WHO IS A MERCHANT BANKER?

“Mercantile banker” is defined as any person who is engaged in the business of issue management, whether by making arrangements regarding the selling, buying, or subscribing of securities or by acting as manager, consultant, adviser, or providing corporate advisory service in relation to such issue management, by Section 2(cb) of the Securities and Exchange Board of India (merchant bankers) Regulations 1992.

MERCHANT BANKERS REGISTRATION

A- Request for certificate issuance

• An application for the issuance of a certificate must be submitted to the Board in Form A and include a 20-lakh rupee as a non-refundable application fee.
• The application must be for one of the following categories of merchant banker-
• Category I, which is-

(i) To carry out any activity of the issue management, including, among other things, preparing the prospectus and other information related to the issue, determining financial structure, tying up financiers, and final allotment and refund of the subscriptions

(ii) To act as advisor, consultant, manager, underwriter, and portfolio manager

• Category II, which is to act as adviser, consultant, co-manager, underwriter, portfolio manager
• Category III, that is to act as underwriter, adviser, consultant to an issue
• Category IV, that is to act only as adviser or consultant to an issue
• Only a candidate who has obtained a separate certificate of registration in accordance with the Securities and Exchange Board of India (Portfolio Manager) Regulations, 1993, is permitted to engage in the activity of a portfolio manager.
• Any application that is incomplete in any way or that does not follow the instructions on the form will be rejected. As long as the applicant is given the chance to remove any objections within the allotted time frame before the application is rejected, the Board may identify objections.
• For the purpose of adjudicating the application, the Board may ask the applicant to provide further information or clarification regarding subjects pertaining to the activities of a merchant banker.
• If required, the applicant or its principal officer must personally appear before the Board.
• When deciding whether to give a certificate, the Board must consider all factors related to merchant banker activities, especially if the applicant satisfies the following criteria-
• The applicant shall be a body corporate other than a non-banking financial firm
• The merchant banker who has been registered by the Reserve Bank of India to act as a primary or satellite dealer may engage in such activity under the restriction that it will not take or hold public deposits
• The applicant satisfies the capital adequacy requirement, i.e., a net worth of not less than five crore rupees
• The applicant, his partner, director, or principal officer is not involved in any litigation
• The applicant has the necessary infrastructure, such as adequate office space, equipment, and manpower, to effectively carry out his activities
• The applicant has in his employment at least two people who have the experience to conduct the business of merchant banker;
• It must immediately notify the Board of any changes to the information it provided when applying for registration, and it must follow by all rules established under the Act with regard to the activities it conducts as a merchant banker.
• If a merchant banker is acting as an underwriter, it must enter into a legal contract with the body corporate for whose benefit it is doing so and abide by the rules established by the Act with regard to the activities it engages in, in that capacity.
• A person directly or indirectly connected (any person being an associate, subsidiary, inter-connected, or group company of the applicant in the case of the applicant being a body corporate) with the applicant has not been granted registration by the Board

1. Grant of Certificate

• The Board will issue a certificate of registration in Form B and notify the applicant after determining if the applicant is eligible.
• The certificate of registration issued pursuant to the above mentioned point, shall be valid unless it fails to comply with the requisites, is halted or terminated by the Board.
• According to sub-regulation (1) of the (The merchant banker who has already been granted a certificate of registration by the Board prior to the commencement of the Securities and Exchange Board of India [Change in Conditions of Registration of Certain Intermediaries] [Amendment] Regulations, 2016, shall be deemed to have received a certificate of registration.
• The merchant banker is responsible for paying the fee in accordance with the regulations.

1. If the Registration is Rejected

• When an application for the issuance of a certificate of registration does not meet the aforementioned requirements, the Board shall, after providing an opportunity for hearing, reject the application.
• The Board must notify the applicant of its decision of not to grant registration within 30 days of the decision, together with the reasons why the application was denied.
• Any applicant who is unhappy with the Board’s decision made pursuant to above point may request that the Board reconsider its choice within thirty days of the date of receipt of such notification.
• The Board must give another look before notifying the applicant of its decision in writing as soon as is practical.
• Any applicant whose request for the Board to award a certificate of permanent registration has been denied must cease all merchant banking activities as of the date of receipt of the letter. Although, the Board may, in the interest of investors subject to some conditions, in the securities market, permit the merchant banker to continue the activities that were started before the intimation of refusal.

D- The need to pay fees and the penalty for not doing so

• A merchant banker who has been granted a certificate of registration, to keep its registration in force, shall pay a fee of nine lakh rupees every three years from the sixth year, from the date of the certificate’s issuance. [Such amount shall be paid by the merchant banker one month before the expiry of the block for which the fee has been paid]
• Every applicant eligible for grant of a certificate shall pay a sum of 20 lakh rupees as registration fee at the time of grant of certificate. This fee must be paid by the merchant banker within fifteen days from the date of receipt of intimation from the Board.
• A non-refundable charge of 50 thousand rupees must be paid with each application for registration.

All of the fees mentioned above must be paid by the merchant banker via direct credit to the bank account using an online payment method through the SEBI payment gateway. The Board may suspend the registration certificate when a merchant banker fails to pay the annual fees as required, in which case the merchant banker must stop acting in any capacity as a merchant banker for the duration of the suspension.

CODE OF CONDUCT GUIDELINES FOR MERCHANT BANKERS

• A merchant banker is required to take all reasonable steps to safeguard investors’ interests.
• When conducting business, a merchant banker must uphold the highest levels of ethics, respect, and fairness.
• A merchant banker must always take reasonable precautions, ensure correct handling, and use their own professional judgment.
• A merchant banker shall make every effort to ensure that-

(a) Inquiries from investors are adequately addressed

(b) Investor grievances are resolved in a timely and appropriate manner; and (c) Where a complaint is not promptly resolved, the investor is informed of any additional steps that may be available to the investor under the regulatory system.

• A merchant banker must make every effort to ensure that investors have access to copies of the prospectus, offer document, letter of offer, or any other pertinent literature at the time of issuance or the offer.
• No statement—verbal or written—that would misrepresent the services that the merchant banker is capable of providing for a client or has already provided for a customer may be made by a merchant banker.
• A merchant banker must set up a system to handle any situations of conflict of interest that might come up throughout the course of doing business, and when they do, they must take reasonable steps to settle them in a fair way.
• A merchant banker must disclose to the client any potential sources of conflict of interest or duty that might arise when performing its duties as a merchant banker and limit its capacity to provide services that are reasonable, impartial, and unbiased.
• A merchant banker is not permitted to disclose to anybody, either verbally or in writing, directly or indirectly, any confidential information about its clients that has come to its knowledge, unless such disclosures are necessary to be done in accordance with any law currently in effect.
• A merchant banker must ensure that clients are promptly informed of any change in registration status, any disciplinary action taken by the Board, or any material change in the merchant banker’s financial situation that may have a negative impact on investors’ or clients’ interests, and that any unfinished business is transferred to another registered intermediary in accordance with the affected clients’ or investors’ wish.
• A merchant banker is prohibited from engaging in unfair competition, such as weaning clients away with promises of higher premiums or advantageous offer prices, or from taking any other action that could be detrimental to the interests of other merchant bankers or investors or put them in a disadvantageous position when bidding for or carrying out any assignment.
• A merchant banker must keep its merchant banking activity independent from all other activities.
• A merchant banker must have internal control mechanisms and financial and operational capabilities that can reasonably be expected to safeguard its operations, clients, investors, and other registered entities from financial loss caused by theft, fraud, and other dishonest acts, as well as from professional misconduct or omissions.
• Any action, legal procedure, etc., brought against a merchant banker that relates to a substantial violation of any law, rule, regulation, or directive of the Board or of any other regulatory authority must be promptly reported to the Board.
• Unless a disclosure of his interest, including a long or short position, in the subject security has been made, a merchant banker or any of its employees shall not directly or indirectly render any investment advice about any security in any publicly accessible media, whether real-time or non-real-time.
• If a merchant banker employee gives such advice, the merchant banker must make sure that the employee discloses, in addition to his or her own interests, the interests of any dependent family members and the employer merchant banker, including whether they have a long or short position in the security in question.
• A merchant banker is required to create its own internal code of conduct to control internal operations and establish standards of proper behaviour for its officers and staff while doing their tasks. An example of such a code might include the upholding of excellence and standards in the workplace, as well as integrity, confidentiality, objectivity, the avoidance or resolution of conflicts of interest, disclosure of shareholdings and other financial interests, etc.
• A merchant banker is responsible for seeing that sound company governance and procedures are in place.
• A merchant banker must make sure that everyone they hire or appoint to do business is competent and suitable for the position for which they have been hired or appointed (including having relevant professional training or experience).
• A merchant banker is accountable for the actions or inactions of its agents and employees with regard to the management of its business.
• A merchant banker is prohibited from participating in or acting as a tool in any of the following-

(a) Creating a false market;

(b) Manipulating or rigging prices; or

(c) Disclosing to anyone or any intermediary in the securities market unpublished price sensitive information regarding securities that are listed or that are being considered for listing on a stock exchange.

• A merchant banker, or any of its directors, partners, or managers, who have control over all or nearly all of the business’s affairs, shall not engage in any insider trading, either through its account or each of their individual accounts, or through their associates, family members, or friends.

A MERCHANT BANKER’S OBLIGATIONS AND RESPONSIBILITIES

• No merchant banker who has been granted a certificate of registration, other than a Bank or a Public Financial Institution, shall (after June 30, 1998) carry on any business other than that in the securities market.
• No lead manager shall agree to manage or be associated with any issue unless his responsibilities with respect to the issue, including those of disclosures, allotment, and refund, are specifically identified, allocated, and determined, and a statement identifying such responsibilities is provided to the Board at least one month prior to the opening of the issue for subscription- – If there are multiple lead merchant bankers, the roles they play in the issue must be clearly defined, and a statement outlining these roles must be provided to the Board at least one month prior to the issue’s opening for subscription.
• A merchant banker shall not lead manage any issue or be associated with any activity carried out under any regulations made by the Board if he is a promoter, a director, or an associate of the issuer of securities or of any person making an offer to sell or purchase securities in accordance with any regulations made by the Board.

– If a merchant banker is only responsible for marketing the issue or offer, he may be appointed even if he is an associate of the issuer or person.

– A merchant banker will be deemed to be a “associate of the issuer or person” for the purposes of this regulation if any of the following conditions are met-

(i) Either of them controls, directly or indirectly through its subsidiary or holding company, not less than fifteen percent of the voting rights in the other; (ii) Either of them directly or indirectly, by itself or in combination with other persons, exercises control over the other; or

(iii) There is a common director, excluding a nominee director, amongst the issuer, its subsidiary or holding company and the merchant banker.

• The lead merchant banker holding a certificate under Category I shall accept a minimum underwriting obligation for each issue to be managed of 5% of the total underwriting commitment or Rs. 25.0 lacs, whichever is less. However, if the lead merchant banker is unable to accept the minimum underwriting obligation, the lead merchant banker shall arrange for the issue to be underwritten to that extent by a merchant banker.
• Every merchant banker acting as an underwriter must enter into an agreement with each body corporate on whose behalf it is acting as an underwriter, and the said agreement shall, among other things, provide for the following-

(i) The period for which the agreement shall be in force;

(ii) The allocation of duties and responsibilities between the underwriter and the client;

(iii) The amount of underwriting obligations;

(iv) The period, within which the underwriting obligations must be completed.

• Except for the commission or brokerage payable under the underwriting agreement established with the client, a merchant banker serving as an underwriter is not permitted to gain any direct or indirect advantage from underwriting the issue.
• At no time shall the total underwriting responsibilities under all agreements exceed twenty times the merchant banker’s net worth.
• If a merchant banker serving as an underwriter is requested to purchase securities from a body corporate under the terms of an underwriting agreement, they must do so within 45 days of receiving the request from the body corporate.
• No merchant banker or any of its directors, partners, managers, or principal officers shall engage in any transaction in securities of corporate bodies on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment, whether from clients or otherwise, either on their own behalf or through their associates or relatives.

DOCUMENTS NEEDED

• The following books of accounts, records, and documents must be kept and maintained by every merchant banker-

(a) A copy of the balance sheet at the end of each accounting period;

(b) A copy of the profit and loss account for that period; and

(c) A copy of the auditor’s report on the accounts for that period.

(d) A financial position statements.

(e) Records and documents relating to the due diligence performed during pre-issue and post-issue operations of issue management as well as in the case of takeover, buyback, and delisting of securities.

• Each merchant banker is required to inform the Board of the whereabouts of the books of accounts, records, and papers.
• Each merchant banker shall provide copies of the balance sheet, profit and loss account, and any other documents for any other preceding five accounting years to the Board upon request.
• Each merchant banker acting as an underwriter shall also keep the following records with regard to-
• Details of all agreements entered with a body corporate on whose behalf it is acting;
• Total amount of subscribed securities by each body corporate in relation to the agreement;
• Statements related to capital adequacy requirement;

(d) Any other information as may be requested by the Board.

• The merchant banker shall maintain the books of account and other records and documents for a minimum period of five years.
• The merchant banker shall provide to the Board half-yearly unaudited financial results when requested by the Board with a view to monitoring the capital adequacy of the merchant banker.

INFORMATION DISCLOSED TO THE BOARD

• Within fifteen days of the transaction’s date, each merchant banker is required to provide the Board with full details of each transaction for the acquisition of securities of any body corporate whose issue they are managing.
• Complete particulars of any transaction for the acquisition of securities made in pursuance of underwriting or market making obligations shall be submitted to the Board on a quarterly basis.
• The following information must be provided to the Board by a merchant banker upon request-

(i) His role in the management of the issue;

(ii) Any changes to the information or particulars previously provided that have an impact on the certificate issued to it;

(iii) The names of the body corporate whose issues he has managed or been associated with; and

(iv) The specifics pertaining to the capital adequacy requirement breach.

• The merchant banker must provide a periodic report in the manner that the Board may from time to time specify.
• A compliance officer must be appointed by every merchant banker who is in charge of overseeing compliance with the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government, as well as resolving investor complaints.
• The Board may designate one or more individuals as inspecting authorities to conduct inspections of the merchant banker’s books of account, records, and documents for any of the purposes listed-

(i) To ensure that the books of account are being maintained in the required manner;

(ii) To verify that the Act, rules, and regulations are being followed;

(iii) To look into any complaints about the merchant banker’s operations that have been made by investors, other merchant bankers, or other people; and

(iv) To conduct an independent investigation into the operations of the merchant banker in the benefit of the securities industry or investors.

• The Board must provide the merchant banker fair notice before conducting an inspection.
• The Board may, by written order, require that the inspection of the merchant banker’s affairs be taken up without such notice when it is determined that doing so would be contrary to the interests of the investors.
• The merchant banker, against whom an inspection is being conducted, shall be required to fulfil his obligations during the course of the examination.

MERCHANT BANKER’S DUTY DURING INSPECTION

• Each director, owner, partner, officer, and employee of a merchant banker who is the subject of an inspection has a duty to provide the inspecting authority with copies of all books, accounts, and other documents in their possession or under their control, as well as statements and information pertaining to their activities as a merchant banker, within the time frame that the inspecting authority may specify.
• 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 purposes of the inspection
• The inspecting authority, in the course of inspection, shall be allowed to examine or record statement 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 to give to the inspecting authority all assistance in connection with inspection which the merchant banker may reasonably be expected to supply.
• The inspecting authority shall, as soon as may be possible submit, an inspection report to the Board.
• The Board or the Chairman should after examination of inspection or investigation report take such action as the Board or Chairman may deem reasonable and appropriate.
• The Board may appoint a qualified auditor to inquire into the books of account or the affairs of the merchant bankers.

WHO IS LIABLE FOR THE DEFAULT

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

EXEMPTIONS FROM THE SPECIFIED REGULATIONS

• The Board may, exempt any person or class of persons from the operation of all or any of the provisions mentioned in the regulations for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new products, processes, services, business models, etc. in live environment of regulatory sandbox (a live testing environment where new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be specified by the Board) in the securities markets.
• Any exemption granted by the Board considering the above point shall be subject to the applicant satisfying such requirements as may be specified by the Board including conditions to be complied with on a continuing basis.