NATIONAL LAW INSTITUTE UNIVERSITY,
BHOPAL
TENTH TRIMESTER
LAWS ON BUSINESS ASSOCIATIONS II
PROJECT ON
The Functions, Role and Importance of Merchant
Bankers in the Securities Market: A Detailed Study
SUBMITTED TO:
SUBMITTED BY:
PROF.(Dr.)KONDIAH JONNALAGADDA
NIMISHA JHA
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2009BALLB01
ENROLMENT NO.: A-0863
TABLE OF CONTENTS
INTRODUCTION..................................................
..............................................................
..03
CAPITAL MARKET
INTERMEDIARIES................................................
.......................04
FINANCIAL
SERVICES......................................................
................................................04
MERCHANT BANKERS:
MEANING.......................................................
........................05
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MERCHANT BANKERS: ORIGIN AND
DEVELOPMENT.........................................07
MERCHANT BANKERS:
INDIA.........................................................
...............................09
MERCHANT BANKERS:
FUNCTIONS.....................................................
.......................10
MERCHANT BANKERS:
REGULATIONS...................................................
...................13
CONCLUSION....................................................
..............................................................
.....21
BIBLIOGRAPHY..................................................
..............................................................
..23
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INTRODUCTIONCompanies raise capital by issuing securities in the market.
Merchant bankers act as intermediaries between the issuers of
capital and the ultimate investors who purchase these
securities. Merchant banking may be defined as an ‘institution
which covers a wide range of activities such as underwriting
of shares, portfolio management, project counselling,
insurance etc.
Merchant Banking is a combination of banking and consultancy
services. It provides consultancy, to its clients, for
financial, marketing, managerial and legal matters.
Consultancy means to provide advice, guidance and service for
a fee. It helps a businessman to start a business. It helps to
raise (collect) finance. It helps to expand and modernise the
business. It helps in restructuring of a business. It helps to
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revive sick business units. It also helps companies to
register, buy and sell shares at the stock exchange.
In short, merchant banking provides a wide range of services
for starting until running a business. It acts as Financial
Engineer for a business.
Fundamentally, merchant banking division is regarded as a
project-evaluation instrument.
It provides expert knowledge and help in the floatation of new
companies, the preparation, planning and execution of new
projects, and the management and promotion of industrial
enterprises as well as their financing. Basically, however,
merchant banks are more service-oriented.
Their main function is to guide the preparation, planning,
evaluation and execution of projects which are helpful to the
growth of industries.
The need for merchant banking was vehemently stressed by the
Banking Commission (1972).
According to the commission, merchant banking institutions are
to offer services like syndication of financing, promotion of
projects, investment management and advisory services to
medium and small savers and to provide funds and trusts to
various types.
Merchant banking was first started in India in 1967 by
Grindlays Bank. It has made rapid progress since 1970.
The merchant banking activity in India is governed by SEBI
(Merchant Bankers) Regulations, 1992. Registration with SEBI
is mandatory to carry out the business of merchant banking in
India.
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CAPITAL MARKET INTERMEDIARIESCapital market intermediaries are a vital link between the
regulators, issuers and investor. Any aberrations in the
capital markets has presumably direct bearing on the
intermediaries, their governance processes and practices which
in turn affect the confidence of the markets. It is therefore
necessary to ensure good governance practice of the
intermediaries and also to have constant monitoring and
surveillance on the acts of the intermediaries.
The Securities and Exchange Board of India Act, 1992 was
framed to provide for the establishment of a Board to protect
the interest of investors in securities and to promote the
development of and regulate the securities market and for
matter connected therewith and incidental thereto.
FINANCIAL SERVICESFinancial services are services that ensure the smooth flow of
financial activities in the economy. Those include banking,
insurance, stock broking and investment services as well as
business and professional services. These services cater the
need of financial institutions, financial markets and
financial instruments financial services include the services
offered by both Asset Management companies and Liability
Management companies.
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Financial Services help to raise the required funds but also
ensure their efficient deployment. This helps to ensure an
efficient management of funds, services such as bill
discounting, factoring of debtors, parking of short term funds
in money market, e-commerce and securitization of debts are
provided by financial service firms. This sector provides
services such as banking, insurance, credit rating, lease
financing, factoring, venture capital, mutual funds, merchant
banking, stock lending, depository services, housing finance.
Financial services industry classifies the financial services
under three broad categories: Fee Based services, Fund Based
services and Insurance Services.
1. Fee Based Services: Financial institutions operate in
specialized fields to earn a substantial income by way of
fees, dividend commission, discount and brokerage on
operations. Issue Management, Corporate Advisory
Services, Credit Rating, Mutual Funds and Assets
Securitization
2. Fund Based Services: The firm raises funds through
equity, debt, and deposits and invests these funds in
securities or lends to those who are in need of capital.
Leasing and Hire Purchase, Hosting Finance, Credit Cards,
Venture Capital, and Bill Discounting.
MERCHANT BANKERS: MEANINGMerchant banking implies investment management. Companies
raise capital by issuing securities in the market. Merchant
bankers act as intermediaries between the issuers of capital
and the investors who purchase these securities.
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Merchant banking is the financial intermediation that matches
the entities that need capital and those that have capital for
investment.
The services provided by merchant bankers include management
of mutual funds, public issues, trusts, securities and
international funds. It involves dealing with the corporate
clients and advising them on various issues like- mergers,
acquisitions, public issues, etc.
Merchant banking is skill based activities and involves
serving every financial need of every client. It requires
focused skill-base to provide for the requirements of the
client.
SEBI has made the quality of man-power as one of the criteria
for registration as merchant banker. These skills should not
be concentrated in issue management and underwriting alone,
which may have an adverse impact on business. Merchant bankers
can turn to any of the activities mentioned above depending
upon resources, such as capital, foreign tie-ups for overseas
activities and skills.
The depth and sophistication in merchant banking business are
improving since the avenues for participating in capital
market activities have widened from issue management and
underwriting to private placement, bought out deals (BODS),
buy-back of shares, mergers and takeovers.
Merchant banking is a much desired innovative step undertaken
by the commercial banks in India.
The need for merchant banking was vehemently stressed by the
Banking Commission (1972).
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According to the commission, merchant banking institutions are
to offer services like syndication of financing, promotion of
projects, investment management and advisory services to
medium and small savers and to provide funds and trusts to
various types.
The National & Grind lays Banks was the first to introduce
merchant banking services in 1967, followed by the First
National City Bank in 1970.
Among the Indian banks, however, the State Bank of India is
the pioneer in starting Merchant Banking Division in 1972.
Other public sector banks such as the Bank of Baroda, Canara
Bank, Bank of India, UCO Bank etc., entered into merchant
banking in the late seventies and early eighties.
Fundamentally, merchant banking division is regarded as a
project-evaluation instrument.
It provides expert knowledge and help in the floatation of new
companies, the preparation, planning and execution of new
projects, and the management and promotion of industrial
enterprises as well as their financing. Basically, however,
merchant banks are more service-oriented.
Their main function is to guide the preparation, planning,
evaluation and execution of projects which are helpful to the
growth of industries.
The Notification of the Ministry of Finance defines merchant
banker as “Any person who is engaged in the business of issue management
either by making arrangements regarding selling, buying or subscribing to securities
as manager-consultant, advisor or rendering corporate advisory services in relation
to such issue management”
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The Amendment Regulation specifies that issue management
consist of Prospectus and other information relating to issue,
determining financial structure, tie-up of financiers and
final allotment and refund of the subscriptions, underwriting
and portfolio management services.
In the words of Skully “A Merchant Bank could be best defined as a
financial institution conducting money market activities and lending, underwriting
and financial advice, and investment services whose organization is characterized by
a high proportion of professional staff able to able to approach problems in an
innovative manner and to make and implement decisions rapidly.”
MERCHANT BANKERS:
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ORIGIN AND DEVELOPMENTA Merchant Bank is a British term for a bank providing various
financial services such as accepting bills arising out of
trade, providing advice on acquisitions, mergers, foreign
exchange, underwriting new issues, and portfolio management. A
Merchant Bank can be generally described as a financial
services company with a private equity investment arm offering
investment banking and ancillary services as well. Because a
merchant bank acts not only as an advisor and broker but also
as a principal, a merchant bank has a longer term approach
than a typical investment bank and is highly concerned with
the viability of each investment opportunity and providing the
right advice for a strong partnership with each client
company.
A Merchant Bank is a British term for a bank providing various
financial services such as accepting bills arising out of
trade, providing advice on acquisitions, mergers, foreign
exchange, underwriting new issues, and portfolio management. A
Merchant Bank can be generally described as a financial
services company with a private equity investment arm offering
investment banking and ancillary services as well. Because a
merchant bank acts not only as an advisor and broker but also
as a principal, a merchant bank has a longer term approach
than a typical investment bank and is highly concerned with
the viability of each investment opportunity and providing the
right advice for a strong partnership with each client
company.
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In banking, a merchant bank is a traditional term for an
Investment Bank. It can also be used to describe the private
equity activities of banking. This article is about the
history of banking as developed by merchants, from the Middle
Ages onwards.
Amidst the swift changes sweeping the financial world,
Merchant Banking has emerged as an indispensable financial
advisory package. Merchant banking is a service-oriented
function that transfers capital from those who own to those
who can use it. They try to identify the needs of the
investors & corporate sector & advice entrepreneurs what to do
to be successful.
Merchant Banking, as the term has evolved in Europe from the
18th century to today, pertained to an individual or a banking
house whose primary function was to facilitate the business
process between a product and the financial requirements for
its development. Merchant banking services span from the
earliest negotiations from a transaction to its actual
consummation between buyer and seller.
In particular, the merchant banker acted as a capital sources
whose primary activity was directed towards a commodity
trader/cargo owner who was involved in the buying, selling,
and shipping of goods. The role of the merchant banker, who
had the expertise to understand a particular transaction, was
to arrange the necessary capital and ensure that the
transaction would ultimately produce "collectable" profits.
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Often, the merchant banker also became involved in the actual
negotiations between a buyer and seller in a transaction.
During the 20th century, however, European merchant banks
expanded their services. They became increasingly involved in
the actual running of the business for which the transaction
was conducted. Today, merchant banks actually own and run
businesses for their own account, and that of others.
Since the 18th century, the term merchant banker has,
therefore, been considerably broadened to include a composite
of modern day skills. These skills include those inherent in
an entrepreneur, a management advisor, a commercial and/or
investment banker plus that of a transaction broker. Today a
merchant banker is who has the ability to merchandise -- that
is, creates or expands a need -- and fulfil capital
requirements. The modern European merchant bank, in many ways,
reflects the early activities and breadth of services of the
colonial trading companies.
Most companies that come to a U.S. merchant bank are looking
to increase their financial stability or satisfy a particular,
immediate capital need.
Professional merchant bankers must have:
1) An understanding of the product, its industry and
operational management;
2) An ability to raise capital which might or might not be
one's own (originally merchant bankers supplied their own
capital and thereby took an equity interest in the
transaction);
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3) And most importantly, effective skills in concluding a
transaction - the actual sale of the product and the
collection of profit.
Some people might question whether or not there are many
individuals or organizations that have the abilities to fulfil
all three areas of expertise.
MERCHANT BANKERS: INDIAMerchant banking activities help in channelizing the financial
surplus of the general public into productive investment
avenues. They help to coordinate the activities of various
intermediaries to the share issue such as the registrar,
bankers, advertising agency, printers, underwriters, brokers,
etc. and to ensure the compliance with rules and regulations
governing the securities market. This being the era where
mergers and acquisitions are hot, the scope of merchant
banking has grown to a large extent.
Merchant banking activity was formally initiated into the
Indian capital Markets when Grind lays bank received the
license from Reserve Bank in 1967. Grind lays started with
management of capital issues, recognized the needs of emerging
class of entrepreneurs for diverse financial services ranging
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from production planning and system design to market research.
Even it provides management consulting services to meet the
requirements of small and medium sector rather than large
sector.
Citibank Setup its merchant banking division in 1970. The
various tasks performed by this divisions namely assisting new
entrepreneur, evaluating new projects, raising funds through
borrowing and issuing equity. Indian banks Started banking
Services as a part of multiple services they offer to their
clients from 1972.
State bank of India started the merchant banking division in
1972. In the initial years the SBI’s objective was to render
corporate advice and assistance to small and medium
entrepreneurs. Merchant banking activities is of course
organized and undertaken in several forms.
Commercial banks and foreign development finance institutions
have organized them through formation divisions, nationalized
banks have formed subsidiaries companies and share brokers and
consultancies constituted themselves into public limited
companies or registered themselves as private limited
companies. Some merchant banking outfits have entered into
collaboration with merchant bankers abroad with several
branches.
In general, however, the merchant banking activities of the
Indian banks have been largely confined to the management of
public issues and loan syndications.
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They have yet to develop expertise in the fields of projects
counselling, corporate counselling, capital restructuring,
portfolio management, etc.
The Indian merchant bankers pay little attention to the
problem of industrial sickness or the growth of small scale
industrial units.
MERCHANT BANKERS: FUNCTIONSThe important functions of merchant banking are depicted
below.
1. Raising Finance for Clients: Merchant Banking helps its
clients to raise finance through issue of shares, debentures,
bank loans, etc. It helps its clients to raise finance from
the domestic and international market. This finance is used
for starting a new business or project or for modernization or
expansion of the business. This forms the main function of the
merchant banker. He assists the companies in raising funds
from the market. The undergoing tasks include instrument
designing, pricing the issue, registration of the offer
document, underwriting support, marketing of the issue,
allotment and refund and listing on stock exchanges.
2. Broker in Stock Exchange: Merchant bankers act as brokers
in the stock exchange. They buy and sell shares on behalf of
their clients. They conduct research on equity shares. They
also advise their clients about which shares to buy, when to
buy, how much to buy and when to sell. Large brokers, Mutual
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Funds, Venture capital companies and Investment Banks offer
merchant banking services. The merchant banker helps in
distributing various securities like equity shares, debt
instruments, mutual funds, insurance products, and commercial
paper, to name a few. The distribution network of the merchant
banker can be classified as institutional and retail in
nature. The institutional network consists of mutual funds,
foreign institutional investors; private equity funds pension
funds, financial institutions, etc.
3. Project Management: Merchant bankers help their clients in
the many ways. For e.g. advising about location of a project,
preparing a project report, conducting feasibility studies,
making a plan for financing the project, finding out sources
of finance, advising about concessions and incentives from the
government. Merchant bankers help their clients in various
stages of the project undertaken by the clients. They assist
them in conceptualizing the project idea in the initial stage.
Once the idea is formed, they conduct feasibility studies to
examine the viability of the proposed project.
4. Advice on Expansion and Modernization: Merchant bankers
give advice for expansion and modernization of the business
units. They give expert advice on mergers and amalgamations,
acquisition and takeovers, diversification of business,
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foreign collaborations and joint-ventures, technology
Upgradation, etc.
5. Managing Public Issue of Companies: Merchant bank advice
and manage the public issue of companies. They provide
following services:
i. Advise on the timing of the public issue.
ii. Advise on the size and price of the issue.
iii. Acting as manager to the issue, and helping in accepting
applications and allotment of securities.
iv. Help in appointing underwriters and brokers to the issue.
v. Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects: A
businessman has to get government permission for starting of
the project. Similarly, a company requires permission for
expansion or modernization activities. For this, many
formalities have to be completed. Merchant banks do all this
work for their clients.
7. Special Assistance to Small Companies and Entrepreneurs:
Merchant banks advise small companies about business
opportunities, government policies, incentives and concessions
available. It also helps them to take advantage of these
opportunities, concessions, etc.
8. Services to Public Sector Units: Merchant banks offer many
services to public sector units and public utilities. They
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help in raising long-term capital, marketing of securities,
foreign collaborations and arranging long-term finance from
term lending institutions.
9. Revival of Sick Industrial Units: Merchant banks help to
revive (cure) sick industrial units. It negotiates with
different agencies like banks, term lending institutions, and
BIFR (Board for Industrial and Financial Reconstruction). It
also plans and executes the full revival package.
10. Portfolio Management: A merchant bank manages the
portfolios (investments) of its clients. This makes
investments safe, liquid and profitable for the client. It
offers expert guidance to its clients for taking investment
decisions.
11. Corporate Restructuring: It includes mergers or
acquisitions of existing business units, sale of existing unit
or disinvestment. This requires proper negotiations,
preparation of documents and completion of legal formalities.
Merchant bankers offer all these services to their clients.
Merchant bankers offer customized solutions to their clients’
financial problems. Financial structuring includes determining
the right debt-equity ratio and the framing of appropriate
capital structure theory.
12. Money Market Operation: Merchant bankers deal with and
underwrite short-term money market instruments, such as:
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i. Government Bonds.
ii. Certificate of deposit issued by banks and financial
institutions.
iii. Commercial paper issued by large corporate firms.
iv. Treasury bills issued by the Government (Here in India by
RBI).
13. Leasing Services: Merchant bankers also help in leasing
services. Lease is a contract between the lessor and lessee,
whereby the lessor allows the use of his specific asset such
as equipment by the lessee for a certain period. The lessor
charges a fee called rentals.
14. Management of Interest and Dividend: Merchant bankers help
their clients in the management of interest on debentures /
loans, and dividend on shares. They also advise their client
about the timing (interim / yearly) and rate of dividend.
15. Loan Syndication: Merchant bankers arrange to tie up loans
for their clients. This takes place in a series of steps.
Firstly, they analyze the pattern of the client’s cash flows,
based on which the terms of the borrowings can be defined.
Then the merchant banker prepares a detailed loan memorandum,
which is circulated to various banks and financial
institutions and they are invited to participate in the
syndicate. The banks then negotiate the terms of lending on
the basis of which the final allocation is done.
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MERCHANT BANKERS: REGULATIONSAccording to the book "Financial Services," major merchant
banking guidelines were first established in 1990, with SEBI
amendments being introduced after the Securities and Exchange
Board of India Act in 1992.
The guidelines require that all merchant bankers must have
experience in finance, law or business management, as well as
adequate office space, equipment and manpower to provide
service of a professional calibre. Sufficient manpower is
considered to be at least two persons with proficiency in
merchant banking.
According to the 1992 guidelines, merchant bankers were
classified into one of four categories: management,
consulting, advising or underwriting.
In 2007, however, a merchant banker's role became more
restricted and was limited to buying, selling or advising on
investment securities. A merchant banker must file a separate
registration for underwriting and portfolio manager
privileges.
Further, a merchant banker cannot perform functions typical to
a retail bank, such as accepting deposits or leasing, but must
involve itself only in matters directly related to the capital
market.
The SEBI oversees all aspects of merchant banking and may
suspend or revoke a merchant banker's status if guidelines or
laws are violated.
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Merchant bankers must submit quarterly reports detailing all
transactions, including the names of involved companies or
parties and the transaction amount. Transactions involving
more than $21 million (as of 2007, converted from Indian
Rupees) may be handled by a maximum of five lead managers. In
addition, corporate bodies and other parties must be aware of
mutual rights, liabilities and obligations before finalizing
any transaction.
The SEBI also monitors merchant banking employees by mandating
that information about each employee be submitted for entry
into an SEBI-managed database.
Registration:The merchant banking activity in India is governed by SEBI
(Merchant Bankers) Regulations, 1992. Registration with SEBI
is mandatory to carry out the business of merchant banking in
India. An applicant should comply with the following norms:
1. The applicant should be a corporate body.
2. The applicant should not carry on any business other than
those connected with the securities market.
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3. The applicant should have necessary infrastructure like
office space, equipment, manpower, etc.
4. The applicant must have at least two employees with prior
experience in merchant banking.
5. Any associate company, group company, subsidiary or
interconnected company of the applicant should not have
been a registered merchant banker.
6. The applicant should not have been involved in any
securities scam or proved guilt for any offence.
7. The applicant should have a minimum net worth Rs50
million.
Merchant bankers are compulsory registered with the SEBI to
carry out their activities. They fall in four categories.
1. Category I merchant bankers carry on any activity
relating to issue management, i.e. preparation of
prospectus and other information relating to the issue,
determining financial structure, tie-up of financiers and
final allotment of securities and refund of the
subscription. They can also act as advisor, consultant,
manager, underwriter or portfolio manager.
2. Category II merchant bankers can act as advisor,
consultant co-manager, underwriter, portfolio manager.
3. Category III merchant bankers can act as an underwriter,
advisor and consultant to an issue. Thus, only Category I
merchant bankers can act as lead managers to an issue.
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Capital Adequacy Requirement: A merchant banker is granted recognition by the SEBI in
different categories on the basis of capital adequacy norms in
terms of its net worth comprising of paid-up capital and free
reserves. The minimum net worth requirements for each category
is:
1. Rs 5 crore (Category I),
2. Rs 0.5 crore (Category II),
3. Rs 0.2 crore (Category III) and
4. For Category IV nil.
Apart from minimum capital requirement, the merchant bankers
are expected to have the necessary infrastructure like
adequate office space, equipment and manpower to effectively
discharge their activities. They should employ at least two
persons with experience to conduct merchant banking business;
they should not be involved in any litigation connected with
the securities market, have professional qualification in
finance, law or business management and, finally their
registration is in the interest of the investors.
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Underwriting obligations (Regulation 22)In respect of every issue to be managed, the lead merchant
banker holding a certificate under Category I shall accept a
minimum Underwriting obligation of five percent of the total
underwriting commitment or rupees twenty-five lacs, whichever
is less: [Regulation 2 (1)]
Provided that, if the lead merchant banker is unable to accept
the minimum underwriting obligation, that lead merchant banker
shall make arrangement for having the issue underwritten to
that extent by a merchant banker associated with the issue and
shall keep the Board informed of such arrangement.
The lead merchant banker, who is responsible for verification
of the contents of a prospectus or the Letter of Offer in
respect of an issue and the reasonableness of the views
expressed therein, shall submit to the Board at least two
weeks prior to the opening of the issue for subscription, a
due diligence certificate in Form C of the Regulations
(Regulation 23)
Documents to be furnished to the Board
(Regulation 24)The lead manager responsible for the issue shall furnish to
the Board, the following documents, namely: -
1. particulars of the issue;
2. draft prospectus or where there is an offer to the
existing shareholders, the draft letter of offer;
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3. any other literature intended to be circulated to the
investors, including the shareholders; and
4. Such other documents relating to prospectus or letter of
offer as the case may be.
The documents referred to in sub-regulation (1) shall be
furnished at least two weeks prior to date of filing of the
draft prospectus or the letter of offer, as the case may be,
with the Registrar of Companies or with the Regional Stock
Exchanges, or with both.
The lead manager shall ensure that the modifications and
suggestions, if any, made by the Board on the draft prospectus
or the Letter of Offer as the case may be, with respect to
information to be given to the investors are incorporated
therein.
The lead manager undertaking the responsibility for refunds or
allotment of securities in respect of any issue shall continue
to be associated with the issue till the subscribers have
received the share or debenture certificates or refund of
excess application money; (Regulation 25)
Provided that where a person other than the lead manager is
entrusted with the refund or allotment of securities in
respect of any issue, the lead manager shall continue to be
responsible for ensuring that such other person discharges the
requisite responsibilities in accordance with the provisions
of the Companies Act and the listing agreement entered into by
the body corporate with the stock- exchange. (Regulation 25)
No merchant banker or any of its directors, partner or manager
or principal officer shall either on their respective accounts
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or through their associates or relatives enter into any
transaction in securities of bodies corporate 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 26)
Every merchant banker shall submit to the Board complete
particulars of any transaction for acquisition of securities
of anybody corporate whose issue is being managed by that
merchant banker within fifteen days from the date of entering
into such transaction. (Regulation 27)
Disclosures to the Board (Regulation 28)A merchant banker shall disclose to the Board as and when
required, the following information, namely:-
1. his responsibilities with regard to the management of the
issue;
2. any change in the information or particulars previously
furnished, which have a bearing on the certificate
granted to it;
3. the names of the body corporate whose issues he has
managed or has been associated with;
4. the particulars relating to breach of the capital
adequacy requirement as specified in regulation 7;
5. Relating to his activities as a manager, underwriter,
consultant or adviser to an issue as the case may be.
Code of conduct:
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Every merchant banker has to abide by the code of conduct as
specified below:
A merchant banker in the conduct of his business has to
observe high standards of integrity and fairness in all his
dealings with his clients and other merchant bankers.
He ought to render at all times high standards of service,
exercise due diligence, ensure proper care and exercise
independent professional judgment. He has to, wherever
necessary, disclose to the clients, possible sources of
conflict of duties and interest, while providing services.
He cannot make any statement or become privy to any act,
practice unfair competition, which is likely to be harmful to
the interest of other merchant bankers or is likely to place
such other merchant bankers in a disadvantageous position in
relation to him, while competing for or executing any
assignments.
He should not make any exaggerated statement, whether oral or
written, to the client either about his qualification or his
capability to render certain services or his achievements in
regard to services rendered to other clients.
A merchant banker has always to endeavour to
(1) Render the best possible advice to the clients having
regard to the clients’ needs and the requirements and his own
professional skill; and
(2) Ensure that all professional dealings are affected in a
prompt, efficient and cost effective manner.
He should not
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(1) Divulge to other clients, press or any other party any
confidential information about his client which has come to
his knowledge; and
(2) Deal in securities of any client company without making
disclosure to the SEBI as required under the regulations and
also the board of directors of the client company.
He should endeavour to ensure that
(1) The investors are provided with true and adequate
information without making any misguided or exaggerated claims
and are made aware of attendant risks before any investment
decision is taken by them:
(2) Copies of prospectus, memorandum and related literature
are made available to the investors;
(3) Adequate steps are taken for the fair allotment of share
application and transfers, listing of securities arrangement
of underwriting/sub-underwriting, placing of issues, selection
of brokers, bankers to the issue, publicity and advertising
agents, printers, etc. In view of the overwhelming importance
of merchant bankers in the process of capital issues, it is
now mandatory that all public issues should be managed by
merchant banker(s) functioning as the lead manager(s). In the
case of right issues not exceeding Rs 50 lakh, such
appointments may not be necessary.
Responsibilities of Lead ManagersEvery lead managers has to enter into an agreement with the
issuing companies setting out their mutual rights, liabilities
and obligation relating to such issues and in particular to
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disclosures, allotment and refund. A statement specifying
these is furnished to the SEBI at least one month before the
opening of the issue for subscription. In case of more than
one lead manager, the statement has to provide details about
their respective responsibilities. A lead merchant banker
cannot manage an issue if the issuing company is his
associate. He can also not associate with a merchant banker
who does not hold a certificate of registration with the SEBI.
It is necessary for a lead manager who is Category I merchant
banker, to accept a minimum underwriting obligation of 5
percent of the total underwriting commitment or Rs 25 lakh,
whichever is less. If he is unable to do so, he has to make
arrangements for underwriting of an equal amount by a merchant
banker associated with that issue under intimation to the
SEBI.
Due Diligence Certificate: The lead manager is responsible for the verification of the
contents of a prospectus/letter of offer in respect of an
issue and the reasonableness of the views expressed in them.
He has to submit to the SEBI, at least two weeks before the
opening of the issue for subscription, a due diligence
certificate to the effect that
(1) They are in conformity with the documents/materials and
papers relevant to the issue.
(2) All legal requirements connected with the issue have fully
complied with, and
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(3) The disclosures are true, fair and adequate to enable the
investors to make a well-formed decision as to the investment
in the proposed issue.
Submission of Documents: The lead managers to an issue have to submit to the SEBI, at
least two weeks before the date of filing with the registrar
of companies/regional stock exchanges or both, particulars of
the issue, draft prospectus/letter of offer, other literature
to be circulated to the investors/ share holders and so on to
the SEBI. They have to ensure that the
modifications/suggestions made by it with respect to the
information to be given to the investors are duly
incorporated. They have to continue to be associated with the
issues till the subscribers have received the share/debenture
certificates or the refund of excess application money.
Acquisition of Shares: A merchant banker is prohibited from acquiring securities of
any company on the basis of unpublished price sensitive
information obtained during the course of any professional
assignment either from the client or otherwise. He has to
submit to the SEBI complete particulars of any acquisition of
securities of a company whose issue is being managed by him
within 15 days from the date of the transaction.
Disclosure to SEBI: As and when required, a merchant banker has to disclose to the
SEBI:
(1) His responsibilities with regard to the management of the
issue,
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(2) Any change in the information/particulars previously
furnished which have a bearing on the certificate of
registration granted to it,
(3) The names of the companies whose issues he has managed or
has been associated with
(4) The particulars relating to the breach of capital adequacy
requirements, and
(5) Information relating to his activities as manager,
underwriter, consultant or advisor to an issue.
Procedure for Inspection:The SEBI can undertake inspection of the books of accounts,
records, and documents of a merchant banker to ensure that the
books are maintained in the manner required, the provision of
the SEBI Act, rules, regulations are being complied with, and
to investigate complaints from investors/other merchant
bankers/any other person or any matter having a bearing on his
activities as a merchant banker and to investigate suo moto in
the interest of securities business/investors into the affairs
of the merchant banker.
The merchant banker has an obligation to furnish all
information called for, allow a reasonable access to the
premises, extend reasonable facility for examination of
books/records/ documents/computer data and provide copies of
the same and give all assistance to the inspecting authority
in connection with the inspection.
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CONCLUSION: NEED AND IMPORTANCE OF
MERCHANT BANKERSImportant reasons for the growth of merchant banks has been
development activities throughout the country, exerting excess
demand on the sources of fund for ever expanding industries
and trade, thus leaving a widening gap unabridged between the
supply and demand of invisible funds. All financial
institutions had experienced constrain of resources to meet
ever increasing demands for demands for funds frame corporate
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sector enterprises. In such circumstances corporate sector had
the only alternative to avail of the capital market service
for meeting their long term financial requirement through
capital issue of equity shares and debentures. Growing demand
for funds put pressure on capital market that enthused
commercial banks, share brokers and financial consultancy
firms to enter into the field of merchant banking and share
the growing capital market. As a result all the commercial
banks in nationalized and public sector as well as in private
sector including foreign banks in India have opened their
merchant banking windows and competing in this field.
Need for merchant banking is felt in the wake of huge public
saving lying untapped. Merchant banker can play highly
significant role in mobilizing funds of savers to invisible
channels assuring promising returns on investment and thus can
assist in meeting the widening demand for invisible funds for
economic activity. With growth of merchant banking profession
corporate enterprises in both private sectors would be able to
raise required amount of funds annually from the capital
market to meet the growing requirement for funds for
establishing new enterprises, undertaking expansion,
modernization and diversification of the existing enterprises.
This reinforces the need for a vigorous role to be played by
merchant banking.
In view of multitude of enactment, rules and regulation,
gridlines and offshoot press release instructions brought out
the government from time to time imposing statutory
obligations upon the corporate sector to comply with those
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entire requirement prescribed there in the need of a skilled
agency existed which could provide counselling in these
matters in a package form. A merchant banker with their skills
updated information and knowledge provide this service to the
corporate units and advice them on such requirement to be
complied with for raising funds from the capital market under
different enactment viz. companies act, income tax act,
foreign exchange regulation act, securities contracts
corporate laws and regulations.
Merchant bank advice the investors of the incentives available
in the form of tax relief, other statutory relaxation, good
return on investment and capital appreciation in such
investment to motivate them to invest their savings securities
of the corporate sector. Thus merchant banks help industries
and trade to rise and the investors to invest their saved
money in sound and healthy concern with confidence, safety and
expectation for higher yields. Finance is the backbone of
business activities. Merchant banker make available finance
for business enterprises acting as intermediaries between them
raising demand for funds and the supplies of funds besides
rendering various other services.
The following are some of the reasons why specialist merchant
bank have a crucial role to play in India.
1. Growing complexity in rules and procedures of the
government.
2. Growing industrialization and increase of technologically
advanced industries.
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3. Need for encouragement of small and medium
industrialists, who require specialist services.
4. Need to develop backward areas and states which require
different criteria.
5. Exploring the possibility of joint ventures abroad and
foreign market.
6. Promoting the role of new issue market in mobilizing
saving from where merchant banks function as an
independent wing or as subsidiary of various
private/central governments/ state government financial
institution. Most of the financial institution in India
is in public sector and therefore such setup plays a role
on the lines of governmental priorities and policies.
BIBLIOGRAPHY
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http://kannanpersonal.com/content/stock/intermediary/merchant-
banker2.html
http://www.citeman.com/5557-responsibilities-of-lead-managers.html
http://shodhganga.inflibnet.ac.in/bitstream/10603/3566/11/11_chapter
%204.pdf
http://www.citeman.com/5558-obligations-and-responsibilities-of-merchant-
banks.html
http://www.indianmba.com/Faculty_Column/FC537/fc537.html
http://yehseeyes.blogspot.com/2010/08/merchant-bankers-regulation-
amendment.html
http://www.ehow.com/list_6948373_sebi-regulations-merchant-banking.html
http://www.ehow.com/facts_7518645_sebi-code-conduct.html
http://www.asialaw.com/Article/1988860/Channel/16958/Merchant-
Banking.html
http://shodhganga.inflibnet.ac.in/bitstream/10603/3566/10/10_chapter
%203.pdf
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