Chapter 13: SEBI (Merchant Bankers), SAST & Bankers to an Issue

Merchant bankers act as issue managers, underwriters, and financial architects for corporate capital raising, corporate restructuring, open offers, and buybacks.

Definition and Regulatory Scope (Regulation 2(cb))

A Merchant Banker is any person 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 services in relation to such issue management.

Key Registration & Operational Mandates

• Corporate Entity Requirement: Certificate of registration is granted exclusively to a body corporate (individuals and partnership firms are barred from acting as merchant bankers).
• Capital Adequacy: Minimum net worth of ₹5 Crores (strengthened in recent circulars to ₹50 Crores for top-tier Category I merchant banking licenses).
• Exclusivity of Business: A merchant banker cannot carry on any business other than that in the securities market (fund-based financing, money lending, or manufacturing activities are strictly prohibited).
• Due Diligence Obligation: The merchant banker must conduct independent due diligence on corporate disclosures, verify material contracts, inspect promoter histories, and submit a formal Due Diligence Certificate to SEBI with the draft offer document.

The SAST Regulations (Takeover Code) ensure that when an acquirer gains substantial voting control of a listed company, all public shareholders are provided a fair, non-discriminatory opportunity to exit at an equitable price.

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|                           TAKEOVER CODE (SAST) TRIGGERS                           |
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| 1. INITIAL THRESHOLD TRIGGER (Reg 3(1)):                                          |
|    - Crossing 25% of voting rights in target company                              |
|    - Mandates compulsory Open Offer for at least 26% public shares                |
|                                                                                   |
| 2. CREEPING ACQUISITION TRIGGER (Reg 3(2)):                                       |
|    - Applies to acquirers already holding between 25% and 75%                     |
|    - Allowed creeping limit: Up to 5% additional voting rights per financial year |
|    - Exceeding 5% in a FY triggers compulsory Open Offer for at least 26%         |
|                                                                                   |
| 3. CHANGE IN CONTROL (Reg 4):                                                     |
|    - Acquisition of direct or indirect management control triggers Open Offer     |
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Key Statutory Requirements of an Open Offer

• Mandatory Offer Size: The open offer must be made for at least twenty-six percent (26%) of the total voting capital of the target company.
• Escrow Account Mandate (Regulation 17): The acquirer must create an escrow account with a scheduled commercial bank before making the public announcement:
  • 25% of the first ₹500 Crores of total offer consideration;
  • 10% of the balance consideration exceeding ₹500 Crores.
• Offer Price Discovery (Regulation 8): The offer price cannot be lower than the highest of:
  1. Highest negotiated price under the Share Purchase Agreement (SPA);
  2. Volume-Weighted Average Price (VWAP) paid by the acquirer during the preceding 52 weeks;
  3. Highest price paid by the acquirer during the preceding 26 weeks;
  4. 60-day VWAP on the recognized stock exchange prior to public announcement.
• Reporting of Shareholding Changes (Regulation 29): Any person whose aggregate shareholding crosses 5%, and any subsequent change of $\pm$ 2%, must disclose the transaction to the target company and stock exchanges within two (2) working days.

Bankers to an Issue handle the monetary flows of public capital issues, rights offerings, and debt issues.

Regulatory Role & Qualifications

• Only a Scheduled Commercial Bank meeting RBI capital adequacy norms (CRAR) is eligible for registration as a Banker to an Issue.
• Duties include: Collecting application monies, managing escrow accounts, validating ASBA block mandates, and releasing funds to issuers upon successful basis of allotment.

The ASBA & UPI Revolution

1. Application Supported by Blocked Amount (ASBA): 100% mandatory for all public and rights issues:
   • Application money is not debited to an issuer's account at the time of application; it remains safely blocked in the investor's own bank account.
   • Bank lien is released or actual money debited strictly upon final basis of allotment, eliminating retail refund delays and cheque bouncing risks.
2. UPI Payment Mechanism for Retail Bidders:
   • Retail Individual Investors (RIIs) bidding up to ₹5 Lakhs utilize Unified Payments Interface (UPI) third-party validation and block mandates, achieving automated, real-time lien creation.

The operational execution of an open offer under the SAST Regulations follows a statutory timeline to protect target company shareholders.

Complete Open Offer Lifecycle Timeline

SAST OPEN OFFER LIFECYCLE

Competing Offers (Regulation 20)

• Any person other than the original acquirer may make a competing offer within fifteen (15) working days from the date of the Detailed Public Statement (DPS).
• A competing offer must be for at least the same number of shares as the original offer.
• Both offers are open simultaneously, and public shareholders have the right to choose which offer to tender into.

Committee of Independent Directors (IDC - Regulation 26)

The Board of Directors of the target company must constitute a Committee of Independent Directors to evaluate the open offer:

• The IDC must publish reasoned recommendations on whether the open offer price is fair and reasonable.
• The recommendations must be published in the same newspapers where the DPS appeared at least two (2) working days before the tendering period opens.

Merchant bankers are subject to stringent conflict of interest rules and ongoing reporting requirements under Schedule III.

Code of Conduct (Schedule III)

• High Standards of Integrity: Merchant bankers must maintain absolute integrity, professional diligence, and fairness in all capital market transactions.
• Independence & Conflict of Interest: A merchant banker cannot lead-manage an issue if it is an associate of the issuer company (holding > 15% equity or sharing common management).
• Prohibition on Speculation: Merchant bankers cannot indulge in speculative buying or selling of securities of companies whose issues they manage.

Statutory Half-Yearly Reporting

Every merchant banker must submit a Half-Yearly Report to SEBI within three (3) months from the end of the half-year (for periods ending September 30 and March 31):

• Details of public, rights, and debt issues managed during the period;
• Status of due diligence certificates submitted;
• Number of investor grievances received, resolved, and pending;
• Confirmation of net worth compliance certified by the statutory auditor.