ROLE OF MERCHANT BANKERS IN

INDIAN SECURITIES MARKET

Submitted To: - Mr. Vikas Gupta

Submitted By: - Mona Lisha (A3211115132)
Jugishna Kohli
(A3211115110)

Prashant Yadav
(A3211115174)

Pratyasha Sharma (A3211115123)

Adi Bhatia (A3211115105)

Afrrin Tarana (A3211115223)

B.A L.L.B(H) Section: - “B”

 Batch: - 2015-2020 Semester: - 8

TABLE OF CONTENT

NAME TITLE SIGN

MONA LISHA Merchant bankers as lead managers for issue A3211115132

management

JUGISHNA KOHLI Merchant banks in India perform the A3211115110

following functions

PRASHANT YADAV Market abuse and its impact on merchant A3211115174

banking

ADI BHATIA Role of merchant bankers in public&rights A3211115123

issue

PRATYASHA SHARMA Role of merchant banker during IPO A3211115105

AFRRIN TARANA Merchant banking regulated in India A3211115223

AKSHITA JOSHI She has not contributed anything in this A3211115168

project and even not cordinated on
continous reminders
MERCHANT BANKERS AS LEAD MANAGERS FOR ISSUE
MANAGEMENT

-Mona Lisha A3211115132

SEBI (Merchant Bankers’) Regulation Act, 1992 defines a ‘merchant banker’ 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”.

Banks are allowed to undertake merchant banking activities through a separate subsidiary
which would be required to comply with SEBI regulations. Banking Institutions performing
merchant banking activities are also required to follow the requirements laid down in the
prudential exposure norms prescribed by RBI, as well as the statutory limits contained in
Section 19(2) & (3) of the Banking Regulation Act, 1949.1

Category I Merchant bankers can only act as Lead Managers. SEBI has specified the
maximum number of lead managers based on issue size 2. (categories as mentioned in SEBI
rules)

The role of the lead manager starts with ascertaining the fund requirements of a client and
continues till full subscription is received. If it is a book building process, the lead manager
also helps determine the price band; in such cases, they are also called Book Running Lead
Managers. Post issue activities, like intimation of allotments and refunds, are their
responsibility as well.

The Lead Manager coordinates with the Registrar and ensures:3

Every lead managers has to enter into an agreement with the issuingcompanies setting out
their mutual rights, liabilities and obligation relating to such issues and in particular to

1 http://shodhganga.inflibnet.ac.in/bitstream/10603/3566/11/11_chapter%204.pdf

2 https;//www.rbi.org.in

3 https://blog.ipleaders.in/essential-role-merchant-bankers/
disclosures, allotment and refund. A statement specifying these is furnished to the SEBI at
least one month before the opening of the issue for subscription. In case of more than one
lead manager, the statement has to provide details about their respective responsibilities. A
lead merchant banker cannot manage an issue if the issuing company is his associate. He can
also not associate with a merchant banker who does not hold a certificate of registration with
the SEBI

Due Diligence Certificate: The lead manager is responsible for the verification of the contents
of a prospectus/letter of offer in respect of an issue and the reasonableness of the views
expressed in them. He has to submit to the SEBI, at least two weeks before the opening of the
issue for subscription, a due diligence certificate to the effect that (1) they are in conformity
with the documents/materials and papers relevant to the issue., (2) all legal requirements
connected with the issue have fully complied with, and (3) the disclosures are true, fair and
adequate to enable the investors to make a well-formed decision as to the investment in the
proposed issue

Submission of Documents: The lead managers to an issue have to submit to the SEBI, at least
two weeks before the date of filing with the registrar of companies/regional stock exchanges
or both, particulars of the issue, draft prospectus/letter of offer, other literature to be
circulated to the investors/shareholders and so on to the SEBI. They have to ensure that the
modifications/suggestions made by it with respect to the information to be given to the
investors are duly incorporated. They have to continue to be associated with the issues till the
subscribers have received the share/debenture certificates or the refund of excess application
money.

Acquisition of Shares: A merchant banker is prohibited from acquiring securities of any

company on the basis of unpublished price sensitive information obtained during the course
of any professional assignment either from the client or otherwise. He has to submit to the
SEBI complete particulars of any acquisition of securities of a company whose issue is being
managed by him within 15 days from the date of the transaction.

Disclosure to SEBI: As and when required, a merchant banker has to disclose to the SEBI:
(1) his responsibilities with regard to the management of the issue, (2) any change in the
information/particulars previously furnished which have a bearing on the certificate of
registration granted to it, (3) the names of the companies whose issues he has managed or has
been associated with (4) the particulars relating to the breach of capital adequacy
requirements, and (5) information relating to his activities as manager, underwriter,
consultant or advisor to an issue.

Government Policy for Merchant Banking:

The Government issued policy guidelines for merchant bankers to ensure sufficient physical
infrastructure, necessary expertise, good financial standing, professional integrity and fairness
in their transactions. The merchant bankers have to be competent to serve the investors also.

On 1st March, 1993 new policy guidelines have been issued by SEBI for the merchant
bankers to ensure greater transparency in their operations and to make them accountable so as
to protect the investor’s interest. The guidelines relate to pre-issue obligations, underwriting,
advertisements and post-issue obligations of the merchant bankers.

Legal Implications on merchant bankers as lead managers as per SEBI

rules

(verbatim)

SECURITIES AND EXCHANGE BOARD OF INDIA (MERCHANT BANKERS)

REGULATIONS, 1992

Responsibilities of lead managers.

Under section:

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

Provided that, where there are more than one lead merchant bankers to the issue the
responsibilities of each of such lead merchant bankers shall clearly be demarcated and a
statement specifying such responsibilities shall be furnished to the Board at least one month
before the opening of the issue for subscription.

Lead merchant banker not to associate with a merchant banker without registration.

21. A lead merchant banker shall not be associated with any issue if a merchant

banker who is not holding a certificate is associated with the issues.4

SEBI’S INVESTIGATION POWER

The SEBI can undertake inspection of the books of accounts, records, and documents of a
merchant banker to ensure that the books are maintained in the manner required, the
provision of the SEBI Act, rules, regulations are being complied with, and to investigate
complaints from investors/other merchant bankers/any other person or any matter having a
bearing on his activities as a merchant banker and to investigate suo moto in the interest of
securities business/investors into the affairs of the merchant banker.

The merchant banker has an obligation to furnish all information called for, allow a
reasonable access to the premises, extend reasonable facility for examination of
books/records/ documents/computer data and provide copies of the same and give all
assistance to the inspecting authority in connection with the inspection.

4 https;//www.sebi.gov.in/
MERCHANT BANKS IN INDIA PERFORM THE FOLLOWING FUNCTIONS

- Jugishna Kohli (A3211115110)

1. Managing Capital Issues.

Merchant banks manage new issues of companies by providing the following services:

(i) Working out the capital structure;

(ii) Drafting the prospectus;

(iii) Obtaining permission of SEBI;

(iv) Getting approval of stock exchanges;

(v) Arranging participation of institutions in the share capital of the company through private
arid market placement;

(vi) Arranging underwriting of the issue from brokers, banks and financial institutions;

(vii) Selecting managers, brokers, issue houses and bankers to the issue;

(viii) Acting as managers to the issue themselves;

(ix) Undertaking the publicity of the issue;

(x) Receiving applications for shares and debentures, their allotment, collection of money and
sending them to subscribers or informing the shareholders and depositories about them.

2. Advice on New Industrial Units:

They render advice to firms for setting up new industrial units relating to their location,
technical collaborations, selecting appropriate technologies, financing, tax planning,
obtaining approvals of governments, etc.

3. Project Formulation:

They help companies in formulating their projects by preparing pre-investment projects,

project reports, and making market surveys, etc.

4. Loan Syndication:

They help companies in loan syndication by arranging finance from banks and financial
institutions. For this, merchant banks prepare applications for submission to banks and
financial institutions; undertake negotiations for sanction of loan facilities; collaborate with
banks for working capital facilities, tie-up for consortium arrangements with financial
institutions; and help in completing loan documents.

5. Trustees:

Merchant banks act as trustees of debenture holders when companies issue secured
debentures. They arrange for their rating from the credit rating agencies to protect the
interests of the debenture holders.

6. Restructuring and Mergers:

They render advice, formulate schemes and prepare documents on restructuring, mergers,
amalgamations and takeovers of companies. They also help in obtaining approvals of
concerned persons and authorities.

7. Portfolio Management:

Merchant banks manage the portfolios of companies by selling and purchasing their
securities. They also provide them market intelligence and advisory services.

8. Equipment Leasing:

They help companies by procuring equipment and leasing it to companies.

9. Sick Industrial Units:

They help in rehabilitating sick industrial units. For this, they conduct studies, prepare reports
for rehabilitation and arrange financial assistance from banks and financial institutions. As a
last resort, they help in preparing a report for submission to the Board for Industrial and
Financial Reconstruction (BIFR).

10. Advice to Non-Resident Indians:

Merchant banks help non-resident Indians (NRIs) who want to set up industrial units in India
in the following ways: by rendering advice on projects, locations, investment opportunities,
collaborations, managing capital issue, portfolio management, etc.

11. Raising funds for clients:

Merchant banking organisation assist the clients in raising funds from the domestic and
international market, by issuing securities like shares, debentures, etc., which can be
deployed for starting a new project or business or expansion activities

12. Promotional Activities:

One of the most important activities of merchant banking is the promotion of business
enterprise, during its initial stage, right from conceiving the idea to obtaining government
approval. There is some organisation, which even provide financial and technical assistance
to the business enterprise.

13. Loan Syndication:

Loan Syndication means service provided by the merchant bankers, in raising credit from
banks and financial institutions, to finance the project cost or working capital of the client’s
project, also termed as project finance service.

14. Leasing Services:

Merchant banking organisations renders leasing services to their customers. There are some
banks which maintain venture capital funds to help entrepreneurs.
15. Equity Underwriting

Large companies often employ the services of merchant banks in acquiring capital through
the stock market. Equity underwriting is achieved by evaluating the amount of stock to be
issued, the value of the business, the use of proceeds, and the timing of issuance of the new
stock. Merchant banks handle all the necessary paperwork and liaison with the appropriate
marketing division to advertise the stock.

16. Credit Syndication

Merchant banks help in processing loan applications for short and long-term credit from
financial institutions. They provide these services by estimating total costs involved,
developing a financial plan for the entire project, as well as adopting a loan application for
commercial lenders. Also, they assist in choosing the ideal financial institutions to provide
credit facilities and act on the terms of the loan application with the financiers. Merchant
banks also ensure the lender’s willingness to participate, organize bridge finance, and engage
in legal formalities regarding investment to be approved and checking the working capital
requirements.

17. Portfolio Management:

Merchant banks provide portfolio management services to institutional investors and other
investors. They help in the management of securities to enhance the value of the underlying
investment. Merchant banks may assist their clients in the purchase and sale of securities to
help them attain their investment objectives.
MARKET ABUSE AND ITS IMPACT ON MARCHANT BANKERS

 Prashant Yadav (A3211115174)

The Securities and Exchange Board of India Act, 1992(hereinafter, the Act) is the primary
regulatory and supervising body for the security and investment market. The securities
market being large and the flow being tremendous, it needs a body vested with supreme
regulatory powers to protect the rights of the investors and the sellers. The objective of SEBI
is laid down in The Act and the Preamble reads as follows:-

“An Act to provide for the establishment of a Board to protect the interests of investors in
securities and to promote the development of, and to regulate, the securities market and for
matters connected therewith or incidental thereto.”

Hence regulatory law and its principles play a vital role in the study and analysis of SEBI’s
regulatory functions. The researcher undertakes to scrutinize the functions of SEBI with
regard to its regulatory role over merchant bankers.

In India, merchant bankers are a body corporate who carries on any activity of the issue
management, which consists of preparing the prospectus and other information relating to the
issue. Merchant banks in India are not allowed to conduct any business other than that related
to the securities market. There is no official category in investment banking.

A Merchant Bank may be defined as “a financial institution providing capital to companies in

the form of share ownership instead of loans. A merchant bank also provides advisory on
corporate matters to the firms in which they invest. In the United Kingdom, the historical
term "merchant bank” refers to an investment bank.”

According to SEBI Merchant Bankers Rules 1992 & the Notification of the Ministry of
Finance, the merchant banker is:-

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

The code of conduct to be followed by the Merchant Bankers were laid down by the Supreme
Court in Daiichi Sankyo Co. v. Jayaram and Ors5.
5 Daiichi Sankyo Co. v. Jayaram and Ors.AIR 2010 SC 3089
a. Having high integration in dealing with clients.

b. Disclosure of all details to the authorities concerned. Avoiding making exaggerated

statements.

c. Disclosing all the facts to its customers.

d. Not disclosing any confidential matter of the clients to third parties.

MARKET ABUSE

The term "Market Abuse", a practice that is against the laws laid down in SEBI Act and the
Companies Act has been given a broader interpretation by the Hon'ble Apex Court vide its
Judgment dated 26.04.2013 in the appeal titled as "N. Narayanan vs. Adjudicating Officer,
SEBI" by a Bench of Hon'ble SC comprising K.S. Panicker Radhakrishnan and Dipak Misra,
JJ6

Hon'ble Apex Court has demonstrated that "market abuse" has now become a common
practice in the Indian security market and, if not properly curbed, the same would result in
defeating the very object and purpose of SEBI Act which is intended to protect the interests
of investors in securities and to promote the development of securities market.

Prevention of market abuse and preservation of market integrity is the hallmark of Securities
Law. Market abuse refers to the use of manipulative and deceptive devices, giving out
incorrect or misleading information, so as to encourage investors to jump into conclusions, on
wrong premises, which is known to be wrong to the abusers.

The object and purpose of the Section 12A of SEBI Act and Regulations 3 and 4 of 2003
Regulations are to curb "market manipulation". As per Palmer's Company Law, "Market
manipulation" is normally regarded as the "unwarranted" interference in the operation of
ordinary market forces of supply and demand and thus undermines the "integrity" and
efficiency of the market." Reference was also be made to the penalty provisions which is
contained in Chapter VI A of the SEBI Act of which is mainly concerned with Section 15HA
which deals with penalty for fraudulent and unfair trade practices and Section 15J which
deals with the factors to be taken into account by the adjudicating officer while adjudging the
quantum of penalty.

CASE STUDY: - YES BANK

6  Civil Appeal Nos. 4112-4113 of 2013 (D. No. 201 of 2013)

Private sector lender Yes Bank and Goldman Sachs today settled a SEBI probe into alleged
violation of listing and disclosure norms as well as merchant banker regulations,
respectively. 
Individually, Yes Bank has paid Rs 40.8 lakh, while Goldman Sachs (India) Securities Pvt
Ltd has remitted Rs 20.80 lakh towards settlement fees, the regulator said in separate orders. 

The SEBI agreed to settle proposed adjudication proceedings in the case, pertaining to
alleged violation of listing and disclosure requirements as well as code of conduct for
merchant bankers after it was approached by Yes Bank and Goldman Sachs, respectively
with a plea under the settlement regulations. Under the settlement, an entity is allowed to
settle charges by paying a penalty without admission or denial of guilt. In the settlement order
passed today, SEBI said it has disposed of the adjudication proceedings initiated against Yes
Bank and Goldman Sachs. 

It was alleged that the private sector bank had violated LODR (Listing Obligation and
Disclosure Requirement) norms, while Goldman Sachs did not comply with the merchant
banker regulations in the matter of Yes Bank. The Securities and Exchange Board of India
(SEBI) had initiated adjudication proceeding against both the entities in December 2016. 
While the adjudication proceedings were in progress, the private sector bank and the
merchant banker had approached SEBI to settle the case on payment of settlement charges. 

Thereafter, Sebi's high powered advisory committee recommended the case for settlement on
the payment of Rs 40.80 lakh for Yes Bank and Rs 20.80 lakh for Goldman Sachs. This
was also approved by the regulator's panel of whole-time members, following which they
remitted the amount. Accordingly, the regulator has disposed of the adjudication proceedings
initiated against the both entities. It further said that enforcement actions, including restoring
or initiating the proceedings, could be initiated if any representation made by them is found to
be untrue.
ROLE OF MERCHANT BANKERS IN PUBLIC & RIGHTS ISSUE

- Adi Bhatia (A3211115105)

Merchant bankers play an important role in public issue process. While acting as a banker to
an issue, a merchant banker has to disclose full details to the Securities Exchange Board of
India (SEBI). The details submitted by merchant banker about the public issue should contain
the following.

Pre & Post issue management:

Pre issue management is time bound programme and concerned with following:

1) Issue of shares

2) Marketing,Coordination and underwriting of the issue.

3) Pricing of issues

Post issue management is concerned with following:

1) Collection of application forms and amount received

2) Scrutinising application

3) Deciding allotment procedure

4) Mailing of share certificates/refund or allotment orders

Purpose behind issue administration:

 The lifting development in the quantity of open recorded organization

 Capacity of open recorded organizations

 The troubles emerging due to the regularly expanding SEBI prerequisite.

A developing economy like India offers colossal extension for issue administration and the
shipper financiers give their abilities and aptitude to organizations in the administration of
capital issues. This basically goes for using family unit reserve funds into the corporate
division through the issue of corporate securities. Organizations raise stores for the
motivations behind financing new undertakings, extension/modernization/enhancement of
existing units and lifting long haul assets for working capital purposes.

Pre issue structuring:

Pre issue organizing is one of the elements of issue administration which incorporates the
accompanying capacities:

 Issue of offers.

 Marketing and Coordination.

 Underwriting of the issue.

 Pricing of issue.

First sale of stock:

A first sale of stock is the primary offer of stock issued by an organization to the general
population. With a generally modest number of investors made up fundamentally of early
financial specialists, (for example, the originators, their families and companions) and expert
speculators.

General society, then again, comprises of every other person – any individual or institutional
financial specialist who wasn't required in the beginning of the organization and who is keen
on purchasing offers of the organization. Until the point that an organization's stock is offered
available to be purchased to people in general, the general population can't put resources into
it. You can possibly approach the proprietors of a privately owned business about
contributing, however they're not committed to offer you anything.

Subsequently IPO is a method for giving without end a piece of the organization to the
general population, where people in general get possession in the organization by putting
resources into the type of offers in such organizations. The IPO alternative raises the biggest
entireties of cash for the organization and its initial financial specialists.

The process of open issue:

On the off chance that an organization intends to raise capital by issuing stock, it must
propose/document a formal enlistment articulation with the Securities and Exchange
Commission (SEC) that gives insights about

 The business' money related history,

 Current money related circumstance,

 The proposed open issue

 Future projections.

 The organization is additionally required to set up a preparatory plan that contains

data indistinct to that of the enlistment articulation for potential financial specialists.

Right issue management:

Rights issue is a profit of membership rights to purchase extra securities in an organization

made to the organization's current security holders. At the point when the rights are for value
securities, for example, shares, in an open organization, it is a non-dilutive ace rate approach
to raise capital. Rights issues are regularly sold through an outline or plan supplement. With
the issued rights, existing security-holders have the benefit to purchase a predefined number
of new securities from the guarantor at a predetermined cost inside a membership period.

Rights issues are helpful for all traded on an open market organizations rather than other
more dilutive financing choices.

In rights issue the budgetary chief needs to consider the accompanying:

 Appoint a merchant chief or intermediary merchant to deal with the offering

procedure.

 Selling gathering and intermediary merchant support.

 Subscription cost per new offer.

 Number of new offers to be sold.

 The estimation of rights versus exchanging cost of the membership rights.

 The impact of rights on the estimation of the present offer.

 The impact of rights to investors of record and new investors and rights holders.
Endorsing of issue:

Rights issues might be endorsed. The part of the guarantor is to ensure and guarantee that the
assets sought after by the organization will be raised. The agreement between the financier
and the organization is set out in a formal endorsing understanding. Commonplace terms of
an endorsing require the financier to subscribe for any offers offered yet not taken up by
investors. The endorsing understanding will regularly enable the financier to end its
commitments in characterized conditions. A sub-financier thus sub-guarantees a few or the
majority of the commitments of the primary guarantor; the guarantor passes its hazard to the
sub-financier by requiring the sub-guarantor to subscribe for or buy a bit of the offers for
which the guarantor should subscribe in case of a deficit. Guarantors and sub- guarantors are
budgetary establishments, stock-intermediaries, real investors of the organization or other
related or random gatherings.

Financiers additionally research and help the hazard every candidate presents. This creates
the market for securities by consummately valuing danger and setting reasonable premium
rates that acceptably take care of the genuine expense of guaranteeing arrangement holders.
On the off chance that a particular candidate's risk3 is reasoned to be too high, guarantors
may abstain from covering it.

ROLE OF MERCHANT BANKER DURING IPO

 -Pratyasha Sharma (A3211115123)

A Merchant bank is a financial institution primarily engaged in internal finance and long
termloans for multinational corporations and governments. It can also be used to describe the
privateequity activities of banking. Merchant banks tend to advise corporations and wealthy
individualson how to use their money. The advice varies from counsel on mergers and
acquisitions torecommendation on the type of credit needed. The job of generating loans and
initiating othercomplex financial transactions has been taken over by investment banks and
private equity firms.A merchant bank deals with the commercial banking needs of finance,
long term company loans,and stock underwriting. A merchant bank does not have retail
offices where one can go and opena savings or checking account. A merchant bank
sometimes said to be a wholesale bank, or in thebusiness of wholesale banking. This is
because merchant banks tend to deal primarily with othermerchant banks and other large
financial institutions.

Regulation of Merchant Bankers

Merchant banking activity in India is regulated by the SEBI (Merchant Bankers) Rules, 1992.
The Rules provide that:

A. no person shall carry on any activity as a merchant banker unless he holds a certificate
granted by SEBI.

b. SEBI would grant the certificate:

i. On payment of the registration fee.

ii. On condition that the merchant banker would redress investor grievances within I
month of investors complaint and would inform
SEBI of all such complaints received.

iii. Only if the applicant has the necessary infrastructure and manpower to carry out the
functions as a merchant banker.

iv. A minimum of two persons who have the experience to conduct the business of
merchant banking should be under the employment of the applicant.

v. The applicant fulfills the capital adequacy requirements. The capital adequacy
requirement should not be less than the net worth of the applicant and the minimum
 shall be Rs.1,00,00,000 for category I merchant banking, Rs.50,00,000 for category II
and Rs.20,00,000 for category III.

vi. The applicant should be professionally qualified in law, business or management.

vii. The applicant should not have been involved in any litigation involving the securities
market.

viii. the applicant should not have been convicted of any offense involving moral turpitu

What is an Initial Public Offering - IPO? 

The process of offering shares in a private corporation to the public for the first time is called
an initial public offering (IPO). Growing companies that need capital will frequently use
IPOs to raise money, while more established firms may use an IPO to allow the owners to
exit some or all their ownership by selling shares to the public. In an initial public offering,
the issuer, or company raising capital, brings in underwriting firms or investment banks to
help determine the best type of security to issue, offering price, amount of shares and time
frame for the market offering.

ROLE OF MERCHANT BANKS:

The merchant banker is the overall process manager and does everything needed to sell the
shares. A typical IPO process consists of 5 stages:

1. Preparation

2. Approval

3. Marketing and distribution

4. Subscription

5. Allotment and listing

In the first stage a draft prospectus is prepared by lawyers under supervision of the merchant
bankers. This document serves the twin purpose of mandatory disclosure to potential
investors as well presenting the investment thesis to convince the investors to invest in the
issue. SEBI casts the responsibility of due diligence of everything written in the draft
prospectus on the merchant banker.

In the second stage the draft prospectus is filed with SEBI for approval. The merchant banker
coordinates between the company and SEBI to satisfy SEBI’s queries and gets SEBI’s
approval to market the issue to investors. The merchant banker also coordinates with the
stock exchanges to obtain their in principle approval for listing the shares.

In the third stage the merchant banker helps markets the issue to investors in India and around
the world through in person roadshows, advertisements and press meets and broker meets.
During this process it gets an idea about the demand for the issue and the price band in which
the issue can be sold. It also coordinates the printing and distribution of application forms all
over the country. Several other intermediaries like ad agencies, printers, brokers etc. involved
at this stage which are coordinated by the merchant banker.

Finally the issue is opened for subscription generally through the book building route for
price discovery and the merchant banker tracks the progress and ensures that the applications
are duly received and transmitted to the registrar for processing.

Lastly the application forms received are processed, shares allotted and credited to the
investors’ demat accounts, refunds processed and the shares are listed on the stock exchanges
for trading. The final updated prospectus is also filed with the registrar if companies for their
records. This entire process is coordinated by the merchant banker with the help of the
registrar.

IPO Pricing and the Role of Merchant Bankers

Equity is risk capital and everyone buying stocks—whether in an IPO or the open market—
should know that losses are possible. All by itself, pricing can ensure a negative outcome but
not a positive one. The IPO of a great business can be rendered a poor investment by a high
price but that of a poor business cannot be made a great investment by a low price. Investors’
responsibility in choosing wisely will stay, regardless of what SEBI does.
 MERCHANT BANKING REGULATED IN INDIA

 Afrrin Tarana (A3211115223)

Merchant banking comprises a wide set of banking activities which involves issues
management by trading in securities, underwriting security issuances (e.g. an IPO),
undertaking valuation of businesses and setting up and packaging M&A deals. In business
parlance, it is distinguished from commercial banking, which largely revolves around
accepting deposits and giving loans (nowadays, commercial banks also provide additional
services such as bill payments, certificates of deposits etc.).

As per RBI’s Master Circular on Para-Banking activities, banks are allowed to undertake

merchant banking activities through a separate subsidiary which would be required to comply
with SEBI regulations. Banking Institutions performing merchant banking activities are also
required to follow the requirements laid down in the  prudential exposure norms prescribed
by RBI, as well as the statutory limits contained in Section 19(2) & (3) of the Banking
Regulation Act, 1949.

Merchant banking can also be pursued by entities other than banks (however, they should not
be NBFCs as defined under the RBI Act), provided they are registered with SEBI. In case a
bank pursues merchant banking activities, it would need a banking license from RBI (to carry
out banking activities) and a SEBI registration under the SEBI Merchant Bankers Regulations
to carry out merchant banking business.

It is to be noted that, those banks and merchant banking subsidiaries which are performing
any of the activities under Portfolio Management Scheme (or any similar scheme) are also
required to comply with the provisions of the SEBI (Portfolio Managers) Rules and
Regulations, 1993

However, RBI exempts a merchant banking company from following requirements:

1. Provisions related to mandatory registration, maintenance of liquid assets and

creation of reserve funds under the RBI Act, 1934;
2. Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998; and
 3. Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions,
1998.

To be eligible for the above exemptions, a merchant banking company would need to fulfil
the following criteria:

 It should be registered with SEBI under section 12 of the SEBI Act 1992;
 It should conduct the business of merchant banking in accordance with rules or
regulations framed by SEBI;
 It should acquire securities only as part of its merchant banking activities;
 It should not be engaged in any other financial activities as mentioned in section
45I(c) of the RBI Act 1934; and
 It should not accept or hold public deposits.

Provisions related to the registration of a merchant bank are laid down in Chapter-II of SEBI
Regulations, which provides for mandatory registration to carry out the business of merchant
banking in India. Following are some of the requirements which are taken into consideration
for grant of certificate:

 Applicant should be a corporate body other than a Non-Banking Financial

Company (as defined under the RBI Act);
 Applicant should not engage in any activity other than those connected to
securities market;
 Applicant should have a minimum of two employees having prior experience in
merchant banking;
 Applicant must not be related (directly or indirectly) to any other entity which is
registered as a merchant banker;
 Applicant has not been found guilty for any economic offence; and
 Applicant should have a minimum capital of 5 crore rupees (for category-I
merchant banker).

Many statutes and regulations require certain functions [such as valuation of shares under
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) Regulations, 2000] to be performed by SEBI registered Merchant Bankers, and hence
for businesses operating in the financial sector, obtaining a merchant banking license can be a
strategic advantage. Examples of some of the important functions that are performed by
Merchant Bankers are given below:

1. Corporate Counselling – After conducting a detailed market analysis to evaluate

feasibility of corporate policies, merchant bankers render commercial and strategic
advice to improve overall efficiency of a company.
2. Project Counselling – Studying the nature and scale of investment in a business
project and assisting clients with finance & procedural aspect for the successful
implementation of the project.
3. Portfolio Management – Advising clients (such as Institutional Investors and
high net worth individuals) on managing their investments in order to earn
maximum profit in a time bound manner.
4. Issue Management – Sponsoring of corporate securities (e.g. IPOs) including
marketing, compliance of listing requirements, procuring private subscription and
offering securities to existing shareholders of the company.

Due to factors such as growth of primary market, increasing need of corporate restructuring
and easing of FDI norms, merchant banking has never been more relevant in India.
Therefore, it is very much required that the restrictive norms governing merchant banking,
especially those related to capital adequacy and registration, should be relaxed in order to
allow small players to enter and further expand the exclusive club of merchant bankers in
India.

CONCLUSION
The regulatory control exercised by SEBI over the merchant bankers can be understood on an
interpretation of The Act and the Merchant Bank Rules. The aforementioned functions are of
paramount importance and efficient control on these aspects of the functions is of great
importance to uphold the objectives of The Act. The researcher, thus, seeks to conclude on
the note that mere procedural and substantive control and legislations may help on a
theoretical level but proper control levied upon the regulatory functioning of the merchant
banks shall ensure a proper day-to-day functioning of the bodies.

BIBLIOGRAPHY
1. http://www.mondaq.com/india/x/247144/Securities/Expan+ded+scope+of+the+term+
Market+abuse+in+the
2. https://www.ijedr.org/papers/IJEDR1702128.pdf
3. https://www.sebi.gov.in/legal/regulations/mar-2017/sebi-merchant-bankers-regulations-
1992-as-amended-as-on-march-6-2017-_35135.html
4. https://accountlearning.com/merchant-bankers-definition-services-offered-categories/
5. http://interlinkcapital.in/issue-management.php
6. https://www.investopedia.com/terms/m/merchantbank.asp