JOSE

THOPPAN

COMMERCIAL E-Banking

BANKING SYSTEM
UNIT V – MERCHANT BANKING
• Merchant banking

• Historical perceptive

• Nature of services provided by Merchant bankers

• Structure of merchant banking firm

• Setting up and managing a merchant bank

• SEBI regulations on merchant banks.

JOSE 2
THOPPAN
 COMMERCIAL
BANKING SYSTEM Merchant Banking

UNIT 5
JOSE
THOPPAN
HISTORY OF MERCHANT BANKING
• Italy and France – 17th and 18th century
• Italian grain merchants used to assist other merchants in their business (production &
trading only), while carrying on their own business.

Merchant
A

B
C D

JOSE
THOPPAN
HISTORY …….
• Initially it was fund-based activity, now it is non-fund-based also.
• Modern era started in London, MB financed foreign trade through
acceptance of bills of exchange.
• Slowly they started helping under-developed countries in raising
finance through floating bonds for them in London money market.
• Post war period
• Loan syndication
• Underwriting of issues
• Portfolio Management etc.

JOSE
THOPPAN
MERCHANT BANKER: DEFINITION AND MEANING

Investment
banker (US)

Merchant
Banker
Accepting and
issuing houses
(UK)

JOSE
THOPPAN
MERCHANT BANKER: DEFINITION AND MEANING
• The MB is a Financial Intermediary

• Involved in the activity of “issue management” for starting ventures and existing companies.

• They provide advisory services to corporate entities in respect of :

• Subscribing
• Selling and
• Buying securities
SEBI defines a merchant banker as “Any person who is engaged in the business of
issue management either by making arrangements regarding selling, buying or
subscribing securities as manager, consultant, advisor, or rendering corporate
advisory services in relation to such issue management”
• So the main business is Issue Management

JOSE
THOPPAN
GROWTH OF MERCHANT BANKING IN INDIA

• Grindlays Bank was the first to commence MB activity in capital markets in 1967
• It began its operations with the management of capital issues, recognizing the
needs of upcoming class of entrepreneurs for diverse financial services.
• Citi Bank 1970 and SBI in 1972.
• ICICI Bank, Bank of India, Bank of Baroda, Canara bank, Punjab National Bank
etc. for MB divisions or subsidiary companies.
• Share brokers and consultancies have constituted themselves into public or private
limited companies.
• Some MB companies have entered into collaboration with foreign merchant
bankers. JOSE
THOPPAN
MERCHANT BANKERS
Public sector : examples

• SBI Capital markets Ltd

• Punjab National Bank

• Bank of Maharashtra

Foreign Players

• Goldman Sachs (India) Securities Pvt Ltd

• Morgan Stanley India Co. Pvt. Ltd

• Barclays Securities (India) Pvt Ltd

• BofA Securities (formerly DSP Merril Lynch Ltd) JOSE

THOPPAN
MERCHANT BANKERS
Private sector Merchant bankers

• ICICI Securities Ltd

• Axis bank Ltd

• Bajaj Capital Ltd

• Tata Capital Markets Ltd

• Reliance Securities Ltd

• Kotak Mahindra Capital co. Ltd

• Yes bank Ltd

JOSE
THOPPAN
MERCHANT BANK VS COMMERCIAL BANK
Type of difference Merchant Banking Commercial Banking
Primary services Non-fund based: Financial advisory, Fund-based: Lending money (Asset
facilitating M&A, Corporate restructuring, Oriented)
private equity placement (Management
oriented)
Secondary services Underwriting and broker-dealer operations Safe deposit vault, insurance and
broking services
Target group Corporate and high networth individuals More emphasis on retail customers,
compared to corporate clientele.
Access Limited clientele Wider clientele
Nature of instruments Raising finances with equity and debt Debt instruments
instruments
Risk Source of risk is from the regulators Risk from defaulting borrowers

Impact of activities Usually related to the growth of financial Impact on money supply and GDP
markets and liquidity of money markets growth

Regulator SEBI RBI & MoF JOSE

THOPPAN
FUNCTIONS OF INVESTMENT BANKS
• They help and private corporates in issuing securities in primary market, provide
guarantee by standby underwriting and act as intermediaries in trading for clients

• They also offer post issue services and portfolio management services and
nonresident investing by providing financial advice to investors and assist them in
purchasing securities, managing financial assets and trading.

• They help government in the disinvestment of public sector enterprises.

• They give companies advice on mergers and acquisitions (M&A) – both sell side
as well as buy side, divestitures, corporate restructuring and spin offs.

• They also support in corporate counselling, loan syndication, project counselling,

offshore financing JOSE
THOPPAN
 JOSE 13
THOPPAN
FUND RAISING SERVICES
Investment banks help clients to raise funds thorough the following:

• Initial Public offerings (IPOs)

• Follow-on Public Offerings (FPOs)

• Qualified Institutional Placements (QIPs)

• Rights Issues

• Preferential Allotments

• Foreign Currency Convertible Bonds (FCCBs)

• Global Depository Receipts (GDRs)

Contd----- JOSE
THOPPAN
MB assists the issuer in a number of critical functions:

• Analyzing the industry and company to determine if there is a demand with

investors for such an offer

• Designing the offering

• Pricing the offering

• Marketing the offering to investors

• Leads and directs the issuer’s team of professional advisors and coordinates
their roles to ensure that the funds are successfully raised.
JOSE
THOPPAN
• According to Securities and Exchange Board of India (Merchant Bankers)
Rules, 1992, it is mandatory for a merchant banker to hold a certificate of
registration granted by the Securities and Exchange Board of India.

• If a person / organization wants to carry or undertake any of the authorized

activities, has to get registered under the regulations.

• To obtain the certificate of registration, one has to apply in the prescribed

form and fulfill two set of norms
(a) operational capabilities and

(b) capital adequacy norms

JOSE 16
THOPPAN
FOUR TYPES OF MERCHANT BANKERS
• Category I MBs can carry on any activity related to issue management, that is:
1. The preparation of prospectus and other information related to the issue,

2. Determine the financial structure

3. Tie-up of financiers

4. Final allotment of securities

5. Refund of subscription

• They could also act as advisors, consultants, managers, underwriters, or portfolio

managers.

Contd…..

JOSE
THOPPAN
• Category II MBs can act as advisors, consultants, co-managers, underwriters
and portfolio managers.

• Category III MBs can act as underwriters, advisors and consultants to an issue.

• Category IV MBs can act only as advisors or consultant to an issue.

JOSE
THOPPAN
CAPITAL ADEQUACY NORMS

The minimum net worth requirement for acting as merchant banker is

given below:

• Category I – Rs. 5 crores

• Category II – Rs, 50 lakhs

• Category III – Rs. 20 lakhs

• Category IV – Nil

JOSE
THOPPAN
CODE OF CONDUCT

• Should make all efforts to protect the interest of investors.

• Should maintain high standards of integrity, dignity and fairness in conduct of
business.
• Should fulfill all obligations in a professional and ethical manner.
• Should not discriminate among the clients.
• Should endeavor to ensure that the inquiries, grievances are adequately dealt
with in a timely and appropriate manner.
• Should ensure that prospectus/letter of offer is available to investors at the time
of issue.

JOSE 20
THOPPAN
CODE OF CONDUCT

• Should render best possible advice to its clients.

• Any penal action taken by SEBI should be informed to its clients.
• Should inform the Board about legal proceedings initiated against it.
• Should abide by the rules of SEBI, 2003.
• Should ensure that any person it employs should have the capacity to be a
merchant banker.
• Should not create false market.

JOSE 21
THOPPAN
OBLIGATIONS AND RESPONSIBILITY

• Not to associate with any business other than that of the securities market.
• Every merchant banker shall keep and maintain the following books of
accounts, records and documents namely:
a. A copy of balance sheet at the end of each accounting period
b. A copy of profit and loss account for that period
c. A copy of auditor’s report on the accounts of that period
d. A statement of financial position
• Submission of half-yearly results
• Report on steps taken on auditor’s report.
• Acquisition of shares prohibited
JOSE
• Information to the Board and Disclosure to the Board
22
THOPPAN
REGISTRATION
SEBI grants a certificate of registration considering the following matters:
• MB should be a body corporate other than an NBFC.
• Enough infrastructure like adequate office space, equipment and manpower.
• Employed atleast two persons with experience to conduct merchant banking
business.
• Any person directly or indirectly connected with the applicant does not have a regn
from SEBI.
• Minimum networth Rs.5 crore
• No litigation with securities
• Have recognized professional qualification in finance, law or business management
• The applicant should be a fit and proper person. JOSE
THOPPAN
REGISTRATION…
• If satisfied, SEBI grants initial registration valid for 5 years upon payment of fee.

• Three months before the expiry of the period of initial registration, an application
in the prescribed form accompanied by the prescribed non-refundable fee should
be made for permanent registration.

• On satisfied, SEBI gives permanent registration on payment of requisite fee.

• Fees: Regn fee for initial regn: Rs.2,00,000 within 15 days from the intimation by
SEBI

• To keep permanent regn, Rs.9,00,000 every three years

• Non-refundable fee for initial/permanent regn: Rs.50,000

JOSE
THOPPAN
CONDITIONS OF REGISTRATION
• Prior approval of SEBI would be necessary to continue to act as a merchant
banker after change in control.

Change in control means:

(i) If its shares are listed, change of control in terms of stipulations of SEBI
Take over regulations

(ii) Change in its controlling interest in any other case. (Controlling interest
means direct/indirect interest to the extent of at least 51% of voting rights.)

• Enter into a legally binding contract with the issuer specifying their mutual
duties and responsibilities.

Contd… JOSE
THOPPAN
• Pay the initial and permanent regn fee in the prescribed manner.

• Take adequate steps for redressal of investors grievances within one month of
the complaint and keep SEBI informed about the number, nature and other
particulars of such complaints together with the manner of their redressal.

• Abide by the relevant regulations under the SEBI Act.

JOSE
THOPPAN
ISSUE MANAGEMENT- APPOINTMENT OF LEAD
MERCHANT BANKERS
• The lead manager plays an important role in:
a. Designing the instrument,

b. Pricing the issue,

c. Timing the issue,

d. Marketing,

e. Prepare the offer document,

f. Listing and

g. Allotment / refund.

JOSE
THOPPAN
NO. OF LEAD MANAGERS SHOULD NOT EXCEED IN
CASE:
Size of Issue No. of MBs

----------------- ---------------

a. Less than Rs.50 crores Two

b. Rs.50 crores but less than 100 crores Three

c. Rs.100 crores but less than Rs.200 crores Four

d. Rs.200 crores but less than Rs.400 crores Five

e. Above Rs.400 crores Five or more as

agreed by the Board

----------------------------------------------------------------------------------------------
JOSE
THOPPAN
RESPONSIBILITIES OF MB
• All responsibilities relating to issue are clear and furnished to the board at least
one month before the opening of the issue.

• No lead MB shall agree to manage the issue made by any body corporate , such
body corporate is an associate of the lead MB.

• Acquisition of share prohibited

No MB (or any director, partner, manager or principal officer) shall enter into any
transaction in securities of the corporate during the course of any professional
assignment either from the clients or otherwise.

JOSE
THOPPAN
• Information to the board:

MB has to submit to the board complete particulars of any transaction for acquisition
of securities of any body corporate whose issue is managed by that MB within 15
days from the date of entering in to such transaction.

• Disclosure to SEBI

A MB should furnish the following information to the SEBI;

• The responsibilities of the MB with regards to the management of the issue;

• Any change in the information or particulars previously furnished.

• The particulars regarding breach of capital-adequacy specified in the regulation

• Relating to any other activities as a manager, underwriter, consultant or advisor

to any issue as the case may be. JOSE
THOPPAN
Appointment of compliance officer

• Every MB has to appoint a compliance officer who shall be responsible for monitoring
the compliance of the Act, rules and regulations, notifications, guidelines, instructions
and so on, issued by the board or the central government and for the redressal of
investors’ grievances.

• The compliance officer shall immediately and independently report to the Board any
non-compliance observed by him.

• He should also ensure that the observations made or deficiencies pointed out by the
Board on/in the draft prospectus or the letter of offer do not occur.

JOSE
THOPPAN
ISSUE MANAGEMENT – OVERVIEW
• Management of the issue of various types of instruments by the Corporate Sector for
raising funds, by offering them to the public on a regular basis, and to the existing
shareholder on a right basis

• Prior to 1992, the new issue market activity was controlled by the Controller of Capital
Issues under the Capital of Controller Issues Control Act 1947.

• Post 1992 the protection of the interest of the investors, regulation and of the market
activity and promotion and development has become the responsibility of Securities
and Exchange Board of India (SEBI).

JOSE
THOPPAN
ROLE OF MB IN APPRAISAL OF PROJECT
The role of a merchant banker during project appraisal is to ensure that they check the following:

• Viability of submitted project

• Analyze the scope of the submitted project

• Prepare recommendations based on the evaluation

• Present the report to the bank for further perusal

JOSE
THOPPAN
DESIGNING CAPITAL STRUCTURE & INSTRUMENTS
• Invest in projects that yield a return greater than the minimum acceptable hurdle rate.

• The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds
(equity) or borrowed money (debt)

• Returns on projects should be measured based on cash flows generated and timing of cash flows; they
should also consider both positive and negative side effects of these projects.

• Choose a financing mix that minimizes the hurdle rate and matches the assets being
financed.

• If not enough investments that earn hurdle rate, return the cash to stockholders.

• Form of returns - dividends & stock buybacks - will depend upon stockholders’ characteristics.

Objective: Maximize the Value of the Firm

JOSE
THOPPAN
DESIGNING CAPITAL STRUCTURE & INSTRUMENTS
• Capital structure theory emphasize on the balance between debt and equity

• Due to tax, debt is considered a cheaper method of capitalization than equity

• However, if a company leverages excessively it increases risks of financial distress

• Companies use a more practical approach in designing a capital mix by considering

• The cost of capital,

• Alignment of capital structure with strategy,

• Flexibility to respond to rapidly changing market conditions and

• Focus on liquidity to minimize reliance on external financing

• Leading companies manage capital structure effectively to take advantage of

opportunities, manage risk and meet the changing needs of the business

JOSE
THOPPAN
CHOICE OF FINANCING
• There are only two ways in which a business can raise money
• DEBT:

The essence of debt is that you promise to make fixed payments in the future
(interest payments and repaying principal). If you fail to make those payments, you
lose control of your business.

• EQUITY:

With equity, you do get whatever cash flows are left over after you have made debt payments.

JOSE
THOPPAN
DEBT VS. EQUITY

Debt versus Equity

Fixed Claim Residual Claim

High Priority on cash flows Lowest Priority on cash flows
Tax Deductible Not Tax Deductible
Fixed Maturity Infinite life
No Management Control Management Control

Debt Hybrids (Combinations Equity

of debt and equity)

JOSE
THOPPAN
A LIFE CYCLE VIEW OF FINANCING CHOICES

Revenues
$ Revenues /
Earnings

Earnings

Time

External f unding High, but High, relative Moderate, relative Declining, as a

needs Low, as projects dry
constrained by to firm value. to firm value. percent of firm
up.
infrastructure value

Internal financing Negative or Negative or Low, relative to High, relative to More than funding needs
low low funding needs funding needs

External Owner’s Equity Venture Capital Common stock Debt Retire deb t
Financing Bank D ebt Common Stock Warrants Repurchase stock
Convertibles

Gro wth stage Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Start-up Rapid Expansion High G rowth Mature G rowth Decline

Financing
Tr ansitions Accessing private equity Inital Public offering Seasoned equity issue Bond is sues JOSE
THOPPAN
MEASURING FIRMS FINANCIAL MIX
• The simplest measure of how much debt and equity a firm is using currently is to look
at the proportion of debt in the total financing.

• This ratio is called the debt to capital ratio:

• Debt to Capital Ratio = Debt / (Debt + Equity)

• Debt includes all interest bearing liabilities, short term as well as long term.

• Equity can be defined either in accounting terms (as book value of equity) or in market
value terms (based upon the current price). The resulting debt ratios can be very
different.

JOSE
THOPPAN
THE CHOICES
• Equity can take different forms:
• For very small businesses: it can be owners investing their savings

• For slightly larger businesses: it can be venture capital

• For publicly traded firms: it is common stock

• Debt can also take different forms

• For private businesses: it is usually bank loans

• For publicly traded firms: it can take the form of bonds

JOSE
THOPPAN
ISSUES

Issues

Public Rights Private Placements

Initial Public Further Public

Offering Offering Qualified Institutional
Private Placements Preferential Issue Placements
(for Unlisted Companies) (for listed Companies)
(for unlisted Companies) (for listed Companies)
(for listed Companies)

Fresh Issue Offer for Sale Fresh Issue Offer for Sale

JOSE
THOPPAN
INTERMEDIARIES IN ISSUE MANAGEMENT
• Merchant Bankers/Lead Managers

• Underwriters

• Bankers to an Issue

• Brokers to the Issue

• Registrars and Share Transfer Agents

• Debenture Trustees

• Portfolio Managers

JOSE
THOPPAN
FUNCTIONS OF A MB IN ISSUE MANAGEMENT
• Composition of Capital Structure

• Obtain SEBI approval

• Arrange for Underwriting

• Prepare draft & final prospectus and obtain clearance

• Prepare and finalize other documents – application forms, adverts., statutory requirements

• Choose Registrar, Underwriters, Brokers, Bankers to the issues and their fees

• SEBI Compliance and compliance with other procedural formalities

• Arrange press conference and investor meets

• Choose printing press, advert. Agencies etc.

• Coordinate printing and publicity

JOSE
THOPPAN
ISSUE MANAGEMENT REQUIREMENTS
Operational
Pre-Issue Obligations Post Issue Obligation
Guidelines

Post Issue Monitoring Submission of Draft and

Due Diligence Requisite Fees Reports Final Offer Document

Submission of Appointment of Instructions on Post-Issue

Documents Post Issue Advertisements
Intermediaries Obligations

Underwriting Offer Document made Co-ordination with

Merchant Bankers
public Intermediaries

Pre-Issue Advertisement
IPO Grading Basis Of Allotment Issue of Penalty Points
Dispatch of Issue
Material
No Complaints Other Responsibilities
Mandatory Collection Certificate
Centers
Authorized Collection
Advertisement of Rights Centers
Post Issues
Appointment of Miscellaneous
Abridged Prospectus Compliance Officers

Agreement with Action Against

Branding of Securities Directions by SEBI
Intermediaries
Depositories
JOSE
THOPPAN
PRE-ISSUE ACTIVITIES
• In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company’s

operations/ management/ business plans/ legal etc.

• Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory

advertisements and memorandum containing salient features of the Prospectus.

• The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed

formalities with the Stock Exchanges, RoC and SEBI including finalisation of Prospectus and

RoC filing.

• Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers

to the Offer is also included in the pre-issue processes.

• The LM also draws up the various marketing strategies for the issue.
JOSE
THOPPAN
PREPARATION OF PROSPECTUS
Offer document

• It is a Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which

is filed with the Registrar of Companies (ROC) and Stock Exchanges.

• It covers all the relevant information to help an investor to make his/her investment decision.

Draft Offer document

• It is an offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to

the filing of the Offer Document with ROC/ SEs.

• SEBI may specifies changes, if any, and the issuer or the Lead Merchant banker shall carry out such changes

in the draft offer document before filing the Offer Document with ROC/SEs.

• The document will be available on the SEBI website for public comments for a period of 21 days from the

filing of the Draft Offer Document with SEBI.

JOSE
THOPPAN
 Cont…

PREPARATION OF PROSPECTUS
Red Herring Prospectus

• A prospectus with no details of either price or no. of shares offered or the amount of issue

• In case price is not disclosed, no. of shares and upper and lower price bands are disclosed

• On the other hand, issuer can state the issue size and the no. of shares are determined later

• For FPO, RHP can be filed with RoC without price band. Issuer, in such a case will notify the floor price or a

price band by way of an advertisement one day prior to opening of the issue

• For book-built issues, it is a process of price discovery and the price cannot be determined until the bidding

process is completed. Hence, such details are not shown in RHP filed with ROC in terms of the provisions of

the Companies Act. Only on completion of the bidding process, the details of the final price are included in

the offer document.

JOSE
THOPPAN
 Cont…

PREPARATION OF PROSPECTUS
• The offer document filed thereafter with ROC is called a prospectus.

Abridged Prospectus

• It is the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the

Companies Act, 1956. It contains all salient features of a prospectus and accompanies the

application form of public issues.

JOSE
THOPPAN
 Cont…

PREPARATION OF PROSPECTUS
Letter of offer

• It is the offer document prepared by company for its rights issue and which is filed with SEs.

• The letter of offer contains all the disclosures as required in term of SEBI(DIP) guidelines and enable
shareholder in making an informed decision.

Abridged letter of offer

• The abridged version of the letter of offer sent by a listed company to each and every shareholder who is
eligible for participating in the rights issue along with the application form.

• A company is also required to send detailed letter of offer upon request by any Shareholder.

Placement Document

• Document prepared by Merchant Banker for the purpose of Qualified Institutions placement and contains all
the relevant and material disclosures to enable QIBs to make an informed decision.

JOSE
THOPPAN
POST-ISSUE ACTIVITIES
• The post issue activities including management of escrow accounts, coordinate non-institutional
allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the
LM.

• The post Offer activities for the Offer will involve essential follow-up steps, which include the
finalization of trading and dealing of instruments and dispatch of certificates and demat of
delivery of shares, with the various agencies connected with the work such as the Registrar(s) to
the Offer and Bankers to the Offer and the bank handling refund business.

• The merchant banker shall be responsible for ensuring that these agencies fulfill their functions
and enable it to discharge this responsibility through suitable agreements with the Company.

JOSE
THOPPAN
POST ISSUE ACTIVITIES
• Post issue monitoring reports

• Redress investors grievances

• Coordinate with intermediaries

• Post-issue advertisements

• Basis of allotment in over-subscribed issues

• Certificate regarding realisation of stock invests

• Other responsibilities

JOSE
THOPPAN
POST ISSUE ACTIVITIES
• Post issue monitoring reports
• 3 day Post issue monitoring report ,where the due date is third day from date of closure
subscription.

• Final Post Issue Monitoring Report , to be submitted the 78th day from the date of closure of
subscription of the issue.

• Rights issue monitoring report on the 3day and 50th day from date of closure of subscription.

• Redressal of Investors Grievances

• To be done by the post issue lead merchant banker

JOSE
THOPPAN
POST ISSUE ACTIVITIES Cont…

• Coordination with Intermediaries

• To be done by the Post issue lead merchant bankers, for monitoring the flow of applications
from the collecting banks, processing of applications, till the basis of allotment is finalized,
certificates despatched, and refund orders completed.

• Underwriters : Lead merchant banker to ensure that issue closes on earliest date only if it is
fully subscribed, or it should continue for the required no. of days to take care of the
Underwriter’s interests.

• Bankers to an Issue : Post issue lead merchant banker to ensure, that the applications monies
maintained in separate bank A/c.s are released only after the listing permission has been
obtained from all stock exchanges.

JOSE
THOPPAN
POST ISSUE ACTIVITIES Cont…

• Post Issue Advertisements

• Post issue advertisements containing details of date of refund order despatch, , date of filing of
listing application , despatch date of certificates, should be released within 10 days from date
of completion of such activities .

• Ad for closure of the issue to be issued only after actual closure.

JOSE
THOPPAN
SEBI GUIDELINES FOR MERCHANT BANKERS
• Registration
• Registration is compulsory and is under 4 categories

Category Description Net Worth Required

Category I To carry on the activity of issue management (prospectus, other 5 Cores

(Since Dec 1997, only information preparation, financial structure , tie up of financiers,
Cat. I MB’s are
final allotment of securities, refund of subscription) and to act as
registered by SEBI.
adviser, consultant, manager, underwriter, portfolio manager
PMs need an additional
registration)

Category II To act as adviser, consultant, co-manager, underwriter, portfolio 50 Lakhs

manager

Category III To act as underwriter, adviser or consultant to an issue 20 Lakhs

Category IV To act only as adviser or consultant to an issue Nil

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• An application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers)
Regulations, 1992.

• SEBI shall consider the application and on being satisfied issue a certificate of registration
in Form B of the SEBI (Merchant Bankers) Regulations, 1992

• Grant of Certificate on compliance of following requirements

• Body corporate other than NBFC.
• Adequate office space, equipment and manpower.
• At least 2 persons with experience in merchant banking
• Applicant’s associate/subsidiary/group company etc. should not have a SEBI Licence
• The company should have a net worth of not less than 5 Crores
• Directors/officer/partner - not involved in any litigation in the securities market
• Directors/officers with professional qualification in finance/law/business management

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• The Registration fee is different for different categories

• The validity period of certificate of registration is 3 years from the date of issue.

• For Renewal, 3 months before the expiry period, an application should be submitted to SEBI in Form A of
the SEBI (Merchant Bankers) Regulations, 1992.

• SEBI shall consider the application and on being satisfied renew certificate of registration for a further
period of 3 years.

• The person whose registration is not current shall not carry on the activity as merchant banker from the date
of expiry of validity period.

• Registration Fee (amount is dependent on category)

• Application Fee of Rs. 25000, Registration Fee of Rs. 10 lakh ration fee payable to SEBI is Rs. 10 lakhs which should be
paid within 15 days of date of receipt of intimation regarding grant of certificate

• Renewal fee of Rs. 5 lakh every 3 years from the 4th year

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• Merchant Banker Code of Conduct
• Protect interest of investors

• Integrity, dignity and fairness

• Obligations fulfilled in prompt and professional manner

• Investor inquiries and grievances handled on time and appropriate manner

• Adequate disclosures to investors as per guidelines

• No discrimination amongst clients.

• Copies of prospectus and offer letter to all investors at time of offer of issue.

• Best advice to clients.

• No divulgence of confidential information

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• Restriction on Business
• Prohibited from carrying on fund/asset business, unless a Bank/ Public Financial Institution

• If registered with RBI as Primary Dealer/Satellite Dealer than may carry on such business as
permitted by RBI.

• Maximum no. of lead managers (related to size of the issue)

• Less than Rs.50 crore - 2 lead managers

• Between Rs.50-Rs.100 crore - 3 lead managers.

• Rs 100-200 crores - 4 lead managers

• Rs. 200-400 crores - 5 lead managers

• Above 400-more than 5 lead managers

JOSE
THOPPAN
 Cont…
SEBI GUIDELINES FOR MERCHANT
BANKERS
• Responsibilities of Lead managers
• Agreement with issuing companies for mutual rights, obligations for issues, allotment and refund

• Statement to SEBI of these details, 1 month before issue. Statements of obligations of other
associates also to be furnished

• Cannot associate with a merchant banker who has not registered with SEBI

• Minimum underwriting commitment Rs. 25 lakhs or 5% of total underwriting amount

• If cannot manage the underwriting amount then has to arrange equal amount through other associate
lead managers.

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• Due Diligence Certificate:
• To be submitted to SEBI 2 weeks before issue

• Details regarding the offer letter/prospectus conformity with the papers , materials relevant to the
issue.

• All disclosures are true, fair and adequate to enable investors to take well informed balanced
decision.

• Submission of documents
• All documents like prospectus, offer letter, other particulars to be submitted to SEBI 2 weeks prior
to the issue along with the prescribed fees.

• If any recommendations made by SEBI, they should be duly incorporated

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• Acquisition of shares
• Not to acquire shares on the basis of the unpublished sensitive information

• To inform SEBI, of any acquisition, within 15 days of transaction.

• Inspection
• Inspection by SEBI at any time.

• All records, documents, computer date to be provided to inspector.

• All provisions on inspection report to be complied with

JOSE
THOPPAN
 Cont…

SEBI GUIDELINES FOR MERCHANT BANKERS

• Action in Case Of Default
• Suspension of Registration
• Failure to furnish any information as required by SEBI, non submission of periodical returns, failure
to resolve complaints, misconduct with reference to prescribed code of conduct

• Fails to pay fees, violates conditions of registration

• Cancellation of Registration
• Indulges in deliberate manipulation/price rigging affecting the securities market.

• Poor financial position of merchant banker

• Is guilty of fraud, or convicted of a criminal offence

JOSE
THOPPAN
UNDERWRITERS
• Make commitment for subscription either by others or by themselves.

• Appointed by issuing companies in consultation with lead managers and reported in the
prospectus

• Registration
• Certificate of registration from SEBI, and pay registration fee to the SEBI.
• Application fee of Rs. 25,000 and Registration fee of Rs. 10 lakhs for first 3yrs
• Renewal fee Rs.5 lakhs every three years from 4th year.

• The conditions for registrations will remain the same as that of a Merchant Banker
• Necessary infrastructure – office space, equipment, manpower etc. to be in place
• At least 2 persons with experience in underwriting should be employed
• The applicant should not have a person directly/ indirectly connected and having an existing license from
SEBI
• Capital Adequacy requirement of not less than 20 lakh in net worth (Capital + Free Reserves)

JOSE
THOPPAN
 Cont…

UNDERWRITERS
• Types of Underwriters
• Firm Underwriting
• An underwriting agreement where the underwrities agrees to take up specified number of
securities irrespective of the securities being offered to the public

• Sub-Underwriting
• Contracting out by the main underwriter to other intermediaries for a commission

• Joint Underwriting
• Joint underwriting by two or more underwriters

• Syndicate Underwriting
• A two part agreement between the issuer and the underwriters and the underwriters
themselves. Generally for large or risky issues

JOSE
THOPPAN
 Cont…

UNDERWRITERS
• General Responsibilities :
• Cannot derive any other benefit from the underwriting , except underwriting commission.

• Underwriting obligations cannot exceed 20 times net worth.

• They have to subscribe for securities under the agreement , within 45 days of intimation

• Code of conduct

• Agreement with clients

• It provides for the period of agreement, amount of underwriting obligations, period within which to
subscribe to the issue, amount of commission and details of arrangements made for fulfilling the
underwriting obligations.

JOSE
THOPPAN
 Cont…

UNDERWRITERS
• Benefits of Underwriting
• Adequate funds within a reasonable and agreed time frame, guarantee for subscription

• Expert advise on soundness of proposed plan, investor attitude, market conditions etc.

• Enhanced Goodwill – Vouchsafe the financial soundness of company

• Assurance to investors on financial integrity of the issue and the company

• Better Marketing

• Benefits to Buyers

• Price Stability

JOSE
THOPPAN
BANKERS TO AN ISSUE
• Activities include accepting application forms, along with the application money from
investors and refund of application money.

• Registration
• Certificate of Registration from SEBI
• The Applicant is a Scheduled Bank and the grant of certificate is in the interest of the investors
• Necessary infrastructure – office space, equipment, manpower etc. to be in place
• The applicant should not be involved in any litigation in Securities Market and has not committed any
economic offence
• Application fee of Rs. 25,000. Rs 10 Lakh as the Registration fee. 5 lakh as Renewal fee every 3 years

• General Responsibilities
• Furnish information to SEBI regarding no. of issues handled by them, no. of applications received, details
of application money received, dates on which the application money is forwarded to the issuing
company, and refund dates

JOSE
THOPPAN
 Cont…

BANKERS TO AN ISSUE
• Books of Accounts/Documents:
• To be maintained for a minimum of 3 yrs .

• Details regarding application money received, the names of investors, the time within which the same is
forwarded to the issuing company, dates & amount of refund to investors.

• Disciplinary Action by RBI

• If RBI takes disciplinary action against the Bank for handling issue payments, the bank has to inform the
same to SEBI.

• If bank has been prohibited from carrying on its activities by RBI, the SEBI registration automatically
gets cancelled

• A Compliance officer should monitor the compliance to SEBI Rules/Acts/notifications/guidelines

and redress investor grievances

JOSE
THOPPAN
BROKERS TO THE ISSUE
• Mainly concerned with procurement of subscription to the issue from the investors.

• Appointment of brokers is not compulsory, and issuers are free to appoint any no. of brokers.

• Appointment of brokers to be made after consent of SE, where they are active members. Hence entry of

brokers is restricted to agencies having experience in new issue activity

• A copy of the consent letter is to be sent along with the prospectus to the ROC.

• Names and addresses of the brokers to be disclosed in the prospectus.

• Brokerage to be paid within limits prescribed, where the rate applicable to the public issue is 1.5%, whether

the issue is underwritten or not. 0.5% for Private Placement

• Mailing cost and out of pocket expenses for canvassing of issue to be borne by the broker

JOSE
THOPPAN
 Cont…

BROKERS TO THE ISSUE

• Brokerage not allowed in the following cases:

• In respect of subscription by directors, their friends and employees

• Rights issue taken or renounced by the existing shareholders

• Subscriptions by the institutions/bankers against their underwriting commitments

• Brokerage Payment

• Brokerage is payable by issuer within 2 months of the date of allotment

• The Issuer should furnish on request, to the broker, the details regarding allotment made against
applications bearing their stamp.

• Brokerage is to be paid to brokers through cheques payable at par at all centres, where recognized stock
exchanges are situated.

JOSE
THOPPAN
REGISTRARS TO AN ISSUE & SHARE TRANSFER AGENTS
• Carrying on activities such as
• Collecting application from the investors
• Keeping a proper record of applications, and money received from investors
• Assisting companies in determining the basis of allotment of securities
• Finalizing allotment
• Processing and dispatching allotment letters, refund orders, certificates and other related documents
in respect of the issue

• Capital adequacy and Fee

• Net worth of Rs.6 lakh & Rs.3 lakh for Category 1 & 2 respectively
• Not applicable to a department of a body corporate maintaining records of holders of securities and
dealing with transfer/redemption of securities
• Registration fees Rs.3,00,000 and Rs.1,00,000 for the two categories respectively
• Renewal fees for them are Rs.1,00,000 and Rs.50,000 respectively, every three years
• Condition for Registration is same as applicable for Merchant Bankers, JOSE
THOPPAN
 Cont…

REGISTRARS TO AN ISSUE & SHARE TRANSFER AGENTS

• Maintenance of Records:
• They have to maintain records relating to all applications received from investors, all rejected
applications, basis of allotment of securities in consultation with stock exchanges, list of allotees,
refund orders, and so on

• In addition the names of transferors and transferees & dates of transfer of securities

• Inspection :
• SEBI is authorized to take up inspection of books of accounts and documents of registrars,
investigate complaints from investors/other registrars, in the interest of the investors

JOSE
THOPPAN
DEBENTURE TRUSTEES
• A debenture trustee is a trustee for a trust deed needed for securing any issue of
debentures by a company/body corporate or private placement by a listed company or
proposed to be listed company.

• A trust deed is a deed executed by a company in favour of the trustees named therein
for the benefit of the debenture holders.

• Only banks, public financial institutions, insurance companies and other companies
fulfilling the capital adequacy requirement of 1 crore in terms of net worth minus
aggregate value of accumulated losses , can act as Debenture Trustees.

JOSE
THOPPAN
 Cont…

DEBENTURE TRUSTEES
• To act as debenture trustees :

• Certificate of registration from SEBI is necessary.

• Adequate office space, equipment and manpower to effectively discharge duties.

• Employment of atleast one person who possesses the professional qualification in law from government

recognized institution

• Directors/principal officers should not be convicted of any economic offence and is a fit and proper

person.

• The initial registration is for 3 yrs and renewable before 3 months before date of expiry.

• Registration fee Rs.10 lakh and renewal fee Rs.5 lakh every three years.

JOSE
THOPPAN
PORTFOLIO MANAGERS
• The term portfolio means holding of securities belonging to any person.

• Portfolio management is the advising/undertaking the management of a portfolio of

securities of clients on behalf of the clients .

• It could be discretionary or non discretionary.

• Discretionary : investment of securities at the discretion of the firm

• Non discretionary : investment of securities only on the directions of the clients.

• Registration compulsory for all, except Category I &II Merchant bankers

JOSE
THOPPAN
 Cont…

PORTFOLIO MANAGERS
• Investment of client’s Money :
• Should not accept money or securities from clients for period less than 1 year

• All renewal of portfolio fund on maturity, treated as fresh placement for 1year

• Investment can be done in money market investments, but not in bill discounting, badla
financing, lending/placement with corporate or non corporate bodies

• No investments where the actual settlement is otherwise than by actual delivery of the
securities

• All purchases and sale of securities separately for each client.

JOSE
THOPPAN
 Cont…

PORTFOLIO MANAGERS
• Disclosures to SEBI:
• Management of portfolio

• Any change in information previously given, which might affect the certificate granted to
them

• Names of clients

• Particulars regarding capital adequacy requirement

JOSE
THOPPAN
END OF UNIT III
JOSE 83
THOPPAN