SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations,

SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations, (Part 1)

Introduction to Merchant Bankers: Merchant Bankers provide fee-based advice to corporations and governments on the issue of securities, and their functions are similar to those of Investment Bankers.
Definition of a Merchant Banker: A Merchant Banker is defined as any person engaged in the business of issue management, acting as manager, consultant, adviser, or rendering corporate advisory services.
Registration as a Merchant Banker: An application for registration as a Merchant Banker must be submitted to SEBI, accompanied by a non-refundable application fee of Rs. 50,000/-, and can be made only for Category I Merchant Banker.
Categories of Merchant Bankers:
- Category I: Can carry on any activity of issue management, act as an adviser, consultant, manager, underwriter, portfolio manager.
- Category II: Can act as an adviser, consultant, co-manager, underwriter, portfolio manager, but is restricted from managing mainboard IPOs.
Eligibility Criteria for Grant of Certificate:
- Capital Adequacy Requirements: Category I Merchant Bankers must have a net worth of not less than Rs. 50 crore, while Category II Merchant Bankers must have a minimum net worth of ₹10 crore.
- Revenue Requirements: Category I Merchant Bankers must generate ₹25 crore in revenue over the last three financial years, while Category II Merchant Bankers must generate ₹5 crore in revenue.
- Liquid Net Worth: Both categories must maintain 25% of the minimum net worth as liquid assets.
- Fit and Proper Person: The applicant, its principal officer, directors, or managing partners must meet the criteria for a fit and proper person, which includes integrity, honesty, ethical behavior, reputation, fairness, and character.
SEBI Guidelines: SEBI has issued guidelines pertaining to the Online Registration Mechanism for Merchant Bankers using the SEBI Intermediary Portal.

SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations, (Part 2)

Fit and Proper Person Criteria: The applicant or intermediary must meet the 'fit and proper person' criteria at the time of application and during the continuity of registration.
Disqualification: If any associate or group entity of the applicant or intermediary is disqualified, it will not affect the 'fit and proper person' criteria unless the applicant or intermediary is also found to be disqualified.
Registration Fees and Validity: A merchant banker must pay a registration fee of Rs. 20 lakhs and a renewal fee of Rs. 9 lakhs every three years to keep the registration in force.
Conditions of Registration: The merchant banker must comply with conditions such as obtaining prior approval for change in control, paying registration fees, redressing investor grievances, maintaining capital adequacy, and abiding by SEBI regulations.
Refusal to Grant Certificate: SEBI can refuse to grant a certificate of registration if the application does not satisfy the conditions, and the applicant can apply for reconsideration within 30 days.
Suspension of Certificate: SEBI may suspend the registration certificate if the merchant banker fails to pay the prescribed fees.
Code of Conduct: Merchant bankers must follow a prescribed code of conduct that emphasizes integrity, honesty, and ethical behavior, and requires them to protect investor interests, maintain high standards, and fulfill obligations in a prompt and professional manner.
General Obligations and Responsibilities: Merchant bankers must comply with regulations, maintain internal control procedures, and ensure that they have the necessary financial and operational capabilities to protect their operations and clients.

Some key points to note are:

The 'fit and proper person' criteria is a crucial aspect of the registration process.
Registration fees and renewal fees are essential for maintaining the registration.
Conditions of registration must be complied with to avoid suspension or cancellation of the registration.
The code of conduct is a critical component of the regulations, emphasizing the importance of integrity, honesty, and ethical behavior.
General obligations and responsibilities require merchant bankers to comply with regulations and maintain internal control procedures to protect their operations and clients.

SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations, (Part 3)

Regulatory Requirements: The SEBI (Merchant Bankers) Regulations outline the responsibilities and obligations of merchant bankers, including rendering investment advice, maintaining books of account, and ensuring good corporate governance.
Investment Advice: A merchant banker or its employees must disclose their interest, including long or short positions, in a security when rendering investment advice in publicly accessible media.
Compliance Officer: The merchant banker must provide adequate freedom and powers to its compliance officer to ensure effective discharge of duties.
Internal Code of Conduct: The merchant banker must develop its own internal code of conduct for governing internal operations and laying down standards of appropriate conduct for employees and officers.
Corporate Governance: The merchant banker must ensure good corporate policies and corporate governance are in place.
Employee Qualifications: The merchant banker must ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in that capacity.
Supervision: The merchant banker must have adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it in the conduct of its business.
Responsibility for Acts or Omissions: The merchant banker is responsible for the acts or omissions of its employees and agents in respect of the conduct of its business.
Access to Information: The senior management, particularly decision-makers, must have access to all relevant information about the business on a timely basis.
Prohibited Activities: The merchant banker must not be a party to or instrument for creation of false markets, price rigging or manipulation, or passing of unpublished price-sensitive information.
Insider Trading: A merchant banker or its directors, partners, or managers must not indulge in insider trading.
Underwriting: A merchant banker acting as an underwriter must not make any statement that would misrepresent its services or underwriting commitment.
Unfair Competition: A merchant banker acting as an underwriter must not indulge in unfair competition that is likely to be harmful to the interest of other entities acting as underwriters.
Restriction on Business: The SEBI (Merchant Bankers) Regulations restrict the association of merchant bankers with any business other than that of the securities market.
Maintenance of Books of Account: The merchant banker must maintain books of account, records, and documents, including balance sheets, profit and loss accounts, and auditor's reports.
Lead Merchant Banker Responsibilities: The lead manager of an issue is responsible for pricing, financing, and distribution of securities and must ensure that its responsibilities are clearly defined and disclosed in the draft offer document and offer document.
Disclosures to SEBI: The merchant banker must disclose to SEBI information regarding its responsibilities, changes in information, and particulars of the issues it has managed or been associated with.
Inspection by SEBI: The merchant banker must produce books, accounts, and other documents to the inspecting authority during an inspection by SEBI.

SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations

Inspection and Investigation: The inspecting authority has the right to inspect the books, records, and documents of a merchant banker. The merchant banker must provide reasonable access to its premises and extend facilities for examining books, records, and computer data.
Compliance Officer: A merchant banker must appoint a Compliance Officer to monitor compliance with SEBI regulations and redress investor grievances.
Dispute Resolution: Merchant bankers must adopt dispute resolution and grievance redressal mechanisms as directed by SEBI.
SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011: These regulations apply to direct and indirect acquisition of shares or voting rights in a target company.
Role of Merchant Banker: The merchant banker acts as a manager to the open offer and must ensure compliance with regulations, including filing the draft letter of offer and due diligence certificate with SEBI.

Key Obligations of the Merchant Banker

Ensure the acquirer can implement the offer
Verify provisions for an escrow account and firm arrangements for funds
Ensure public announcements and letters of offer are in terms of regulations
Furnish a due diligence certificate to SEBI
Ensure compliance with regulations and applicable laws
File a report with SEBI within 15 working days from the expiry of the tendering period

Disclosure Requirements

Event-based Disclosures: The acquirer must disclose acquisition and disposal of shares or voting rights in a target company within 2 working days of the receipt of intimation of allotment or disposal of shares.
Disclosure to Stock Exchanges and Target Company: The acquirer must disclose the aggregate shareholding and voting rights in the target company to the stock exchanges and the target company.

SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations, (Part 5)

Disclosure Requirements: Promoters of a target company must disclose their shareholding or voting rights if they hold 5% or more of the shares or voting rights.
Intimation of Shareholding: The promoter must intimate the stock exchange and the target company about any change in shareholding or voting rights, even if it falls below 5%, if the change exceeds 2% of the total shareholding or voting rights.
Exceptions: For listed entities on the Innovators Growth Platform, the disclosure threshold is 10% instead of 5%, and the change threshold is 5% instead of 2%.
Disclosure of Encumbered Shares: Promoters must disclose details of encumbered shares, including invocation or release of encumbrance, to the stock exchange and the target company within 7 working days.
Yearly Declaration: Promoters must declare annually that they have not made any encumbrance, directly or indirectly, other than those already disclosed, within 7 working days from the end of each financial year.

SEBI (Bankers to an Issue) Regulations 1994

Definition of Banker to an Issue: A scheduled bank or banking company that carries out activities such as acceptance of application and application monies, refund of application monies, and payment of dividend or interest warrants.
Registration Requirements: Applicants must have necessary infrastructure, not be involved in litigation connected to the securities market, and be a fit and proper person.
Registration Fees: A non-refundable application fee of Rs. 50,000 and a registration fee of Rs. 20 lakhs.
Renewal Fees: Rs. 9 lakhs every three years from the sixth year of registration.
General Obligations: Bankers to an issue must maintain records, furnish information to SEBI, and appoint a compliance officer.
Code of Conduct: Bankers to an issue must protect investors' interests, observe high standards of integrity and fairness, and fulfill obligations in a prompt and professional manner.

SEBI (Merchant Bankers) Regulations 1992, SEBI (SAST) Regulations (Part 6)

Code of Conduct: The SEBI (Merchant Bankers) Regulations, 1992, outlines a code of conduct for merchant bankers, which includes:
- Not making exaggerated statements about their qualifications or capabilities
- Rendering the best possible advice to clients
- Maintaining confidentiality of client information
- Avoiding conflict of interest and making adequate disclosure of their interests
General Obligations: Merchant bankers are required to:
- Put in place a mechanism to resolve conflict-of-interest situations
- Make appropriate disclosures to clients about potential areas of conflict
- Not indulge in unfair competition
- Not discriminate amongst clients
Registration and Compliance: Merchant bankers must:
- Register with SEBI and pay the required registration fees
- Maintain an appropriate level of knowledge and competency
- Abide by the provisions of the SEBI Act, regulations, circulars, and guidelines
- Comply with the award of the Ombudsman passed under the Securities and Exchange Board of India (Ombudsman) Regulations, 2003
Internal Control and Governance: Merchant bankers are required to:
- Have internal control procedures and financial and operational capabilities to protect their operations and clients
- Provide adequate freedom and powers to their compliance officer
- Develop an internal code of conduct for governing their internal operations
- Ensure that their employees and agents are fit and proper and otherwise qualified to act in their capacity
Review Questions: The SEBI (Merchant Banking) Regulations, 1992, provides for:
- Registration of merchant bankers
- General obligations of merchant bankers
- General responsibilities of merchant bankers
- The applicant for merchant banker should have necessary infrastructure like office space, equipment, and skilled manpower
- The applicant for merchant banker should necessarily fulfil the capital adequacy requirement as specified in the SEBI (Merchant Bankers) Regulation
- Every Banker to an Issue is required to pay a sum of Rs. 25 lakh as registration fees at the time of the grant of certificate by SEBI