Associate

A merchant banker signs its name to what an issuer says about itself. That signature is only worth something if the banker has no stake in the answer. So the regulations draw a line around the firms that are too close to the issuer to be trusted with the job — and the word they use for that closeness is associate.

The test is not about friendship or reputation. It is mechanical: count the voting rights, check who controls whom, and look at the two boards for a shared director. If any one of those links exists, the merchant banker is an associate, and its role in that issue shrinks to marketing only.

The same idea turns up again in the anchor investor rules, where the regulator wants to stop a lead manager's own group from filling the anchor book — but there the voting-rights threshold is different, which is exactly why the word needs a page of its own.

Regulation 21A of the SEBI (Merchant Bankers) Regulations (Chapter 3). A merchant banker that is a promoter or an associate of the issuer — or of a person making an offer to sell or purchase securities under any SEBI regulation — shall not lead manage the issue or be associated with any activity undertaken under SEBI's regulations by that issuer or person. The exception: an associate may be appointed if it is involved only in the marketing of the issue or offer.

The three-limb test. "Associate of the issuer or the person who is issuing the securities" is interpreted as:

Limb (iii) has two provisos: it does not apply where the director is a nominee director, and it does not apply to an independent director who recuses from the issue on the boards of both the issuer and the merchant banker.

The anchor investor version (Chapter 4). Neither the lead managers nor their associates may apply in the anchor investor category — with carve-outs for mutual funds, insurance companies, AIFs and pension funds sponsored or promoted by associates, and FPIs (other than individuals, corporate bodies and family offices) that are associates. For this rule an anchor investor is deemed an "associate of the lead manager" if either controls not less than 15% of the voting rights in the other, either exercises control over the other, or there is a common director (excluding a nominee director) between them.

Registration (Chapter 3). A person "directly or indirectly connected" with an applicant — defined as an associate, subsidiary, inter-connected or group company of a body corporate applicant — must not already have been granted merchant banker registration, subject to the conditions SEBI specifies.

Illustrative figures. Kaveri Capital Ltd, a Category I merchant banker, is pitching for the book running mandate on the ₹600 crore IPO of Nilgiri Foods Ltd. Kaveri's parent holds 12% of Nilgiri's voting rights, and one of Nilgiri's independent directors also sits on Kaveri's board.

Step 1 — voting rights. 12% is held through Kaveri's holding company, which the test expressly counts ("directly or indirectly through its subsidiary or holding company"). 12% ≥ 10%, so limb (i) is met on its own.

Step 2 — the director. The shared director is independent. Had limb (iii) been the only link, recusal from the issue on both boards would have taken Kaveri out of the definition. It is not the only link, so recusal changes nothing.

Result. Kaveri is an associate. It cannot lead manage the IPO. It can be appointed to market it.

Now the anchor book. A pension fund sponsored by Kaveri's parent wants ₹30 crore of anchor allocation, and a separate proprietary investment company in Kaveri's group holding 12% of the lead manager's voting rights wants ₹20 crore.

The same 12% makes Kaveri an associate for Regulation 21A and does not make the investment company one for the anchor rule. Two thresholds, one word.

Chapter 3 (Registration, Code of Conduct & General Obligations of Merchant Bankers in India) carries Regulation 21A and its three-limb definition, alongside the neighbouring rules that a merchant banker may not lead manage its own issue and may not be lead manager where an unregistered merchant banker is associated with the issue. Chapter 4 (Issue Management – Important Terms) carries the anchor investor bar.

Expect a scenario question: a percentage of voting rights, a shared director, and four options about what the banker may do. The answer usually turns on the 10% line, the nominee-director proviso, or the "marketing only" exception.

• "Not less than 10%" includes exactly 10%. A 10.0% holding is an associate.
• Indirect holdings count — through a subsidiary or holding company.
• An associate is not barred completely. It may be appointed for the marketing of the issue or offer; it may not lead manage.
• A nominee director does not create an association. An independent director does not either — but only if he or she recuses from the issue on both boards.
• The anchor investor test uses 15%, not 10%. Do not carry one threshold into the other rule.
• Regulation 21A reaches beyond IPOs — any activity under SEBI's regulations by an issuer or a person making an offer to sell or purchase securities, so buy-backs and open offers too.
• Associate is not the same as "its own issue". A merchant banker lead managing its own issue is a separate prohibition.
• The workbook's anchor footnote says it applies "for the purpose of clause (k)" while the associate bar sits in clause (j) of its list. Read the content, not the pointer.