotiating foreign collaborations, amalgamations,


mergers and takeovers.

11. Undertaking financial study of the project and preparation of viability


reports to various national financial institutions, state level institutions and banks.

12. Providing assistance in the preparation of project profiles and feasibility


studies based on preliminary project ideas, covering the technical, financial and
economic aspects of the project from the point of view of their acceptance by
financial institutions and banks

13. Advising and assisting clients in preparing applications for financial


assistance to various national financial institutions, state level institutions, banks,
etc.
14. Assisting clients in preparing applications for obtaining letters of intent,
industrial license, DGTD registrations etc.

15. Providing assistance in seeking approvals from the government of India


for foreign technical and financial collaboration agreements, guidance on
investment opportunities for entrepreneurs coming to India

3. Pre-investment studies

Activities that are connected with making a detailed feasibility exploration to


evaluate alternative avenues of capital investment in terms of growth and profit
prospects are called ‘pre-investment studies. Some of these activities are as
follows:

1. Carrying out an in-depth investigation of environment and regulatory


factors, location of raw material supply, demand projections and financial
requirements in order to assess the financial and economic viability of a given
project

2. Helping the client in identifying and short listing those projects which are
built upon the client’s inherent strength with a view to accentuate corporate
profitability and growth in the long run

3. Conducting such studies as maybe required for foreign companies wishing


to participate in joint ventures in India

4. Offering a package of services, including advice on the extent of


participation, government regulatory factors and an environmental scan of certain
industries in India.

4. Capital restructuring services

Activities that are carried out to assist projects in achieving their maximum
potential through effective capital structuring and to suggest various strategies to
wide3n and restructure the capital base diversify operations and implement
schemes for amalgamations, merger or change in business status are collectively
known as Capital restructuring services.

Under the gamut of Capital restructuring services, merchant bankers provide


advice to companies governed by FERA on disinvestments to their maximum
advantage, and restructuring the capital for ailing or sick units. Capital restructuring
is undertaken by analyzing the capital structure ratios, asset restructuring ratios
and the debt service coverage with overall impact on fund generating capacity of
the client corporate unit.

Following are the services covered:

1. Examining the capital restructuring services of the client and the company
to determine the extent of capitalization required.

2. Preparing a comprehensive memorandum for the Controller of Capital


Issues, and securing consent where the capitalization takes place.

3. Suggesting an alternative capital structure conforming to legal


requirements, viz, extent of capitalization of reserve and quantum of
disinvestments by ‘offer for sale’ and/or fresh issues of corporate securities such as
equity share, and preference share in case of FERA companies

4. Preparing a memorandum covering valuation of shares and justifying the


level of premium applied for

5. Critically examining tax implications where the proposal involves offer for
sale.

6. Suggesting the ideal capital restructuring fir sick units and advising the
client companies on the ‘extent and means of bringing fresh capital into business’.

7. Capital restructuring may cover mergers, takeovers and amalgamations,


involving modernization or diversification of the existing production systems and
the units.
5. Credit syndication

Activities connected with credit procurement and project financing, aimed at


raising Indian and fore I g n currency loans from banks and financial institutions, are
collectively known as ‘credit syndication’

Activities covered under credit syndication are as follows:

1. Estimating the total cost of the project to be undertaken

2. Drawing up a financial plan for the total project cost which conforms to the
requirements of the promoters and their collaborators, financial institutions and
banks, government agencies and underwriters

3. Preparing loan application for financial assistance from term


lenders/financial institutions/banks, and monitoring their progress, including pre-
sanction negotiations

4. Selecting institutions and banks for participation in financing

5. Follow-up of term loan application with the financial institutions and banks,
obtaining the approval for their respective share of participation

6. Arranging bridge finance

7. Assisting in completions of formalities for drawing of term finance


sanctioned by institutions expediting legal documentation formalities, drawing up
agreements etc as prescribed by the participating financial institutions and banks

8. Assessing working capital requirements

It is to be noted that loan syndication services overlap with those of project


counseling and project finance. In practice, banks and financial institutions
undertake wide ranging functions, such as preparing the applications for financial
assistance from financial institutions/banks, monitoring their progress including the
pre-sanction negotiations, post-sanction negotiation/liaisons with the term lenders,
completing the formalities for drawing the sanctioned loan amount, and assisting in
the final disbursal of the sanctioned loan amount in rupee or foreign currencies.

6. Issue Management and Underwriting

Issue management and underwriting connotes activities that are concerned


with the management of the public issues of corporate securities, viz. equity
shares, preference shares, and debentures or bonds, and are aimed at mobilization
of money from the capital market.

Following are some of the popular services provided by merchant bankers in


this regard:

1. Preparation of an action plan

2. Preparation of budget for the total expenses for the issues

3. Preparation of CCI application and assisting in obtaining


consent/acknowledgement

4. Drafting of prospectus

5. Selection of institutional and broker underwriters for


syndication/underwriting arrangements

6. Selection of Issue Houses and advertising for undertaking pre and post-
issue publicity

7. Obtaining the approval of institutional underwriters and stock exchange for


publication of the prospectus

8. Making arrangements for designing and printing of prospectus and


application forms, as well as their dispatch, if necessary

9. Providing assistance in launching the issue in the form of advertising


campaigns by holding press, brokers and investors conferences, etc.
10. Coordination with the underwriters, brokers and bankers to the issue, and
the stock exchanges.

11. Providing advice on the design of a sound capital structure, acceptable to


financial to financial institutions

12. Determining the quantum, terms and timing of the public issue of
different forms of securities, the extent and sources, loan finance and deployment
of internal resources etc in compliance with the requirements of the Companies
Act/Stock Exchanges, etc

13. Arranging for Stock Exchange clearances and listing of securities

14. Liasioning and coordinating with various constituents of the public isse to
make the function of issue management successful

7. Portfolio Management

Making decisions relating to the investment of the cash resources of a


corporate enterprise in marketable securities by deciding the quantum, timing and
the type of security to be bought, is known as ‘Portfolio Management’. It involves
making the right choice of investment, aimed at obtaining an optimum investment
mix, taking into account factors such as the objectives of the investment, tax
bracket of the investor, need for maximizing yield and capital appreciation, etc.

The services covered are as follows:

1. Undertaking investment in securities

2. Undertaking investment for non-resident Indians, on both repatriation and


non-repatriation basis

3. Undertaking review of Provident fund Investment, Trust investment, etc

4. Safe custody of securities in India and overseas


5. Collection of return on investment and re-investment of the same in
profitable avenues, investment advisory services to the investors and
other related services on selection of investments

6. Providing advice on selection of investments

7. Carrying out a critical evaluation of investment portfolio

8. Securing approval from RBI for the purchase /sale of securities(for NRI
clients)

9. Maintaining investment records and complying with ceiling requirements

10.Collecting and remitting interest and dividend on investment

11.Providing tax counseling and filing tax returns through tax consultants

8. Working Capital Finance

The finance required for meeting the day-to-day expenses of an enterprise is


known as ‘Working Capital Finance”. Merchant Bankers undertake the following
activities as part of providing this type of finance:

1. Assessment of working capital requirements

2. Preparing the necessary application to negotiations for the sanction of


appropriate credit facilities

3. Providing assistance in negotiations with all banks, and suggesting a sharing


pattern of credit limits amongst participating banks, where more than one
bank is involved.

4. Assisting coordinating and expediting documentation and other formalities for


disbursement

5. Advising on the issue of debentures for augmenting long-term requirements


of working capital
9. Acceptance Credit and bill Discounting

Activities relating to the acceptance and the discounting of bills of exchange,


besides the advancement of loans to business concerns on the strength of such
instruments, are collectively known as ‘Acceptance Credit and Bill Discounting’. Bill
accepting and discounting are an integral part of the developed merchant market.

In order that the bill accepting and discounting takes place on sound lines, it
is imperative that the firms involved command a good reputation and financial
standing. Further, collecting credit information and rating the credit-worthiness of
the parties concerned are very much a part of this function. In developed money
markets like London and New York, there are specialized agencies, such as discount
houses and acceptances houses, that play an active role in the promotion of this
function. In India, RBI takes special care in developing the bill market.

10. Merger and Acquisition

This is a specialized service provided by the merchant banker who arranges


for negotiating acquisitions and mergers by offering expert valuation regarding the
quantum and the nature of consideration, and other related matters.

The various functions that form part of this activity are as follows:

1. Undertaking management audits to identify areas of corporate strength and


weakness in order to help formulate guidelines and directions for future
growth.

2. Conducting exploratory studies on a global basis to locate overseas markets,


foreign collaboration and prospective joint ventures associates

3. Examining the pros and cons of proposals and formulating schemes for
financial reconstruction, merger and acquisition

4. Obtaining approvals from the shareholders, depositories, creditors,


government and other authorities.
5. Monitoring the implementation of merger and amalgamation schemes

6. Identifying organizations with matching characteristics

7. Assisting in the compliance of legal requirements, obtaining consent from


various authorities, etc by coordinating with solicitors, accountants, valuators
and other professional experts involved in the task

8. Advising on capital reorganization of business enterprises

Merchant bankers provide advice on acquisition propositions after careful


examination of all aspects, viz., financial statements, articles of associations,
provisions of companies act, rules and guidance of trade chambers, the issuing
house associations, etc.

There are many reasons for the recent trend towards mergers and
amalgamations, such as:

1. Existence of excess unused manufacturing capacity of the purchasing


company, which can be utilized efficiently by taking over other units.

2. Lack of manufacturing space with the purchase company. The best solution
may be to buy the controlling interest in another company having excessive
manufacturing space or capacity.

3. Advantages of economics of scale, viz. bulk buying and joint-selling,


particularly the possibility of reduced sales promotion expenses may cause a
takeover bid in a horizontal merger of enterprises in a similar trade.

4. Benefit of vertical integration attracts a takeover bid by a company which is a


supplier to customers who are making larger profits, so that the group as a
whole can reap the benefits.

11. Venture financing


A specially designed capital, as a form of equity financing for funding high-
risk and high reward projects, is known as ‘Venture Capital’. The concept of venture
capital originated in the USA in the 1950’s, when business magnates like
Rockfeller financed new technology companies. The concept became more popular
in the sixties and the seventies, when several private enterprises undertook the
financing of high-risk and high reward projects. In India, venture capital companies
have largely contributed to the technological and industrial revolution.

A large number of Indian and international companies are engaged in venture


capital funding for high technology and high risk projects. A number of leading
national development financial institutions such as IFCI, IDBI and ICICI are engaged
in venture capital financing, and have developed a number of special schemes for
this purpose.

12. Lease Financing

A merchant banking activity whereby financial activities are provided to


companies that undertake leasing, is known as ‘Lease Financing’. Leasing involves
letting out assets on lease for a particular time period for use by the lessee.

Leasing provides an important alternative source of financing capital outlay. Lease


financing benefits both the lessor and the lessee.

Following are the important services provided in regard to leasing:

1. Providing advice on the viability of leasing as an alternative source for


financing capital investment projects.

2. Providing advice on the choice of a favorable rental structure.

3. Providing assistance in establishing lines of lease for acquiring capital


equipment, including preparation of proposals, documentation, etc.

In India, leasing is a non-banking financial activity, undertaken by leading


development financial institution like ICICI, IDBI and IFCI. Commercial banks also
provide lease financing by forming subsidiaries under the amended Banking
Regulations Act of 1949.

13. Foreign Currency Financing

The finance provided to fund foreign trade transactions is called ‘Foreign


Currency Finance’. The provision of foreign currency finance takes the form of
export-import trade finance, euro currency loans, and Indian Joint Ventures abroad
and foreign collaborations. The main areas that are covered in this type of
merchant activity are as follows:

1. Providing assistance for carrying out the study of turnkey and construction
contract jobs

2. Arranging assistance in application to working groups, liaison with RBI, ECGD


and other institutions

3. Arranging for the syndication of various types of guarantees, letters of credit


pre-shipment credit deferred post-shipment credit, bridge loans, and other
credit facilities

4. Providing assistance in opening and operating bank accounts abroad

5. Arranging foreign currency loans under buyer’s credit scheme for importing
goods

6. Arranging deferred payment guarantees under suppliers credit schemes for


importing capital goods

7. Providing assistance in obtaining export credit facilitates from the EXIM bank
for export of capital goods, and arranging for the necessary government
approvals and clearance

8. Undertaking negotiations for deferred payment, export payment, export


finance, buyers credit, documentary credits and other foreign exchange
services like packing credit, etc.
9. Providing guidance on forward cover for exchange risk

10. Assisting in arranging foreign currency guarantees and performance


bonds for exporters

14. Brokering Fixed Deposits

Following are the services rendered by merchant bankers in this regard:

1. Computation of the amount that could be raised by a company in the form of


deposits from the public and loams from shareholders.

2. Drafting of advertisements for inviting deposits

3. Filing a copy of advertisement with the Registrar of Companies for registration

4. Arranging for the issue of advertisement in newspapers, as required by the


Companies Act

5. Drafting and printing of application forms

6. Making arrangements for the collection of deposits at the bank branches

7. Submission of periodical statements to companies concerned

8. Making arrangement for payment of interest amounts

9. Providing advice to the company on the terms and conditions of fixed


deposits, and deciding on the appropriate rate of interest, keeping in view the
prevailing capital and money market conditions

10.Helping the company to observe all the rules and regulations in this
connection

11.Assisting in maintenance of records and registers for the purpose

Assistance in provided under Sec.58 (A) of the Companies Act, 1956 and the
rules there under.
15. Mutual Funds

Institutions and agencies that are engaged in the mobilization of savings of


innumerable investors for the purpose of channeling them into productive
investments of a wide variety of corporate and other securities are called “Mutual
Funds”. UTI is the first and the largest mutual fund in the country. The mutual fund
industry has a large number of players, both in the public as well as the private
sector. Commercial banks are also making rapid strides in the realm of mutual
funds business.

Some of the services rendered by Mutual Funds are as follows

1. Mopping up public savings

2. Investing the funds in a diversified portfolio of shares and debentures


belonging to well managed and growing companies

3. Earning investors a steady return on investments with an assurance of capital


appreciation0

4. Engaging in the business of acquisition, holding or disposable of securities

5. Making investments in any commercial paper floated by the central Govt.,


RBI, any local authority, any foreign govt., foreign bank, or any other
authority outside India and approved by RBI.

16. Relief to Sick industries

Merchant Bankers extend the following services as part of providing relief to


sick industries:

1. Rejuvenating old-lines and ailing units by appraising their technology and


process, assessing their requirements and restructuring their capital base

2. Evolving rehabilitation packages which are acceptable to financial institutions


and banks
3. Exploring the possibilities of mergers/amalgamations, wherever called for

4. Assisting in obtaining approvals from the Board for Industrial and Financial
Reconstruction and other authorities under the Sick Industrial Companies
(Special Provisions) Act, 1985

5. Monitoring the implementation of rehabilitation schemes, mergers and/or


amalgamations

17. Project Appraisal

The evaluation of industrial projects in terms of alternative variants in


technology, raw materials, production capacity, and location of plant is known as
‘Project Appraisal’. Project evaluation is indispensable because resources are scarce
and alternative opportunities exist in terms of projects for commitment of
resources. Project selection can be rational only if it is superior to others
commercially or important to the nation as a whole. The various steps in a project
appraisal are:

 Financial appraisal

Financial appraisal involves assessing the feasibility of a new proposal for


setting up a new project or the expansion of existing production facilities.
Financial appraisal is done in order to gauge the viability of the project, as well
as to rank projects on the basis of their profitability. It may be noted that
financial appraisal is concerned with the measurement of profitability of the
project without reference to the source of finance. While appraising a project, the
direct benefits and costs that are associated with the project are estimated at
the prevailing market prices.

Financial appraisal is undertaken through an analysis which takes into


account the financial features of the project, including sources of financing.
Financial analysis helps trace the smooth operation of the project over its entire
life cycle. The two major aspects of financial analysis are liquidity analysis and
capital structure analysis, for which ratios are employed. Liquidity ratios
measure a project’s ability to meet its short-term obligations. Capital structure
analysis is done to assess long term solvency, i.e., the project’s ability to meet
long-term commitments to creditors.

 Technical Appraisal

Technical appraisal is primarily concerned with the project concept in


terms of technology, design, scope and content of the plant, as well as inputs
and infrastructure facilities envisaged for the project. Basically, the project
should be able to deliver a marketable product from the resources deployed, at a
cost which would leave a margin that would be adequate to service the
investment, and also plough back a reasonable amount into the project to
enable the enterprise to consolidate its position.

 Economic Appraisal

Economic appraisal of a project deals with the impact of the project on


economic aggregates. These may be classified under two broad categories. The
first deals with the effect of the project on employment and foreign exchange,
and the second deals with the impact of the project on net social benefits or
welfare.

Regulatory Framework on Merchant Banking

The SEBI has brought about a number of regulative measures for the purpose
of disciplining the functioning of the merchant bankers in India. The objective is to
usher in an era of regulated financial markets and thereby pave way for the
development of the capital market in India. The measures were introduced by the
SEBI in the year 1992. The measures were revised by SEBI in 1997. Te salient
features of the regulative framework of merchant banking in India are described as
follows:

SEBI Regulations:

I. Registration of Merchant Bankers

The relevant guidelines with regard to the registration of merchant bankers are
as follows:

 Application for Grant of Certificate

An application by a person for grant of a certificate shall be made to the


Board in Form A. The application shall be made for any one of the following
categories of the merchant banker namely:

 Category I: To carry on an 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 financers
and final allotment and refund of the subscription: 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 an underwriter, adviser, consultant, co-manager,


underwriter, portfolio manager

 Category IV: To act only as adviser or consultant to an issue.

With effect from 9th December, 1997 an application can be made only for
carrying on the activity mentioned in category I. An application can carry on the
activity as underwriter only if he obtains certificate of registration under the
provisions of Securities and Exchange Board of India Regulations, 1993.

 Conformance to Requirements
Subject to the provisions of the regulations, any application, which is not
complete in all respects and does not conform to the instruction specified In the
form, shall be rejected. However, before rejecting any such application, the
applicant will be given an opportunity to remove within the time specified such
objections as may be indicated by the Board.

 Furnishing of Information

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.

 Consideration of Application

The Board shall take into account for considering the grant of a certificate
all matters, which are relevant to the activities relating to merchant banker and
in particular whether the applicant complies with the following requirements:

 That the applicant shall be a body corporate other than a non-banking


financial company as defined under clause(f) of section 45-I of the Reserve
Bank of India Act, 1934, 92 of 1934) as amended from time to time:

 That the merchant banker who has been granted registration by the
Reserve Bank of India to act as a Primary or Satellite Dealer may carry on
such activity subject to the condition that it shall not accept or hold public
deposit

 That the applicant has the necessary infrastructure like adequate office
space, equipments, and manpower to effectively discharge his activities

 That the applicant has in his employment minimum of two persons who
have the experience to conduct the business of the merchant banker.
 That a person directly or indirectly connected with the applicant has not
been granted registration by the Board

 That the applicant fulfils the capital adequacy requirement as specified in


the relevant

 That the applicant, his partner, director, partner 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

 That 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.

 That the applicant has the professional qualification from an institution


recognized by the government in finance, law or business management:

 That the applicant is a fit and proper person

 That the grant of certificate to the applicant is in the interest of investors.

 Capital adequacy Requirement

According to the regulations, the capital adequacy requirement shall not be


less that the net worth of the person making the application for grant of
registration. For this purpose, the net worth shall be as follows

Category Minimum Requirement

Category I Rs. 5, 00, 00,000

Category II Rs. 50, 00,000

Category III Rs. 20, 00,000

Category IV Nil
For the propose of this regulation “net worth” means in the case of an
applicant which is a partnership firm or a body corporate, the value of the capital
contributed to the business of such firm or the paid up capital of such body
corporate plus free reserves as the case may be at a time of making application.

 Procedure for Registration

The Board on being satisfied that the applicant is eligible shall grant a
certificate in Form B. On the grant of certificate the applicant shall be liable to pay
the fees in accordance with Schedule II.

 Renewal of Certificate

Three months before the expiry of the certificate, the merchant banker, may
if he so desires, makes an application for renewal in Form A. The applicant for
renewal shall be dealt with in the same manner as if it were a fresh application for
the grant of certificate. In case of an application for renewal of certificate of
registration the provision of clause (a) of regulation 6 shall not e applicable up to
June 30th, 1998. The Board on being satisfied that the applicant is eligible for
renewal certificate shall grant a certificate in Form B and send intimation to the
applicant. On the grant of a certificate the applicant shall be liable to pay the fees
in accordance with Schedule II.

 Procedure where Registration is not Granted

Where an application for grant of a certificate under regulation 3 or of


renewal under regulation 9, does not satisfy the criteria set out in regulation 6, the
Board may reject the application after giving an opportunity of being heard. The
refusal to grant of registration shall be communicated by the board within thirty
days of refusal to the applicant stating therein the grounds on which the application
has been rejected.

Any applicant may, being aggrieved by the decision of the Board, under sub-
regulation (1), apply within a period of thirty days from the date of receipt of such
intimation to the Board for reconsideration of decision. The Board shall reconsider
an application made under sub-regulation (3) and communicate its decision as soon
as possible in writing to the applicant.

 Effect of Refusal to Grant Certificate

Any merchant banker whose application for a certificate has been refused by
the Board shall on and from the date of the receipt of the communication under
sub-regulation (2) of regulation 10 cease to carry on the activity as a Merchant
Banker.

 Payment of Fees

Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified in Schedule II. Where a merchant banker
fails to pay the annual fees as provided in sub-regulation (1), read with Schedule II,
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.

General Obligations

The 1992 SEBI Regulations have enunciated the following general obligations
and responsibilities for the merchant bankers:

 Sole Function

Every merchant Banker shall abide by the code of conduct as specified


in Schedule III. They are as follows:

 Merchant Banker not to associate with any business other than that of the
securities market.
 No merchant banker, other than a bank or a public financial institution,
who has been granted a certificate of registration under these regulation,
shall after June 30th, 1998 carry on any business other than that in the
securities market.

However, a merchant banker who prior to the date of notification of the


Securities and Exchange Board of India (Merchant Bankers) Amendment
Regulations, 1997, has entered into a contract in respect of a business
other than that of the securities market may, if he so desires, discharge his
obligations under such contract. Similarly, a merchant banker who has
been granted certificate of registration to act as primary or satellite dealer
by Reserve Bank of India may carry on such business as may be permitted
by Reserve Bank of India.

 Maintenance of Books

Every merchant banker shall keep and maintain the following


books of accounts, records and documents:

 A copy of balance sheet as at the end of each accounting period:

 A copy of profit and loss account for that period:

 A copy of the auditors report on the accounts for that period: and

 A statement of financial position.

Every merchant banker shall intimate to the Board the place


where the books of accounts, 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 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.

The merchant banker shall preserve the books of accounts and


other records and documents maintained under regulation 14 for a minimum
period of five years.

 Appointment on Maintenance of Lead Merchant Bankers

All issues should be managed by at least one merchant banker


functioning as the lead merchant banker. In an issue of offer of rights to the
existing members with or without the right of renunciation, the amount of the
issue of the body corporate does not exceed rupees fifty lakhs, the
appointment of a lead merchant banker shall not be essential. Every lead
merchant banker shall before taking up the assignment relating to an issue,
enter into an agreement with such body corporate setting out their mutual
right, liabilities and obligations relating such an issue and in particular to
disclosures, allotment and refund.

 Restriction on appointment of Lead Managers

The number of lead merchant bankers may not, exceed in case of an


issue of the following:

Size of Issue Number of Merchant


Bankers

Less than Rs. 50 Crores Two

> Rs. 50 Crores but < Rs. 100 Crores Three

> Rs. 100 Crores but < Rs. 200 Crores Four

> Rs. 200 Crores but < Rs. 400 Crores Five
> Rs. 400 Crores Five or more as agreed by
SEBI

 Responsibilities of Lead Managers

No manager shall agree to manage or be associated with any issue unless his
responsibilities relating to the 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 banker shall
clearly be demarcated and a specifying such responsibilities shall be furnished to
the at least one month before the opening of the issue for subscription.

No lead merchant banker shall, agree to manage the issue made by any body
corporate, if such body corporate is an associate of the lead merchant banker. A
lead merchant banker shall not be associated with the issue if a merchant banker
who is not holding a certificate is associated with the issue.

 Underwriting Obligations

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 five
percent of the total underwriting commitment or rupees twenty-five lacs, whichever
is less. If the merchant banker is unable to accept the minimum underwriting
obligation, that lead merchant banker shall keep the board informed of such
arrangement.

 Submission of Due Diligence Certificate

The lead merchant banker, who is responsible for verification of the contents
of a prospectus or the Letter of Offer in respect of an issue and the reasonableness
of the views expressed therin, shall submit to the Board at least two weeks prior to
the opening of the issue for subscription, a due diligence certificate in Form C.
 Documents to be Furnished to the Board

The lead manager responsible for the issue shall furnish to the Board, the
following documents:

 Particulars of issue:

 Draft prospectus or where there is an offer to the existing shareholders,


the draft letter of offer:

 Any other literature intended to be circulated to the investors, including


the shareholders: and

 Such other documents relating to prospectus or letter of offer as the case


may be.

The documents shall be furnished at least two weeks prior to date of filling
of the draft prospectus or the letter of offer, as the case may be, with
Registrar of Companies or with the Regional Stock Exchanges, or with both.
The lead manager shall ensure that the modifications and suggestions, if any,
made by the Board on the draft prospectus or the Letter of offer as the case
may be, with respect to information to be given to the investors are
incorporated therein.

 Payment of Fees to the Board

The draft prospectus or draft letter of offer referred to in regulation 24 shall


be submitted along with such fees and in such manner as may be specified in
schedule IV.

 Continuance of Association of Lead Manager

The lead manager undertaking the responsibility for refunds or allotment of


securities in respect of any issue shall continue to be associated with the issue till
the subscriptions have received the share or debenture certificates for refund of
excess application money. Where a person other than the lead manager is
entrusted with the refund or allotment of securities in respect of any issue, the lead
manager shall continue to be responsible for ensuring that such other person
discharges the requisite responsibilities in accordance with the provisions of the
Companies Act and the listing agreement entered into by the body corporate with
the stock exchange.

 Acquisitions of Shares Prohibited

No merchant banker or any of its directors, partners 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 the board

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 the Board

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 issue he has managed or has
been associated with;

 The particulars relating to breach of the capital adequacy requirement as


specified in regulation 7;

 Relating to his as a manager, underwriter, consultant or adviser to an issue


as the case may be.

 Appointment of Compliance Officer

Every merchant banker shall appoint a compliance officer who shall be


responsible for monitoring the compliance of the act, rules and regulation,
notifications, guidelines, instructions, etc, issued by the Board or the Central
Government and for redressal of investor’s 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.

II. Procedure for inspection

 Board’s right to inspect

The Board may appoint one or more persons as inspecting authority to


undertake inspections of the books of accounts, Records and documents of the
merchant banker for any of the purpose specified in sub-regulation 92). The
purposes referred to in sub-regulation (1) may be as follows:

 To ensure that the books of accounts are being maintained in the


manner required:

 To ensure that the provision 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-moto in the interest of securities business or


investors interests in the affairs of merchant banker.

 Notice before inspection

Before undertaking an inspection under regulation 29 the Board shall give a


reasonable notice to the merchant banker for that purpose. Where the Board is
satisfied that in the interest of the investors no such notice should be given, it may
by an order in writing directing that the inspection of the affairs of the merchant
banker be taken up without such notice. During the course of inspection, the
merchant banker against whom an inspection is being carried out shall be bound to
discharge his obligations as provided under regulation 31.

 Obligations of Merchant Banker on inspection

It shall be the duty of every director, proprietor, partner, officer and employee
of the merchant banker, who is being inspected, to produce to the inspecting
authority such books, accounts and other documents in his custody or control and
furnish him with the statements and information relating to his activities as a
merchant banker within such time as the inspecting authority may require.

The merchant banker shall allow the inspecting authority to have reasonable
access to the premises occupied by such merchant banker or by any other person
on his behalf and also extend reasonable facility for examining any books, records,
documents and computer data in the possession of the merchant banker or any
such other person and also provide copies of documents or other materials which,
in the opinion of the inspecting authority are relevant for the purpose of the
inspection.
The inspecting authority, in the course of inspection, shall be entitled to examine
or record statements of any principal officer, director, partner, proprietor and
employee of the merchant banker. It shall be the duty of every director, proprietor,
partner, officer or employee of the merchant banker may reasonably be expected
to give.

 Submission of Report to the Board

The inspecting authority shall, as soon as possible submit, an inspection


report to the Board.

 Action on Inspection or Investigation Report

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 the Securities and Exchange Board of India
(Procedure for Holding Enquiry Officer and Imposing Penalty) Regulations, 2002.

 Appointment of Auditor

The Board may appoint a qualified auditor to investigate into the books of
accounts or the affairs of the merchant banker. The auditor so appointed shall have
the same powers of the inspecting authority as are mentioned in regulation 29 and
the obligations of the merchant banker in regulation 31 shall be applicable to the
investigation under this regulation.

 Communication of Findings
The Board shall after consideration of the inspection report communicate the
findings to the merchant banker to give him an opportunity of being heard before
any action is taken by the Board on the findings of the inspecting authority. On
receipt of the explanation if any, from the merchant banker, the Board may call
upon the merchant banker to take such measures as the Board may deem fit in the
interest of the securities market and for due compliance with the provisions of the
act, rules and regulations.

III. Procedure for action in case f default

 Liability for action in case of default

A merchant Banker who fails to comp[ly with any conditions subject to


which certificate has been granted, and contravenes any of the provisions of the
Act, rules or regulations, shall be dealt with in the manner provided under SEBI
Regulations 2002.

The penalties referred to in sub-regulation (1) may be either suspension


of registration or cancellation of registration.

 Suspension of registration

A penalty for suspension of registration of a merchant banker may be


imposed under the following circumstances:

 where the merchant banker violates the provisions of the Act, rules or
regulations; or

 where the merchant banker fails to furnish any information relating to


his activities as merchant banker as required by the Board; or furnishes
wrong or false information; or does not submit periodical returns as
required by the Board; or does not cooperate in any enquiry conducted
by the Board; or
 where the merchant banker fails to resolve the complains of the
investors or fails to give a satisfactory reply to the board in this behalf;
or

 where the merchant banker indulges in manipulating or price rigging or


cornering activities;

 Where the merchant banker is guilty of misconduct or improper or


unbusiness-like or unprofessional conduct which is not in accordance
with the Code of Conduct specified in the Schedule III; or

 Where the merchant banker fails to maintain the capital adequacy


requirement in accordance with the provision of regulation 7; or

 Where the merchant banker fails to pay the fees; or

 Where the merchant banker violates the conditions of registration; or

 Where the merchant banker does not carry out his obligation as
specified in the regulation.

 Cancellation of registration

A penalty of cancellation of registration of a merchant banker may be


imposed where:

 Where the merchant banker indulges in manipulating or price rigging


or cornering activities affecting the securities market and the investors
interest:

 The financial position of the merchant banker detoriates to such an


extent that the board is of the opinion that his continuance as merchant
banker is not in the interest of investors:

 The merchant banker is guilty of fraud, or is convicted of a criminal


offence;
 In case of repeated defaults of the nature mentioned in regulation 36
provided that the board furnishes reasons for cancellation in writing

Manner of making order of suspension or cancellation

 No order of penalty of suspension or cancellation

no order of penalty of suspension or cancellation as the case may


be; shall be imposed except after holding an enquiry in accordance
with the procedure specified in regulation.

 Manner of holding Enquiry before Suspension or Cancellation

For the purpose of holding an enquiry under regulation 38; the Board
may appoint an enquiry officer. The enquiry officer shall issue to the
merchant banker a notice the registered office or the principal place of
business of the merchant banker .

The merchant banker may within thirty days from the date of receipt
of such notice, furnish to the enquiry officer a reply together with copies of
document or other evidence relied on by him or sought by the Board from
the merchant banker.

The enquiry officer shall, give a reasonable opportunity of hearing to


the merchant banker may either from the merchant banker

The enquiry officer shall, give a reasonable opportunity of hearing to


the merchant banker to enable him to make submissions in support of his
reply made under sub-regulation [3]. The merchant banker may either appear
in person or through any duly authorized person. No lawyer or advocate shall
be permitted to represent the merchant banker at the enquiry . Where a
lawyer or an advocate has been appointed by the Board as a presenting
officer under sub-regulation [6] , it shall be lawful for the merchant banker
to present its case through a lawyer or advocate.

If it is considered necessary ; the enquiry officer may ask the Board to


appoint a presenting officer to present its case. The enquiry officer, after taking
into account all relevant facts and submissions made by the merchant banker,
submit a report to the Board and recommend the penalty to be imposed as also the
grounds on the basis of which the proposed penalty is justified.

 Show cause Notice and Order

On receipt of the report from the enquiry officer, the Board shall consider the
same and issue a show-cause notice as to why the penalty as proposed by the
enquiry officer should not be imposed. The merchant banker shall within twenty-
one days of the date of the receipt of the show-cause send a reply to the Board.

The Board after considering the reply to the show-cause notice, if recived,
shall as soon as possible but not later than thirty-says from the receipt of the reply,
if any, pass such order as it deems fit. Every order passed under sub-regulation (3)
shall be self contained and give reasons for the conclusion stated therein including
justification of the penalty imposed by that order The Board send a copy of the
order under sub-regulation (3) to the merchant banker

 Effect of Suspension and Cancellation

On and from the date of the suspension of the merchant banker he shall
cease to carry on any activity as a merchant banker during the period of
suspension. On and from the date of cancellation the merchant banker shall with
immediate effect cease to carry on any activity as a merchant banker. The order of
suspension or cancellation of certificate passed under sub-regulation (3) of the
regulation 40 shall be published in at least two daily newspapers by the Board.

 Appeal to the Securities


Any person aggrieved b an order of the Board made, on and after the
commencement of the Securities Laws Act, 1999, under these regulations may
prefer an appeal to as Securities Appellate Tribunal having jurisdiction in the
master.

 Fees

Every merchant banker shall pay a sum of Rupees five Lacs as registration
fees at the time of the grant of certificate by the Board. The fee shall be paid by the
merchant banker within fifteen days from the date of receipt of the intimation from
the Board under sub-regulation (1) of regulation 8. A merchant Banker to keep
registration in force shall pay renewal fee of Rs. 2.5 lacs every three years from the
fourth year from the date of initial registration. The fee shall be paid by the
merchant banker within fifteen days from the date of receipt of intimation from the
board under sub-regulation (3) of regulation (9).

The fees specified shall be payable by merchant banker by demand draft in


favor of ‘Securities and Exchange Board of India’ payable at Mumbai or at the
respective regional office.

Every Merchant Banker shall pay registration fees as set out below:

 Category I merchant banker.

A sum of Rs. 2.5 Lacs to be paid annually for the first two years
commencing from the date of initial registration and thereafter for the third
year a sum of Rs. 1 lakh to keep his registration in force:

 Category II merchant banker.

A sum of Rs 1 lakhs to be paid annually for the first two years


commencing from the date of initial registration and thereafter for the third
year a sum of Rs. 50000 to keep his registration in force

 Category III merchant banker.


A sum of Rs 1 lakhs to be paid annually for the first two years
commencing from the date of initial registration and thereafter for the third
year a sum of Rs. 25000 to keep his registration in force.

 Category IV merchant banker.

A sum of Rs 5000 to be paid annually for the first two years


commencing from the date of initial registration and thereafter for the third
year a sum of Rs. 1000 to keep his registration in force.

 Renewal Fees

 Category I merchant banker.

A sum of Rs 1 lakh to be paid annually for the first two years


commencing from the date of each renewal and thereafter for the third year
a sum of Rs. 20000 to keep his registration in force.

 Category II merchant banker.

A sum of Rs 75000 to be paid annually for the first two years


commencing from the date of each renewal and thereafter for the third year
a sum of Rs. 10000 to keep his registration in force.

 Category III merchant banker.

A sum of Rs 50000 to be paid annually for the first two years


commencing from the date of each renewal and thereafter for the third year
a sum of Rs. 5000 to keep his registration in force.

 Category IV merchant banker.


A sum of Rs 5000 to be paid annually for the first two years
commencing from the date of each renewal and thereafter for the third year
a sum of Rs. 2500 to keep his registration in force.

In addition the merchant bankers have to pay the following fees towards
documentation:

Size of the Issue Fee per


document (Rs.)

Upto 5 crores 10000

More than 5 crores and upto 10 crores 15000

More than 10 crores and upto 50 crores 25000

More than 50 crores and upto 100 crores 50000

More than 100 crores and upto 500 crores 250000

More than 500 crores 500000

IV. Code of Conduct for merchant Banker (Under Regulation


13)

 A Merchant Banker shall make all efforts to protect the interests of investors.

 A Merchant Banker shall maintain high standards of integrity, dignity and


fairness in the conduct of its business.

 A Merchant Banker shall fulfill its obligations in a prompt, ethical, and


professional manner.

 A Merchant Banker shall at all times exercise due diligence, ensure proper care
and exercise independent professional judgment
 A Merchant Banker shall endeavor to ensure that enquiries from investors are
adequately dealt with: grievances of investors are redressed in a timely and
appropriate manner: where a complaint is not remedied promptly, the investor
is advised of any further steps which may be available to the investor under
the regulatory system.

 A Merchant Banker shall ensure that adequate disclosures are made to the
investors in a timely manner in accordance with the applicable regulations and
guidelines so as to enable them to make a balanced and informed decision.

 A Merchant Banker shall endeavor to ensure that the investors are provided
with true and adequate information without making any misleading or
exaggerated claims or any misrepresentation and are made aware of the
attendant risks before taking any investments decision.

 A Merchant Banker shall endeavor to ensure that copies of the prospectus,


offer document, letter of offer or any other related literature is made available
to the investors at the time of issue of the offer.

 A merchant banker shall not discriminate amongst its clients, save and except
on ethical and commercial considerations.

 A Merchant Banker shall make any statement, either oral or written, which
would misrepresent the services that the Merchant Banker is Capable of
performing for any client or has rendered to any client.

 A Merchant Banker shall avoid conflict of interest and make adequate


disclosure of its interest.

 A merchant Banker shall put in place a mechanism to resolve any conflict of


interest situation that may arise in the conduct of its business or where any
conflict of interest arises, shall take reasonable steps to resolve the same in an
equitable manner.
 A Merchant Banker shall make appropriate disclosure to the client of its
possible source or potential areas of conflict of duties and interest while acting
as Merchant Banker which would impair its ability to render fair, objective and
unbiased services.

 A Merchant Banker shall always endeavor to render the best possible advice to
the clients having regard to their needs.

 A Merchant Banker shall not divulge ton anybody either orally or in writing,
directly or indirectly, any confidential information about its clients which has
come to its knowledge, without taking prior permission of its clients, except
where such disclosures are required to be made in compliance with any law for
the time being in force.

 A Merchant Banker shall ensue that any change In registration status/any


penal action taken by the Board or any material change in the Merchant
Banker’s financial status, which may adversely affect the interests of
clients/investors is promptly informed to the clients and any business
remaining outstanding is transferred to another registered intermediary in
accordance with any instructions of the affected clients

 A Merchant Banker shall not indulge in any affair competition, such as weaning
away the clients on assurance of higher premium or advantageous offer price
or which is likely to harm the interests of the other merchant banker or the
investors or is likely to place other merchant banker in a disadvantageous
position while competing for or executing any assignment

 A Merchant Banker shall maintain arms length relationship between its


merchant banking activity and any other activity.

 A Merchant Banker shall have internal control procedures and financial and
operational capabilities which can be reasonably expected to protect its
operations, its clients, investors and other registered entities from financial loss
arising from theft, fraud and other dishonest acts, professional misconducts or
omissions.

 A Merchant Banker shall not make untrue statement or suppress any material
fact in any documents, reports or information furnished to the board.

 A Merchant Banker shall maintain an appropriate level of knowledge and


competence and abide by the provisions of the ACT, regulations made
thereunder, circulars and guidelines, which may be applicable and relevant to
the activities carried on by it.

 A Merchant Banker shall ensure that the board is the promptly informed about
any action, legal proceedings etc., initiated against it in respect of material
breach or non-compliance by it, of any law, rules, regulations, directions of the
Board or of any other regulatory body.

 A Merchant Banker or any of its employees shall not render, directly or


indirectly, any investment advice about any security in any publicly accessible
media, whether real-time or non-real-time, unless a disclosure of his interest
including a long or short position, in the said security has been made, while
rendering such advice.

 A Merchant Banker shall demarcate the responsibilities of the various


intermediaries appointed by it clearly so as to avoid any conflict or confusion in
their job description.

 A merchant banker shall provide adequate freedom and powers to its


compliance officer for the effective discharge of the compliance officer’s duties.

 A Merchant Banker shall develop its own internal code of conduct for governing
its internal operations and laying down its standards of appropriate conduct for
its employees and officers in carrying out their duties. Such a code may extend
to the maintenance of professional excellence and standards, integrity,
confidentiality, objectivity, avoidance or resolution of conflict of interests,
disclosures of shareholdings and interests etc.

 A Merchant Banker shall ensure that good corporate policies and corporate
governance are in place

 A Merchant Banker shall ensure that any person it employs or appoints to


conduct business is fit and proper and otherwise qualified to act in th capacity
so employed or appointed.

 A Merchant Banker shall ensure that it has adequate resources to supervise


diligently and does supervise diligently persons employed or appointed by it in
the conduct of its business , in respect of dealing in securities market.

 A Merchant Banker shall be responsible for the acts or omissions of its


employees and agents in respect of the conduct of its business.

 A Merchant Banker shall ensure that the senior management; particularly


decision makers have access to all relevant information about the business on
a timely basis.

 A Merchant Banker shall not be a party to or instrumental for creation of false


market; price rigging or manipulation; or passing of unpublished price sensitive
information in respect of securities which are listed and proposed to be listed in
any stock exchange to any person or intermediary in the securities market.

SEBI Guidelines

Operational Guidelines

SEBI has pronounced the following guidelines for compliance by the eligible
merchant bankers:

1. Submission of offer document:


The offer documents of issue size up to Rs. 20 crores shall be filed by
lead merchant bankers with the concerned regional office of the Board under
the jurisdiction of which the registered office of the issuer company falls. The
jurisdiction of regional offices / head office shall be as per Schedule XXII.
According to Clause 5.6 of Chapter V of the Guidelines, the draft offer
document filed with the board shall be made public.

The lead merchant banker shall make available 10 copies of the draft
offer document o the Board and 25 copies to the stock exchange(s) where the
issue is proposed to be listed. Copies of the draft offer document shall be
made available to the public by the lead merchant bankers/ Stock Exchange.
The lead merchant banker and the Stock Exchange(s) may charge for
providing a copy of the draft offer document.

The lead merchant banker shall also submit to the board the draft offer
document on a computer floppy in the format specified in Schedule XXII. The
lead Merchant Banker shall submit two copies of the printed copy of the final
offer document to dealing offices of the Board “within three days of filing offer
document with Registrar of Companies/ concerned Stock Exchange(s) as the
case may be.”

The lead merchant banker shall submit one printed copy of the final
offer document to the Primary Market Department, SEBI, Head Office, “within
three days of filing the offer document with Registrar of companies/
concerned Stock Exchange(s) as the case may be.” The lead merchant banker
shall submit a computer floppy containing the final prospectus/ letter of offer
to the Primary Market Department, SEBI, and Head Office, as specified in
Schedule XXII within three days of filing the final prospectus / letter of offer
with the Registrar of Companies / concerned Stock Exchange. Along with the
floppy, the lead manager shall submit an undertaking to SEBI certifying that
the contents of the floppy are in HTML format, and are identical to the printed
version of the prospectus/ letter of offer filed with the Registrar of Companies/
concerned Stock Exchange, as the case may be.

Whenever offer documents (for public/ rights, takeovers or for any other
purpose) are filed with any Department/ office of the Board, the following
details “certified as correct” shall be given by the lead merchant banker in
the forwarding letters:

a. Registration number

b. Date of Registration/ Renewal of registration

c. Date of expiry of registration

d. If applied for renewal, date of application

e. Any communication from the Board prohibiting them from acting as


a merchant banker

f. Any inquiry/ investigation being conducted by the Board

g. Period upto which registration/ renewal fees has been paid

h. Whether any promoter/ director/ group and/ or associate company of


the issuer company is a associated with securities- related business
and registered with SEBI

i. If any one or more of these persons/ entities are registered with


SEBI, their respective registration numbers

j. If registration has expired, reasons for non renewal

k. Details of enquiry/ investigation conducted by SEBI at any time


l. Penalty imposed by SEBI (Penalty includes deficiency/ warming
letter, adjudication proceedings, suspension/ cancellation/
prohibitory orders)

m. Outstanding fees payable to SEBI by these entities, if any

Offer documents not accompanied by the information as contained above


may be rejected. Lead merchant bankers shall obtain similar information from
other intermediaries to ensure that they comply with the guidelines and are
eligible to be associated with the concerned issue. The intermediaries shall also
indicate their letters that they have obtained such information from other
intermediaries.

2. Dispatch of issue material:

Lead merchant shall ensure that whenever there is a reservation for


NRIs, 10 copies of the prospectus together with 1000 application forms are
dispatched in advance of the issue opening date, directly along with a letter
addressed in person to Adviser (NRI), Indian Investment Centre, Jeevan Vihar
Building Sansad Marg, and New Delhi. Twenty copies of the prospectus and
application forms shall be dispatched in advance of the issue opening date to
the Investors Associations.

3. Underwriting:

While selecting underwriters and finalizing underwriting arrangements,


lead merchant bankers shall ensure that the underwriters do not overexpose
themselves so that it becomes difficult to fulfill their underwriting
commitments. The overall exposure of underwriter(s) belonging to the same
group or management in an issue shall be assed carefully by the lea
merchant banker. OTC Dealers registered with the Board under SEBI (Stock
Brokers and Sub-Brokers) Rules and Regulations, 1992 shall be treated at par
with the brokers of other stock exchanges in respect of underwriting
arrangement.

4. Compliance obligations:

The merchant banker shall ensure compliance with the following post-
issue obligations:

a. Association OF RESOURCE PERSONEL In terms of Clause 7.1 of Chapter VII


of these Guidelines, in case of over-subscription in public issues, a Board
nominated public representative shall be associated in the process of
finalization of the basis of allotment. The lead merchant banker shall
intimate to the person so nominated the date, time, venue etc regarding
the process of finalization of the basis of allotment.

The expenses of the public representatives associated in the allotment


process of oversubscribed issues shall be borne by the lead merchant
bankers, and recovered from the issuers. Honorarium at a minimum of Rs.
500/- per day, plus normal conveyance charges shall be paid to them, and
the Board Regional Managers at New Delhi, Chennai and Calcutta shall be
associated with them.

b. Redressal of investor grievances The merchant bankers shall assign high


priority to investor grievances, and take al preventive steps to minimize
the number of complaints. The lead merchant banker shall set up a proper
grievance monitoring and redressal system in coordinating with the issuers
and the Registrars to Issue. They shall take all necessary measures to
resolve the grievances quickly. They actively associate with post-issue
refund and allotment activities, and regularly monitor investor grievances
arising therefrom.

c. Submission of post issue monitoring reports The concerned lead merchant


banker shall submit, in duplicate , the Post issue Monitoring Reports
specified in Clause 7.2 chapter VII of these Guidelines, within 3 working
days from the due dates, either by registered post or deliver them at the
respective regional offices of the Board, a copy of the report shall inform
the Board on important developments about the particular issues being
lead managed by them during the period intervening the reports

d. Issue of No Objection Certificate (NOC) In accordance with the Listing


Agreement of the Stock Exchanges, the issuer companies shall deposit 1%
of the amount of securities offered to the public and/ or to the holders of
the existing securities of the company as the case may be with the
regional Stock Exchange. These securities can be released by the
concerned Stock Exchange only after obtaining an NOC from the Board.

e. Registration of Merchant Bankers

Application for renewal of certificate of registration shall be made by


the merchant bankers according to regulation 9 of SEBI (Merchant bankers)
Rules and regulation 1992. While filing the renewal application for the
certificate of registration as merchant banker, it shall provide a statement
highlighting the changes that have taken place in the information that was
submitted to the Board for earlier registration, and a declaration stating that
no other change besides those mentioned in the above statement have taken
place.

Merchant bankers, while forwarding the renewal application in Form A


of SEBI (Merchant bankers) Rules and regulation 1992, shall also forward the
additional information as specified in schedule XXVI. Registered merchant
bankers shall inform the board of their having become a member of AMBI,
with the relevant details.

f. Reporting requirements In terms of regulation 28 of SEBI (Merchant


bankers) Rules and regulation 1992, the merchant bankers shall send a
half yearly report, in the format specified in schedule XXVII, relating to
their merchant banking activities. The report referred to in sub clause A
shall be submitted twice a year on March 31st and Sept 30, and it should
reach the board within 3 months from the close of period to which it
relates.

g. Impositions of Penalty points Penalty points may be imposed on the


merchant banker for violation of any of the provisions for operational
guidelines. the merchant banker, on whom penalty point of 4 or more
has been imposed may be restrained from filing any other offer
document or associating or managing any issues for a particular period.

The board may initiate action under the SEBI (Merchant bankers) Rules and
regulation against the merchant bankers, irrespective of whether any penalty
point is imposed or not. Imposing of penalty point is not a pre-condition for
initiation of proceedings against the merchant banker under SEBI (Merchant
bankers) Rules and regulation 1992.

Guidelines on Advertisement:

Following are the guidelines applicable to lead merchant bankers who shall
ensure due compliance by the issuer company:

1. Factful and truthful:

An issue advertisement shall be truthful, fair and clear and shall not contain
any statement that is untrue or misleading. Any advertisement reproducing, or
purporting to reproduce, any information contained in an offer document shall
reproduce such information in full and disclose all relevant Facts. It should not be
restricted to select extracts relating to that item. An issue advertisement shall be
considered to be misleading, if it contains: a) Statements made about the
performance or activities of the company in the absence of necessary explanatory
or qualifying statements, which may give n exaggerated picture of the performance
activities. b) An inaccurate portrayal, or its portrayal in a manner which implies
that past gains or income will be repeated in the future.

2. Clear and Concise:

An advertisement: An advertisement shall be set forth in a clear, concise and


understandable language. Extensive use of technical, legal terminology or complex
language and the inclusion of excessive details which may distract the investor
shall be avoided.

3. Promise of profits:

An issue advertisement shall not contain statements which promise or


guarantee rapid increase in profits. An issue advertisement shall not contain
statements which promise or guarantee rapid increase in profits. An issue
advertisement shall not contain any information that is not contained in the offer
document.

4. Mode of advertising:

No models, celebrities, fictional characters, landmarks, caricatures or the like


shall be displayed on or form part of the offer documents or issue advertisements.
Issue advertisements shall not appear in the form of crawlers on television.
Similarly, no advertisement shall include any issue slogans or brand names for the
issue, except the normal commercial name of the company or commercial brand
names of its products already in use. No slogans, expletives or non-factual and
unsubstantiated titles shall appear in the issue advertisements or offer documents.

5. Financial Data:
If any advertisement carries any financial data it shall also contain data for
the past three years and shall include particulars relating to sales, gross profit, net
profit, share capital, reserves, earnings per share, dividends, and book values.

6. Risk Factors:

All issues advertisements carried I the print media such as newspapers,


magazines, brochures or, pamphlets shall contain highlights relating to any issue,
besides containing detailed information on the risk factors. The print size of
highlights and risk factors in issue advertisements shall not be in less than point 7
sizes. It shall contain the names of Issuer Company, address of its registered office,
names of the main lead merchant bankers and Registrars to the issue. No issue
advertisement shall be released without giving “Risk Factors” in respect of the
highlights need not contain risk factors.

7. Issue Date:

No corporate advertisement of Issuer Company shall after 21 days of filing of


the offer document with the board until the closure of the issue, unless the risk
factors which are required to be mentioned in the offer document are mentioned in
the advertisement.

8. Product advertisement:

No product advertisement of the company shall contain any reference,


directly or indirectly, to the performance of the company during the period.

9. Subscription:

No advertisement shall be issued stating that the issue has been fully
subscribed or oversubscribed during the period the issue is open for subscription,
except to the effect that the issue is open or closed.

10. Issue Closure:


No announcement regarding closure of the issue shall be made except on the
date of closing. If the issue is fully subscribed before the date on which the issue is
to be closed. Announcements regarding closure of the issue shall be made only
after the lead merchant banker is satisfied that at least 90% of the issue has been
subscribed, and a certificate has been obtained to that effect from the Registrar to
the Issue.

11.Incentives:

No incentives, apart from the permissible underwriting commission and


brokerage, shall be offered through advertisements to anyone associated with
marketing the issue.

12.Reservation:

In case there is a reservation for NRI’s, the issue advertisement shall specify
the same, and, also indicate the place in India from where the individual NRI
applicant can procure application forms.

13. Underwriting:

An underwriting has to be obtained from the issuer as part of the MoU


between the lead merchant banker and the issuer company to the effect that the
issuer company shall not directly or indirectly release, during any conference or at
any other time, any material or information which is not contained in the offer
documents.

13. Availability of copies:

To ensure that the issuer company obtains approval for all issue
advertisements and publicity materials from the lead merchant banker responsible
for marketing the issue and also ensure the availability of copies of all issue related
materials with the lead merchant banker, at least until the allotment is completed.

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