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Merchant Banking
SEBI Guidelines
BIET MBADAVANGERE
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Merchant Bankers: Merchant banker is any person engaged in the business of issue
management in terms of facilitating, arranging or undertaking in
respect of selling, buying, or subscribing to securities; activities of
a merchant banker also involve acting as manager, consultant or
advisor in relation to issues of securities by corporate entities.
In Indian context, merchant banking primarily refers to thoseservices rendered to corporate entities by experts in the filed of
capital markets, which help them to successfully raise long term
capital by issuing shares, debentures, etc.
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Merchant bankers act as the sponsors of issues of securities byMerchant bankers act as the sponsors of issues of securities by
corporate entitiescorporate entities
The advise the issuers on the capital structure ideal for optimizingThe advise the issuers on the capital structure ideal for optimizing
cost of capital and return on equitycost of capital and return on equity
They draft the prospectus or other offer documents that form theThey draft the prospectus or other offer documents that form the
basis of providing relevant information to the prospective investorsbasis of providing relevant information to the prospective investors
They also draft other documents like the application forms,They also draft other documents like the application forms,contracts with brokers, bankers, registrars etccontracts with brokers, bankers, registrars etc
They help the issuers to comply with all the legal provisionsThey help the issuers to comply with all the legal provisions
relevant to the issuance of securities under the law of the landrelevant to the issuance of securities under the law of the land
They arrange for appointments of registrars who deal with share
application processing, allotment processing, transfers, listing of
securities, underwriting arrangements etc
They assist the issues in placing the issues with large investors
They help the issuers in selecting brokers and bankers to the issue
They arrange for publicity, advertising, and marketing of the issue
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Legal necessity: all public issues shall be managed by merchant bankers registered with
the SEBI acting as the lead managers. Controller of Capital Issues (CCI) was the legal authority that regulated the capital
issues in India until the year 1992. CCI was established under the Capital Issues
(Control) Act, 1947.
In the wake of the fundamental changes that occurred in the Indian capital markets, a
need was felt to comprehensively change the regulatory environment in regards to the
capital markets. CCI was abolished in the year 1992 and a new regulatory structure was established
under the Securities and Exchange Board of India (SEBI).
SEBI guidelines for merchant bankers:
Compulsory registration: Category I can carry on all activities related to issue management prospectus preparation;
determining financial structure; tie-ups with financiers; final allotment; refunds; allotments; AND
also as Advisors; consultants; co-managers; underwriters; portfolio managers etc Category II can act as: Advisors; consultants; co-managers; underwriters; portfolio managers
etc
Category III underwriters; advisors; and consultants
Category IV advisor or consultant only
Note: effective from 9-12-2009, only category I merchant bankers are registered with
SEBI to carry on the activities of portfolio managers, merchant bankers have to obtain
separate certifications
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Who can get certification as merchant bankers?
Bodies corporate other than NBFCs Possessing necessary infrastructure
At least two persons on rolls with experience to carry out merchant
banking activities
A directly or an indirectly connected person is not possessing a SEBI
certificate as merchant banker
Minimum capital of INR 5 Crores (PUC plus reserves) Not involved in any litigation relating to securities market directly or
indirectly
Possess recognized professional qualification in finance, law or business
management
Their registration is in the interest of investors
The applicant is a fit and proper person
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Meaning of fit and proper person: No conviction for offence involving moral turpitude, economic offence,
securities law or fraud;
Order of winding has not been passed;
Not an insolvent
A SEBI order (or of other competent authority) has not been passed and is
still in force - on him by which he is restrained, prohibited or debarred from
dealing in securities;
A SEBI order cancelling the registration has not been passed for insider
trading, fraudulent and unfair trade practices or manipulation of market; He has not been denied the grant of certificate on an application or his
certificate has not been withdrawn by SEBI or other authority and such
order is still current (3 years);
Not financially sound;
Any other negative reason is present
FEES:
application- INR 25,000;
Initial registration- INR 10 lakhs;
tri-annual renewal from the fourth year- INR 5 lakhs
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Conditions for registration:
Change in constitution/control to be approved by SEBI
Always enters into a legally binding contract with issuer, spelling outmutual obligations and duties
Payment of renewal fees
Adequate steps taken to redress issues relating to investor complaints
Abide by all provisions of the SEBI Act
Code of Conduct for Merchant bankers:
Protection of investor interests
High standards of integrity, dignity and fairness
Performa all obligations professionally, ethically and promptly
Due diligence, care and independent judgment
Prompt redressal of all investor complaints
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Relevant and material disclosures to investors
No misleading and exaggerated statements- draw attention to risks involved
Make prospectus, offer documents, letter of offers available to investors at issue time
Not to discriminate between clients, otherwise than on justifiable commercial
considerations
Avoid conflict of interest and make disclosure of present interests, if any
Establish a system to deal with any conflicts of interest
Disclose potential areas of conflict of interest
Offer best possible professional advice to clients
Not divulge any price sensitive information, but for cases where he is under legal
obligation
Any penal action or change in registration status informed to clients and investors Not indulge in any unfair competition
Maintain an arms length relationship between merchant banking and any other activity
Robust internal control systems to detect and prevent frauds
Not make any untrue statements or suppress any material information
Maintain an appropriate level of professional competence
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Notify SEBI of any legal actions initiated by any authority
Not render any investment advice- directly or indirectly on media- if
doing, disclose interest Demarcate responsibilities to intermediaries appointed
Provide adequate freedom to intermediaries
Develop an internal code for excellence, integrity, confidentiality,
objectivity, disclosures etc
Ensure good corporate governance
Ensure the credentials and qualifications of people employed
Ensure the availability of adequate supervisory personnel
Senior management shall have complete access to information
Not be a party or instrument in: creation of false market; price rigging;passing on price sensitive information on stocks that are listed or
proposed to be listed
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Restriction on business- fund
based/asset based- no fund basedactivities (except banks and public
FIs); RBI primary or satellite dealers
can involve in activities permitted byRBI
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ResponsibilitiesofLead Manger:
Agreement with issuer detailing mutualrights, obligations and liabilities; break
up of responsibilities between multiple
MBs- details submitted to SEBI before
one month of opening of issue
Not associate with unregistered persons
to act as co-bankers or managers
Min underwriting of 5% or 25 lakhs, WIL
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Due diligence certificate:
Verify the contents of P/LO and submitdue diligence certificate to SEBI 2 weeks
before opening of issue
The DD certificate has to state that theP/LO are in conformity with relevant
supporting documents
It has to state that all legal requirementshave been fully complied with
It has to state that disclosures are true,
fair and adequate
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Submission of documents: LM hasto:
Submit to SEBI- before filing with ROC or
designated Stock Exchange- particularsof issue, P/LO and any other literature to
be circulated among investors
SEBI vets them and may suggestmodifications, which are to be
incorporated
Feestobepaid whilesubmittingthesedocuments:public issue- INR 10,000 forlessthanissuesizeof
INR 1 croreand 0.01 percentforsizesabove INR 1
crore;Rights issue upto INR 2 crore INR 10,000;
2-500 crore, 0.005 percent;morethan 500 crore, flat
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Restriction on acquisition of shares
of issuer based on unpublished pricesensitive information-
Prohibited from such practices-
further, he has to furnish informationon any shares acquired by him in the
issuer co to SEBI, within 15 days
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Disclosures to SEBI makedisclosuresto SEBI on
his responsibilities in issue management
any changes in the status of details which were originally furnished
names of companies, the issues of which he has managed and with
which he has been associated
any particulars with regard to breach of capital adequacy
information on his activities as manager, underwriter, consultant, adviser
etc, of the issue
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Appointment of a compliance officer:
Every merchant banker has toappoint a CO
He would be responsible to monitor
and independently report to theSEBI on the state of compliances
He is also responsible to ensure that
the P/LO would incorporate any
suggestions made by SEBI before
release to investors
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SEBIs power to inspect:
SEBI can undertake inspection ofbooks and other records of
merchant bankers
Act either on a complaint byinvestors orsuo moto
All books and other information to
be furnished
MB will be allowed to present his
defense
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Defaults by MBs and Penalty points:
Typesofdefault:
1) General;
2) Minor;
3) Major;
4) Serious; and
5) Defaults in prospectus
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General defaults: (one penalty point)
Failure to submit DP/LO to SEBI
Failure to file inter-se responsibility
allocation
Failure to file due diligence certificateFailure to file minimum subscription
certificate
Failing to ensure prompt dispatch ofrefund orders/share certificates
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Minor defaults: (two penalty points)
Communicating info that is not part of Prospectus
Publicizing exaggerated info or extraneous info
Failure to substantiate material details of prospectus
Violating regulations regarding ads about issue
Failure to exercise due diligence in verifying P/LO
Failure to provide adequate info about risks involved Delay in refund/allotment
Non-handling of investor grievances properly
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Major defaults: (three penalty points)
Mandatory underwriting not undertaken
Excess number of lead managers
Association with unregistered MBs Serious defaults: (four penalty
points)
Unethical practices/violation of code ofconduct
Non-cooperation with SEBI in
investigations
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General negative points: in case
highlights are provided in an issue:absence of statement of risk factors-
one point; failing to give listing
details- half a point; stating mattersextraneous to prospectus- half a
point.
Suspension/cancellation: cumulativescore of eight points leads to
suspension/cancellation; one issue,
max four penalty points
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MANAGEMENT OF EQUITY AND RIGHTS ISSUES
Typesofissues:Public Issues;and
Rights Issues
Publicissuesmightinclude: IPOs,
FPOs, andOffersforsale;they mightbe
issuedby listedorunlistedcompanies;
they needprospectus
Rightsissuesareissuedonly by
existinglistedcompanies- letter of offer
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Conditions to be satisfied OR Eligibility norms
Filing of offer document: DP filedthrough an eligible MB 21 days
before filing with ROC; changes
suggested by SEBI need to beincorporated before filing with ROC
NOTE:incaseofRightsissuesoflessthan 50 lakhs, LOistobe
preparedandfiled with SEBI
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Applying for listing: public
issues
Enter into agreement with a
registered depository NOTE:thenormsdiscussed hereapply toissuesofequity sharesand
convertiblesecuritiesoflistedorunlistedcompanies
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IPOsIPOs byby unlistedunlisted companiescompanies
NetNet tangibletangible assetsassets ofof INRINR 33 crorescrores inin eacheach ofofthethe precedingpreceding 33 full full yearsyears;; not not moremore thanthan halfhalf
ofof thesethese cancan bebe inin nonnon--committedcommitted monetarymonetary
formform
TrackTrack recordrecord ofof distributabledistributable profitsprofits inin at at leastleast
33 out out of of fivefive immediatelyimmediately precedingpreceding yearsyears (in(in
casecase of of proprietaryproprietary andand partnershippartnership firmsfirms
convertedconverted intointo corporatecorporate form,form, thethe accountsaccounts
wouldwould bebe consideredconsidered onlyonly whenwhen theirtheir financialfinancial
statementsstatements conformconform toto OROR havehave beenbeen restatedrestated
inin thethe prescribedprescribed formform underunder thethe CompaniesCompanies
ActAct;; andand theythey havehave beenbeen dulyduly auditedaudited byby aa CA)CA)
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Has a minimum networth of INR 1 crore
in each of the preceding 3 full years of 12months each
In case of change of name, at least 50
percent of its revenue of the precedingone year has been derived from the
proposed type of activity
Aggregate of the proposed issue and all
previous issues in the same financial
year does not exceed five times its pre-
issue networth as per audited balance
sheet of the last FY
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NOTE:anunlistedcocanissuesecuritiestopubliceven whenitdoesnot
satisfy theabovefiveconditions, providedthat:
Book-building method is used and 50percent of net offer to public is offered to
QIBs; or
The project has at least 15 percentparticipation by banks/FIs of which at
least 10 percent comes from the
appraisers- in addition, at least 10percent has to be allotted to QIBs
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Minimum postMinimum post--issue face value of capitalissue face value of capital
would be 10would be 10 crorescrores oror
Compulsory marketCompulsory market--making is arranged formaking is arranged for--
with a depth of at least 300 shares; and bidwith a depth of at least 300 shares; and bid--
ask spread is less than 10 percent; and,ask spread is less than 10 percent; and,
inventory of market makers on each of stockinventory of market makers on each of stock
exchanges as on the date of allotment ofexchanges as on the date of allotment of
securities is at least five percent of thesecurities is at least five percent of theproposed issueproposed issue
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MeaningofQIB:
PFI; Banks; MFs; FIIs registeredwith SEBI; bilateral and
multilateral DFIs; VCFs registered
with SEBI; SIDCs; Insurancecompanies registered with IRDA;
PFs and pension funds with a
minimum corpus of 25 crores;
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Public Issues by listed companies
Eligibility conditions:
Size of issue, -inclusive of all those
done within one year past- does not
exceed five times pre-issue
networth;
In case of change in name, at least
50 percent of revenue..........NOTE: A listedcocanissuesecuritiesto
publiceven whenitdoesnotsatisfy the
aboveconditions, providedthat:
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Listedcompaniescanalsoraisefundsby issuancesofsecuritiesinthe
formofQualified InstitutionalPlacementorQIProute.
Exemptions from the above conditions: theaboveconditionsdonotapply to:privateandpublicsectorbanks; Infrastructurecompanies;rights
issuesby listedcompanies.
Anunlistedcompany havingoutstanding warrantsorothersuch
instruments with promotersorothers which aretobeconvertedinto
shares, cannotissuesecuritiestopublic
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Before making a public issue, all
existing partly paid up shares need tobe converted into fully paid shares/or
forfeited
A company cannot make public orrights issue unless it has made firm
arrangements of finance towards 75
percent of the stated means offinance, excluding the amount to be
raised through the proposed issue.
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Pricing ofIssues:
Listed company- free to issue at any price
Unlisted company- when proposes to list on a recognized exchange, freeto price
An infrastructure co- free to price, subject to the compliance with
disclosure norms laid down by SEBI
Differential pricing:
Prices for public and firm categories of issues can be different- firmallotment price higher
Listed companies making a composite issue can price its securities
differentially to public and rights segments; it can also adopt further
differentiation in regards to the splits of public segment between firm and
pro-rata allotments to public Price band: when filing the draft offer document with SEBI, an issuer can show an
indicative band of issue price with a 20 percent spread- cap should not be set at
more than 20 percent of floor; the actual price can be decided later on, by passing a
Board resolution or in consultation with the designated exchange
Note: discounts and commissions cannot be offered to any firm allottee
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Denomination of shares: Sec 13 (4) ofCompanies Actandprovisions
ofSEBI:
IPO- FV below INR 10 if issue price is INR500 or more, subject to a min of INR 1,
without decimal denominations; FV of
INR 10, if issue price is less than INR 500Other points- no decimal denomination;
only one denomination at a given time;
subject to MA and AA provisions;disclose all relevant aspect clearly
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Promoters contribution and lock-in
requirements:Unlisted co- IPO/OFS- 20% of post issue
capital
Listed co- PI- 20% compliance
Composite issues by listed co- 20% of
proposed issue is contributed OR 20
percent of post-issue capital ismaintained, excluding rights issue
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Other than cash considerations; revaluation of assets, capitalization of
intangible assets, bonus shares out of revaluation reserves- NOT
COUNTED
Securities issued at a lesser price to promoters within the last 12 months-
promoters have to make good the difference- NOT COUNTED
Subscriptions solicited form unrelated persons as private placements-
NOT COUNTED
Securities for which written consent has not been obtained from the
holders (like friends and relatives)- NOT COUNTED
Subscription by promoters to Convertible securities- when the issue
is of shares, the subscription by promoters to CSs will be counted if
the price at which they are to be converted is stated in the
prospectus; if the issue is of the convertible securities themselves,
the promoters contribution shall be counted only when they bindthemselves to full conversion on the proposed dates.
Promoters contribution has to be brought in at least one day before
the opening of the issue- it shall be held in an Escrow account with
a bank.
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Exemption from promoters contribution requirement:
Listedco;publicissue; 3 yeardividendtrackrecord;
Noidentifiablegroupofpromotersexists
Rightsissues- they howeverhavetodiscloseexistingshareholding
Lock-in requirement: 3 years; start day from date of allotment and
last day from the date of commercial production or the date of
allotment,WIL
Incaseofexcesscontributionby promotersofunlistedco, lockinperiod
isone year;forlistedcompany, thisone yearlockinperiod willnotbe
applicable;ifashortfallinfirmallotmentcategory ismetby promoter, it
willbesubjecttolock-in
Theentirepre-issuesubscriptionsincaseofunlistedcompanies willbe
lockedinforone year- shareslentto Stabilizing Agents (SAs)are
exemptedfromlock-inrequirement.
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Lock-in of firm allotment securities: one year lock-in from the date
of allotment or commencement of commercial productions,WIL
Note 1: locked in securities can be pledged with only approvedbanks and FIs
Note 2: Inter-se transfers among the promoters is permitted- they
can also be transferred to a new promoter
Note 3: Inscription of non-transferability is necessary
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Advertisement Code:
True, fairandclear
FullformofOD, notextracts
Notmisleading- explanatory andqualifying
statements
avoidtechnicalandcomplexlanguage
No guaranteeingkindofstatementsaboutprofitability increases
Nouseofcrawlerson TV
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No slogans or brand names, mere commercial name in use
No celebrity or other endorsements
No expletives or non-factual statements If financial data is presented, sales, GP, NP, SC, Reserves, EPS, DPS, BV
have to be there
Contain risk factor statements clearly, highlighted
All publicity material duly authorized by directors
Prominent display of any SEBI, ROC and DSE information
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No payment of any incentive to anyone,
but for contracted brokerageWhen NRI reservation is present, specify
wherefrom they can obtain application
forms
MB to take undertaking from issuer that
ads comply with all directives
Ensure that issuer takes approval fromhim
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Research reports:
Prepared only on the basis of published information
Information should be made available to all analysts- no selectivity has tobe there in terms of reports
No research report should be circulated commencing from the date 45
days immediately preceding the filing of the offer document with the SEBI
Ad code applies to research reports to the relevant extent