Registration, Code of Conduct & General Obligations of Merchant Bankers in India

Registration, Code of Conduct & General Obligations of Merchant Bankers in India (Part 1)

• Definition of Merchant Banker: A merchant banker is defined as 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.
• SEBI-Regulated Activities: Merchant bankers can undertake activities such as managing public issues of securities, underwriting public issues, managing/advising on international debt/equity offerings, private placement of securities, and corporate advisory services.
• Non-SEBI Regulated Activities: Merchant bankers can undertake fee-based, non-fund-based activities in the financial service sector, provided they are incidental or complementary to merchant banking and conducted through Strategic Business Units (SBUs) with proper segregation and ring-fencing.
• Eligibility Criteria: To register as a merchant banker, an applicant must be a body corporate, have necessary infrastructure, and meet capital adequacy requirements, including a net worth of not less than Rs. 50 crore for Category I and Rs. 10 crore for Category II.
• Categories of Merchant Bankers: There are two categories of merchant bankers:
  • Category I: Can carry on any activity of issue management, act as adviser, consultant, manager, underwriter, and portfolio manager.
  • Category II: Can act as adviser, consultant, co-manager, underwriter, and portfolio manager, but with certain restrictions.
• Registration Fees and Validity: The registration fee for merchant bankers is Rs. 20 lakh, and the registration is valid for three years, after which a renewal fee of Rs. 9 lakh is payable.
• Fit and Proper Person: SEBI considers the "Criteria for fit and proper person" as given under the SEBI (Intermediaries) Regulations 2008, which includes competence, capability, infrastructure, manpower, and financial soundness.
• Conditions of Registration: The certificate of registration granted to a merchant banker is subject to certain conditions, including the requirement to pay registration and renewal fees, maintain capital adequacy, and comply with SEBI regulations.

Registration, Code of Conduct & General Obligations of Merchant Bankers in India (Part 2)

• Registration Conditions: The merchant banker shall be subject to the following conditions:
  • Obtain prior approval of the SEBI for continuing to act as such after a change in control
  • Pay the fees for registration in the manner as provided in these regulations
  • Take adequate steps for redressal of grievances of the investors within 21 days of the date of the receipt of the complaint and keep SEBI informed about the number, nature, and other particulars of the complaints received
  • Maintain capital adequacy requirements at all times during the period
  • Abide by the regulations made under the SEBI Act, 1992 in respect of the activities carried on by it as merchant banker
  • Immediately intimate SEBI, details of changes that have taken place in the information that was submitted, while seeking registration
  • Enter into a valid agreement with the body corporate on whose behalf it is acting as an underwriter and abide by the regulations made under the Act in respect of the activities carried on by it as underwriter
• Code of Conduct for Merchant Bankers: The code of conduct emphasizes the importance of integrity, honesty, and ethical behavior expected from merchant bankers, including:
  • Protecting the interests of investors
  • Maintaining high standards of integrity, dignity, and fairness in the conduct of its business
  • Fulfilling obligations in a prompt, ethical, and professional manner
  • Exercising due diligence, ensuring proper care, and exercising independent professional judgment
  • Ensuring adequate disclosures are made to the investors in a timely manner
  • Providing true and adequate information without making any misleading or exaggerated claims
  • Avoiding conflict of interest and making adequate disclosure of its interest
• General Obligations and Responsibilities: Merchant bankers have general responsibilities, including:
  • Following the Code of Conduct
  • Maintaining proper books of accounts
  • Submitting half-yearly results and other relevant information to SEBI
  • Specific responsibilities with regard to lead managers of an issue
  • Ensuring good corporate policies and corporate governance are in place
  • Ensuring that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed

Registration, Code of Conduct & General Obligations of Merchant Bankers in India (Part 3)

• Restrictions on Business: A merchant banker, other than a bank or a public financial institution, shall not carry on any business other than that in the securities market.
• Maintenance of Books and Records: Every merchant banker must maintain the following:
  • A copy of the balance sheet as at the end of each accounting period
  • A copy of the profit and loss account for that period
  • A copy of the auditor’s report on the accounts for that period
  • A statement of financial position
  • Records and documents pertaining to due diligence exercised in pre-issue and post-issue activities
• Submission of Half-Yearly Results: Merchant bankers must submit unaudited half-yearly financial results to SEBI when required.
• Responsibilities of Lead Managers: Lead managers are responsible for pricing, financing, and distribution of securities, and must ensure that their responsibilities are clearly defined and disclosed in the draft offer document and offer document.
• Prohibition on Association with Unregistered Merchant Bankers: A lead merchant banker must not associate with any merchant banker that does not hold a SEBI registration.
• Underwriting Obligations: The lead manager must accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs. 25 lakh, whichever is lesser.
• Acquisition of Shares: Merchant bankers are prohibited from acquiring shares on the basis of unpublished price-sensitive information.
• Disclosure to SEBI: Merchant bankers must disclose information regarding issue management, capital adequacy, and other activities to SEBI as required.
• Appointment of Compliance Officer: A merchant banker must appoint a compliance officer to monitor compliance with SEBI rules and regulations and to redress investor grievances.
• Redressal of Investor Grievances: SEBI has established a centralized web-based complaints redress system called SCORES, and merchant bankers must use this system to address investor complaints.

Registration, Code of Conduct & General Obligations of Merchant Bankers in India (Part 4)

• Complaints: Certain matters are not considered as complaints in SCORES, including:
  • Complaints that are incomplete or not specific
  • Allegations without supporting documents
  • Offering suggestions or seeking guidance/explanation
  • Seeking explanation for non-trading of shares or illiquidity of shares
  • Not satisfied with trading price of the shares of the companies
  • Non-listing of shares of private offer
  • Disputes arising out of private agreement with companies/intermediaries
• Exclusions from SEBI: There are certain complaints not dealt with by SEBI, including:
  • Complaints against unlisted/delisted/wound up/liquidated/sick companies
  • Complaints that are sub-judice (relating to cases which are under consideration by court of law, quasi-judicial proceedings etc.)
  • Complaints falling under the purview of other regulatory bodies viz. RBI, IRDA, PFRDA, CCI, etc., or under the purview of other ministries viz., MCA, etc.
• Review Questions: Key points to note from the review questions include:
  • A Merchant Banker applicant should have at least 2 people in his employment who should be experienced to conduct the business of Merchant Banker
  • The fees payable by the merchant banker on grant of certificate of registration should be by a demand draft in favour of SEBI (not 'Association of Investment Bankers of India (AIBI)')
  • Every merchant banker shall submit to SEBI complete particulars of any transaction for acquisition of securities of any Body Corporate whose issue is being managed by that merchant banker within 30 days from the date of entering into such transaction
  • The SCORES system of SEBI does not deal with any complaints which fall under the purview of the other regulatory bodies i.e. IRDAI, PFRDA etc. (This statement is True)