Chapter 3: Registration, Code of Conduct & General Obligations of Merchant Bankers in India

Under Section 12 of the SEBI Act, 1992 and Regulation 3 of the SEBI (Merchant Bankers) Regulations, 1992, no person or entity is permitted to function as a merchant banker in the Indian securities market without obtaining a valid Certificate of Registration granted by the Securities and Exchange Board of India.

Permitted Entity Structure and Non-Banking Restrictions

• Corporate Entity Prerequisite: An applicant for registration as a merchant banker must be a body corporate.
• Prohibition on Fund-Based NBFC Activities:
  • Under Regulation 13B, a merchant banker is strictly prohibited from carrying on any business other than that in the securities market.
  • A merchant banker cannot operate as a Non-Banking Financial Company (NBFC) engaged in lending, leasing, hire-purchase, or bill discounting on its own balance sheet.
  • This structural separation ensures that merchant banking entities do not expose their capital advisory practice to liquidity runs, credit default risks, or balance-sheet solvency shocks.

PERMITTED ACTIVITIES UNDER MERCHANT BANKING LICENSE

Capital Adequacy and Net Worth Benchmark

Historically, SEBI maintained four distinct categories of merchant bankers (Categories I, II, III, and IV) based on permitted operational scope. To enhance market solvency, investor protection, and professional institutionalization:

• Categories II, III, and IV were systematically abolished or merged into Category I.
• Currently, all registered merchant bankers in India operate as Category I Merchant Bankers, authorized to perform the complete spectrum of issue management, underwriting, advisory, and restructuring activities.
• Statutory Net Worth Benchmark:
  • An applicant seeking registration as a Category I Merchant Banker must possess a minimum net worth of INR 5,00,00,000 (INR 5 Crores).
  • Statutory Definition of Net Worth: Defined as the aggregate value of paid-up equity capital plus free reserves (excluding reserves created out of revaluation, accumulated write-offs, fictitious assets, and intangible assets), less accumulated losses and deferred expenditure.
  • Net worth must be certified by an independent practicing Chartered Accountant upon application and continuously maintained on an ongoing operational basis.

Eligibility Criteria: Infrastructure and Key Personnel

Under Regulation 6 of the SEBI (Merchant Bankers) Regulations, 1992, SEBI assesses several factors before granting registration:

1. Adequate Operational Infrastructure: The applicant must maintain necessary office space, equipment, communication networks, data storage, and administrative facilities.
2. Professional Personnel Benchmarks:
   • Must employ a minimum of two key personnel who possess professional qualifications in finance, law, or business administration (e.g., Chartered Accountants [CA], Company Secretaries [CS], Cost and Management Accountants [CMA], Chartered Financial Analysts [CFA], or post-graduate MBAs in finance from recognized institutions).
   • These key personnel must possess a minimum of five years of direct professional experience in merchant banking, capital markets, securities law, or corporate finance.
3. Fit and Proper Person Criteria:
   • The applicant, its promoters, directors, key management personnel, and principal shareholders must satisfy the criteria set forth in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
   • Disqualifications include conviction for economic offenses, moral turpitude, insolvency, wilful loan default, debarment by SEBI or other financial regulators, or being named a fugitive economic offender.

The procedural workflow for obtaining and maintaining a Merchant Banking registration is governed by Chapter II of the SEBI (Merchant Bankers) Regulations, 1992.

The Application and Grant Procedure

1. Filing of Form A:
   • An eligible corporate entity submits an application to SEBI in Form A along with non-refundable application fees.
   • The application must include detailed corporate organizational structures, promoter track records, audited balance sheets for the preceding three financial years, chartered accountant net worth certificates, personnel profiles, and disclosure of past litigation.
2. SEBI Scrutiny and Clarifications:
   • SEBI inspects documentation, verifies fit-and-proper credentials, assesses operational infrastructure, and may call for supplemental information or conduct physical inspections of the applicant's registered premises.
3. Grant of Certificate in Form B:
   • If satisfied that the applicant meets all statutory eligibility benchmarks, SEBI issues an intimation of approval requiring payment of registration fees.
   • Upon receipt of fees, SEBI grants a Certificate of Registration in Form B.
   • Under current SEBI regulatory provisions, registration is granted on a permanent basis (subject to continuous compliance with net worth criteria and timely payment of recurring statutory maintenance fees every three years).

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|                        MERCHANT BANKER REGISTRATION PROCEDURAL WORKFLOW                           |
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|                                                                                                   |
|  [ SUBMIT FORM A ]   -->   [ SEBI SCRUTINY ]   -->   [ INTIMATION ]   -->   [ CERTIFICATE FORM B ]|
|  • Detailed dossier        • Background check        • SEBI issues          • Permanent validity  |
|  • Net worth cert          • Personnel audit           in-principle           granted             |
|  • Infrastructure          • Office inspection         approval             • Subject to fees     |
|  • Form A app fee          • Fit & Proper check      • Pay reg fees           every 3 years       |
|                                                                                                   |
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Statutory Fee Structure

The fees payable by Merchant Bankers are set forth in Schedule IV of the Regulations:

• Application Fee: A non-refundable fee payable at the time of submitting Form A.
• Registration Fee: Payable upon receipt of the grant intimation to activate the certificate.
• Recurring Maintenance Fee: Payable every three years from the date of initial registration to keep the license active. Failure to remit fees within prescribed statutory timelines results in suspension or cancellation of registration under the SEBI (Intermediaries) Regulations, 2008.

Regulation 13 mandates that every registered Merchant Banker strictly observe the Code of Conduct specified in Schedule III of the SEBI (Merchant Bankers) Regulations, 1992. The Code of Conduct establishes the ethical and fiduciary standards governing merchant banking practice in India.

Key Tenets of the Schedule III Code of Conduct

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|                          SCHEDULE III CODE OF CONDUCT: CORE PRINCIPLES                            |
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|                                                                                                   |
|  1. INTEGRITY & FAIRNESS     • Highest standards of commercial integrity and fair practice.        |
|  2. DUE DILIGENCE & CARE     • Exercise independent professional diligence; verify all facts.     |
|  3. CONFLICT OF INTEREST     • Avoid, manage, and disclose conflicts; maintain arm's length.      |
|  4. CLIENT CONFIDENTIALITY   • Preserve client secrets; strict Chinese Walls around UPSI.         |
|  5. MARKET INTEGRITY         • Never participate in price rigging, circular trading, or slop.     |
|  6. ACCURATE DISCLOSURE      • Ensure offer documents contain true, fair, and adequate facts.     |
|  7. STATUTORY COMPLIANCE     • Promptly adhere to all SEBI, Companies Act, and exchange rules.   |
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Analytical Breakdown of Code of Conduct Clauses

1. Integrity, Fairness, and Due Diligence:

   • A merchant banker must maintain high standards of integrity, dignity, fairness, and professional competence in all dealings.
   • Must exercise due skill, care, and diligence in conducting investigations into the affairs of the issuer company, verifying representations, and independently cross-checking disclosures before filing offer documents.

2. Avoidance and Management of Conflicts of Interest:

   • A merchant banker must avoid situations that create conflict of interest between its own commercial interests, its corporate clients, and the investing public.
   • Where conflicts cannot be eliminated, the merchant banker must make full and transparent disclosures to all affected parties and ensure the fiduciary interests of public investors take precedence.
   • Structural Restriction: A merchant banker is expressly prohibited from acting as lead manager or issue manager in an offer of securities where the merchant banker itself, its promoters, or its parent corporate entity is the issuer.

3. Confidentiality and Handling of Material Information:

   • A merchant banker must maintain strict confidentiality regarding proprietary client data, transaction details, and unpublished financial statements acquired during its mandates.
   • Information cannot be disclosed to third parties unless required by statutory authorities, courts, or regulatory bodies.
   • Personnel are prohibited from using unpublished price-sensitive information (UPSI) for personal trading or providing trading tips to associates.

4. Prohibition on Manipulative and Fraudulent Practices:

   • A merchant banker must not engage in any manipulative or deceptive practices, market rigging, price distortion, or circular trading designed to create artificial liquidity or inflate securities prices ahead of public offerings.
   • Prohibited from disseminating unsubstantiated forecasts, rumors, or marketing claims not contained in the offer document.

5. Client Relationships and Arm's Length Dealings:

   • Must maintain arm's-length commercial relationships with issuers, underwriters, registrars, and advertising agencies.
   • Cannot offer rebates, kickbacks, or illicit incentives to investors to solicit bids or inflate subscription figures.

Chapter III of the SEBI (Merchant Bankers) Regulations, 1992 outlines the general operational obligations and statutory compliance requirements for registered merchant banking firms.

1. Mandatory Maintenance of Books of Accounts and Records

Under Regulation 14, every merchant banker must preserve comprehensive statutory books, registers, and records for a minimum period of five years:

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|                        STATUTORY RECORDS PRESERVED FOR MINIMUM 5 YEARS                            |
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|                                                                                                   |
|  • Audited balance sheets, profit & loss accounts, and auditor reports for every financial year.  |
|  • Complete correspondence, MoUs, and engagement agreements with every corporate client.         |
|  • Due diligence dossiers, verification notes, working papers, and expert legal/tax opinions.     |
|  • Copies of all offer documents, draft offer documents, and advertisements issued to public.     |
|  • Underwriting agreements, syndicate sub-underwriting records, and devolvement notices.          |
|  • Records of allocation, basis of allotment approval records, and refund reconciliation logs.    |
|  • Investor grievance registers, SCORES communications, and complaint resolution evidence.        |
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2. Submission of Half-Yearly Reports to SEBI

Under Regulation 15, every merchant banker must furnish periodic compliance reports to SEBI:

• Must submit half-yearly unaudited financial statements and operational activity reports within prescribed deadlines following the close of each half-year (periods ending September 30 and March 31).
• Reports must disclose the number and nature of public issues managed, underwriting commitments assumed, underwriting defaults encountered, net worth computations, and details of pending or resolved investor grievances.

3. Appointment and Duties of Compliance Officer

Under Regulation 6A, every merchant banker must appoint a designated Compliance Officer:

• Must be a qualified professional (typically a Company Secretary, Legal Counsel, or senior compliance specialist).
• Responsibilities include:
  • Monitoring ongoing compliance with the SEBI Act, rules, regulations, notifications, and circulars issued by SEBI and the Central Government.
  • Ensuring the Schedule III Code of Conduct is implemented across all operational divisions.
  • Reporting directly to the Board of Directors and serving as the primary liaison with SEBI inspection officers.
  • Independently reporting any non-compliance, regulatory breach, or operational default directly to SEBI.

To preserve the integrity of primary public markets, SEBI enforces strict operational boundaries, joint responsibilities among co-lead managers, and comprehensive supervisory inspection mechanisms.

Operational Boundaries and Conflict Restrictions

• Restriction on Non-Capital Market Activities: As established under Regulation 13B, a merchant banker cannot operate any business outside the securities markets.
• Prohibition on Proprietary Public Offerings: A merchant banker is expressly barred from managing an issue of securities where the merchant banker itself is the issuer. If an associate of a merchant banker issues securities, that merchant banker cannot act as the sole lead manager; an independent, unaffiliated merchant banker must be appointed to lead the issue, conduct due diligence, and submit statutory certifications.
• Lead Manager Memorandum of Understanding (MoU):
  • When an issuer appoints multiple lead managers (co-lead managers) to manage a large public issue, Regulation 23 mandates the execution of a formal inter-se Agreement / MoU among the Lead Managers.
  • The MoU must clearly delineate the operational responsibilities, due diligence allocations, and regulatory reporting duties assigned to each lead manager (e.g., offer document drafting, regulatory liaison, syndicate management, marketing and roadshows, pricing, post-issue monitoring).
  • A copy of the inter-se allocation of responsibilities must be submitted to SEBI along with the draft offer document and prominently disclosed in the offer document.
  • Despite inter-se allocation of specific operational tasks, all lead managers remain jointly and severally responsible for overall due diligence integrity and the accuracy of statutory disclosures.

SEBI INSPECTION AND ENFORCEMENT FRAMEWORK

SEBI Inspection of Books and Operational Audits

Under Regulations 17 through 28, SEBI holds statutory authority to inspect the books and operational records of any merchant banker:

• Inspection Objectives:
  • Verify whether statutory books of account, due diligence papers, and compliance registers are properly maintained.
  • Investigate complaints received from investors, clients, or other market intermediaries.
  • Review the adequacy of due diligence conducted for public offerings, rights issues, and open offers.
• Duty to Cooperate: Every director, officer, and employee of the merchant banker is legally bound to provide the Inspecting Officer with complete access to books, records, internal emails, computer files, and working papers, and to provide oral or written testimony under oath.
• Disciplinary Penalties:
  • If an inspection reveals material non-compliance, negligence, intentional mis-statement in offer documents, or breach of the Code of Conduct, SEBI may initiate formal disciplinary proceedings under the SEBI (Intermediaries) Regulations, 2008.
  • Sanctions include issuing warnings, monetary civil penalties (under Section 15HB of the SEBI Act), suspending the merchant banker's registration certificate for a specified period, or permanently canceling the certificate.

Investor protection lies at the heart of SEBI's regulatory mandate. SEBI has established an automated, time-bound grievance redressal mechanism that holds merchant bankers directly accountable for resolving complaints arising from public offerings, rights issues, buybacks, and open offers.

Investor Complaints in Public Issues

During and immediately following a public offering, investor complaints typically concern:

1. Non-receipt of refund orders or failure of SCSBs to unblock ASBA application funds within statutory T+3 timelines.
2. Non-credit of allotted equity shares to investor demat accounts.
3. Errors or delays in credit of fractional share entitlements or dividend distributions.
4. Misleading marketing statements or material omissions in the offer document.

The SCORES 2.0 Redressal Architecture

SEBI operates an advanced web-based centralized grievance redressal platform known as SCORES (SEBI Complaints Redress System), recently upgraded to SCORES 2.0:

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|                                   SCORES 2.0 REDRESSAL TIMELINE                                   |
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|                                                                                                   |
|  [ COMPLAINT LODGED ]  -->  [ AUTO-FORWARDED ]  -->  [ ACTION TAKEN REPORT ]  -->  [ RESOLUTION ] |
|  • Investor registers        • Forwarded to           • Merchant Banker must        • Maximum 21  |
|    on SCORES 2.0               designated               resolve and upload            calendar    |
|    portal/mobile app           Compliance               Action Taken Report           days from   |
|                                Officer                  (ATR) with proof              receipt     |
|                                                                                                   |
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• Automated Two-Tier Routing: When an investor lodges a grievance on SCORES, the system automatically routes the complaint directly to the designated compliance officer of the concerned Merchant Banker and the RTA.
• Mandatory 21-Day Resolution Deadline:
  • The Merchant Banker is statutorily required to investigate the grievance, resolve the underlying cause, and submit an Action Taken Report (ATR) supported by documentation within a maximum period of 21 calendar days from the date of receipt.
  • Failure to resolve grievances within 21 days automatically triggers escalation flags within SEBI's surveillance monitoring system, potentially subjecting the merchant banker to enforcement action.
• Smart Online Dispute Resolution (SMART ODR):
  • For grievances that remain unresolved through SCORES or where the investor is dissatisfied with the ATR, SEBI introduced the SMART ODR Portal.
  • SMART ODR provides an institutional dispute resolution mechanism combining online conciliation with independent arbitral proceedings administered by recognized stock exchanges and depositories.