Disinvestment, Buyback and Other Merchant Banking Activities

What this chapter covers

Chapter 8 carries 10% — the last chapter of the paper.

After studying this chapter, you should know about the role of Merchant Banker in: Disinvestment transactions · Buyback of shares and delisting of shares · Issue and listing of debt issues · Share based employee benefits.

Plus three more topics the chapter adds — exit to dissenting shareholders, SME issues, and alternative investment funds.

8.1 Disinvestment

Disinvestment means the direct or indirect sale by the Central Government or any State Government or by a government company, as the case may be, of shares or voting rights in, or control over, a target company, which is a public sector undertaking.

Transactions related to Government entities can be either a disinvestment transaction or an advisory transaction.

Disinvestment transactions are generally of two types:

(1) An offer for sale by the selling shareholder (in this case the Government of India) through the prospectus- at times this could be a combination of a fresh issue and an offer for sale; or Offer for Sale through the Stock Exchange Mechanism; or

(2) Strategic sale directly to a successful bidder.

The merchant banker's role

The role of a Merchant Banker in Disinvestment transactions is similar to the transactions of any IPO / FPO / OFS (SE) or a strategic sale in the private sector.

Who handles it in government: the concerned department for this activity in the Central Government is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance.

DIPAM, not the Department of Economic Affairs — the workbook's review question tests this, and the answer is False.

The services can be in the area of advice with regard to bidding process, valuation and bid pricing, conducting the bid process or the proposed market transaction such as an OFS as per SEBI Regulations or a strategic sale to an identified third party.

Beyond strategic sales: apart from strategic disinvestments, advisory transactions for a Government entity could be for a bonus issue or a buy-back or any other advisory transaction. In such cases also, the role of a Merchant Banker is similar to the transactions of advisory nature for any entity in the private sector.

But with an extra rulebook: if a Merchant Banker has been mandated to provide advisory services to any Government entity then DPE guidelines issued by the Department of Public Enterprises, have to be kept in mind.

The DPE composite score

In order to review the performance of the PSU, a composite score based on its performance for the last three years would be calculated.

For calculation of composite score, 6 performance indicators have been identified based on their general applicability to the PSUs. The performance indicators have been chosen so as to capture the performance of PSUs irrespective of their belonging to manufacturing sector or services sector.

Net Profit to Net Worth carries the highest weight at 25; Inter Sectoral Performance is second at 20; EPS the lowest at 10.

And the EPS score itself is banded (face value Rs. 10):

8.2 Buy-back of equity shares

SEBI (Buy-back of Securities) Regulations is applicable to buy-back of shares or other specified securities of a company listed on a stock exchange.

With a fundamental limit: a company listed on a stock exchange shall not buy-back its shares or other specified securities so as to delist its shares or other specified securities from the stock exchange.

A buy-back may not be used as a back-door delisting.

Methods

A company shall buy-back its shares or other specified securities using any of the following methods:

(a) from the existing shareholders or other specified securities holders on a proportionate basis through the tender offer;

(b) from the open market through (i) book-building process, or (ii) stock exchange.

With two restrictions on the open market route: no offer of buy-back for five percent or more of the paid up capital and free reserves of the company shall be made from the open market till March 31, 2025, and buy-back from the open market through the stock exchange shall not be allowed with effect from April 1, 2025.

So the stock exchange route is being phased out; the tender offer and the book-building route remain.

Limits and sources

The maximum limit of any buy-back shall be twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company, based on the standalone or consolidated financial statements of the company, whichever sets out a lower amount.

The debt equity ratio, after buy-back shall, be less than or equal to 2:1.

A company may undertake a buy-back of its own shares or other specified securities out of— (a) its free reserves; (b) the securities premium account; or (c) the proceeds of the issue of any shares or other specified securities: Provided that no such buy-back shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Prohibitions

No company shall directly or indirectly purchase its own shares or other specified securities:

(a) through any subsidiary company including its own subsidiary companies

(b) through any investment company or group of investment companies; or

(c) if a default is made by the company in the repayment of deposits, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

And three more:

A company shall not buy-back its shares or other specified securities so as to delist its shares... from the stock exchange.

A company shall not buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private arrangement.

A company shall not make any offer of buy-back within a period of one year reckoned from the date of expiry of buyback period of the preceding offer of buy-back, if any.

Plus a capital consequence: a company shall not allow buy-back of its shares unless the consequent reduction of its share capital is effected.

And the merchant banker comes first: appointment of merchant banker is the first step before starting the process of public announcement for buyback.

8.2.1 The merchant banker's eleven obligations

The merchant banker shall ensure that -

a. the company is able to implement the offer

b. the provision relating to escrow account as referred in the regulation has been made

c. firm arrangements for monies for payment to fulfil the obligations under the offer are in place

d. the public announcement of buy-back is made in terms of the regulations — under the tender offer method a copy of the public announcement in electronic mode, shall also be submitted with the SEBI and the stock exchanges on which its shares or other specified securities are listed

e. the letter of offer has been filed in terms of the regulations — under the tender offer method, the draft letter of offer, along with a soft copy,... shall be filed through a merchant banker who is not associated with the company within five days of the public announcement, while under the open market purchase method, it shall be filed simultaneously with the public announcement

Note who must file it — a merchant banker who is not associated with the company.

f. the merchant banker shall furnish to SEBI a due diligence certificate which shall accompany the draft letter of offer

g. the merchant banker shall ensure that the contents of the public announcement of offer as well as the letter of offer are true, fair and adequate and quoting the source wherever necessary

h. under the book building method, the merchant banker shall assist the company to determine the buyback price based on the acceptances received from shareholders

i. the merchant banker shall ensure compliance with the Companies Act, and any other laws or rules as may be applicable in this regard

j. upon fulfilment of all obligations by the company under the regulations, the merchant banker shall inform the bank with whom the escrow or special amount has been deposited to release the balance amount to the company

k. the merchant banker shall send a final report to SEBI in the form specified, in electronic mode within 15 working days from the date of expiry of buyback period.

The public announcement

The public announcement shall contain the following information as specified in the Schedule II of the SEBI (Buyback of Securities) Regulations, 2018.

Who signs it: the Public announcement shall be dated and signed on behalf of the Board of Directors of the company by its manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one.

And full disclosure is required: a full and complete disclosure of all material facts including the disclosures mentioned in Schedule I shall also be made.

Schedule I — the explanatory statement

i. Date of the Board meeting at which the proposal for buy back was approved · ii. Necessity for the buy back · iii. Maximum amount required under the buy back and its percentage of the total paid up capital and free reserves · iv. Maximum price... and the basis of arriving at the buyback price · v. Maximum number of securities that the company proposes to buy back · vi. Method to be adopted for buyback.

vii. (a) the aggregate shareholding of the promoter and of the directors of the promoters,... and of persons who are in control of the company as on the date of the notice convening the General Meeting or the Meeting of the Board of Directors; (b) aggregate number of shares or other specified securities purchased or sold by [those] persons... from a period of six months preceding the date of the Board Meeting at which the buyback was approved till the date of notice convening the general meeting; (c) the maximum and minimum price at which purchases and sales referred to in (b) above were made along with the relevant dates.

viii. Intention of the promoters and persons in control of the company to tender shares... for buy-back.

ix. A confirmation that there are no defaults subsisting in repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institutions or banks.

x. A confirmation that the Board of Directors has made a full enquiry into the affairs and prospects of the company and has formed the opinion that immediately following the date on which the General Meeting or the meeting of the Board of Directors is convened there will be no grounds on which the company could be found unable to pay its debts, and that the company will be able to meet its liabilities as and when they fall due and will not be rendered insolvent within a period of one year from that date — taking into account the liabilities as if the company were being wound up, including prospective and contingent liabilities.

xi. A report addressed to the Board of Directors by the company's auditors stating that- (i) they have inquired into the company's state of affairs; (ii) the amount of the permissible capital payment for the securities in question is in their view properly determined; and (iii) the Board of Directors have formed the opinion as specified in clause (x) on reasonable grounds and that the company will not, having regard to its state of affairs, will not be rendered insolvent within a period of one year from that date.

xii. Prior approval obtained from the lenders of the company in case of a breach of any covenant with such lender(s).

Schedule IV — the open market announcement

Additional disclosures include the date of shareholders' approval for buy back, if applicable · minimum and maximum number of securities... sources of funds... and the cost of financing the buy back · proposed time table from opening of offer till the extinguishment of the certificates · process and methodology · brief information about the company · audited Financial information for the last 3 years, where the lead manager shall ensure that the particulars... shall not be more than 6 months old from the date of the public announcement · details of escrow account opened and the amount deposited therein.

Plus market data — high, Low and average market prices... during the preceding three years, monthly high and low prices for the six months preceding the date of the public announcement, volumes on those days, data split by capital structure changes, the market price immediately after the date of the resolution of the Board of directors approving the buy back, and monthly volumes for six months.

And more — the present capital structure... and shareholding pattern, the post-buyback structure including outstanding convertibles, promoter group and controlling persons' shareholding, their purchases and sales during a period of twelve months preceding the date of the public announcement with prices and dates, management discussion and analysis on the likely impact of buy back on the company's earnings, public holdings, holdings of NRIs/FIIs etc., promoters' holdings and any change in management structure, details of statutory approvals obtained, collection and bidding centres, and the name of compliance officer and details of investors service centres.

Note the two lookback periods — six months for the Schedule I explanatory statement, twelve months for the Schedule IV open market announcement.

Letter of offer

The company file with SEBI the letter of offer containing disclosures, within 2 working days from the record date in electronic mode. The issuer company shall work with the merchant banker for such filing and the merchant banker shall ensure that all disclosures are provided as per SEBI requirement.

Signed the same way — by its manager or secretary, if any, and by not less than two directors... one of whom shall be a managing director where there is one.

And containing i. Disclosures in Schedule IV; ii. Disclaimer Clause as may be specified by the SEBI; iii. Record date and ratio of buyback as per the entitlement in each category.

8.3 Delisting

SEBI (Delisting of Equity Shares) Regulations, 2021 apply to delisting of equity shares of a company from all or any of the recognised stock exchanges where such shares are listed.

Two exclusions: they shall not apply to securities listed without making a public issue, on the Innovators Growth Platform of a recognised stock exchange — and not to a delisting pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016, if that plan lays down any specific procedure to complete the delisting or provides an exit option to the existing public shareholders at a price which shall not be less than the price, at which a promoter or any entity belonging to the promoter group or any other shareholder, directly or indirectly, is provided an exit opportunity — with the details of delisting of such shares along with the justification for the exit price... disclosed to the recognized stock exchange(s)... within one day of approval of the resolution plan.

The merchant banker comes first here too: before making the public announcement, the acquirer or promoter shall appoint a merchant banker registered with SEBI. It shall be the responsibility of the promoter and the merchant banker to ensure compliance with the provisions as stated by SEBI in its regulations.

The escrow: before the public announcement, the acquirer or promoter shall open an escrow account and deposit therein the total estimated amount of consideration calculated on the basis of the floor price and the number of equity shares outstanding with public shareholders.

The escrow account shall consist of either cash deposited with a scheduled commercial bank, or a bank guarantee in favour of the merchant banker, or a combination of both.

The workbook's review question tests exactly this — the statement is True.

And the merchant banker controls the cash: where the escrow account consists of deposit with a scheduled commercial bank, the promoter shall, while opening the account, empower the merchant banker to instruct the bank to issue banker's cheques or demand drafts for the amount lying to the credit of the escrow account, for the purposes mentioned in these regulations, and the amount in such deposit, if any, remaining after full payment of consideration for equity shares tendered in the offer.

Letter of offer: despatched not later than 2 working days from the date of the detailed public announcement, containing all the disclosures made in the public announcement and such other disclosures as may be necessary for the shareholders to take an informed decision, with the bidding form... sent along with the letter of offer.

A crucial prohibition: a promoter or a person acting in concert with any of the promoters shall not make a bid in the offer and the merchant banker shall take necessary steps to ensure compliance with this provision.

Pricing: offer price with respect to delisting is required to be determined by the promoter and the merchant banker taking into account certain factors as specified.

And the outcome must be announced: within two working days of closure of the offer, the promoter/acquirer and the merchant banker shall make a public announcement in the same newspapers in which the public announcement was made regarding: (i) the success of the offer, along with the final price accepted by the acquirer; or (ii) the failure of the offer; or (iii) rejection of the final price discovered by the promoters.

8.4 Issue and listing of debt securities

The issue of debt securities is regulated by: (1) SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (2) Various circulars issued by SEBI (3) Companies Act, 2013 and Rules framed thereunder (4) Listing Regulations (5) RBI Rules and Regulations and (6) SCRA and SCRR.

**The 2008 Regulations apply to (a) public issue of debt securities; and (b) listing of debt securities issued through public issue or on private placement basis on a recognized stock exchange.

Eight important points

(1) Shelf Prospectus can be issued only by a certain category of issuers.

(2) The issuer may decide the amount of minimum subscription which it seeks to raise... and disclose the same in the offer document. The minimum subscription as stipulated by SEBI is 75% of the base issue size for both NBFCs and Non-NBFCs issuers. Further, if the issuer does not receive minimum subscription of its base issue size (75%), then the entire application monies shall be refunded within stipulated period from the date of the closure of the issue.

75% for debt, against 90% for equity.

(3) Security has to be created within a specified time limit for debt securities which are secured.

(4) Debenture redemption reserve needs to be created — though the requirement for creation of debenture redemption reserve (DRR) was dispensed with for All India Financial Institutions and banks regulated by the RBI as well as housing finance companies registered with the National Housing Bank with regard to public issue or private placement of debt securities. NBFCs regulated by the RBI and other listed companies are exempted from DRR requirements with regard to public issues only. Similar exemptions have been specified for unlisted companies as well.

(5) In case of public issue of debt securities, the base issue size should be a minimum of Rs.100 crore.

(6) Issuers are allowed to retain over-subscription money upto a maximum of 100% of the base issue size. In case of issuers filing a shelf prospectus, they can retain oversubscription upto the rated size as specified in their shelf prospectus.

(7) The debt securities may be secured or unsecured instruments subject to other regulatory requirements.

(8) In case of private placement of debt securities, there is a limit on the number of potential investors who can be approached. In the event where this limit is breached, it shall be deemed to be a public issue and all requirements of a public issue shall apply.

The merchant banker's role

The issuer shall appoint one or more SEBI registered merchant bankers, at least one of whom shall be a lead merchant banker.

The issuer and the lead merchant banker has to ensure that the offer document contains all material disclosures which will help the subscribers of the debt securities take informed investment decision, including a) Disclosures specified in Section 26 of the Companies Act, 2013; b) Disclosures as mentioned in these regulations, viz., memorandum and articles of associations and a copy of the trust deed, copy of the latest audited balance sheet and annual report, statement containing particulars of dates of, and parties to all material contracts and agreements, name and address of the registered office of the issuer and the directors of the issuer etc. — the full list being in schedule I — and c) Additional disclosures as may be specified by the board.

Process points: online applications are permitted, ASBA facility can be availed by investors and the post issue timelines applicable for public issue of equity shall be applicable.

The Lead Merchant Banker shall ensure that all comments received on the draft offer document are suitably addressed prior to the filing of the offer document with the Registrar of Companies.

A copy of draft and final offer document shall also be forwarded to SEBI for its records, simultaneously with filing of these documents with designated stock exchange. The lead merchant banker shall, prior to filing of the offer document with the Registrar of Companies, furnish to Board a due diligence certificate.

And on application forms: every application form issued by the issuer is accompanied by a copy of the abridged prospectus, the abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus, and adequate space shall be provided in the application form to enable the investors to fill in various details.

Pricing: the issuer may determine the price of debt securities in consultation with the lead merchant banker and the issue may be at fixed price or the price may be determined through book building process.

Documents

Public issue: (1) Draft Prospectus / Draft Shelf Prospectus (2) Prospectus / Shelf Prospectus (3) Tranche Prospectus (4) Issue Agreement (5) Escrow Agreement (6) Debenture Trustee Agreement (7) Agreement with the Registrars to the Issue (8) Application Form (9) Debenture Certificate (in case of allotment in physical mode) (10) Refund Warrants / stationery (11) Debenture Trust Deed.

Private placement: (1) Information Memorandum (as per Form PAS-2...) (2) Offer Letter (as per Form PAS-4...) (3) Record of Private Placement Offers (as per Form PAS-5...) — all prescribed under the Prospectus & Allotment of Securities Rules, 2014.

The eight steps

(1) Approval of the shareholders and the Board of Directors of the issuer company.

(2) Appointment of the SEBI Registered intermediaries such as Merchant Banker(s), Registrars, Debenture Trustee, Bankers to the Issue and Brokers to the Issue.

(3) The Draft Prospectus or the Draft Shelf Prospectus... has to be filed with the Stock Exchanges. This document is available to the public for comments for a period of seven days.

(4) After the end of the seven day period, the Prospectus or the Shelf Prospectus is prepared after incorporating comments received from the public, if any, adopted by the Board of Directors of the issuer company and filed with the Stock Exchanges and SEBI.

(5) Thereafter the issue opens and remains open for the period as mentioned in the offer document.

(6) After closure of the offer, the Registrar processes the applications and identifies the cases of technical rejections, prepares a basis of allotment and submits the same to the designated stock exchange.

(7) Upon receipt of the approval of the designated stock exchange, the company's Board allots the debt securities.

(8) Thereafter, the registrar completes the process of crediting the debt securities in demat mode, despatch of physical certificates..., despatch of refund orders / credit of refund to the bank accounts of unsuccessful allottees and despatch of intimation of allotment / refund.

Then: the final listing approval and trading permissions are obtained from the stock exchanges.

Note the seven-day public comment period for debt — no SEBI observation stage as in an equity IPO.

8.4.1 The merchant banker's obligations

i. The issuer shall disclose all the material facts in the offer documents... and shall ensure that all the disclosures made in the offer document are true, fair and adequate and there is no misleading or untrue statements or mis-statement.

ii. The Merchant Banker shall verify and confirm that the disclosures made in the offer documents are true, fair and adequate and ensure that the issuer is in compliance with these regulations as well as all transaction specific disclosures as required in the Companies Act, 2013.

iii. The issuer shall treat the applicants in a public issue of debt securities in a fair and equitable manner.

iv. The intermediaries shall be responsible for the due diligence in respect of assignments undertaken by them in respect of issue, offer and distribution of securities to the public.

v. No person shall employ any device, scheme or artifice to defraud in connection with issue or subscription or distribution of debt securities.

vi. The issuer and the merchant banker shall ensure that the security created to secure the debt securities is adequate to ensure 100% asset cover for the debt securities.

One hundred percent asset cover — the workbook's review question asks this.

8.5 Share based employee benefits

Share Based Employee Benefits apply to any company whose shares are listed on any recognised stock exchange in India.

The Company shall appoint a registered Merchant Banker for the implementation of Share Based Employee Benefits as per the regulations for the implementation of schemes covered by these regulations till the stage of obtaining in-principal approval from the stock exchanges in accordance with clause (b) of regulation 10 of SEBI (share based employee benefits) regulation.

Note where the mandate ends — at in-principle approval from the exchanges.

A merchant banker plays a crucial role in Share Based Employee Benefits (SBEB) by providing expert advice, managing the administrative process of issuing shares to employees under schemes like ESOPs (Employee Stock Option Plans), ensuring compliance with regulatory requirements, and facilitating the overall smooth execution of the SBEB program, including valuation of shares and structuring the plan to best suit the company's needs.

8.6 Exit to dissenting shareholders

"Dissenting shareholders" means those shareholders who have voted against the resolution for change in objects or variation in terms of a contract, referred to in the prospectus of the issuer.

"Frequently traded shares" shall have the same meaning as assigned to it in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 — that is, turnover of at least ten per cent over twelve calendar months.

"Relevant date" means date of the board meeting in which the proposal for change in objects or variation in terms of a contract, referred to in the prospectus is approved, before seeking shareholders' approval.

The promoters or shareholders in control, shall appoint a SEBI registered merchant banker and finalize the exit offer price in accordance with these regulations.

And afterwards: within a period of two working days from the payment of consideration, the issuer shall furnish to the recognised stock exchange(s), disclosures giving details of aggregate number of shares tendered, accepted, payment of consideration and the post-offer shareholding pattern of the issuer and a report by the merchant banker that the payment has been duly made to all the dissenting shareholders whose shares have been accepted in the exit offer.

8.7 SME issues

"SME exchange" means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the SEBI to list the specified securities issued in accordance with the regulations and includes a stock exchange granted recognition for this purpose but does not include the Main Board (Main Exchange).

Disclosures and filing

The offer document shall contain all material disclosures which are true and adequate, including disclosures specified in the Companies Act, 2013 and Part A of Schedule VI.

The lead manager(s) shall exercise due diligence and satisfy themselves about all aspects of the issue including the veracity and adequacy of disclosure, call upon the issuer, its promoters and its directors or in case of an offer for sale, also the selling shareholders, to fulfil their obligations, and ensure that the particulars are not more than six months old from the issue opening date.

Filing differs from the main board. The issuer shall file a copy of the offer document with the board through the lead manager(s), immediately upon filing of the offer document with the Registrar of Companies, and — crucially — the board shall not issue any observation on the offer document.

No SEBI observations on an SME offer document.

The lead manager(s) shall submit a due-diligence certificate as per Form A of Schedule V including additional confirmations as provided in Form G of Schedule V and the draft abridged prospectus along with the offer document to SEBI.

And it goes public immediately: the offer document shall be displayed from the date of filing... on the websites of the Board, the lead manager(s) and the SME exchange(s).

Underwriting — the distinctive rule

The initial public offer shall be underwritten for hundred percent of the offer and shall not be restricted upto the minimum subscription level.

The lead manager(s) shall underwrite at least 15% of the issue size on their own account(s).

One hundred percent underwriting, of which at least 15% on the lead manager's own book — a much heavier commitment than on the main board.

The issuer, in consultation with lead manager(s), shall appoint merchant bankers or stock brokers, registered with the Board, to act as underwriters and may enter into an agreement with the nominated investors indicating therein the number of specified securities which they agree to subscribe at the issue price in case of under-subscription.

And it must be certified in advance: the lead manager(s) shall file an undertaking to SEBI that the issue has been 100% underwritten along with the list of underwriters, nominated investors and sub-underwriters indicating the extent of underwriting or subscription commitment made by each of them, one day before the opening of issue.

The lead manager is the ultimate backstop: if any of the underwriters fail to fulfill their underwriting obligations or the nominated investors fail to subscribe to the unsubscribed portion, the lead manager(s) shall fulfill the underwriting obligations.

And nobody may use the issue as a trading opportunity: underwriters and sub-underwriters other than the lead managers and nominated investors shall not subscribe to the issue in any manner except for fulfilling their obligations under their respective agreements.

All underwriting and subscription arrangements made by the lead manager(s) shall be disclosed in the offer document.

Application size and allottees

The minimum application size shall be one lakh rupees per application, with applications in multiples of the minimum application amount.

The minimum sum payable on application per specified security shall at least be 25% of the issue price: Provided that in case of an offer for sale, the full issue price for each specified security shall be payable on application.

And "minimum application value" shall be with reference to the issue price of the specified securities and not with reference to the amount payable on application.

No allotment shall be made pursuant to any initial public offer, if the number of prospective allottees is less than fifty.

Fifty on the SME exchange, against one thousand on the main board.

A cap on applications: a person shall not make an application in the net offer category for a number of specified securities that exceeds the total number of specified securities offered to the public, and the maximum application by non-institutional investors shall not exceed total number of specified securities offered in the issue less total number of specified securities offered in the issue to qualified institutional buyers.

Market making

The lead manager(s) shall ensure compulsory market making through the stock brokers of the SME exchange(s) appointed by the issuer, in the manner specified by SEBI for a minimum period of three years from the date of listing of the specified securities or from the date of migration from the Main Board.

Inventory: the inventory of the market maker, as on the date of allotment of the specified securities, shall be at least 5% of the specified securities proposed to be listed on SME exchange.

Small holders get a full exit: the market maker shall buy the entire shareholding of a shareholder of the issuer in one lot, where the value of such shareholding is less than the minimum contract size allowed for trading on the SME exchange — though market maker shall not sell in lots less than the minimum contract size.

Promoters are excluded: the market maker shall not buy the shares from the promoters or persons belonging to the promoter group of the issuer or any person who has acquired shares from such promoter or person belonging to the promoter group during the compulsory market making period, and the promoters' holding shall not be eligible for offering to the market maker during the compulsory market making period — save that promoters' holding which is not locked-in... can be traded with prior permission of the SME exchange.

Disclosure and board representation: the issuer shall disclose the details of the market making arrangement in the offer document, and the lead manager(s) may be represented on the board of directors of the issuer subject to the agreement between the issuer and the lead manager(s) who have the responsibility of market making.

Note that market making appears in Chapter 3 as a permitted activity — market making in accordance with the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

8.8 Alternative Investment Funds

'Alternative Investment Fund' or 'AIF' means any fund established or incorporated in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

SEBI (Alternative Investment Funds) Regulations, 2012, as amended... require a Merchant Banker to provide a due diligence certificate for the placement memorandum for the Scheme.

SEBI vide its Circular dated October 21, 2021, provided the framework of the role and responsibilities of a Merchant Banker for providing a certificate. All AIFs shall launch scheme(s) subject to filing of placement memorandum with SEBI through a SEBI-registered Merchant Banker.

And on dissolution: in terms of Regulation 29B (2) of SEBI (Alternative Investment Funds) Regulations, 2012..., the scheme of an AIF entering into a dissolution period shall file an information memorandum with SEBI through a merchant banker.

The two duties:

1) The Merchant Banker ("MB") shall independently exercise due diligence of all the disclosures in the placement memorandum

2) MB shall satisfy itself with respect to the veracity and adequacy of the disclosures and provide a due diligence certificate.

This connects back to Chapter 3's permitted activity list — filing of placement memorandum of an alternative investment fund.