Merchant Bankers Regulations

Prepared By:Amar Ranu (905)Deepak Thakkar (909)Kumar Dhananjay Rakesh (917)Shakti Shatpathy (930)

Under Guidance of :Prof. Dr. Rachana BaidIndian Institute of Capital Markets

Securities Exchange Board of India(Merchant Bankers) Regulations, 1992

Registration

Obligations & Responsibilities

Procedure forInspection

Introduction

Procedure for Action incase of Default

Contents


Registration


Procedure for Inspection

Introduction

IntroductionOrigination of Merchant Bankers in India

Nature of Merchant Banking

Merchant Banker’s Core Business Portfolio

Need for Regulation

Definition


Securities Exchange Board of India(Merchant Bankers) Regulations, 1992 Introduction

Registration






Need for Regulation

Definition



Registration



Introduction


Merchant banking activity was formally initiated into the Indian capital Markets in 1967.

Started with various services like management of capital issues, production planning and system design to market research and management consulting services to meet the requirements of small and medium sector rather than large sector.

Citibank Setup its merchant banking division in 1970. The various tasks performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity.

Indian banks Started banking Services as a part of multiple services they offer to their clients from 1972.

State bank of India started the merchant banking division in 1972. In the Initial years the SBI's objective was to render corporate advice And Assistance to small and medium entrepreneurs.



Registration






Need for Regulation

Definition



Registration



Introduction

IntroductionNature of Merchant Banking

The services of merchant bank cover project counseling, pre investment activities, feasibility studies, project reports, design of capital structure, issue management, underwriting, loan syndication, mobilization of funds, foreign currency finance, mergers, amalgamation, takeover, venture capital and public deposits.

Merchant banking is skill based activities and involves serving financial need of every client.

The depth and sophistication in merchant banking business are improving since the avenues for raising funds are widening and demands for funds is increasing.

Merchant bankers can turn to any of the activities depending upon resources, such as capital, foreign tie-ups for overseas activities and skills.



Origination of Merchant Bankers in India



Need for Regulation

Definition

Registration



Introduction



Registration



Introduction

IntroductionMerchant Banker’s Core Business Portfolio

Core Business Portfolio

Non-fund Based

Merchant Banking Services for Management of public offers of equity and debt instruments

Right issues

Open offer under the takeover code

Buyback offers

Advisory and Transaction services in

Project financing

Syndicated loans

Private Equity/Venture capital

Business Advisory

Financial Restructuring

Corporate re-organisations such as mergers and demergers, hive-offs, asset sales, divestitures

Acquisition, strategic sale, buyouts and takeovers

Fund Based

Underwriting

Market Making

Bought out deals

Proprietary investment and trading in equities, bonds and derivatives.



Registration






Need for Regulation

Definition



Registration



Introduction

IntroductionNeed for Regulation

The merchant banker's regulations, which regulate the raising of funds in the primary market, would assure for the issuer market for raising resources at low cost, effectively and easily, ensure high degree of protection of investors interest.

The regulations provide for the merchant bankers a dynamic and competitive market with the high standard of professional competence, dignity, integrity and solvency.

The regulations promote a primary market, which is fair, efficient, and flexible, and inspire confidence.



Registration






Need for Regulation

Definition



Registration



Introduction

IntroductionDefinition

"Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities has manager, consultant, advisor or rendering corporate advisory services in relation to such issue management".



Registration



Registration of Merchant Bankers

IntroductionCategories of the Merchant Bankers

Requirements for Granting of Certificate

Capital Adequacy Requirement

Procedure for Registration

Renewal of Certificate



Registration











Registration



IntroductionCategories of Merchant Bankers


(a) Category 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 subscription; and

to act as adviser, consultant, manager, underwriter, portfolio manager.

(b) Category IITo act as adviser, consultant, co-manager, underwriter, portfolio manager

(c) Category III To act as underwriter, adviser, consultant to an issue (d) Category IV To act only as adviser or consultant to an issue.



Registration











Registration



IntroductionRequirements for Granting of Certificate


The Applicant . . . .

shall be a body corporate other than a NBFC

has the necessary infrastructure to effectively discharge his activities.

Should have minimum two experienced employees to conduct the business of the merchant banker.

Should fulfill the capital adequacy requirement as specified.

his partner, director or principal officer should not be involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant.

his partner, director or principal officer has not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence.

Should have the professional qualification from an institution recognized by the Government in finance, law or business management.

Should be a fit and proper person.



Registration











Registration



IntroductionCapital Adequacy Requirements


The Capital Adequacy Requirement(CAR) shall not be less than the net worth of the person making the application for grant of registration.

The net worth shall be as follows, namely: - Category Minimum Amount 1) Category I Rs. 5, 00, 00, 000 2) Category II Rs. 50, 00, 000 3) Category III Rs. 20, 00, 000 4) Category IV Nil

Explanation: For the purposes of this regulation "net worth" means in the case of an applicant which is a partnership firm or a body corporate, the value of the capital contributed to the business of such firm or the paid up capital of such body corporate plus free reserves as the case may be at the time of making application.



Registration











Registration



IntroductionProcedure for Registration


The SEBI on being satisfied that the applicant is eligible shall grant a certificate in Form B.

On the grant of a certificate the applicant shall be liable to pay the fees in accordance with Schedule II as shown below:

Registration FeesMerchant Banker

Initial Fees for 2 Yrs

Continuation Fees

Category I Rs. 2.5 Lakhs Rs. 1 LakhCategory II Rs. 1 Lakh Rs. 50,000Category III Rs. 1 Lakh Rs. 25,000Category IV Rs. 5000 Rs. 1000



Registration











Registration



IntroductionRenewal of Certificate


Three months before expiry of the period of certificate, the merchant banker, may if he so desires, make an application for renewal in Form A.

The application for renewal shall be dealt within the same manner as if it were a fresh application for grant of a certificate.

The SEBI on being satisfied that the applicant is eligible for renewal of certificate shall grant a certificate in Form B and send intimation to the applicant.

On the grant of a certificate the applicant shall be liable to pay the fees in accordance with Schedule II as shown below:

Renewal FeesMerchant Banker

Initial Fees for 2 Yrs

Continuation Fees

Category I Rs. 1 Lakh Rs. 20,000Category II Rs. 75,000 Rs. 10,000Category III Rs. 50,000 Rs. 5,000Category IV Rs. 5000 Rs. 2500


Securities Exchange Board of india(Merchant Bankers) Regulations, 1992

Registration




IntroductionCode of Conduct

Maintenance of Books of Accounts, Records, etc.

Submission of Half Yearly Results

Appointment of Lead Merchant Bankers & Restrictions

Responsibilities of Lead Managers

Underwriting Obligations

Appointment of Compliance OfficersProcedure for Action incase of Default


Registration












Registration



IntroductionCode of conduct


Every merchant banker shall abide by the Code of Conduct as specified in Schedule III.

No merchant banker, other than a bank or a public financial institution, who has been granted a certificate of registration under these regulations shall after June 30th, 1998 carry on any business other than that in the securities market.

A merchant banker who has been granted certificate of registration to act as primary dealer by Reserve Bank of India, may carry on such business as may be permitted by Reserve Bank of India.



Registration












Registration



IntroductionMaintenance of Books of Accounts, Records, etc.


Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:- (a) a copy of balance sheet and P&L account as at the end of each accounting period; (b) a copy of the auditor's report on the accounts for that period; and (c) a statement of financial position.

Every merchant banker shall intimate to the SEBI the place where the books of accounts, records and documents are maintained.

Every merchant banker shall, after the end of each accounting period furnish to the SEBI copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the SEBI.



Registration












Registration



IntroductionSubmission of Half Yearly Results


Every merchant banker shall furnish to the SEBI half-yearly unaudited financial results when required by the SEBI with a view to monitor the capital adequacy of the merchant banker.



Registration












Registration



IntroductionAppointment of Lead merchant Bankers


All issues should be managed by at least one merchant banker functioning as the lead merchant banker.

Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund.

Restriction on appointment of lead managers The number of lead merchant bankers may not, exceed in

case of any issue of Size of issue No. of Merchant Bankers (a) Less than rupees fifty crore - Two (2) (b) Rupees fifty crore but less than rupees one hundred crore

- Three(3) (c) Rupees one hundred crore but less than rupees two

hundred crore - Four (4)(d) Rupees two hundred crore but less than rupees four

hundred crore - Five (5)(e) Above Rupees four hundred crore five or more as may be

agreed by the SEBI



Registration












Registration



IntroductionResponsibilities of Lead Managers


No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the SEBI at least one month before the opening of the issue for subscription:

Incase there are more than one lead merchant bankers, the responsibilities should be clearly demarcated .

No lead merchant banker shall, agree to manage the issue made by any body corporate, if such body corporate is an associate of the lead merchant banker.



Registration












Registration



IntroductionUnderwriting Obligations


In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum Underwriting obligation of five percent of the total underwriting commitment or rupees twenty-five lakh, whichever is less.

Incase the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement for having the issue underwritten to that extent by a merchant banker associated with the issue and shall keep the SEBI informed of such arrangement.Procedure for Action

incase of Default


Registration












Registration



IntroductionAppointment of Compliance Officers


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 SEBI or the Central Government and for redressal of investors’ grievances.

The compliance officer shall immediately and independently report to the SEBI any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the SEBI in the draft prospectus or the Letter of offer as the case may be, do not recur.



Registration




IntroductionSEBI’s right to inspect

Notice before inspection

Submission of Reports to the SEBI

Appointment of Auditors



Registration










Registration



IntroductionSEBIs right to Inspect


The SEBI may appoint one or more persons as inspecting authority to undertake inspection of

the books of accounts, records and documents of the merchant banker.

Purpose of Inspection . . .

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

to ensure 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; and

to investigate suo-moto in the interest of securities business or investors interest into the affairs of the merchant banker.



Registration










Registration



IntroductionNotice before Inspection


Before undertaking an inspection under regulation 29 the SEBI shall give a reasonable notice to the merchant banker for that purpose.

During the course of inspection, the merchant banker against whom an inspection is being carried out shall be bound to discharge his obligations.



Registration










Registration



IntroductionSubmission of Reports to the SEBI


The inspecting authority shall, as soon as may be possible submit an inspection report to the SEBI.

Action on inspection or investigation report

The SEBI or the Chairman shall after consideration of inspection or investigation report take such action as the SEBI or Chairman may deem fit and appropriate including action under the Securities and Exchange Board of India.



Registration










Registration




IntroductionAppointment of Auditors


The SEBI may appoint a qualified auditor to investigate into the books of account or the affairs of the merchant banker provided that the auditor so appointed shall have the same powers of the inspecting authority


Registration



Procedure for Actionincase of Default

Procedure for Action in case of Default

IntroductionSuspension of Registration

Cancellation of Registration

Show-cause notice and order

Effect of Suspension & cancellation of Registration of Merchant Bankers

Publication of Order of Suspension


Registration











Registration






A penalty of suspension of registration of a merchant banker may be imposed where –

The merchant banker violates the provisions of the Act, rules or regulations;

The merchant banker – (a) fails to furnish any information relating to his activity as

merchant banker as required by the SEBI; (b) furnishes wrong or false information; (c) does not submit periodical returns as required by the SEBI. (d) does not co-operate in any enquiry conducted by the SEBI.

The merchant banker fails to resolve the complaints of the investors or fails to give a satisfactory reply to the SEBI in this behalf;

The merchant banker indulges in manipulating or price rigging or cornering activities;

The merchant banker fails to maintain the capital adequacy requirement;

The merchant banker fails to pay the fees; The merchant banker violates the conditions of registration; The merchant banker does not carry out his obligations as specified

in the regulation.


Registration











Registration





IntroductionCancellation of Registration

A penalty of cancellation of registration of a merchant banker may be imposed if

The merchant banker indulges in deliberate manipulation or price rigging or cornering activities affecting the securities market and the investors interest;

The financial position of the merchant banker deteriorates to such an extent that the SEBI is of the opinion that his continuance as merchant banker is not in the interest of investors;

The merchant banker is guilty of fraud, or is convicted of a criminal offence;


Registration











Registration





IntroductionShow-cause notice and order

On receipt of the report from the enquiry officer, the SEBI shall consider the same and issue a show-cause notice as to why the penalty as proposed by the enquiry officer should not be imposed.

The merchant banker shall within twenty-one days of the date of the receipt of the show- cause send a reply to the SEBI.

The SEBI after considering the reply to the show-cause notice, if received, shall as soon as possible but not later than thirty days from the receipt of the reply, if any, pass such order as it deems fit.

Every order passed shall be self- contained and give reasons for the conclusions stated therein including justification of the penalty imposed by that order.

The SEBI shall send a copy of the order to the merchant banker.


Registration








Effect of Suspension & Cancellation of Registration of Merchant Bankers



Registration





IntroductionEffect of Suspension & cancellation of Registration of

Merchant Bankers

On and from the date of the suspension of the merchant banker, he shall cease to carry on any activity as a merchant banker during the period of suspension.

On and from the date of cancellation the merchant banker shall with immediate effect cease to carry on any activity as a merchant banker.


Registration











Registration





IntroductionPublication of Order of Suspension

The order of suspension or cancellation of certificate passed shall be published in at least two daily newspapers by the SEBI.

Any person aggrieved by an order of the SEBI made, on and after the commencement of the Securities Laws (Second amendment) Act, 1999, (i.e., after 16th December 1999), under these regulations may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

Thank You

Economy & Finance

Merchant Bankers Regulations