Module

1
Learning Objectives
 Merchant Banking : Meaning and Categories
 Services/Functions offered by MB
 SEBI Guidelines for Merchant Bankers
 Issue Management (Equity, Rights and Debentures)
 Pre and Post Issue activities
 ORIGIN – HISTORY OF MB
 A Merchant bank is a “United Kingdom” term for an
Investment Bank.
 The origin of Merchant Banking is to be traced to
Italy and France during the seventeenth and
eighteenth centuries.
 In France, a merchant banker (le merchant banquer)
was not merely a trader but an entrepreneur. He
invested his accumulated profits in all forms of
promising activities. He added banking business to his
merchant activities and became a merchant banker.
 The term “Merchant bank" stemmed from leading
merchants of the early 1800's, whether trading in
grain, paper or steel, who transitioned from
merchanting to banking.
 The merchant banker's role evolved in the 1920's
when leading firms became heavily involved in
advising as well as financing their clients.
 Later these merchants formed an association which
is now called “Merchant Banking and Securities
House Association”
Now….

 Merchant banks tend to advise corporations and

Wealthy Individuals on how to use their money.

 The advice varies from counsel on mergers and

acquisitions to recommendation on the type of
credit needed.
Definitions:
 Rule 2(e) of SEBI (Merchant Bankers) Rules, 1992:
“Any person who is engaged in the business of
Issue#Management^ either by making
arrangements regarding Selling, Buying or
Subscribing to Securities as managers,
Consultant, Advisor or rendering Corporate
Advisory Service in relation to such Issue
management”.
(Issued by SEBI on 22.12.1992 and Amendment Regulations on 09.12.1997)
Issue Management
 Issue management consist of preparation of
prospectus and other information relating to
the issue, determining financial structure, tie-up
of financiers and final allotment and refund of
the subscription; and to act as adviser,
consultant, manager, underwriter, portfolio
manager.
Features
 MB is simply an Organization – Individuals are
not called Merchant Banker, rather he is called
a Broker.

 MB is generally engaged in a business of Issue

management.

 Merchant banker plays the role of Manager,

Consultant and Advisor.
SEBI Regulations on MB
 SEBI has brought about a effective regulative
measures for the purpose of disciplining the
functioning of the merchant bankers in India.
 The objective is to ensure an era of regulated
financial markets and thus streamline the
development of the capital market in India.
 The measures were introduced by the SEBI
in1992. These measures were revised by SEBI
in 1997.
Registration
 Originally, as per SEBI Regulations, Merchant
bankers were required to get authorization to
act as “Issue manager” or “Advisor”.

 This authorization was granted by SEBI based

on the Networth limits, Professional
competence, Experience in Business, General
reputation and Past performance records.
Categories of Merchant Bankers

Certificate from SEBI is a must. SEBI regulations

provided for 4 categories of Merchant Bankers;
 Category I: To carry on all activities of the issue
management;
 Category II: To act as adviser, consultant, co-
manager, underwriter, portfolio manager;
 Category III: To act as underwriter, adviser,
consultant to an issue;
 Category IV: To act only as adviser or consultant to
an issue.
 CAPITAL ADEQUACY NORMS :

A Merchant Banker will be granted recognition by SEBI

based on Capital Adequacy Norms in terms of
Networth.
CATEGORY MINIMUM NETWORTH ^^
Category I : Rs. 5 crore
Category II : Rs. 0.5 crore
Category III : Rs. 0.2 crore
Category IV : Nil (No Capital adequacy)

^^Networth comprises of Paid-up Capital +Reserves

Appointment of MB & other Intermediaries
 One of the crucial steps for successful
implementation of IPO is appointment of a
merchant Banker.
 Merchant Banker should have a valid SEBI
Registration to be eligible for appointment.
 A Merchant Banker can be any of the following:
 Lead Manager (BRLMs)
 Co-manager

 Consultant/ Advisor

 Underwriter
Section 30 of the SEBI Act, 1992
 SEBI guidelines insist that all issues should be
managed by atleast one Authorized Merchant
Banker.
 Companies are free to appoint one or more
agencies as managers to the issue.
 The number of Co-managers should not exceed the
number of Lead managers.
 There can be only one Advisor/Consultant to the
issue.
 There is no Limit on the number of Underwriters.
Merchant Banker As lead Managers

S. No Size of the issue Maximum Number

Of Lead Manager

1. Less than Rs.50 crore 2

2. Rs.50 crore to Rs.100 crore 3

3. Rs.100 crore to Rs.200 crore 4

4. Rs.200 crore to Rs.400 crore 5

5. Above Rs.400 crore 5 or more as

agreed by SEBI
Services Rendered by MBs
 Issue Management;
 Project Counseling;
 Loan syndication;
 Management of capital issues;
 Advisory services to mergers and takeovers;
 Consultancy to sick industrial units;
 Portfolio management;
 Corporate Advisory services;

Many more….(Plz refer)

ISSUE MANAGEMENT
 Forms the ‘Bread and Butter’ operations for
most merchant bankers.
 The main area of service involves: Instrument

designing and vetting of prospectus; Pricing of

the issue; Registration process for the issue of
shares; Appointment of Underwriters, Bankers,
Registrars, Brokers; Marketing efforts;
Coordinating final allotment to investors; Listing
details on stock exchanges
Pre-issue activities:
 They prepare draft prospectus and send it to
SEBI and then file them to Registrar of
Companies.
 They conduct meetings with company
representatives and advertising agencies to
decide upon the date of opening issue, closing
issue, launching publicity campaign etc..
 They help the companies in fixing up the prices
for their issues (Price band).
Post-issue activities:
 It includes (Over-seeing) collection of
application forms, screening of applications,
deciding allotment procedure, mailing of
allotment letters, refund orders and so on…
SEBI GUIDELINES FOR MERCHANT BANKERS

 Authorization criteria:
Authorization criteria include:
 Professional qualification in finance, law or business
management
 Infrastructure like office space, equipment and man
power
 Capital adequacy

 Past track of record, experience, general reputation and

fairness in all transactions
SEBI GUIDELINES FOR MERCHANT BANKERS

 General Obligations and Responsibilities:

 Every merchant banker should maintain copies of
balance sheet, Profit and loss account, statement of
financial position.
 Half-yearly unaudited result should be submitted to
SEBI.
 Merchant bankers are prohibited from buying
securities based on the unpublished price sensitive
information of their clients.
 SEBI has been vested with the power to suspend or
cancel the authorization in case of violation of the
guidelines.
 Every merchant banker shall appoint a ‘Compliance
Officer’ to monitor compliance of the Act.
 SEBI has the right to send inspecting authority to
inspect books of accounts, records etc… of
merchant bankers.
 Inspections will be conducted by SEBI to ensure that
provisions of the regulations are properly complied.
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 ensure that prospectus, letter of offer etc.. is
available to investors at the time of issue
 Should render best possible advice to its clients
 Any penal action taken by SEBI should be informed to its
clients
CODE OF CONDUCT
 Should inform the board about any legal proceedings
initiated against it
 Should abide by the rules of ‘‘Securities and Exchange
Board of India Regulations”
 Shall develop its own internal code of conduct for governing
its internal operations
 Should ensure that any person it employs should have the
capacity to be a merchant banker (Broker)
 It is responsible for the act of its employees and agents
 Should not create false market
 Qualities Required of Merchant Bankers

 Ability to analyse
 Abundant knowledge
 Ability to built up relationship
 Innovative approach
 Integrity

DO YOU HAVE IT IN YOU!!!!!!!

Pre-Issue Obligations
 Documents to be submitted to SEBI:
 MOU between Merchant banker and Issuer company
 Due diligence Certificate

 Draft Prospectus in computer CD in prescribed format.

 Ten copies of Draft Offer document.

 MB shall satisfy himself about all the aspects of
offering, veracity and adequacy of disclosure in the
offer document.
 Section 62 of the Companies act places Civil
liability on every responsible person and make
them responsible for compensation or loss due to
misstatements in the prospectus.
 Section 63 of the Act, places Criminal Liability on
every responsible person and makes them liable for
imprisonment and fine for misstatements in the
prospectus.
 Appointment of Intermediaries:
Registrars, Underwriters etc. shall be appointed in
consultation with lead merchant banker.
 Underwriting:
Underwriting of public issue is not mandatory. There
is no Limit on the number of Underwriters. However,
if an issue is underwritten, the unsubscribed portion
has to purchased by the underwriters.
 Appointment of compliance officer:
An Issuer company shall appoint a Compliance
officer who have direct link with the Board with
regard to compliance with various laws, rules,
regulations and other directives issued by the
Board.
 Offer documents to be made public:
After a period of 21 days from the date the draft
offer document was made public, the lead manager
shall file a statement with SEBI giving a list of
complaints received by it, stating whether it
proposes to amend the draft offer document and if
so, highlighting the amendments.
 Final offer document and Prospectus:
The lead manager shall certify that all amendments,
suggestions or observation made by SEBI have been
carried out.
Final prospectus is to be submitted with Registrar of
Companies and the offer document with regional
stock exchange.
 Application forms:
Application form must be accompanied by
Abridged prospectus. Disclaimer clause of SEBI
should be printed in bold.
Highlights and risk factor should be given same
prominence.
 Period of subscription:
Subscription for public issues shall be kept open
atleast 3 working days and not more than 10
working days.
In case of an infrastructure company, it may be kept
open for 21 working days.
Rights issue shall be kept open for atleast 30 days
and not more than 60 days.
 The lead manager shall ensure that the issuer
company has entered into agreements with the
depositories for Dematerialization of securities
Post Issue Obligations
 The lead manager shall ensure the submission of
the Post-Issue Monitoring reports as per prescribed
formats.
 Actively associate himself with post-issue activities
namely allotment, refund and dispatch and shall
regularly monitor redressal of investor.
 Co-ordination with intermediaries: Any act of
omission or commission on the part of intermediaries
shall be reported to the Board.
 Underwriters:
The lead manager shall satisfy itself that the issue is
fully subscribed before announcing of the closure of
the issue.
In case there is a devolvement on underwriters, the
lead manager shall ensure that the underwriters
honour their commitments within 60 days from the
date of the closure of the issue.
 Bankers to the issue:
The lead manager shall ensure that the monies
received pursuant to the issue is kept in a Separate
bank account as per the provisions of section 73(3)
of the Companies act.
Such money shall be released by the concerned
bank only after the listing permission has been
obtained from all the stock exchange.
 Post-issue Advertisement:
Post- issue lead merchant banker shall ensure that in
all issues, advertisement giving details relating to
oversubscription, basis on allotment, number, value
and percentage of application received etc. is
released within 10 days.
 Basis of Allotment:
The lead merchant banker and the registrar to an
issue, shall ensure that allotments are made in
prescribed manner. (Refer Mr.Takur’s Presentation)
 Compliance with Guidelines on Advertisement:
^Refer Advertisement Guidelines^.
Non-Compliance and Defaults

TYPE NATURE PENALTY POINTS(PPS)

 I General Defaults 1
 II Minor Defaults 2
 III Major Defaults 3
 IV Serious Defaults 4