SEBI Guidelines for MB

8/4/2019 SEBI Guidelines for MB

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SEBI Guidelines for

Merchant Bankers

Kanika Khurana



SECURITIES AND EXCHANGE BOARD

OF INDIA

(MERCHANT BANKERS)

REGULATIONS, 1992



Definitions

• “merchant banker” means any person who is

engaged in the business of issue management

either by making arrangements regarding

selling, buying or subscribing to securities or

acting as manager, consultant, adviser or

rendering corporate advisory service in

relation to such issue management;



Definitions

• “issue” means an offer of sale or purchase of

securities by any body corporate/ persons, to orfrom the public, or the holders of securities

through a merchant banker;• “issue management” consists of prospectus and

other information relating to the issue,determining financial structure, tie-up of

financiers and final allotment and refund of subscriptions, underwriting and portfoliomanagement services;



Activities of Merchant Bankers

Activities relating to the securities market, andwhich do not require registration as an NBFC (asper SEBI Circular issued in June 1998)

• Managing of Public Issues of securities• Underwriting connected with issues

• Managing of International offerings- ADRs, GDRs,Bonds

• Private placement of securities

• Primary or satellite dealership of govt. securities



Activities of Merchant Bankers

• Corporate Advisory services related to

securities market eg. Takeovers, acquisitions,

disinvestment

• Stock Broking

• Advisory services for projects

• Syndication of rupee term loans• International Financial Advisory services



Registration of Merchant Bankers

• Merchant Bankers can be in the form of

subsidiaries or divisions of banks, public or

private limited companies, partnerships and

even proprietary concerns.

• As on July 26, 2011, there were 179 merchant

bankers registered with SEBI and another 41

applications were under process of renewal.




Application for grant of certificate.• An application for registration made shall be accompanied by a

non-refundable application fee

• The application shall be made for any one of the following

categories of the merchant banker namely:—

(a) Category I, that is—

(i) to carry on any activity of the issue management, which will,

inter alia, consist of preparation of prospectus and other

information relating to the issue, determining financial structure, tie

up of financiers and final allotment and refund of the subscriptions;and

(ii) to act as adviser, consultant, manager, underwriter, portfolio

manager;




(b) Category II, to act as adviser, consultant, co-manager,underwriter, portfolio manager;

(c) Category III, to act as underwriter, adviser, consultant to anissue

(d) 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 activities mentioned inCategory I

• An applicant can carry on the activity as portfolio manageronly if he obtains separate certificate of registration under theprovisions of the Securities and Exchange Board of India(Portfolio Manager) Regulations, 1993.



Consideration of application

The Board shall take into account for considering the grant of a certificate, the following requirements:

• the applicant shall be a body corporate other than a non-banking financial company

• the applicant has the necessary infrastructure likeadequate office space, equipments, and manpower

• the applicant has in his employment minimum of twopersons who have the experience to conduct the business

• a person directly or indirectly connected with the

applicant has not been granted registration• the applicant fulfils the capital adequacy requirement i.e.

a net worth of not less than Rs.5 crore at the time of making application



Consideration of application

• the applicant/ partner/ director/ principal officer is not

involved in any litigation connected with the securities market

• the applicant/ partner/ director/ principal officer has not at

any time been convicted for any moral/ economic offence

• the applicant has the professional qualification from an

institution recognized by the Government in finance, law or

business management;

• grant of certificate to the applicant is in the interest of

investors

• the applicant is a fit and proper person (as per criteria

specified in SEBI (Intermediaries) Regulations, 2008)



Renewal of certificate

• Three months before the expiry of the period of certificate, the merchant banker may make anapplication for renewal along with a non-refundableapplication fee

The application for renewal shall be accompanied by

• details of the changes that have taken place in theinformation that was submitted while seekingregistration or earlier renewal,

• declaration stating that no changes other than thosementioned have taken place.



Conditions of registration

Any registration granted or any renewal granted shall be subject to the

following conditions, namely:—

• where the merchant banker proposes to change its status or

constitution, it shall obtain prior approval of the Board

• it shall pay the fees for registration or renewal

• it shall take adequate steps for redressal of grievances of the

investors within one month of the date of the receipt of the

complaint and keep the Board informed about the number, nature

and other particulars of the complaints received;• it shall maintain capital adequacy requirements at all times during

the period of the certificate or renewal thereof;

• it shall abide by the regulations made under the Act in respect of

the activities carried on by it as merchant banker.



Period of validity of certificate

• The certificate of registration granted or its

renewal granted shall be valid for a period of

three years from the date of its issue



GENERAL OBLIGATIONS AND

RESPONSIBILITIES • Every merchant banker shall abide by the Code of Conduct

(discussed later)

• Merchant banker not to associate with any business other thanthat of the securities market

Maintenance of books of account, records etc.

• Every merchant banker shall keep and maintain the following booksof account

(a) a copy of balance sheet

(b) a copy of profit and loss account

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

(d) a statement of financial position.• Every merchant banker shall intimate to the Board the place where

the books of account, records and documents are maintained.




RESPONSIBILITIES

• every merchant banker shall, after the end of eachaccounting period furnish to the Board the books of accounts for preceding five accounting years whenrequired by the Board

• Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required bythe Board with a view to monitor the capital adequacy

• Every merchant banker shall, within two months from

the date of the auditor’s report, take steps to rectifythe deficiencies made out in the auditor’s report.




RESPONSIBILITIES

Responsibilities of lead managers.

• No lead manager shall agree to manage or be associated with

any issue unless his responsibilities relating to issue mainly,

those of disclosures, allotment and refund are clearly defined,

allocated and determined and a statement specifying suchresponsibilities is furnished to the Board at least one month

before the opening of the issue for subscription

• Provided that, where there are more than one lead merchant

bankers to the issue the responsibilities of each of such leadmerchant bankers shall clearly be demarcated and a statement

specifying them is furnished to the Board at least one month

before the opening of the issue for subscription.




RESPONSIBILITIES

Responsibilities of lead managers.

• A lead merchant banker shall not be associated with any

issue if a merchant banker who is not holding a certificate

is associated with the issue.

• A merchant banker shall not lead manage any issue or be

associated with any activity under any regulations made by

the Board, if he is a promoter/director/associate of the

issuer of securities or of any person making an offer to sell

or purchase securities




RESPONSIBILITIES

Underwriting obligations.

• In respect of every issue to be managed, the lead

merchant banker shall accept a minimum underwriting

obligation of 5% of the total underwriting commitmentor Rs.25 lakhs, whichever is less

• if the lead merchant banker is unable to accept the

minimum underwriting obligation, that lead merchant

banker shall make arrangement for having the issueunderwritten to that extent by a merchant banker

associated with the issue




RESPONSIBILITIES Due Diligence Certificate

• Lead Manager is responsible for the verification of contents in theprospectus/ letter of offer and reasonableness of the viewsexpressed in them

• Lead Manger has to submit to SEBI a due diligence certificate at

least 2 weeks prior to opening of the issue, to the effect that,a) Prospectus/letter of offer are in conformity with the

documents, materials and papers relevant to the issue

b) All legal requirements connected to the issue have beencomplied with

c) All disclosures are true, fair and adequate and enable theinvestors to make a well informed decision regardinginvestment in the proposed issue




RESPONSIBILITIES

Documents to be submitted to SEBI

• Lead manger has to submit to SEBI at least 2 weeks before

date of filing with Registrar of Companies/ Stock exchanges-

the particulars of issue, draft prospectus/letter of offer

(along with prescribed fees), other literature to be circulated

to the investors

• Lead manager has to ensure that modifications/ suggestions

made by SEBI with respect to in formation given to investors

are duly incorporated




RESPONSIBILITIES

Acquisition of shares prohibited.

• No merchant banker or any of its directors, partner or manager

or principal officer shall either on their respective accounts or

through their associates or relatives, enter into any transaction

in securities of bodies corporate on the basis of unpublishedprice sensitive information obtained by them during the course

of any professional assignment.

Information to the Board.

• Every merchant banker shall submit to the Board completeparticulars of any transaction for acquisition of securities of any

body corporate whose issue is being managed by that merchant

banker within 15 days from the date of entering into such

transaction.




RESPONSIBILITIES 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, whichhave a bearing on the certificate granted to it;

• the names of the body corporate whose issues he has managed or has

been associated with;

• the particulars relating to the breach of the capital adequacy requirement

• Information relating to his activities as a manager, underwriter,consultant or adviser to an issue

The merchant banker shall submit a half yearly report for the period ending

with 31st March and 30th September of every year, in the prescribed

format, the above details within three months from the close of the

period




RESPONSIBILITIES

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 regulations, notifications, guidelines,

instructions, etc., issued by the Board or the Central

Government and for redressal of investors’ grievances.

• The compliance officer shall immediately and independently

report to the Board any non-compliance observed by him

and ensure that the observations made or deficiencies

pointed out by the Board in the draft prospectus or the letter

of offer, do not recur.



PROCEDURE FOR INSPECTION

Board’s right to inspect.• The Board may appoint one or more persons as inspecting authority to

undertake inspection of the books of account, records and documents of

the merchant banker

The purposes may be as follows:

• to ensure that the books of account are being maintained in the manner

• required

• that the provisions of the Act, rules, regulations are being complied with;

• to investigate into the complaints received from investors, other

merchant bankers or any other person on any matter having a bearing on

the activities of the merchant banker

• to investigate suo moto (on its own initiative) in the interest of securities

business or investors interest into the affairs of the merchant banker.



PROCEDURE FOR INSPECTION

Reasonable Notice for inspection shall be given; Notice may not be givenif Board is satisfied that the same is in interest of investors

Obligations of merchant banker on inspection- every director, proprietor,partner, officer and employee of the merchant banker shall

• produce to the inspecting authority such books, accounts and otherdocuments in his custody relating to his activities

• reasonable access to the premises occupied

• give its assistance in connection with inspection

• let inspecting authority examine or record their statements

Appointment of auditor- The Board may appoint a qualified auditor (withthe same powers as inspecting authority) to investigate into the booksof account or the affairs of the merchant bankers.



PROCEDURE FOR ACTION IN CASE OF

DEFAULT

• A merchant banker who contravenes any of

the provisions of the Act, Rules or Regulations

shall be liable for one or more actions

specified therein including the actions underSEBI (Intermediaries) Regulations, 2008.



FEES

• Every merchant banker shall pay a sum of Rs.10 lakh

fees at the time of the grant of certificate

• A merchant banker to keep registration in force shall

pay renewal fee of Rs.5 lakh every three years• The fee referred to shall be paid by the merchant

banker within fifteen days from the date of receipt

of intimation from the Board

• The non-refundable fee payable along with an

application for registration or an application for

renewal of registration shall be Rs.25,000.



FEES

• There shall be charged on every draft offer

document submitted by a merchant banker to

the Board, a fee at the following rates:



Public Issues

Size of the issue, including

intended retention of

oversubscription

Amount / Rate of fees

Less than or equal to

ten crore rupees.

A flat charge of twenty five thousand

rupees (Rs.25,000/-).

More than ten crore rupees, but less

than or equal to five

thousand crore rupees.

0.025 per cent. of the issue size.

More than five

thousand crore rupees, but less than

or equal to twenty fivethousand crore rupees.

One crore twenty five lakh rupees

(Rs.1,25,00,000/-) plus 0.00625 per cent

of the portion of the issue size in excessof five thousand crore rupees

(Rs.5000,00,00,000/-).

More than twenty five

thousand crore rupees.

A flat charge of three crore rupees

(Rs.3,00,00,000/-).



Rights Issues

Size of the issue, including

intended retention of

oversubscription

Amount / Rate of fees

Less than or equal toten crore rupees.

A flat charge of twenty five thousandrupees (Rs.25,000/-).

More than ten crores rupees and

less than or equal to five

hundred crore rupees.

0.005 per cent. of the issue size.

More than five

hundred crore rupees.

A flat charge of five lakh rupees

(Rs.5,00,000/-).”

Source: SECURITIES AND EXCHANGE BOARD OF INDIA (PAYMENT OF FEES) (AMENDMENT) REGULATIONS, 2008



CODE OF CONDUCT

• A merchant banker shall make all efforts to protect the interests of investors.

• A merchant banker shall fulfil its obligations in a prompt, ethical,and professional manner.

• A merchant banker shall endeavour to ensure that—

(a) inquiries from investors are adequately dealt with;(b) grievances of investors are redressed in a timely and

appropriate manner;

(c) where a complaint is not remedied promptly, the investor isadvised of any further steps which may be available to the investor

under the regulatory system.• A merchant banker shall ensure that adequate disclosures aremade to the investors in a timely manner in accordance with theapplicable regulations and guidelines so as to enable them to makea balanced and informed decision.



CODE OF CONDUCT

• A merchant banker shall endeavour 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

investment decision.• A merchant banker shall endeavour 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 or

the offer.

• A merchant banker shall ensure that the Board is promptlyinformed 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.



CODE OF CONDUCT

• 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 not be a party to or instrument

for—

(a) creation of false market ;

(b) price rigging or manipulation ; or

(c) 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.