Merchant banker agreement
Also written Agreement with merchant banker · Merchant banker appointment agreement · AIF merchant banker agreement
The contract by which an AIF appoints a SEBI-registered merchant banker to file its placement memorandum with SEBI and certify the adequacy of its disclosures.
In plain language
If you have landed here looking for what a merchant banker is, you want merchant banker. This page is about the contract an AIF signs with one.
An AIF cannot file its private placement memorandum with SEBI by itself. It must file through a SEBI-registered merchant banker.
The merchant banker is not a postbox. It has to do its own due diligence on every disclosure in the memorandum, satisfy itself that the disclosures are true and complete, and sign a due diligence certificate in SEBI's prescribed format.
That is a serious liability. The workbook says the role is stipulated to be akin to companies going to the public market with a due diligence responsibility.
Which is exactly why a written agreement becomes, in the workbook's word, imperative. Two parties are taking on duties to each other and to SEBI, and the scope of each has to be on paper.
So the agreement sets out who supplies what information, what the banker must do with it, by when, and for what fee.
How it works
Section 13.7.1 explains the appointment and then the reason a contract is needed for it.
The regulatory trigger. An AIF shall launch schemes subject to filing of the placement memorandum with SEBI through a SEBI registered Merchant Banker. The merchant banker shall independently exercise due diligence of all the disclosures in the placement memorandum, satisfy itself as to their veracity and adequacy, and provide a due diligence certificate in the prescribed format. The details of the appointed merchant banker have to be disclosed in the PPM.
The ongoing obligation. AIFs must intimate SEBI of any changes in the terms of the placement memorandum on a consolidated basis, within one month of the end of each financial year. That intimation must also be submitted through a merchant banker, along with the banker's due diligence certificate in the prescribed format. Section 13.5.3 and Chapter 7 add one relaxation: intimation of a specific change in the terms of the PPM may be filed directly with SEBI, without a merchant banker.
The independence rule. The merchant banker appointed for filing the placement memorandum shall not be an associate of the AIF, its sponsor, manager or trustee.
What the agreement must contain, in the workbook's own list of covenants:
| Side | Covenants |
|---|---|
| The AIF | Disclosure of information according to law and regulation; providing necessary details, documents and records; extending support for the conduct of due diligence |
| The merchant banker | Performance of duties and responsibilities under the appointment in accordance with, and in fulfilment of, the AIF Regulations; representations and warranties to that effect |
| Both | Commercial terms for services rendered; adequate provisions to ensure an arm's length distance between the parties; the scope of work; the process for conduct of the due diligence; filing of the report and the associated steps, to be taken in a time bound manner to ensure quality of service |
What the AIF must do for itself. The workbook says the AIF shall safeguard its own position by appointing a merchant banker with proper credentials and track record, along with adequate experience in AIF business matters and PPMs. Choosing the banker is part of the compliance, not a procurement exercise.
Where the same banker appears in the investment conditions. Chapter 17 permits both Venture Capital Funds and Category II AIFs to enter into an agreement with a merchant banker to subscribe to the unsubscribed portion of an issue, or to receive or deliver securities in the process of market making, as per Chapter IX of the SEBI (ICDR) Regulations, 2018. That is a different agreement for a different purpose, and it does not replace the PPM-filing appointment.
A worked example
Sahyadri Alternative Investment Trust is launching its second scheme, Sahyadri Growth Fund II, targeting a corpus of Rs 750 crore.
Step 1 — check independence. The trust's first choice of merchant banker is the investment banking arm of its own sponsor group. That is barred: the merchant banker shall not be an associate of the AIF, its sponsor, manager or trustee. It appoints an unconnected SEBI-registered merchant banker instead.
Step 2 — sign the agreement. The key terms:
| Clause | What it says |
|---|---|
| Scope of work | Due diligence on all PPM disclosures; due diligence certificate in SEBI's prescribed format; filing of the draft PPM and incorporation of SEBI's comments |
| AIF covenants | Supply all details, documents and records; disclose as required by law; support the diligence exercise |
| Banker covenants | Discharge duties in accordance with the AIF Regulations; representations and warranties to that effect |
| Timelines | Diligence report within 30 days of receiving a complete data room |
| Fee | Rs 45 lakh plus GST at 18% = Rs 53.10 lakh |
| Arm's length | No cross-holdings, no shared personnel, no referral arrangements |
Step 3 — the diligence bites. The draft PPM claims the key investment team has managed Rs 4,000 crore. The banker's diligence finds that two of the four named professionals joined only last quarter, and that Rs 1,100 crore of the figure was managed at a previous employer by one of them alone.
The banker refuses to certify the claim as drafted. The disclosure is rewritten, because the certificate covers the veracity and adequacy of every disclosure and the banker carries a liability for it akin to a public issue.
Step 4 — the annual obligation. In March the fund reduces its hurdle rate and changes one service provider. Those changes go to SEBI on a consolidated basis within one month of the end of the financial year, again through the merchant banker and again with a due diligence certificate. A single specific change, filed on its own during the year, could have gone directly to SEBI without the banker.
Where the cost sits. The Rs 53.10 lakh is a set-up cost of the scheme, not part of the management fee. On a Rs 750 crore corpus it is about 7 basis points — small against the fee load, and non-negotiable, because without the certificate the scheme cannot be filed at all.
Why NISM asks about it
Chapter 13 (Legal Documents and Negotiations), section 13.7.1 (Agreement with Merchant Banker), opens the Support Services Agreements group, and Chapter 7, section 7.1.4.1, introduces the merchant banker among the service providers. Chapter 17 carries the separate market-making and unsubscribed-portion agreement for VCFs and Category II AIFs.
Expect the independence rule as a direct question: the merchant banker shall not be an associate of the AIF, its sponsor, manager or trustee. Expect the filing route — a PPM is filed with SEBI through a SEBI-registered merchant banker, with a due diligence certificate — and the annual intimation of PPM changes within one month of the end of each financial year, also through a merchant banker. The relaxation for a specific change, which may be filed directly with SEBI, is the discriminator.
Common exam traps
- The merchant banker cannot be an associate of the AIF, sponsor, manager or trustee. All four, not just the AIF.
- Consolidated annual intimation goes through the merchant banker; a specific change may go directly to SEBI. Two routes, and questions offer the wrong one.
- One month from the end of the financial year is the consolidated intimation deadline, not one month from the change.
- The due diligence is independent. The banker is not certifying that the manager says the right things; it is satisfying itself of the veracity and adequacy of the disclosures.
- The banker's details go into the PPM. A candidate who thinks the appointment is private to the fund and SEBI misses this.
- The market-making agreement is a different agreement. VCFs and Category II AIFs may agree with a merchant banker to take the unsubscribed portion of an SME issue under Chapter IX of the ICDR Regulations. That has nothing to do with filing a PPM.
- The fee is a set-up cost, not a management fee item. So it is borne by the scheme and disclosed as such.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- Investment Management AgreementThe agreement between the trustee, acting for the AIF, and the investment manager, by which the trustee delegates its entire investment management power — and by which the manager can later be removed.
- Material changeA change to an AIF's PPM or fund terms significant enough to influence an investor's decision to stay invested — such as a new sponsor or manager, change in control, or adverse fee change.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Private placement memorandumThe offer document of a Category III AIF, filed with SEBI through a merchant banker at least 30 days before a scheme launches — and the document SEBI comments on but never approves.
- Contribution AgreementThe agreement between one investor, the trustee and the investment manager that sets the terms on which that investor participates in the AIF — the contract that turns a commitment into units.
- Set-up CostThe one-time cost of forming the fund and issuing its units, charged to investors as a percentage of capital commitments — up to 1.5% or 2.5% — and usually amortised over the first 36 months.
- WrapperA supplement attached to a domestic fund's Private Placement Memorandum when it is distributed offshore, so the offering complies with private placement rules in the jurisdictions where it is marketed.
- Custodial agreementThe legally binding contract between an AIF and its custodian, fixing the scope of custody services, the parties' mutual obligations and the commercial terms.
- Distribution AgreementThe contract between an AIF's investment manager and a distributor, defining the distributor's role, binding it to a code of conduct and fixing how commission may be paid.