SEBI GUIDELINES FOR MERCHANT BANKERS

BY SHAMEEM ET

MERCHANT BANK

According to SEBI (merchant bankers)rules 1992, “A merchant banker has been defined 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 advisor or rendering corporate advisory services in relation to such issue management”.

GUIDELINES FOR MERCHANT BANKING1. The merchant banking activity in India is governed by SEBI

(merchant bankers) regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India.

An applicant should comply with the following norms:I) the applicant should be a corporate body. Ii) the applicant should not carry on any business other than those connected with the securities market. Iii) the applicant should have necessary infrastructure like office space, equipment, manpower, etc. Iv) the applicant must have at least two employees with prior experience in merchant banking. V) any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker. Vi) the applicant should not have been involved in any securities scam or proved guilt for any offence.

SEBI (MERCHANT BANKERS) REGULATIONS, 1992.A merchant banker will require authorization by SEBI to carry out the business. SEBI has classified the merchant bankers into four categories based on the nature and range of the activities and the responsibilities.• CATEGORY I – THEY ARE ALLOWED TO CARRY ON THE ACTIVITY OF ISSUE MANAGEMENT AND TO ACT AS ADVISER, CONSULTANT, MANAGER, UNDERWRITER, PORTFOLIO MANAGER.

• CATEGORY II –THEY ARE ALLOWED TO ACT AS ADVISER, CONSULTANT, CO-MANAGER, UNDERWRITER, PORTFOLIO MANAGER.

• CATEGORY III –THEY ARE PERMITTED TO ACT AS UNDERWRITER, ADVISER OR CONSULTANT TO AN ISSUE.

• CATEGORY IV – THEY CAN ACT ONLY AS ADVISER OR CONSULTANT TO AN ISSUE.

CAPITAL ADEQUACY NORMS:• CATEGORY I : RS. 1 CRORES

• CATEGORY II : RS.50 LAKHS

• CATEGORY III : RS.20 LAKHS

• CATEGORY IV : NIL

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From 9 December 1997, however, all other categories were abolished, and merchant bankers can now only be registered under category- I by SEBI.Capital adequacy norms The securities exchange board of India (SEBI) has prescribed capital adequacy norms for merchant bankers to register under the various categories. The minimum ‘net worth’ set by SEBI for category- I of merchant bankers was initially fixed at the value of Rs. 1 crore and later raised to the value of Rs. 5 crores through an amendment of the regulations in the year 1995.

2.Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of financial position

3.Half-yearly unaudited result should be submitted to SEBI4.Merchant bankers are prohibited from buying securities

based on the unpublished price sensitive information of their clients

5.SEBI has been vested with the power to suspend or cancel the authorization in case of violation of the guidelines

6.Every merchant banker shall appoint a ‘Compliance Officer’ to monitor compliance of the Act

7.SEBI has the right to send inspecting authority to inspect books of accounts, records etc. of merchant bankers

8. Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied

9. SEBI will give authorization for a merchant banker to operate for 3 years only. Without SEBI’s authorization ,merchant bankers cannot operate

10.An initial authorization fee, an annual fee and renewal fee may be collected by SEBI

11.A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less

12. It is mandatory under SEBI rules that every issuing company must appoint one or more SEBI registered merchant bankers as lead manager(s) for the management of issueIssue amount No of lead managers

Up to 50 crores not more than Two 50 to 100 crores Three100 to 200 crores four200 to 400 crores fiveAbove 400 Five or more as may be agreed by the

SEBI

However, the limit to the maximum number of lead managers to be appointed in a single issue was omitted through amendment in this regulations on April 19, 2006

RBI exempted merchant banking companies from compulsory registration (section 45 IA), maintenance of liquid assets (section 45 IB), creation of reserve fund (section 45 IC) and all the provisions of the recent directions relating to deposit acceptance and prudential norms.

Conditions: Such companies are registered with SEBI under section

12 of the SEBI Act, 1992 and are carrying on the business of merchant banker in accordance with rules/regulations framed by SEBI;

They require securities only as part of their merchant banking business

They do not accept/ hold public deposits.

Exemption from RBI Regulations