merchant banking

Merchant Banking

Merchant banking, although a non-banking financial activity, resembles

banking function. The functions of merchant banking which originated, and grew in

Europe, was enriched by American patronage, and these services are now being

provided throughout the world by both banking and non-banking institutions. The

word “Merchant Banking” originated among the Dutch and the Scottish traders, and

was later on developed and professionalized in Britain.

Definition:

A set of functions and services rendered by a merchant banker may be

termed as ‘merchant banking’.

1. According to Random House Dictionary, “merchant bank is an organisation

that underwrites securities for corporations, advises such clients on mergers and is

involved in the ownership of commercial ventures. These organizations are

sometimes banks which are not merchants and sometimes which are not banks and

sometimes houses which bare neither merchants nor banks.

2. According to Charles P. Kindleburger, “merchant banking is the

development of banking from commerce which frequently encountered a prolonged

intermediate stage known in England originally as merchant banking”.

3. According to the Securities and Exchange Board of India (Merchant

Bankers) Rules, 1992, management either by making arrangements regarding

selling , buying or subscribing to securities or acting as manager, consultant,

adviser or rendering corporate advisory services in relation to such issue

management”

Merchant Bankers

A set of financial institutions that are engaged in providing specialist services,

which generally include the acceptance of bills of exchange, corporate finance,

portfolio management and other banking services, are known as “merchant

bankers’. It is not necessary for a merchant banker to carry out all the above-

mentioned activities. A merchant banker may specialize in one activity, and take u

other activities, which may be complementary or supportive to the specialized

activity.

Functions

Merchant banking being a service oriented industry renders the same

services in India as merchant banks in UK and other European countries. In the U.S.,

investment bankers cater to the needs of business enterprises carrying out

merchant banking functions. Merchant banks in India carry out the following

functions and services:

1. Corporate Counseling

2. Project Counseling

3. Pre-investment Studies

4. Capital Restructuring

5. Credit Syndication and Project Finance

6. Issue Management and Underwriting

7. Portfolio Management

8. Working Capital Finance

9. Acceptance Credit and Bill Discounting

10. Mergers, Amalgamations and Takeovers

11. Venture Capital

12. Lease Financing

13. Foreign Currency Finance

14. Fixed Deposits Broking

15. Mutual Funds

16. Relief to Sick Industries

17. Project Appraisals

A brief description of these functions is presented below:

I. Corporate Counseling

Corporate counseling refers to a set of activities that is undertaken to ensure

efficient running of a corporate enterprise at its maximum potential through

effective management of finance. It aims at rejuvenating old-line companies and

ailing units, and guiding existing units in locating areas/ activities of growth and

diversification.

A merchant banker, as a managerial economist, guides the client on aspects

of organizational goals, locational factors, organization size and operational scale,

choice of product and market survey , forecasting for a product, cost reduction and

cost analysis, allocation of resources, investment decisions, capital management

and expenditure control pricing methods and marketing strategy, etc. As a financial

and investment expert, a capital management, financial requirements and sources

of finance, evaluating financial alternatives, rate of return and cost of capital,

besides providing basic corporate services such as financial rearrangement,

reorganization, mergers and acquisitions, etc.

Following are the activities which form part of corporate counseling:

1. Providing guidance in areas of diversification based on the government’s

economic and licensing policies.

2. Undertaking appraisal of product lines, analyzing their growth and

profitability and forecasting future trends.

3. Rejuvenating old-line companies and ailing sick units by appraising their

technology and process, assessing their requirements and restructuring their

capital base.

4. Commissioning of diagnostic studies

5. Assessment of the revival prospects and planning for rehabilitation through

modernization and diversification and revamping of the financial and organizational

structure.

6. Arranging for the approval of the financial institutions/bank for schemes of

rehabilitation involving financial relief, etc.

7. Providing assistance in getting soft loans from financial institutions for

capital expenditure and the requisite credit facilitates from the bank.

8. Monitoring of rehabilitation schemes.

9. Exploring possibilities for takeover of sick units and providing assistance in

making consequential arrangements and negotiations with financial

institutions/authorities involved.

2. Project Counseling

Project counseling is a part of corporate counseling, and relates to project

finance. It broadly covers the study of the project, offering advisory assistance on

the viability and procedural steps for its implementation.

Following are the activities forming part of the Project counseling:

1. Undertaking the general review of the project ideas/project profile.

2. Providing advice on procedural aspects of project implementation

3. Conducting review of technical feasibility of the project on the basis of the

project prepared by own experts or by outside consultants.

4. Assisting in the selection of a Technical Consultancy Organization (TCO) for

preparing project reports and market surveys, or review of the project reports or

market survey reports prepared by TCO

5. Assisting in the preparation of the project report from a financial angle,

advising and acting on various procedural steps including obtaining government

consents for implementation of the project

6. Assisting in obtaining approvals/licenses/permissions/grants, etc from

government agencies in the form of letter of intent, industrial license, DGTD

registration, and the government approval for foreign collaboration.

7. Providing guidance to Indian entrepreneurs for making investment in

Indian projects in India and in Indian joint venture overseas.

8. Identification of potential investments avenues

9. Carrying out precise capital structuring and shaping the pattern of

financing

10. Arranging and negotiating foreign collaborations, amalgamations,

mergers and takeovers.

11. Undertaking financial study of the project and preparation of viability

reports to various national financial institutions, state level institutions and banks.

12. Providing assistance in the preparation of project profiles and feasibility

studies based on preliminary project ideas, covering the technical, financial and

economic aspects of the project from the point of view of their acceptance by

financial institutions and banks

13. Advising and assisting clients in preparing applications for financial

assistance to various national financial institutions, state level institutions, banks,

etc.

14. Assisting clients in preparing applications for obtaining letters of intent,

industrial license, DGTD registrations etc.

15. Providing assistance in seeking approvals from the government of India

for foreign technical and financial collaboration agreements, guidance on

investment opportunities for entrepreneurs coming to India

3. Pre-investment studies

Activities that are connected with making a detailed feasibility exploration to

evaluate alternative avenues of capital investment in terms of growth and profit

prospects are called ‘pre-investment studies. Some of these activities are as

follows:

1. Carrying out an in-depth investigation of environment and regulatory

factors, location of raw material supply, demand projections and financial

requirements in order to assess the financial and economic viability of a given

project

2. Helping the client in identifying and short listing those projects which are

built upon the client’s inherent strength with a view to accentuate corporate

profitability and growth in the long run

3. Conducting such studies as maybe required for foreign companies wishing

to participate in joint ventures in India

4. Offering a package of services, including advice on the extent of

participation, government regulatory factors and an environmental scan of certain

industries in India.

4. Capital restructuring services

Activities that are carried out to assist projects in achieving their maximum

potential through effective capital structuring and to suggest various strategies to

wide3n and restructure the capital base diversify operations and implement

schemes for amalgamations, merger or change in business status are collectively

known as Capital restructuring services.

Under the gamut of Capital restructuring services, merchant bankers provide

advice to companies governed by FERA on disinvestments to their maximum

advantage, and restructuring the capital for ailing or sick units. Capital

restructuring is undertaken by analyzing the capital structure ratios, asset

restructuring ratios and the debt service coverage with overall impact on fund

generating capacity of the client corporate unit.

Following are the services covered:

1. Examining the capital restructuring services of the client and the company

to determine the extent of capitalization required.

2. Preparing a comprehensive memorandum for the Controller of Capital

Issues, and securing consent where the capitalization takes place.

3. Suggesting an alternative capital structure conforming to legal

requirements, viz, extent of capitalization of reserve and quantum of

disinvestments by ‘offer for sale’ and/or fresh issues of corporate securities such as

equity share, and preference share in case of FERA companies

4. Preparing a memorandum covering valuation of shares and justifying the

level of premium applied for

5. Critically examining tax implications where the proposal involves offer for

sale.

6. Suggesting the ideal capital restructuring fir sick units and advising the

client companies on the ‘extent and means of bringing fresh capital into business’.

7. Capital restructuring may cover mergers, takeovers and amalgamations,

involving modernization or diversification of the existing production systems and

the units.

5. Credit syndication

Activities connected with credit procurement and project financing, aimed at

raising Indian and fore I g n currency loans from banks and financial institutions, are

collectively known as ‘credit syndication’

Activities covered under credit syndication are as follows:

1. Estimating the total cost of the project to be undertaken

2. Drawing up a financial plan for the total project cost which conforms to the

requirements of the promoters and their collaborators, financial institutions and

banks, government agencies and underwriters

3. Preparing loan application for financial assistance from term

lenders/financial institutions/banks, and monitoring their progress, including pre-

sanction negotiations

4. Selecting institutions and banks for participation in financing

5. Follow-up of term loan application with the financial institutions and banks,

obtaining the approval for their respective share of participation

6. Arranging bridge finance

7. Assisting in completions of formalities for drawing of term finance

sanctioned by institutions expediting legal documentation formalities, drawing up

agreements etc as prescribed by the participating financial institutions and banks

8. Assessing working capital requirements

It is to be noted that loan syndication services overlap with those of project

counseling and project finance. In practice, banks and financial institutions

undertake wide ranging functions, such as preparing the applications for financial

assistance from financial institutions/banks, monitoring their progress including the

pre-sanction negotiations, post-sanction negotiation/liaisons with the term lenders,

completing the formalities for drawing the sanctioned loan amount, and assisting in

the final disbursal of the sanctioned loan amount in rupee or foreign currencies.

6. Issue Management and Underwriting

Issue management and underwriting connotes activities that are concerned

with the management of the public issues of corporate securities, viz. equity

shares, preference shares, and debentures or bonds, and are aimed at mobilization

of money from the capital market.

Following are some of the popular services provided by merchant bankers in

this regard:

1. Preparation of an action plan

2. Preparation of budget for the total expenses for the issues

3. Preparation of CCI application and assisting in obtaining

consent/acknowledgement

4. Drafting of prospectus

5. Selection of institutional and broker underwriters for

syndication/underwriting arrangements

6. Selection of Issue Houses and advertising for undertaking pre and post-

issue publicity

7. Obtaining the approval of institutional underwriters and stock exchange for

publication of the prospectus

8. Making arrangements for designing and printing of prospectus and

application forms, as well as their dispatch, if necessary

9. Providing assistance in launching the issue in the form of advertising

campaigns by holding press, brokers and investors conferences, etc.

10. Coordination with the underwriters, brokers and bankers to the issue, and

the stock exchanges.

11. Providing advice on the design of a sound capital structure, acceptable to

financial to financial institutions

12. Determining the quantum, terms and timing of the public issue of

different forms of securities, the extent and sources, loan finance and deployment

of internal resources etc in compliance with the requirements of the Companies

Act/Stock Exchanges, etc

13. Arranging for Stock Exchange clearances and listing of securities

14. Liasioning and coordinating with various constituents of the public isse to

make the function of issue management successful

7. Portfolio Management

Making decisions relating to the investment of the cash resources of a

corporate enterprise in marketable securities by deciding the quantum, timing and

the type of security to be bought, is known as ‘Portfolio Management’. It involves

making the right choice of investment, aimed at obtaining an optimum investment

mix, taking into account factors such as the objectives of the investment, tax

bracket of the investor, need for maximizing yield and capital appreciation, etc.

The services covered are as follows:

1. Undertaking investment in securities

2. Undertaking investment for non-resident Indians, on both repatriation and

non-repatriation basis

3. Undertaking review of Provident fund Investment, Trust investment, etc

4. Safe custody of securities in India and overseas

5. Collection of return on investment and re-investment of the same in

profitable avenues, investment advisory services to the investors and

other related services on selection of investments

6. Providing advice on selection of investments

7. Carrying out a critical evaluation of investment portfolio

8. Securing approval from RBI for the purchase /sale of securities(for NRI

clients)

9. Maintaining investment records and complying with ceiling requirements

10. Collecting and remitting interest and dividend on investment

11. Providing tax counseling and filing tax returns through tax consultants

8. Working Capital Finance

The finance required for meeting the day-to-day expenses of an enterprise is

known as ‘Working Capital Finance”. Merchant Bankers undertake the following

activities as part of providing this type of finance:

1. Assessment of working capital requirements

2. Preparing the necessary application to negotiations for the sanction of

appropriate credit facilities

3. Providing assistance in negotiations with all banks, and suggesting a sharing

pattern of credit limits amongst participating banks, where more than one

bank is involved.

4. Assisting coordinating and expediting documentation and other formalities for

disbursement

5. Advising on the issue of debentures for augmenting long-term requirements

of working capital

9. Acceptance Credit and bill Discounting

Activities relating to the acceptance and the discounting of bills of exchange,

besides the advancement of loans to business concerns on the strength of such

instruments, are collectively known as ‘Acceptance Credit and Bill Discounting’. Bill

accepting and discounting are an integral part of the developed merchant market.

In order that the bill accepting and discounting takes place on sound lines, it

is imperative that the firms involved command a good reputation and financial

standing. Further, collecting credit information and rating the credit-worthiness of

the parties concerned are very much a part of this function. In developed money

markets like London and New York, there are specialized agencies, such as discount

houses and acceptances houses, that play an active role in the promotion of this

function. In India, RBI takes special care in developing the bill market.

10. Merger and Acquisition

This is a specialized service provided by the merchant banker who arranges

for negotiating acquisitions and mergers by offering expert valuation regarding the

quantum and the nature of consideration, and other related matters.

The various functions that form part of this activity are as follows:

1. Undertaking management audits to identify areas of corporate strength and

weakness in order to help formulate guidelines and directions for future

growth.

2. Conducting exploratory studies on a global basis to locate overseas markets,

foreign collaboration and prospective joint ventures associates

3. Examining the pros and cons of proposals and formulating schemes for

financial reconstruction, merger and acquisition

4. Obtaining approvals from the shareholders, depositories, creditors,

government and other authorities.

5. Monitoring the implementation of merger and amalgamation schemes

6. Identifying organizations with matching characteristics

7. Assisting in the compliance of legal requirements, obtaining consent from

various authorities, etc by coordinating with solicitors, accountants, valuators

and other professional experts involved in the task

8. Advising on capital reorganization of business enterprises

Merchant bankers provide advice on acquisition propositions after careful

examination of all aspects, viz., financial statements, articles of associations,

provisions of companies act, rules and guidance of trade chambers, the issuing

house associations, etc.

There are many reasons for the recent trend towards mergers and

amalgamations, such as:

1. Existence of excess unused manufacturing capacity of the purchasing

company, which can be utilized efficiently by taking over other units.

2. Lack of manufacturing space with the purchase company. The best solution

may be to buy the controlling interest in another company having excessive

manufacturing space or capacity.

3. Advantages of economics of scale, viz. bulk buying and joint-selling,

particularly the possibility of reduced sales promotion expenses may cause a

takeover bid in a horizontal merger of enterprises in a similar trade.

4. Benefit of vertical integration attracts a takeover bid by a company which is a

supplier to customers who are making larger profits, so that the group as a

whole can reap the benefits.

11. Venture financing

A specially designed capital, as a form of equity financing for funding high-

risk and high reward projects, is known as ‘Venture Capital’. The concept of venture

capital originated in the USA in the 1950’s, when business magnates like

Rockfeller financed new technology companies. The concept became more popular

in the sixties and the seventies, when several private enterprises undertook the

financing of high-risk and high reward projects. In India, venture capital companies

have largely contributed to the technological and industrial revolution.

A large number of Indian and international companies are engaged in venture

capital funding for high technology and high risk projects. A number of leading

national development financial institutions such as IFCI, IDBI and ICICI are engaged

in venture capital financing, and have developed a number of special schemes for

this purpose.

12. Lease Financing

A merchant banking activity whereby financial activities are provided to

companies that undertake leasing, is known as ‘Lease Financing’. Leasing involves

letting out assets on lease for a particular time period for use by the lessee.

Leasing provides an important alternative source of financing capital outlay. Lease

financing benefits both the lessor and the lessee.

Following are the important services provided in regard to leasing:

1. Providing advice on the viability of leasing as an alternative source for

financing capital investment projects.

2. Providing advice on the choice of a favorable rental structure.

3. Providing assistance in establishing lines of lease for acquiring capital

equipment, including preparation of proposals, documentation, etc.

In India, leasing is a non-banking financial activity, undertaken by leading

development financial institution like ICICI, IDBI and IFCI. Commercial banks also

provide lease financing by forming subsidiaries under the amended Banking

Regulations Act of 1949.

13. Foreign Currency Financing

The finance provided to fund foreign trade transactions is called ‘Foreign

Currency Finance’. The provision of foreign currency finance takes the form of

export-import trade finance, euro currency loans, and Indian Joint Ventures abroad

and foreign collaborations. The main areas that are covered in this type of

merchant activity are as follows:

1. Providing assistance for carrying out the study of turnkey and construction

contract jobs

2. Arranging assistance in application to working groups, liaison with RBI, ECGD

and other institutions

3. Arranging for the syndication of various types of guarantees, letters of credit

pre-shipment credit deferred post-shipment credit, bridge loans, and other

credit facilities

4. Providing assistance in opening and operating bank accounts abroad

5. Arranging foreign currency loans under buyer’s credit scheme for importing

goods

6. Arranging deferred payment guarantees under suppliers credit schemes for

importing capital goods

7. Providing assistance in obtaining export credit facilitates from the EXIM bank

for export of capital goods, and arranging for the necessary government

approvals and clearance

8. Undertaking negotiations for deferred payment, export payment, export

finance, buyers credit, documentary credits and other foreign exchange

services like packing credit, etc.

9. Providing guidance on forward cover for exchange risk

10. Assisting in arranging foreign currency guarantees and performance

bonds for exporters

14. Brokering Fixed Deposits

Following are the services rendered by merchant bankers in this regard:

1. Computation of the amount that could be raised by a company in the form of

deposits from the public and loams from shareholders.

2. Drafting of advertisements for inviting deposits

3. Filing a copy of advertisement with the Registrar of Companies for

registration

4. Arranging for the issue of advertisement in newspapers, as required by the

Companies Act

5. Drafting and printing of application forms

6. Making arrangements for the collection of deposits at the bank branches

7. Submission of periodical statements to companies concerned

8. Making arrangement for payment of interest amounts

9. Providing advice to the company on the terms and conditions of fixed

deposits, and deciding on the appropriate rate of interest, keeping in view the

prevailing capital and money market conditions

10. Helping the company to observe all the rules and regulations in this

connection

11. Assisting in maintenance of records and registers for the purpose

Assistance in provided under Sec.58 (A) of the Companies Act, 1956 and the

rules there under.

15. Mutual Funds

Institutions and agencies that are engaged in the mobilization of savings of

innumerable investors for the purpose of channeling them into productive

investments of a wide variety of corporate and other securities are called “Mutual

Funds”. UTI is the first and the largest mutual fund in the country. The mutual fund

industry has a large number of players, both in the public as well as the private

sector. Commercial banks are also making rapid strides in the realm of mutual

funds business.

Some of the services rendered by Mutual Funds are as follows

1. Mopping up public savings

2. Investing the funds in a diversified portfolio of shares and debentures

belonging to well managed and growing companies

3. Earning investors a steady return on investments with an assurance of capital

appreciation0

4. Engaging in the business of acquisition, holding or disposable of securities

5. Making investments in any commercial paper floated by the central Govt.,

RBI, any local authority, any foreign govt., foreign bank, or any other

authority outside India and approved by RBI.

16. Relief to Sick industries

Merchant Bankers extend the following services as part of providing relief to

sick industries:

1. Rejuvenating old-lines and ailing units by appraising their technology and

process, assessing their requirements and restructuring their capital base

2. Evolving rehabilitation packages which are acceptable to financial institutions

and banks

3. Exploring the possibilities of mergers/amalgamations, wherever called for

4. Assisting in obtaining approvals from the Board for Industrial and Financial

Reconstruction and other authorities under the Sick Industrial Companies

(Special Provisions) Act, 1985

5. Monitoring the implementation of rehabilitation schemes, mergers and/or

amalgamations

17. Project Appraisal

The evaluation of industrial projects in terms of alternative variants in

technology, raw materials, production capacity, and location of plant is known as

‘Project Appraisal’. Project evaluation is indispensable because resources are scarce

and alternative opportunities exist in terms of projects for commitment of

resources. Project selection can be rational only if it is superior to others

commercially or important to the nation as a whole. The various steps in a project

appraisal are:

Financial appraisal

Financial appraisal involves assessing the feasibility of a new proposal for

setting up a new project or the expansion of existing production facilities.

Financial appraisal is done in order to gauge the viability of the project, as well

as to rank projects on the basis of their profitability. It may be noted that

financial appraisal is concerned with the measurement of profitability of the

project without reference to the source of finance. While appraising a project,

the direct benefits and costs that are associated with the project are estimated

at the prevailing market prices.

Financial appraisal is undertaken through an analysis which takes into

account the financial features of the project, including sources of financing.

Financial analysis helps trace the smooth operation of the project over its entire

life cycle. The two major aspects of financial analysis are liquidity analysis and

capital structure analysis, for which ratios are employed. Liquidity ratios

measure a project’s ability to meet its short-term obligations. Capital structure

analysis is done to assess long term solvency, i.e., the project’s ability to meet

long-term commitments to creditors.

Technical Appraisal

Technical appraisal is primarily concerned with the project concept in

terms of technology, design, scope and content of the plant, as well as inputs

and infrastructure facilities envisaged for the project. Basically, the project

should be able to deliver a marketable product from the resources deployed, at

a cost which would leave a margin that would be adequate to service the

investment, and also plough back a reasonable amount into the project to

enable the enterprise to consolidate its position.

Economic Appraisal

Economic appraisal of a project deals with the impact of the project on

economic aggregates. These may be classified under two broad categories. The

first deals with the effect of the project on employment and foreign exchange,

and the second deals with the impact of the project on net social benefits or

welfare.

Regulatory Framework on Merchant Banking

The SEBI has brought about a number of regulative measures for the purpose

of disciplining the functioning of the merchant bankers in India. The objective is to

usher in an era of regulated financial markets and thereby pave way for the

development of the capital market in India. The measures were introduced by the

SEBI in the year 1992. The measures were revised by SEBI in 1997. Te salient

features of the regulative framework of merchant banking in India are described as

follows:

SEBI Regulations:

I. Registration of Merchant Bankers

The relevant guidelines with regard to the registration of merchant bankers are

as follows:

Application for Grant of Certificate

An application by a person for grant of a certificate shall be made to the

Board in Form A. The application shall be made for any one of the following

categories of the merchant banker namely:

Category I: To carry on an activity of the issue management, which will

inter-alia consist of preparation of prospectus and other information

relating to the issue, determining financial structure, tie-up of financers

and final allotment and refund of the subscription: and to act as adviser,

consultant, manager, underwriter, portfolio manager.

Category II: To act as adviser, consultant, co-manager underwriter,

portfolio manager.

Category III: to act as an underwriter, adviser, consultant, co-manager,

underwriter, portfolio manager

Category IV: To act only as adviser or consultant to an issue.

With effect from 9th December, 1997 an application can be made only for

carrying on the activity mentioned in category I. An application can carry on the

activity as underwriter only if he obtains certificate of registration under the

provisions of Securities and Exchange Board of India Regulations, 1993.

Conformance to Requirements

Subject to the provisions of the regulations, any application, which is not

complete in all respects and does not conform to the instruction specified In the

form, shall be rejected. However, before rejecting any such application, the

applicant will be given an opportunity to remove within the time specified such

objections as may be indicated by the Board.

Furnishing of Information

The Board may require the applicant to furnish further information or

clarification regarding matters relevant to the activity of a merchant banker for

the purpose of disposal of the application. The applicant or its principal officer

shall, if so required, appear before the Board for personal representation.

Consideration of Application

The Board shall take into account for considering the grant of a certificate all

matters, which are relevant to the activities relating to merchant banker and in

particular whether the applicant complies with the following requirements:

That the applicant shall be a body corporate other than a non-banking

financial company as defined under clause(f) of section 45-I of the Reserve

Bank of India Act, 1934, 92 of 1934) as amended from time to time:

That the merchant banker who has been granted registration by the

Reserve Bank of India to act as a Primary or Satellite Dealer may carry on

such activity subject to the condition that it shall not accept or hold public

deposit

That the applicant has the necessary infrastructure like adequate office

space, equipments, and manpower to effectively discharge his activities

That the applicant has in his employment minimum of two persons who

have the experience to conduct the business of the merchant banker.

That a person directly or indirectly connected with the applicant has not

been granted registration by the Board

That the applicant fulfils the capital adequacy requirement as specified in

the relevant

That the applicant, his partner, director, partner or principal officer is not

involved in any litigation connected with the securities market which has

an adverse bearing on the business of the applicant

That the applicant, his director partner or principal officer has not at any

time been convicted for any offence involving moral turpitude or has been

found guilty of any economic offence.

That the applicant has the professional qualification from an institution

recognized by the government in finance, law or business management:

That the applicant is a fit and proper person

That the grant of certificate to the applicant is in the interest of investors.

Capital adequacy Requirement

According to the regulations, the capital adequacy requirement shall not be

less that the net worth of the person making the application for grant of

registration. For this purpose, the net worth shall be as follows

Category Minimum Requirement

Category I Rs. 5, 00, 00,000

Category II Rs. 50, 00,000

Category III Rs. 20, 00,000

Category IV Nil

For the propose of this regulation “net worth” means in the case of an

applicant which is a partnership firm or a body corporate, the value of the capital

contributed to the business of such firm or the paid up capital of such body

corporate plus free reserves as the case may be at a time of making application.

Procedure for Registration

The Board on being satisfied that the applicant is eligible shall grant a

certificate in Form B. On the grant of certificate the applicant shall be liable to pay

the fees in accordance with Schedule II.

Renewal of Certificate

Three months before the expiry of the certificate, the merchant banker, may

if he so desires, makes an application for renewal in Form A. The applicant for

renewal shall be dealt with in the same manner as if it were a fresh application for

the grant of certificate. In case of an application for renewal of certificate of

registration the provision of clause (a) of regulation 6 shall not e applicable up to

June 30th, 1998. The Board on being satisfied that the applicant is eligible for

renewal certificate shall grant a certificate in Form B and send intimation to the

applicant. On the grant of a certificate the applicant shall be liable to pay the fees

in accordance with Schedule II.

Procedure where Registration is not Granted

Where an application for grant of a certificate under regulation 3 or of

renewal under regulation 9, does not satisfy the criteria set out in regulation 6, the

Board may reject the application after giving an opportunity of being heard. The

refusal to grant of registration shall be communicated by the board within thirty

days of refusal to the applicant stating therein the grounds on which the application

has been rejected.

Any applicant may, being aggrieved by the decision of the Board, under sub-

regulation (1), apply within a period of thirty days from the date of receipt of such

intimation to the Board for reconsideration of decision. The Board shall reconsider

an application made under sub-regulation (3) and communicate its decision as soon

as possible in writing to the applicant.

Effect of Refusal to Grant Certificate

Any merchant banker whose application for a certificate has been refused by

the Board shall on and from the date of the receipt of the communication under

sub-regulation (2) of regulation 10 cease to carry on the activity as a Merchant

Banker.

Payment of Fees

Every applicant eligible for grant of a certificate shall pay such fees in such

manner and within the period specified in Schedule II. Where a merchant banker

fails to pay the annual fees as provided in sub-regulation (1), read with Schedule II,

the Board may suspend the registration certificate, whereupon the merchant

banker shall cease to carry on any activity as a merchant banker for the period

during which the suspension subsists.

General Obligations

The 1992 SEBI Regulations have enunciated the following general obligations

and responsibilities for the merchant bankers:

Sole Function

Every merchant Banker shall abide by the code of conduct as specified

in Schedule III. They are as follows:

Merchant Banker not to associate with any business other than that of the

securities market.

No merchant banker, other than a bank or a public financial institution,

who has been granted a certificate of registration under these regulation,

shall after June 30th, 1998 carry on any business other than that in the

securities market.

However, a merchant banker who prior to the date of notification of the

Securities and Exchange Board of India (Merchant Bankers) Amendment

Regulations, 1997, has entered into a contract in respect of a business

other than that of the securities market may, if he so desires, discharge his

obligations under such contract. Similarly, a merchant banker who has

been granted certificate of registration to act as primary or satellite dealer

by Reserve Bank of India may carry on such business as may be permitted

by Reserve Bank of India.

Maintenance of Books

Every merchant banker shall keep and maintain the following

books of accounts, records and documents:

A copy of balance sheet as at the end of each accounting period:

A copy of profit and loss account for that period:

A copy of the auditors report on the accounts for that period: and

A statement of financial position.

Every merchant banker shall intimate to the Board the place

where the books of accounts, records and documents are maintained, Every

merchant banker shall, after the end of each accounting period furnish to the

Board copies of the balance sheet, profit and loss account and such other

documents for any other preceding five accounting years when required by

the Board.

Every merchant banker shall furnish to the Board half-yearly

unaudited financial results when required by the Board with a view to monitor

the capital adequacy of the merchant banker.

The merchant banker shall preserve the books of accounts and

other records and documents maintained under regulation 14 for a minimum

period of five years.

Appointment on Maintenance of Lead Merchant Bankers

All issues should be managed by at least one merchant banker

functioning as the lead merchant banker. In an issue of offer of rights to the

existing members with or without the right of renunciation, the amount of the

issue of the body corporate does not exceed rupees fifty lakhs, the

appointment of a lead merchant banker shall not be essential. Every lead

merchant banker shall before taking up the assignment relating to an issue,

enter into an agreement with such body corporate setting out their mutual

right, liabilities and obligations relating such an issue and in particular to

disclosures, allotment and refund.

Restriction on appointment of Lead Managers

The number of lead merchant bankers may not, exceed in case of an

issue of the following:

Size of Issue Number of Merchant

Bankers

Less than Rs. 50 Crores Two

> Rs. 50 Crores but < Rs. 100 Crores Three

> Rs. 100 Crores but < Rs. 200 Crores Four

> Rs. 200 Crores but < Rs. 400 Crores Five

> Rs. 400 Crores Five or more as agreed

by SEBI

Responsibilities of Lead Managers

No manager shall agree to manage or be associated with any issue unless his

responsibilities relating to the issue mainly, those of disclosures, allotment and

refund are clearly defined, allocated and determined and a statement specifying

such responsibilities is furnished to the Board at least one month before the

opening of the issue for subscription. Where there are more than one lead

merchant bankers to the issue the responsibilities of each of such lead merchant

banker shall clearly be demarcated and a specifying such responsibilities shall be

furnished to the at least one month before the opening of the issue for subscription.

No lead merchant banker shall, agree to manage the issue made by any body

corporate, if such body corporate is an associate of the lead merchant banker. A

lead merchant banker shall not be associated with the issue if a merchant banker

who is not holding a certificate is associated with the issue.

Underwriting Obligations

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. If the merchant banker is unable to accept the minimum underwriting

obligation, that lead merchant banker shall keep the board informed of such

arrangement.

Submission of Due Diligence Certificate

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 therin, 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.

Documents to be Furnished to the Board

The lead manager responsible for the issue shall furnish to the Board, the

following documents:

Particulars of issue:

Draft prospectus or where there is an offer to the existing shareholders,

the draft letter of offer:

Any other literature intended to be circulated to the investors, including

the shareholders: and

Such other documents relating to prospectus or letter of offer as the case

may be.

The documents shall be furnished at least two weeks prior to date of filling

of the draft prospectus or the letter of offer, as the case may be, with

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.

Payment of Fees to the Board

The draft prospectus or draft letter of offer referred to in regulation 24 shall

be submitted along with such fees and in such manner as may be specified in

schedule IV.

Continuance of Association of Lead Manager

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 subscriptions have received the share or debenture certificates for refund of

excess application money. 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.

Acquisitions of Shares Prohibited

No merchant banker or any of its directors, partners manager or principal

officer shall either on their respective accounts 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

Information to the board

Every merchant banker shall submit to the Board complete particulars of any

transaction for acquisition of securities of any body corporate whose issue is being

managed by that merchant banker within fifteen days from the date of entering

into such transaction.

Disclosures to the Board

A merchant banker shall disclose to the board as and when required, the

following information:

His responsibilities with regard to the management of the issue;

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 issue he has managed or has

been associated with;

The particulars relating to breach of the capital adequacy requirement as

specified in regulation 7;

Relating to his as a manager, underwriter, consultant or adviser to an

issue as the case may be.

Appointment of Compliance Officer

Every merchant banker shall appoint a compliance officer who shall be

responsible for monitoring the compliance of the act, rules and regulation,

notifications, guidelines, instructions, etc, issued by the Board or the Central

Government and for redressal of investor’s grievances. The compliance officer shall

immediately and independently report to the board 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.

II. Procedure for inspection

Board’s right to inspect

The Board may appoint one or more persons as inspecting authority to

undertake inspections of the books of accounts, Records and documents of the

merchant banker for any of the purpose specified in sub-regulation 92). The

purposes referred to in sub-regulation (1) may be as follows:

To ensure that the books of accounts are being maintained in the

manner required:

To ensure that the provision of the Act, rules, regulations are being

complied with:

To investigate into the complaints received from investors, other

merchant bankers or any other person on any matter having a bearing

on the activities of the merchant banker: and

To investigate suo-moto in the interest of securities business or

investors interests in the affairs of merchant banker.

Notice before inspection

Before undertaking an inspection under regulation 29 the Board shall give a

reasonable notice to the merchant banker for that purpose. Where the Board is

satisfied that in the interest of the investors no such notice should be given, it may

by an order in writing directing that the inspection of the affairs of the merchant

banker be taken up without such notice. During the course of inspection, the

merchant banker against whom an inspection is being carried out shall be bound to

discharge his obligations as provided under regulation 31.

Obligations of Merchant Banker on inspection

It shall be the duty of every director, proprietor, partner, officer and employee

of the merchant banker, who is being inspected, to produce to the inspecting

authority such books, accounts and other documents in his custody or control and

furnish him with the statements and information relating to his activities as a

merchant banker within such time as the inspecting authority may require.

The merchant banker shall allow the inspecting authority to have reasonable

access to the premises occupied by such merchant banker or by any other person

on his behalf and also extend reasonable facility for examining any books, records,

documents and computer data in the possession of the merchant banker or any

such other person and also provide copies of documents or other materials which,

in the opinion of the inspecting authority are relevant for the purpose of the

inspection.

The inspecting authority, in the course of inspection, shall be entitled to examine

or record statements of any principal officer, director, partner, proprietor and

employee of the merchant banker. It shall be the duty of every director, proprietor,

partner, officer or employee of the merchant banker may reasonably be expected

to give.

Submission of Report to the Board

The inspecting authority shall, as soon as possible submit, an inspection

report to the Board.

Action on Inspection or Investigation Report

The Board or the chairman shall after consideration of inspection or

investigation report take such action as the Board or Chairman may deem fit and

appropriate including action under the Securities and Exchange Board of India

(Procedure for Holding Enquiry Officer and Imposing Penalty) Regulations, 2002.

Appointment of Auditor

The Board may appoint a qualified auditor to investigate into the books of

accounts or the affairs of the merchant banker. The auditor so appointed shall have

the same powers of the inspecting authority as are mentioned in regulation 29 and

the obligations of the merchant banker in regulation 31 shall be applicable to the

investigation under this regulation.

Communication of Findings

The Board shall after consideration of the inspection report communicate the

findings to the merchant banker to give him an opportunity of being heard before

any action is taken by the Board on the findings of the inspecting authority. On

receipt of the explanation if any, from the merchant banker, the Board may call

upon the merchant banker to take such measures as the Board may deem fit in

the interest of the securities market and for due compliance with the provisions of

the act, rules and regulations.

III. Procedure for action in case f default

Liability for action in case of default

A merchant Banker who fails to comp[ly with any conditions subject to

which certificate has been granted, and contravenes any of the provisions of the

Act, rules or regulations, shall be dealt with in the manner provided under SEBI

Regulations 2002.

The penalties referred to in sub-regulation (1) may be either suspension

of registration or cancellation of registration.

Suspension of registration

A penalty for suspension of registration of a merchant banker may be

imposed under the following circumstances:

where the merchant banker violates the provisions of the Act, rules or

regulations; or

where the merchant banker fails to furnish any information relating to

his activities as merchant banker as required by the Board; or furnishes

wrong or false information; or does not submit periodical returns as

required by the Board; or does not cooperate in any enquiry conducted

by the Board; or

where the merchant banker fails to resolve the complains of the

investors or fails to give a satisfactory reply to the board in this behalf;

or

where the merchant banker indulges in manipulating or price rigging or

cornering activities;

Where the merchant banker is guilty of misconduct or improper or

unbusiness-like or unprofessional conduct which is not in accordance

with the Code of Conduct specified in the Schedule III; or

Where the merchant banker fails to maintain the capital adequacy

requirement in accordance with the provision of regulation 7; or

Where the merchant banker fails to pay the fees; or

Where the merchant banker violates the conditions of registration; or

Where the merchant banker does not carry out his obligation as

specified in the regulation.

Cancellation of registration

A penalty of cancellation of registration of a merchant banker may be

imposed where:

Where the merchant banker indulges in manipulating or price rigging

or cornering activities affecting the securities market and the investors

interest:

The financial position of the merchant banker detoriates to such an

extent that the board is of the opinion that his continuance as merchant

banker is not in the interest of investors:

The merchant banker is guilty of fraud, or is convicted of a criminal

offence;

In case of repeated defaults of the nature mentioned in regulation 36

provided that the board furnishes reasons for cancellation in writing

Manner of making order of suspension or cancellation

No order of penalty of suspension or cancellation

no order of penalty of suspension or cancellation as the case may

be; shall be imposed except after holding an enquiry in accordance

with the procedure specified in regulation.

Manner of holding Enquiry before Suspension or Cancellation

For the purpose of holding an enquiry under regulation 38; the Board

may appoint an enquiry officer. The enquiry officer shall issue to the

merchant banker a notice the registered office or the principal place of

business of the merchant banker .

The merchant banker may within thirty days from the date of receipt

of such notice, furnish to the enquiry officer a reply together with copies of

document or other evidence relied on by him or sought by the Board from

the merchant banker.

The enquiry officer shall, give a reasonable opportunity of hearing to

the merchant banker may either from the merchant banker

The enquiry officer shall, give a reasonable opportunity of hearing to

the merchant banker to enable him to make submissions in support of his

reply made under sub-regulation [3]. The merchant banker may either appear

in person or through any duly authorized person. No lawyer or advocate shall

be permitted to represent the merchant banker at the enquiry . Where a

lawyer or an advocate has been appointed by the Board as a presenting

officer under sub-regulation [6] , it shall be lawful for the merchant banker

to present its case through a lawyer or advocate.

If it is considered necessary ; the enquiry officer may ask the Board to

appoint a presenting officer to present its case. The enquiry officer, after taking

into account all relevant facts and submissions made by the merchant banker,

submit a report to the Board and recommend the penalty to be imposed as also the

grounds on the basis of which the proposed penalty is justified.

Show cause Notice and Order

On receipt of the report from the enquiry officer, the Board shall consider the

same and issue a show-cause notice as to why the penalty as proposed by the

enquiry officer should not be imposed. The merchant banker shall within twenty-

one days of the date of the receipt of the show-cause send a reply to the Board.

The Board after considering the reply to the show-cause notice, if recived,

shall as soon as possible but not later than thirty-says from the receipt of the reply,

if any, pass such order as it deems fit. Every order passed under sub-regulation (3)

shall be self contained and give reasons for the conclusion stated therein including

justification of the penalty imposed by that order The Board send a copy of the

order under sub-regulation (3) to the merchant banker

Effect of Suspension and Cancellation

On and from the date of the suspension of the merchant banker he shall

cease to carry on any activity as a merchant banker during the period of

suspension. On and from the date of cancellation the merchant banker shall with

immediate effect cease to carry on any activity as a merchant banker. The order of

suspension or cancellation of certificate passed under sub-regulation (3) of the

regulation 40 shall be published in at least two daily newspapers by the Board.

Appeal to the Securities

Any person aggrieved b an order of the Board made, on and after the

commencement of the Securities Laws Act, 1999, under these regulations may

prefer an appeal to as Securities Appellate Tribunal having jurisdiction in the

master.

Fees

Every merchant banker shall pay a sum of Rupees five Lacs as registration

fees at the time of the grant of certificate by the Board. The fee shall be paid by the

merchant banker within fifteen days from the date of receipt of the intimation from

the Board under sub-regulation (1) of regulation 8. A merchant Banker to keep

registration in force shall pay renewal fee of Rs. 2.5 lacs every three years from the

fourth year from the date of initial registration. The fee shall be paid by the

merchant banker within fifteen days from the date of receipt of intimation from the

board under sub-regulation (3) of regulation (9).

The fees specified shall be payable by merchant banker by demand draft in

favor of ‘Securities and Exchange Board of India’ payable at Mumbai or at the

respective regional office.

Every Merchant Banker shall pay registration fees as set out below:

Category I merchant banker.

A sum of Rs. 2.5 Lacs to be paid annually for the first two years

commencing from the date of initial registration and thereafter for the third

year a sum of Rs. 1 lakh to keep his registration in force:

Category II merchant banker.

A sum of Rs 1 lakhs to be paid annually for the first two years


year a sum of Rs. 50000 to keep his registration in force

Category III merchant banker.

A sum of Rs 1 lakhs to be paid annually for the first two years


year a sum of Rs. 25000 to keep his registration in force.

Category IV merchant banker.

A sum of Rs 5000 to be paid annually for the first two years


year a sum of Rs. 1000 to keep his registration in force.

Renewal Fees

Category I merchant banker.

A sum of Rs 1 lakh to be paid annually for the first two years

commencing from the date of each renewal and thereafter for the third year

a sum of Rs. 20000 to keep his registration in force.

Category II merchant banker.




Category III merchant banker.




Category IV merchant banker.




In addition the merchant bankers have to pay the following fees towards

documentation:

Size of the Issue Fee per

document (Rs.)

Upto 5 crores 10000

More than 5 crores and upto 10 crores 15000




More than 500 crores 500000

IV. Code of Conduct for merchant Banker (Under Regulation

13)

A Merchant Banker shall make all efforts to protect the interests of investors.

A Merchant Banker shall maintain high standards of integrity, dignity and

fairness in the conduct of its business.

A Merchant Banker shall fulfill its obligations in a prompt, ethical, and

professional manner.

A Merchant Banker shall at all times exercise due diligence, ensure proper care

and exercise independent professional judgment

A Merchant Banker shall endeavor to ensure that enquiries from investors are

adequately dealt with: grievances of investors are redressed in a timely and

appropriate manner: where a complaint is not remedied promptly, the investor

is advised of any further steps which may be available to the investor under

the regulatory system.

A Merchant Banker shall ensure that adequate disclosures are made to the

investors in a timely manner in accordance with the applicable regulations and

guidelines so as to enable them to make a balanced and informed decision.

A Merchant Banker shall endeavor to ensure that the investors are provided

with true and adequate information without making any misleading or

exaggerated claims or any misrepresentation and are made aware of the

attendant risks before taking any investments decision.

A Merchant Banker shall endeavor to ensure that 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 of the offer.

A merchant banker shall not discriminate amongst its clients, save and except

on ethical and commercial considerations.

A Merchant Banker shall make any statement, either oral or written, which

would misrepresent the services that the Merchant Banker is Capable of

performing for any client or has rendered to any client.

A Merchant Banker shall avoid conflict of interest and make adequate

disclosure of its interest.

A merchant Banker shall put in place a mechanism to resolve any conflict of

interest situation that may arise in the conduct of its business or where any

conflict of interest arises, shall take reasonable steps to resolve the same in an

equitable manner.

A Merchant Banker shall make appropriate disclosure to the client of its

possible source or potential areas of conflict of duties and interest while acting

as Merchant Banker which would impair its ability to render fair, objective and

unbiased services.

A Merchant Banker shall always endeavor to render the best possible advice to

the clients having regard to their needs.

A Merchant Banker shall not divulge ton anybody either orally or in writing,

directly or indirectly, any confidential information about its clients which has

come to its knowledge, without taking prior permission of its clients, except

where such disclosures are required to be made in compliance with any law for

the time being in force.

A Merchant Banker shall ensue that any change In registration status/any

penal action taken by the Board or any material change in the Merchant

Banker’s financial status, which may adversely affect the interests of

clients/investors is promptly informed to the clients and any business

remaining outstanding is transferred to another registered intermediary in

accordance with any instructions of the affected clients

A Merchant Banker shall not indulge in any affair competition, such as weaning

away the clients on assurance of higher premium or advantageous offer price

or which is likely to harm the interests of the other merchant banker or the

investors or is likely to place other merchant banker in a disadvantageous

position while competing for or executing any assignment

A Merchant Banker shall maintain arms length relationship between its

merchant banking activity and any other activity.

A Merchant Banker shall have internal control procedures and financial and

operational capabilities which can be reasonably expected to protect its

operations, its clients, investors and other registered entities from financial loss

arising from theft, fraud and other dishonest acts, professional misconducts or

omissions.

A Merchant Banker shall not make untrue statement or suppress any material

fact in any documents, reports or information furnished to the board.

A Merchant Banker shall maintain an appropriate level of knowledge and

competence and abide by the provisions of the ACT, regulations made

thereunder, circulars and guidelines, which may be applicable and relevant to

the activities carried on by it.

A Merchant Banker shall ensure that the board is the promptly informed about

any action, legal proceedings etc., initiated against it in respect of material

breach or non-compliance by it, of any law, rules, regulations, directions of the

Board or of any other regulatory body.

A Merchant Banker or any of its employees 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 a disclosure of his interest

including a long or short position, in the said security has been made, while

rendering such advice.

A Merchant Banker shall demarcate the responsibilities of the various

intermediaries appointed by it clearly so as to avoid any conflict or confusion in

their job description.

A merchant banker shall provide adequate freedom and powers to its

compliance officer for the effective discharge of the compliance officer’s duties.

A Merchant Banker shall develop its own internal code of conduct for governing

its internal operations and laying down its standards of appropriate conduct for

its employees and officers in carrying out their duties. Such a code may extend

to the maintenance of professional excellence and standards, integrity,

confidentiality, objectivity, avoidance or resolution of conflict of interests,

disclosures of shareholdings and interests etc.

A Merchant Banker shall ensure that good corporate policies and corporate

governance are in place

A Merchant Banker shall ensure that any person it employs or appoints to

conduct business is fit and proper and otherwise qualified to act in th capacity

so employed or appointed.

A Merchant Banker shall ensure that it has adequate resources to supervise

diligently and does supervise diligently persons employed or appointed by it in

the conduct of its business , in respect of dealing in securities market.

A Merchant Banker shall be responsible for the acts or omissions of its

employees and agents in respect of the conduct of its business.

A Merchant Banker shall ensure that the senior management; particularly

decision makers have access to all relevant information about the business on

a timely basis.

A Merchant Banker shall not be a party to or instrumental for creation of false

market; price rigging or manipulation; or passing of unpublished price sensitive

information in respect of securities which are listed and proposed to be listed in

any stock exchange to any person or intermediary in the securities market.

SEBI Guidelines

Operational Guidelines

SEBI has pronounced the following guidelines for compliance by the eligible

merchant bankers:

1. Submission of offer document:

The offer documents of issue size up to Rs. 20 crores shall be filed by

lead merchant bankers with the concerned regional office of the Board under

the jurisdiction of which the registered office of the issuer company falls. The

jurisdiction of regional offices / head office shall be as per Schedule XXII.

According to Clause 5.6 of Chapter V of the Guidelines, the draft offer

document filed with the board shall be made public.

The lead merchant banker shall make available 10 copies of the draft

offer document o the Board and 25 copies to the stock exchange(s) where the

issue is proposed to be listed. Copies of the draft offer document shall be

made available to the public by the lead merchant bankers/ Stock Exchange.

The lead merchant banker and the Stock Exchange(s) may charge for

providing a copy of the draft offer document.

The lead merchant banker shall also submit to the board the draft offer

document on a computer floppy in the format specified in Schedule XXII. The

lead Merchant Banker shall submit two copies of the printed copy of the final

offer document to dealing offices of the Board “within three days of filing offer

document with Registrar of Companies/ concerned Stock Exchange(s) as the

case may be.”

The lead merchant banker shall submit one printed copy of the final

offer document to the Primary Market Department, SEBI, Head Office, “within

three days of filing the offer document with Registrar of companies/

concerned Stock Exchange(s) as the case may be.” The lead merchant

banker shall submit a computer floppy containing the final prospectus/ letter

of offer to the Primary Market Department, SEBI, and Head Office, as

specified in Schedule XXII within three days of filing the final prospectus /

letter of offer with the Registrar of Companies / concerned Stock Exchange.

Along with the floppy, the lead manager shall submit an undertaking to SEBI

certifying that the contents of the floppy are in HTML format, and are

identical to the printed version of the prospectus/ letter of offer filed with the

Registrar of Companies/ concerned Stock Exchange, as the case may be.

Whenever offer documents (for public/ rights, takeovers or for any other

purpose) are filed with any Department/ office of the Board, the following

details “certified as correct” shall be given by the lead merchant banker in

the forwarding letters:

a. Registration number

b. Date of Registration/ Renewal of registration

c. Date of expiry of registration

d. If applied for renewal, date of application

e. Any communication from the Board prohibiting them from acting as

a merchant banker

f. Any inquiry/ investigation being conducted by the Board

g. Period upto which registration/ renewal fees has been paid

h. Whether any promoter/ director/ group and/ or associate company of

the issuer company is a associated with securities- related business

and registered with SEBI

i. If any one or more of these persons/ entities are registered with

SEBI, their respective registration numbers

j. If registration has expired, reasons for non renewal

k. Details of enquiry/ investigation conducted by SEBI at any time

l. Penalty imposed by SEBI (Penalty includes deficiency/ warming

letter, adjudication proceedings, suspension/ cancellation/

prohibitory orders)

m. Outstanding fees payable to SEBI by these entities, if any

Offer documents not accompanied by the information as contained above

may be rejected. Lead merchant bankers shall obtain similar information from

other intermediaries to ensure that they comply with the guidelines and are

eligible to be associated with the concerned issue. The intermediaries shall also

indicate their letters that they have obtained such information from other

intermediaries.

2. Dispatch of issue material:

Lead merchant shall ensure that whenever there is a reservation for

NRIs, 10 copies of the prospectus together with 1000 application forms are

dispatched in advance of the issue opening date, directly along with a letter

addressed in person to Adviser (NRI), Indian Investment Centre, Jeevan Vihar

Building Sansad Marg, and New Delhi. Twenty copies of the prospectus and

application forms shall be dispatched in advance of the issue opening date to

the Investors Associations.

3. Underwriting:

While selecting underwriters and finalizing underwriting arrangements,

lead merchant bankers shall ensure that the underwriters do not overexpose

themselves so that it becomes difficult to fulfill their underwriting

commitments. The overall exposure of underwriter(s) belonging to the same

group or management in an issue shall be assed carefully by the lea

merchant banker. OTC Dealers registered with the Board under SEBI (Stock

Brokers and Sub-Brokers) Rules and Regulations, 1992 shall be treated at par

with the brokers of other stock exchanges in respect of underwriting

arrangement.

4. Compliance obligations:

The merchant banker shall ensure compliance with the following post-

issue obligations:

a. Association OF RESOURCE PERSONEL In terms of Clause 7.1 of Chapter VII

of these Guidelines, in case of over-subscription in public issues, a Board

nominated public representative shall be associated in the process of

finalization of the basis of allotment. The lead merchant banker shall

intimate to the person so nominated the date, time, venue etc regarding

the process of finalization of the basis of allotment.

The expenses of the public representatives associated in the allotment

process of oversubscribed issues shall be borne by the lead merchant

bankers, and recovered from the issuers. Honorarium at a minimum of Rs.

500/- per day, plus normal conveyance charges shall be paid to them, and

the Board Regional Managers at New Delhi, Chennai and Calcutta shall be

associated with them.

b. Redressal of investor grievances The merchant bankers shall assign high

priority to investor grievances, and take al preventive steps to minimize

the number of complaints. The lead merchant banker shall set up a proper

grievance monitoring and redressal system in coordinating with the issuers

and the Registrars to Issue. They shall take all necessary measures to

resolve the grievances quickly. They actively associate with post-issue

refund and allotment activities, and regularly monitor investor grievances

arising therefrom.

c. Submission of post issue monitoring reports The concerned lead merchant

banker shall submit, in duplicate , the Post issue Monitoring Reports

specified in Clause 7.2 chapter VII of these Guidelines, within 3 working

days from the due dates, either by registered post or deliver them at the

respective regional offices of the Board, a copy of the report shall inform

the Board on important developments about the particular issues being

lead managed by them during the period intervening the reports

d. Issue of No Objection Certificate (NOC) In accordance with the Listing

Agreement of the Stock Exchanges, the issuer companies shall deposit 1%

of the amount of securities offered to the public and/ or to the holders of

the existing securities of the company as the case may be with the

regional Stock Exchange. These securities can be released by the

concerned Stock Exchange only after obtaining an NOC from the Board.

e. Registration of Merchant Bankers

Application for renewal of certificate of registration shall be made by

the merchant bankers according to regulation 9 of SEBI (Merchant bankers)

Rules and regulation 1992. While filing the renewal application for the

certificate of registration as merchant banker, it shall provide a statement

highlighting the changes that have taken place in the information that was

submitted to the Board for earlier registration, and a declaration stating that

no other change besides those mentioned in the above statement have taken

place.

Merchant bankers, while forwarding the renewal application in Form A

of SEBI (Merchant bankers) Rules and regulation 1992, shall also forward the

additional information as specified in schedule XXVI. Registered merchant

bankers shall inform the board of their having become a member of AMBI,

with the relevant details.

f. Reporting requirements In terms of regulation 28 of SEBI (Merchant

bankers) Rules and regulation 1992, the merchant bankers shall send a

half yearly report, in the format specified in schedule XXVII, relating to

their merchant banking activities. The report referred to in sub clause A

shall be submitted twice a year on March 31st and Sept 30, and it should

reach the board within 3 months from the close of period to which it

relates.

g. Impositions of Penalty points Penalty points may be imposed on the

merchant banker for violation of any of the provisions for operational

guidelines. the merchant banker, on whom penalty point of 4 or more

has been imposed may be restrained from filing any other offer

document or associating or managing any issues for a particular period.

The board may initiate action under the SEBI (Merchant bankers) Rules

and regulation against the merchant bankers, irrespective of whether any

penalty point is imposed or not. Imposing of penalty point is not a pre-

condition for initiation of proceedings against the merchant banker under SEBI

(Merchant bankers) Rules and regulation 1992.

Guidelines on Advertisement:

Following are the guidelines applicable to lead merchant bankers who shall

ensure due compliance by the issuer company:

1. Factful and truthful:

An issue advertisement shall be truthful, fair and clear and shall not contain

any statement that is untrue or misleading. Any advertisement reproducing, or

purporting to reproduce, any information contained in an offer document shall

reproduce such information in full and disclose all relevant Facts. It should not be

restricted to select extracts relating to that item. An issue advertisement shall be

considered to be misleading, if it contains: a) Statements made about the

performance or activities of the company in the absence of necessary explanatory

or qualifying statements, which may give n exaggerated picture of the performance

activities. b) An inaccurate portrayal, or its portrayal in a manner which implies

that past gains or income will be repeated in the future.

2. Clear and Concise:

An advertisement: An advertisement shall be set forth in a clear, concise and

understandable language. Extensive use of technical, legal terminology or complex

language and the inclusion of excessive details which may distract the investor

shall be avoided.

3. Promise of profits:

An issue advertisement shall not contain statements which promise or

guarantee rapid increase in profits. An issue advertisement shall not contain

statements which promise or guarantee rapid increase in profits. An issue

advertisement shall not contain any information that is not contained in the offer

document.

4. Mode of advertising:

No models, celebrities, fictional characters, landmarks, caricatures or the like

shall be displayed on or form part of the offer documents or issue advertisements.

Issue advertisements shall not appear in the form of crawlers on television.

Similarly, no advertisement shall include any issue slogans or brand names for the

issue, except the normal commercial name of the company or commercial brand

names of its products already in use. No slogans, expletives or non-factual and

unsubstantiated titles shall appear in the issue advertisements or offer documents.

5. Financial Data:

If any advertisement carries any financial data it shall also contain data for

the past three years and shall include particulars relating to sales, gross profit, net

profit, share capital, reserves, earnings per share, dividends, and book values.

6. Risk Factors:

All issues advertisements carried I the print media such as newspapers,

magazines, brochures or, pamphlets shall contain highlights relating to any issue,

besides containing detailed information on the risk factors. The print size of

highlights and risk factors in issue advertisements shall not be in less than point 7

sizes. It shall contain the names of Issuer Company, address of its registered office,

names of the main lead merchant bankers and Registrars to the issue. No issue

advertisement shall be released without giving “Risk Factors” in respect of the

highlights need not contain risk factors.

7. Issue Date:

No corporate advertisement of Issuer Company shall after 21 days of filing of

the offer document with the board until the closure of the issue, unless the risk

factors which are required to be mentioned in the offer document are mentioned in

the advertisement.

8. Product advertisement:

No product advertisement of the company shall contain any reference,

directly or indirectly, to the performance of the company during the period.

9. Subscription:

No advertisement shall be issued stating that the issue has been fully

subscribed or oversubscribed during the period the issue is open for subscription,

except to the effect that the issue is open or closed.

10. Issue Closure:

No announcement regarding closure of the issue shall be made except on the

date of closing. If the issue is fully subscribed before the date on which the issue is

to be closed. Announcements regarding closure of the issue shall be made only

after the lead merchant banker is satisfied that at least 90% of the issue has been

subscribed, and a certificate has been obtained to that effect from the Registrar to

the Issue.

11. Incentives:

No incentives, apart from the permissible underwriting commission and

brokerage, shall be offered through advertisements to anyone associated with

marketing the issue.

12. Reservation:

In case there is a reservation for NRI’s, the issue advertisement shall specify

the same, and, also indicate the place in India from where the individual NRI

applicant can procure application forms.

13. Underwriting:

An underwriting has to be obtained from the issuer as part of the MoU

between the lead merchant banker and the issuer company to the effect that the

issuer company shall not directly or indirectly release, during any conference or at

any other time, any material or information which is not contained in the offer

documents.

13. Availability of copies:

To ensure that the issuer company obtains approval for all issue

advertisements and publicity materials from the lead merchant banker responsible

for marketing the issue and also ensure the availability of copies of all issue related

materials with the lead merchant banker, at least until the allotment is completed.