Merchant Bankers, Takeovers and Bankers to an Issue

What this chapter covers

This chapter carries 6 per cent of the III-A examination, and covers three sets of regulations.

LEARNING OBJECTIVES: After studying this chapter, you should know about some salient features of: SEBI (Merchant Bankers) Regulations, 2025 · SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 · SEBI (Bankers to an Issue) Regulations, 1994 · Role of Merchant Bankers as per the Regulations stated above

13.1 Introduction

The primary activity of Merchant Bankers is to provide fee-based advice to corporations and governments on the issue of securities.

Fee-based — the merchant banker earns for advice and management, not from taking positions.

But the business has widened. Merchant bankers these days however perform a variety of other activities such as financing foreign trade, underwriting of equity issues, portfolio management and undertaking foreign security business as well as foreign loan business, project appraisal etc.

And how does this differ from investment banking? Since the functions are very similar to those of Investment Bankers, they are often thought to be the same. The term 'Investment Banking' has a much wider connotation and is gradually becoming more of an inclusive term to refer to all types of capital market activity, both fund-based and non-fund based. Investment banks also provide specialized corporate advisory services in the areas of project advisory, business and financial advisory and mergers and acquisitions.

Merchant banking is the narrower, issue-management core; investment banking the wider umbrella.

13.2.1 Definition

Merchant Banker as defined in the Regulation means "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, adviser or rendering corporate advisory service in relation to such issue management".

Note the breadth. Making arrangements for selling, buying or subscribing — and also acting as manager, consultant, adviser or rendering corporate advisory service, so long as it is in relation to such issue management.

13.2.2 Registration

An application for the grant of certificate of registration as merchant bankers needs to be submitted to SEBI, accompanied by a non-refundable application fee of Rs. 50,000/-, and can be made only for Category I Merchant Banker.

Two categories exist:

(i) Category I, which can carry out all the permitted activities;

(ii) Category II, which can carry out all the permitted activities except public issues of equity shares proposed to be listed on the main board of a recognised stock exchange.

The distinction is the main-board equity IPO — Category II may do everything else.

And existing registrants must choose: a merchant banker that already holds a certificate of registration under these regulations shall re-categorise itself as Category I or Category II within such time period and in the manner, as may be specified by the Board.

Related registrations. Stock Brokers and/ or Merchant bankers holding a valid registration certificate under the SEBI Act are entitled to act as an underwriter. However, an applicant can carry on the activity as a portfolio manager only if he obtains a separate certificate of registration under the SEBI (Portfolio Manager) Regulations, 1993.

Underwriting comes with the registration; portfolio management does not.

Applications are made online — SEBI has issued guidelines pertaining to the Online Registration Mechanism for Merchant Bankers using SEBI Intermediary Portal.

13.2.3 Eligibility criteria

An applicant seeking registration as Merchant Banker shall comply with the requirements such as the Capital Adequacy Requirements, Registration Fees, and Criteria for fit and proper person.

Under Regulation 6, SEBI shall take into account all matters which are relevant to the activities of a merchant banker and in particular whether the applicant complies with the following:

(a) An applicant shall be a body corporate other than NBFC, provided that a merchant banker granted registration by the RBI to act as Primary or Satellite Dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit.

(b) The applicant should have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge its activities.

Three limbs — office space, equipment and manpower, which is why the second review question answers All of the above.

(c) The applicant has in its employment, a minimum of two persons who are professionally qualified in finance or law or accountancy or business management from a Government recognised university or institution or who have a recognised degree in finance or law or accountancy or business management from a foreign university or institution.

A minimum of two qualified persons.

(d) A person directly or indirectly connected with the applicant has not been granted registration by SEBI — directly or indirectly connected meaning any person being an associate, subsidiary or inter-connected or group company of the applicant in case of the applicant being a body corporate. SEBI has clarified that it may consider grant of certificate of registration to an applicant, notwithstanding that another entity in the same group has been previously granted registration by the Board, if certain conditions are fulfilled.

(e) The applicant, its partner, director or principal officer are not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant.

(f) The applicant, its director, partner or principal officer have not been at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence.

(g) The applicant has the professional qualification from an institution recognized by the Government in finance, law or business management.

(h) Grant of certificate to the applicant is in the interest of investors.

(i) The applicant satisfies the capital adequacy requirements and is a fit and proper person.

Capital adequacy

Regulation 7 requires a net worth of not less than–

1. fifty crore rupees for Category I merchant banker, and

2. ten crore rupees for Category II merchant banker.

Rs. 50 crore and Rs. 10 crore. Existing registrants comply in the manner and within such time, as may be specified by the Board.

And the sanction for falling short is immediate in effect: a merchant banker that fails to meet the minimum shall not undertake any fresh permitted activity, till such time it complies with the requirement, without prejudice to any action that may be taken by the Board.

What net worth means: in case of a body corporate, shall have the same meaning assigned to it under sub-section (57) of section 2 of the Companies Act, 2013; and in case of a limited liability partnership, shall mean the sum of the partners' contributions (fixed) plus reserves and surplus.

Liquid net worth — Regulation 7A adds a second, tighter test: not less than– (i) twelve crore fifty lakh rupees for Category I merchant banker, and (ii) two crore fifty lakh rupees for Category II merchant banker, with the same consequence for a shortfall.

Twenty-five per cent of net worth in each case.

What counts as liquid: liquid assets shall mean low risk assets that can be converted into cash in a short period of time such as cash, fixed deposits, government securities, money markets instruments, treasury bills, repo on government securities and acceptable marketable securities with applicable haircut.

One exemption: merchant bankers handling only debt/hybrid issues are exempt from revenue requirements.

Fit and proper person

Regulation 6A applies the "Criteria for fit and proper person" as given under the SEBI (Intermediaries) Regulations 2008.

The applicant or intermediary shall meet the criteria including the competence and capability in terms of infrastructure and manpower requirements and the financial soundness, which includes meeting the net worth requirements.

Who is tested:

• (a) the applicant or the intermediary.
• (b) the principal officer, the directors or managing partners, the compliance officer and the key management persons by whatever name called.
• (c) the promoters or persons holding controlling interest or persons exercising control.
• And in case of an unlisted applicant or intermediary, any person holding twenty percent or more voting rights, irrespective of whether they hold controlling interest or exercise control.

What is weighed: integrity, honesty, ethical behaviour, reputation, fairness and character. The person must also be free of eleven disqualifications:

• a pending SEBI criminal complaint under section 154 of the Code of Criminal Procedure, 1973.
• a pending charge sheet... by any enforcement agency in matters concerning economic offences.
• a subsisting order of restraint, prohibition or debarment.
• pending recovery proceedings.
• conviction for any offence involving moral turpitude.
• winding up proceedings.
• being declared insolvent and not discharged.
• being found to be of unsound mind.
• being categorized as a wilful defaulter.
• being declared a fugitive economic offender.
• any other specified disqualification.

The consequences of failing the test. A person declared not fit and proper shall not be eligible to apply for any registration during the period provided in the said order or for a period of five years from the date of effect of the order, if no such period is specified.

A pending show cause notice blocks an application for one year from the date of issuance of such notice or until the conclusion of the proceedings, whichever is earlier.

Group disqualification does not automatically attach: a disqualification of an associate or group entity shall not have any bearing on the "fit and proper person" criteria of the applicant or intermediary unless the applicant or intermediary or any other person referred in clause (2), is also found to incur the same disqualification.

But personnel and holders must be cured. A disqualified officer under clause (2)(b) must be replaced within thirty days; a disqualified controller under clause (2)(c) must not exercise voting rights and must divest their holding within six months — failing which the criteria may be invoked against such intermediary.

Thirty days for people; six months for shareholdings.

And the test is continuous: it applies at the time of application of registration and during the continuity of registration.

Regulation 5 allows SEBI to require the applicant to furnish further information or clarification, and the applicant or its principal officer shall, if so required, appear before SEBI for personal representation.

13.2.4 Fees

Every Merchant Banker is required to pay a sum of Rs. 20 lakhs as registration fees at the time of grant of certificate of registration.

To keep it in force: a fee of Rs. 9 lakhs every three years from the sixth year from the date of grant of certificate of registration, payable one month before the expiry of the block for which the fee has been paid.

The fee ladder at a glance:

• Rs. 50,000 application.
• Rs. 20 lakh registration.
• Rs. 9 lakh every three years from the sixth year.

13.2.5 Conditions of registration

a) Where the merchant banker proposes a change in control, it shall obtain prior approval of SEBI for continuing to act as such after the change.

b) The merchant banker shall pay the fees for registration in the manner as provided in these regulations.

c) The merchant banker shall take all steps for the redressal of the grievances of the investors within 21 calendar days of the date of receipt of the complaint.

d) The merchant banker shall maintain capital adequacy requirements at all times during the period of the certificate.

e) The merchant banker shall abide by the regulations made under the SEBI Act, 1992 in respect of the activities carried on by it as a merchant banker.

f) The merchant banker shall immediately intimate the Board, details of changes that have taken place in the information that was submitted while seeking registration.

g) Where the merchant banker is acting as an underwriter, it shall enter into a valid agreement with the body corporate on whose behalf it is acting as an underwriter.

Twenty-one calendar days again — the same period as for stockbrokers and portfolio managers.

13.2.6 Refusal to grant

Under Regulation 10:

Where an application... does not satisfy the conditions as laid down in the Regulation 6, SEBI may reject the application after giving an opportunity of being heard.

SEBI should communicate the refusal to grant registration within thirty days of such refusal to the applicant stating therein the grounds on which the application has been rejected.

An applicant... may apply to SEBI, within a period of thirty days from the date of receipt of such intimation from SEBI, for reconsideration of its decision, and SEBI shall reconsider... and communicate its decision as soon as possible in writing.

Thirty days to communicate; thirty days to seek reconsideration.

And on refusal, business stops. Regulation 11 requires an applicant whose registration has been refused, on and from the date of the receipt of the communication, to cease to carry on any activity as a merchant banker — though SEBI may, in the interest of investors in the securities market, permit the merchant banker to carry on activities undertaken prior to the receipt of the intimation of refusal.

13.2.7 Suspension

Under Regulation 12, where a merchant banker fails to pay the prescribed annual fees, SEBI may suspend the registration certificate, upon which the merchant banker will not be allowed to carry on with its business till the time he remains suspended.

13.2.8 Code of conduct

Regulation 13 requires compliance with the prescribed code of conduct as given under the Schedule III.

Its temper: the code of conduct impresses heavily the importance of integrity, honesty and ethical behaviour expected from merchant bankers. As a client and investor-driven business, merchant bankers are expected to keep in mind the interests of the investors at all times and redress any grievances immediately while keeping SEBI informed of the same.

Thirty-five clauses. The first four set the tone:

• make all efforts to protect the interests of investors.
• maintain high standards of integrity, dignity and fairness in the conduct of its business.
• fulfil its obligations in a prompt, ethical, and professional manner.
• at all times exercise due diligence, ensure proper care and exercise independent professional judgment.

On investors: ensuring inquiries from investors are adequately dealt with, that grievances of investors are redressed in a timely and appropriate manner, and that where a complaint is not remedied promptly, the investor is advised of any further steps which may be available; ensuring adequate disclosures are made to the investors in a timely manner... to enable them to make a balanced and informed decision; ensuring investors receive true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks; and ensuring copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer.

On clients:

• not discriminating save and except on ethical and commercial considerations.
• not misrepresenting the services that the merchant banker is capable of performing.
• avoiding conflict of interest with adequate disclosure of its interest, having a mechanism to resolve any conflict-of-interest situation and making appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest.
• rendering the best possible advice.
• keeping client information confidential without taking prior permission of its clients.
• promptly informing clients of any change in registration status/any penal action taken by SEBI or any material change in the merchant banker's financial status, transferring outstanding business to another registered intermediary in accordance with any instructions of the affected clients.

On the market and the firm:

• no unfair competition, such as weaning away the clients on assurance of higher premium or advantageous offer price.
• maintain an arms-length relationship between its merchant banking activity and any other activity.
• internal control procedures and financial and operational capabilities... to protect its operations, its clients, investors and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.
• no untrue statement or suppress any material fact in any documents, reports or information furnished to SEBI.
• maintain an appropriate level of knowledge and competence and comply with the award of the Ombudsman passed under the SEBI (Ombudsman) Regulations, 2003.
• prompt information to SEBI of any action, legal proceedings, etc., initiated against it in respect of material breach or non-compliance.

Public advice requires disclosure of position: a merchant banker or employee shall not render, directly or indirectly, any investment advice about any security in any publicly accessible media, whether real-time or non-real-time, unless disclosure of their interest including a long or short position, in the said security has been made, an employee also disclosing the interests, if any, of himself, his dependent family members and the employer merchant banker.

On governance:

• demarcating the responsibilities of the various intermediaries appointed by it.
• giving adequate freedom and powers to its compliance officer.
• developing its own internal code of conduct covering professional excellence and standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings and interests.
• ensuring good corporate policies and corporate governance.
• employing only persons who are fit and proper and otherwise qualified.
• having adequate resources to supervise diligently and actually supervising.
• being responsible for the acts or omissions of its employees and agents.
• ensuring senior management, particularly decision-makers have access to all relevant information about the business on a timely basis.

And the market-integrity clauses: not being party to creation of false market, price rigging or manipulation or passing of unpublished price sensitive information; and no insider trading by the merchant banker or any of the directors, partners or manager having the management of the whole or substantially the whole of affairs of the business, whether through its account or their respective accounts or through their associates or family members, relatives or friends.

As underwriter, no misrepresentation of the services that the underwriter is capable of performing or its underwriting commitment, and no unfair competition.

Restriction on business

Regulation 13A: "No merchant banker, other than a bank or a public financial institution, who has been granted a certificate of registration under these regulations, shall after June 30th, 1998 carry on any business other than that in the securities market."

Securities market only — with three qualifications: pre-1997 contracts may be discharged; a primary or satellite dealer registered by the RBI may carry on such business as may be permitted by Reserve Bank of India; and a merchant banker shall ensure market-making in accordance with SEBI (ICDR) Regulations, 2009.

Books of account — Regulation 14

Every merchant banker is required to keep and maintain:

• (a) a copy of balance sheet as at the end of each accounting period.
• (b) a copy of profit and loss account for that period.
• (c) a copy of the auditor's report on the accounts for that period.
• (d) a statement of financial position.
• (e) records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management and the case of takeover, buyback and delisting of securities.

Limb (e) is the distinctive one — the due diligence trail.

Every merchant banker shall intimate to SEBI the place where the books of account, records and documents are maintained — note that here it is SEBI, not an exchange, since a merchant banker holds no exchange membership.

After each accounting period it must furnish copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by SEBI.

As underwriter it keeps details of all agreements entered with a body corporate, total amount of securities of each body corporate subscribed to in pursuance of an agreement, a statement of capital adequacy requirements, and other specified records.

The above documents need to be maintained for a minimum period of 8 years.

Eight years — as for stockbrokers.

And there is now an electronic home for them: stock exchanges have set up an online Document Repository platform which would enable Merchant bankers to upload and maintain the aforesaid documents electronically, intended to facilitate easier access to documents pertaining to the public issue process.

13.2.9 Lead merchant banker

Lead managers of an issue are primarily responsible for the pricing, financing and distribution of the securities. They have a greater responsibility towards investors, SEBI and the issuer company.

Regulation 20: no lead manager shall agree to manage or be associated with any issue unless its responsibilities relating to the issue particularly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is disclosed in the draft offer document and offer document.

And where there are several: the responsibilities of each of such lead merchant bankers shall clearly be demarcated and a statement specifying such responsibilities shall be disclosed in the draft offer document and offer document.

Two association bars — Regulations 21 and 21A. A merchant banker should not be associated with any issue if a merchant banker who is not holding a certificate of registration is associated with the issue. And a merchant banker, being a promoter, director, or associate of either the issuer of the securities or of a person making an offer to sell or purchase securities... shall not lead manage any issue or be associated with any activity undertaken under SEBI regulations by such issuer or person — provided that a merchant banker who is an associate of such issuer or person may be appointed, if it is involved only in the marketing of the issue or offer.

Marketing only is the narrow exception.

Regulation 26 bars dealing on inside information: no merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives enter into any transaction in securities of body corporates on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.

Regulation 27 requires reporting of acquisitions: complete particulars of the transaction for acquisition of securities of a body corporate whose issue is managed by that merchant banker, within fifteen days from the date of entering into such a transaction — but acquisitions pursuant to underwriting or market making obligations in accordance with the... (ICDR) Regulations, 2018 shall be submitted to the Board on a quarterly basis.

13.2.10 Disclosures to SEBI

A merchant banker shall disclose to SEBI, as and when SEBI requires:

• the merchant banker's responsibilities with regard to the management of the issuer.
• any change in the information or particulars previously furnished, which have a bearing on the certificate granted to it.
• the names of the body corporate whose issues the merchant banker has managed or has been associated with.
• the particulars relating to the breach of the capital adequacy requirements.
• any information relating to the merchant banker's activities as a manager, underwriter, consultant or adviser to an issue.

A periodic report is also required. The Boards of Merchant Bankers are required to review the report and record its observations on:

• (i) the deficiencies and non-compliances.
• (ii) corrective measures initiated to avoid such instances in future.
• (iii) pre-issue and post-issue due diligence process followed and whether they are satisfied.
• (iv) track record of past issues managed.

And the compliance officer shall immediately and independently report to the SEBI any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on/in the draft prospectus or the letter of offer as the case may be, do not recur.

13.2.11 Inspection

Under Regulation 31, on inspection it shall be the duty of every director, proprietor, partner, officer and employee of the merchant banker to:

• produce to the inspecting authority such books, accounts and other documents in its custody or control, and furnish statements and information relating to its activities.
• allow the inspecting authority to have reasonable access to the premises.
• extend reasonable facility for examining any books, records, documents and computer data, and provide copies.
• permit examination or recording of the statement of any principal officer, director, partner, proprietor and employee.
• render any kind of assistance that may be required in the course of the inspection.

And a standing obligation: the merchant banker shall ensure compliance with the Investor Charter specified by SEBI from time to time.

13.2.12 Compliance officer

Regulation 28A requires a compliance officer who shall be responsible for monitoring the compliance of the SEBI Act, rules and regulations, notifications, guidelines, instructions, etc., issued by SEBI or the Central Government and for redressal of investors' grievances.

**And merchant bankers must adopt dispute resolution and grievance redressal mechanisms as directed by SEBI in the regulations (28B and 28C).

Case 13.1 — SEBI v Inventure Merchant Banker Services. SEBI inspected the lead manager to an SME issue. It alleged that the firm:

• did not call for additional documents which resulted in the understatement of loan liability of a group company.
• had not obtained a certificate with respect to the legal vetting of the IPO.
• had presented a factually incorrect and misleading estimate of the cost of plant and machinery and civil works.
• had not submitted a half-yearly periodic report, nor provided a webpage /weblink in respect of its track record of the public issue on its website.
• had material discrepancies in the information with respect to the compliance officers and Key Managerial Personnel.

The findings were that Inventure has not exercised proper due diligence with respect to all aspects of the issue including the veracity and adequacy of the disclosures in the offer documents, and — the sentence worth remembering — that Merchant Banker should take a little extra effort than usual in ensuring that disclosure made in the offer documents are true, without any misleading or exaggerated claims or any misrepresentation. The above also requires independent verification and independent professional judgements.

**There was a lack of due diligence, if not active concealment, though there are not enough material/documents available on record to conclude that Inventure lacked knowledge and competence under clause 21.

**Order: monetary penalty of Rs 10 lakhs... under section 15HB of the SEBI Act, 1992.

13.3 Takeover Regulations, 2011

These regulations apply to direct and indirect acquisition of shares or voting rights in, or control over the target company. They do not apply to direct and indirect acquisition of shares or voting rights in, or control over a company listed without making a public issue, on the Innovators Growth Platform of a recognised stock exchange.

The merchant banker's place in an open offer. The acquirer company is required to appoint a SEBI registered Merchant Banker, as a manager to the open offer before making the public announcement.

And independence is required: the merchant banker, however, should not be an associate of or group of the acquirer or the target company.

Acquirer means any person who, directly or indirectly acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.

Pricing is a joint exercise: the rules governing offer price specified in Regulation 8 of the SAST Regulations require determination of the same by the acquirer as well as the merchant banker.

The announcement sequence. The public announcement for a proposed acquisition... shall be made by the merchant banker on the date of the first such acquisition, provided the acquirer discloses the details of proposed subsequent acquisitions. The public announcement for a voluntary offer shall be made on the same day as the date on which the acquirer takes the decision. Post the public announcement, a detailed public statement shall be published by the acquirer within a stipulated time.

Where it goes: to all the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public, with a copy submitted to SEBI and the target company at its registered office through the Merchant Banker within one working day of the date of the public announcement.

And then the letter of offer: within 5 working days from the date of public statement, the merchant banker shall file the draft of the letter of offer with SEBI along with a non-refundable fee.

13.3.1 General obligations of the merchant banker

Before the public announcement, the merchant banker must ensure that:

• the acquirer is able to implement the offer.
• provisions relating to escrow account has been made.
• firm arrangements for funds and money for payment through verifiable means to fulfil the obligations under the offer are in place.
• the announcement is in terms of the regulations.
• that merchant banker's shareholding, if any in the target company should be disclosed in the public announcement and the letter of offer.

Then:

• furnish to SEBI a due diligence certificate which shall be attached to the draft letter of offer.
• ensure the public announcement, detailed public statement and letter of offer are filed with SEBI, the target company and also sent to all the stock exchanges.
• ensure their contents are true, fair and adequate and based on reliable sources, quoting the source wherever necessary.
• not deal on his own account in the shares of the target company during the offering period.
• ensure compliance with the regulations and other applicable law.
• file a report with SEBI within 15 working days from the expiry of the tendering period... confirming status of completion of various open offer requirements.

13.3.2 Disclosure requirements

Event-based disclosures — Regulation 29.

On the Innovators Growth Platform the thresholds are relaxed: any reference to "five per cent" shall be read as "ten per cent", and under 29(2) any reference to "two per cent" shall be read as "five per cent".

Note the direction-neutrality of 29(2) — a fall below five per cent must still be disclosed.

Encumbrance disclosures — Regulation 31.

With one carve-out in both rows: the aforesaid disclosure requirement shall not be applicable where such encumbrance is undertaken in a depository.

And an annual declaration: the promoter of every target company shall declare on a yearly basis that he, along with persons acting in concert, has not made any encumbrance, directly or indirectly, other than those already disclosed during the financial year. It is made within seven working days from the end of each financial year. It goes to every stock exchange where the shares of the target company are listed and to the audit committee of the target company.

SEBI's powers — Regulation 32 include directing the transfer of any proceeds or securities to the Investor Protection and Education Fund and directing the target company or depository not to give effect to the transfer of shares that have been acquired in violation of the Takeover Regulations.

13.4 Bankers to an Issue Regulations, 1994

Banker to an Issue means a scheduled bank or such other banking company as may be specified by SEBI from time to time that carries out any of:

• i. acceptance of application and application monies.
• ii. acceptance of allotment or call monies.
• iii. refund of application monies.
• iv. payment of dividend or interest warrants.
• v. providing escrow services for the purposes of issue management, buyback, delisting, or open offer.
• vi. opening of a separate bank account for depositing the proceeds in the initial public offer/ further public offer.
• vii. such other activities as may be specified by SEBI.

Registration

Requirements:

• necessary infrastructure, communication and data processing facilities and manpower.
• the applicant or any of its directors is not involved in any litigation connected with the securities market which has an adverse bearing on the business... or has not been convicted of any economic offence.
• the applicant is a scheduled bank or such other banking company as specified by the Board.
• the applicant is a fit and proper person.
• grant of certificate to the applicant is in the interest of investors.

Fees:

• a non-refundable application fee of Rs. 50 thousand.
• Rs. 20 lakhs as registration fees at the time of the grant of certificate.
• renewal fee is Rs. 9 lakh every three years from the sixth year from the date of grant of certificate of registration.

The same fee ladder as a merchant banker — which is the fourth review question: Rs. 20 lakh.

**And the certificate shall be valid unless it is suspended or cancelled by SEBI.

Records and information

Every banker to an issue shall maintain the following records for a minimum period of 8 years:

• a. the number of applications received, the names of the investors, the dates on which the applications were received and the amount so received from the investors.
• b. the time within which the applications received from the investors were forwarded to the body corporate or registrar to an issue.
• c. dates and amount of refund monies paid to the investors.
• d. dates, names and amount of dividend/interest warrant paid to the investors.

**And each banker shall also keep SEBI informed about the place where the records and documents mentioned above are kept.

Information to SEBI on request covers the number of issues for which he was engaged, applications and application monies received, the dates applications were forwarded, dates and amounts refunded, and the payment of dividends/or interest warrants to the investors.

A compliance officer is required, responsible for monitoring the compliance of the Act, rules and regulations... and for redressal of investors' grievances, reporting immediately and independently to the Board any non-compliance observed by him.

RBI action must be reported: every banker to an issue shall inform SEBI about any disciplinary action taken by the Reserve Bank of India against the banker to an issue only in relation to issue payment work. And if as a result of any such action, the banker to an issue is prohibited from carrying on the activities, the certificate shall be deemed to have been suspended or cancelled as the case may be.

Grievances: promptly but not later than twenty-one calendar days from the date of receipt.

Agreement with the body corporate

Every banker to an issue shall enter into an agreement with the body corporate for which it is acting. It contains:

• a. the number of centres at which the applications and application monies... will be collected from the investors.
• b. the time within which the statement regarding the applications and application monies received... will be forwarded to the registrar to an issue or the body corporate.
• c. that a daily statement will be sent by the designated controlling branch of the bankers to the issue to the registrar to an issue indicating the number of applications received on that date... and the amount of application money received.

Code of conduct

The positive duties mirror the merchant banker's:

• make all efforts to protect the interests of investors.
• observe high standards of integrity and fairness.
• fulfil its obligations in a prompt, ethical and professional manner.
• at all times exercise due diligence, ensure proper care and exercise independent professional judgments.
• not at any time act in collusion with other intermediaries or the issuer in a manner that is detrimental to the investor.

Clause 7 is the distinctive one — five things a banker to an issue must not do:

(a) allow blank application forms bearing brokers stamp to be kept at the bank premises or peddled anywhere near the entrance of the premises.

(b) accept applications after office hours or after the date of closure of the issue or on bank holidays.

(c) after the closure of the public issue accept any instruments such as cheques/demand drafts/stock invests from any other source other than the designated Registrar to the Issue.

(d) part with the issue proceeds until listing permission is granted by the stock exchange to the body corporate.

(e) delay in issuing the final certificate pertaining to the collection figures to the Registrar to the Issue, the lead manager and the body corporate and such figures should be submitted within seven working days from the issue closure date.

Limb (d) is the investor's real protection — the money stays put until listing permission comes.

The rest of the code falls into four groups.

Towards investors and clients:

• promptness in disbursing dividends, interests, or any such accrual income.
• no exaggerated statement, and the best possible advice.
• confidentiality, and avoidance and resolution of conflicts with disclosure.
• no unfair competition, and no discrimination save and exception ethical and commercial considerations.
• prompt information of registration or penal changes, with transfer of outstanding business.

Towards regulators:

• knowledge and competence, with compliance with the award of the Ombudsman.
• prompt information to SEBI of legal proceedings.
• no untrue statement or suppress any material fact, and no refusal to submit books to SEBI.
• abiding by the directions of the Central Government, the Reserve Bank of India, the Indian Banks Association or SEBI.

Inside the firm:

• internal control procedures and financial and operational capabilities.
• adequate freedom and powers to its compliance officer, and an internal code of conduct.
• fit and proper employees, and adequate supervision.
• responsibility for the acts or omissions of its employees and agents.
• senior management access to information.
• an arms-length relationship where registered in another capacity.

Towards the market:

• disclosure of position when giving public investment advice.
• no insider trading.
• no part in creation of false market, price rigging or manipulation or passing of unpublished price sensitive information.

The chapter's review questions confirm that the Merchant Banking Regulations provide for registration, general obligations and general responsibilities — all of the above; that the required infrastructure covers office space as per SEBI criteria, equipment in place and skilled and relevant manpower — again all of the above; that it is True that an applicant must fulfil the capital adequacy requirement; and that a banker to an issue pays Rs. 20 lakh as registration fees.