Merchant banker

A company that wants to raise money from the public cannot just print a document and ask for cheques. Someone licensed has to stand between the company and the investor. That someone checks what the company says about itself. It also puts its own name and registration at risk on that check. That someone is the merchant banker.

The SEBI (Merchant Bankers) Regulations, 1992 define it. In plain words, a merchant banker is any person in the business of issue management. It can do this in two ways:

• by making arrangements for selling, buying or subscribing to securities; or
• by acting as "manager, consultant, adviser", or giving corporate advisory service, for that issue management.

Read that slowly. It is not about lending money. It is not about broking. It is about issue management.

The words "manager, consultant, adviser" explain something. They are why the same firm shows up in an IPO. It also shows up in a takeover, a buy-back and a delisting.

What it may do. The SEBI-regulated activities are a closed list: managing public issues, QIPs and rights issues and advisory incidental to them; managing acquisitions and takeovers under SAST, buy-backs under the Buy-Back Regulations, delisting under the Delisting Regulations, LODR compliances for a scheme of arrangement, and schemes under the Share Based Employee Benefits and Sweat Equity Regulations; underwriting; private placement of listed or to-be-listed securities; managing international offerings; filing an AIF placement memorandum; issuing fairness opinions; managing secondary market transactions in listed securities; and market making under ICDR Chapter IX.

Who may be one. A body corporate or an LLP — but not a One Person Company, not an NBFC, and not a body corporate incorporated outside India other than a foreign bank licensed by the RBI. It must have adequate office space, equipment and manpower, and at least two employees professionally qualified in finance, law, accountancy or business management, holding the NISM-Series-IX certificate.

The two categories. Category I may carry out all the permitted activities. Category II may carry out all of them except public issues of equity shares proposed to be listed on the main board. A fresh application can be made only for Category I, accompanied by a non-refundable application fee of Rs 50,000.

What it costs. On intimation of the grant of the certificate the fees must be paid within 15 days. The registration fee is Rs 20 lakh. To keep registration in force, Rs 9 lakh every three years from the sixth year. Fail to pay and the merchant banker may undertake no new activity until it does, and owes interest at 15% per annum for each month of delay or part thereof.

What it must be worth. Regulation 7A phases the net worth and liquid net worth requirements:

What it must earn. Cumulative revenue from permitted activities over the three immediately preceding financial years of at least Rs 25 crore for Category I and Rs 5 crore for Category II; first assessment with effect from April 1, 2029. Shortfall makes the registration liable to cancellation under summary proceedings — though SEBI weighs natural calamities, pandemics, global recession and geopolitical factors before cancelling.

A Mumbai advisory firm registered as a merchant banker has net worth of Rs 28 crore, of which Rs 9 crore sits in cash and bank fixed deposits. Over FY24, FY25 and FY26 it billed Rs 6.4 crore, Rs 7.1 crore and Rs 8.8 crore = Rs 22.3 crore cumulative from permitted activities.

Can it stay Category I?

It clears Phase I comfortably and then runs into a wall. Failing the Category I requirement at the end of Phase II means it is automatically designated a Category II merchant banker — it does not lose its registration, it loses the mainboard equity IPO business. As Category II it needs only Rs 10 crore net worth, Rs 2.5 crore liquid net worth and Rs 5 crore of cumulative revenue, all of which it has several times over.

The arithmetic of staying Category I is therefore stark: Rs 22 crore of fresh capital to reach Rs 50 crore of net worth, of which Rs 12.5 crore must sit in liquid assets earning very little, plus Rs 2.7 crore of extra fee income over three years — against a triennial registration fee of only Rs 9 lakh. The fee is trivial; the balance sheet is the barrier.

Chapter 3 is built on this and Chapter 2 (Introduction to the Merchant Banking) sets it up. The numbers in this entry are the single densest source of factual questions in the paper: the Rs 50,000 application fee, the Rs 20 lakh registration fee, the Rs 9 lakh every three years from the sixth year, the 15% per annum interest on delay, the 15-day payment window, the minimum of two professionally qualified employees, and each cell of the Regulation 7A table.

Chapter 3's own review question 1 asks how many professionally qualified people a merchant banker applicant must have in employment — the answer is 2.

• Category II is not "smaller Category I". The single thing it may not do is a public issue of equity shares proposed to be listed on the main board. It may still manage takeovers, buy-backs, delistings, QIPs and debt issues.
• A fresh application can only be for Category I. Existing merchant bankers re-categorise; new ones enter at Category I.
• Rs 20 lakh is once; Rs 9 lakh is every three years starting from the sixth year — not annually, and not from year one.
• An NBFC cannot be a merchant banker, but a merchant banker registered by the RBI as a primary or satellite dealer may carry on that business provided it accepts no public deposit.
• Net worth and liquid net worth are two tests, not one. Rs 50 crore of net worth in illiquid assets fails Regulation 7A even though it passes Regulation 7.
• Revenue is cumulative over three financial years, not annual — and the first assessment is only from April 1, 2029.
• Failing Category I at Phase II is an automatic re-designation to Category II, not a cancellation. Failing Category II is worse: no fresh permitted activity at all until it complies.