Merchant Banking Sebiguidelines

8/6/2019 Merchant Banking Sebiguidelines

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Merchant Banking

SEBI Guidelines

BIET MBADAVANGERE


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Merchant Bankers: Merchant banker is any person engaged in the business of issue

management in terms of facilitating, arranging or undertaking in

respect of selling, buying, or subscribing to securities; activities of

a merchant banker also involve acting as manager, consultant or

advisor in relation to issues of securities by corporate entities.

In Indian context, merchant banking primarily refers to thoseservices rendered to corporate entities by experts in the filed of

capital markets, which help them to successfully raise long term

capital by issuing shares, debentures, etc.


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Merchant bankers act as the sponsors of issues of securities byMerchant bankers act as the sponsors of issues of securities by

corporate entitiescorporate entities

The advise the issuers on the capital structure ideal for optimizingThe advise the issuers on the capital structure ideal for optimizing

cost of capital and return on equitycost of capital and return on equity

They draft the prospectus or other offer documents that form theThey draft the prospectus or other offer documents that form the

basis of providing relevant information to the prospective investorsbasis of providing relevant information to the prospective investors

They also draft other documents like the application forms,They also draft other documents like the application forms,contracts with brokers, bankers, registrars etccontracts with brokers, bankers, registrars etc

They help the issuers to comply with all the legal provisionsThey help the issuers to comply with all the legal provisions

relevant to the issuance of securities under the law of the landrelevant to the issuance of securities under the law of the land

They arrange for appointments of registrars who deal with share

application processing, allotment processing, transfers, listing of

securities, underwriting arrangements etc

They assist the issues in placing the issues with large investors

They help the issuers in selecting brokers and bankers to the issue

They arrange for publicity, advertising, and marketing of the issue


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Legal necessity: all public issues shall be managed by merchant bankers registered with

the SEBI acting as the lead managers. Controller of Capital Issues (CCI) was the legal authority that regulated the capital

issues in India until the year 1992. CCI was established under the Capital Issues

(Control) Act, 1947.

In the wake of the fundamental changes that occurred in the Indian capital markets, a

need was felt to comprehensively change the regulatory environment in regards to the

capital markets. CCI was abolished in the year 1992 and a new regulatory structure was established

under the Securities and Exchange Board of India (SEBI).

SEBI guidelines for merchant bankers:

Compulsory registration: Category I can carry on all activities related to issue management prospectus preparation;

determining financial structure; tie-ups with financiers; final allotment; refunds; allotments; AND

also as Advisors; consultants; co-managers; underwriters; portfolio managers etc Category II can act as: Advisors; consultants; co-managers; underwriters; portfolio managers

etc

Category III underwriters; advisors; and consultants

Category IV advisor or consultant only

Note: effective from 9-12-2009, only category I merchant bankers are registered with

SEBI to carry on the activities of portfolio managers, merchant bankers have to obtain

separate certifications


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Who can get certification as merchant bankers?

Bodies corporate other than NBFCs Possessing necessary infrastructure

At least two persons on rolls with experience to carry out merchant

banking activities

A directly or an indirectly connected person is not possessing a SEBI

certificate as merchant banker

Minimum capital of INR 5 Crores (PUC plus reserves) Not involved in any litigation relating to securities market directly or

indirectly

Possess recognized professional qualification in finance, law or business

management

Their registration is in the interest of investors

The applicant is a fit and proper person


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Meaning of fit and proper person: No conviction for offence involving moral turpitude, economic offence,

securities law or fraud;

Order of winding has not been passed;

Not an insolvent

A SEBI order (or of other competent authority) has not been passed and is

still in force - on him by which he is restrained, prohibited or debarred from

dealing in securities;

A SEBI order cancelling the registration has not been passed for insider

trading, fraudulent and unfair trade practices or manipulation of market; He has not been denied the grant of certificate on an application or his

certificate has not been withdrawn by SEBI or other authority and such

order is still current (3 years);

Not financially sound;

Any other negative reason is present

FEES:

application- INR 25,000;

Initial registration- INR 10 lakhs;

tri-annual renewal from the fourth year- INR 5 lakhs


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Conditions for registration:

Change in constitution/control to be approved by SEBI

Always enters into a legally binding contract with issuer, spelling outmutual obligations and duties

Payment of renewal fees

Adequate steps taken to redress issues relating to investor complaints

Abide by all provisions of the SEBI Act

Code of Conduct for Merchant bankers:

Protection of investor interests

High standards of integrity, dignity and fairness

Performa all obligations professionally, ethically and promptly

Due diligence, care and independent judgment

Prompt redressal of all investor complaints


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Relevant and material disclosures to investors

No misleading and exaggerated statements- draw attention to risks involved

Make prospectus, offer documents, letter of offers available to investors at issue time

Not to discriminate between clients, otherwise than on justifiable commercial

considerations

Avoid conflict of interest and make disclosure of present interests, if any

Establish a system to deal with any conflicts of interest

Disclose potential areas of conflict of interest

Offer best possible professional advice to clients

Not divulge any price sensitive information, but for cases where he is under legal

obligation

Any penal action or change in registration status informed to clients and investors Not indulge in any unfair competition

Maintain an arms length relationship between merchant banking and any other activity

Robust internal control systems to detect and prevent frauds

Not make any untrue statements or suppress any material information

Maintain an appropriate level of professional competence


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Notify SEBI of any legal actions initiated by any authority

Not render any investment advice- directly or indirectly on media- if

doing, disclose interest Demarcate responsibilities to intermediaries appointed

Provide adequate freedom to intermediaries

Develop an internal code for excellence, integrity, confidentiality,

objectivity, disclosures etc

Ensure good corporate governance

Ensure the credentials and qualifications of people employed

Ensure the availability of adequate supervisory personnel

Senior management shall have complete access to information

Not be a party or instrument in: creation of false market; price rigging;passing on price sensitive information on stocks that are listed or

proposed to be listed


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Restriction on business- fund

based/asset based- no fund basedactivities (except banks and public

FIs); RBI primary or satellite dealers

can involve in activities permitted byRBI


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ResponsibilitiesofLead Manger:

Agreement with issuer detailing mutualrights, obligations and liabilities; break

up of responsibilities between multiple

MBs- details submitted to SEBI before

one month of opening of issue

Not associate with unregistered persons

to act as co-bankers or managers

Min underwriting of 5% or 25 lakhs, WIL


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Due diligence certificate:

Verify the contents of P/LO and submitdue diligence certificate to SEBI 2 weeks

before opening of issue

The DD certificate has to state that theP/LO are in conformity with relevant

supporting documents

It has to state that all legal requirementshave been fully complied with

It has to state that disclosures are true,

fair and adequate


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Submission of documents: LM hasto:

Submit to SEBI- before filing with ROC or

designated Stock Exchange- particularsof issue, P/LO and any other literature to

be circulated among investors

SEBI vets them and may suggestmodifications, which are to be

incorporated

Feestobepaid whilesubmittingthesedocuments:public issue- INR 10,000 forlessthanissuesizeof

INR 1 croreand 0.01 percentforsizesabove INR 1

crore;Rights issue upto INR 2 crore INR 10,000;

2-500 crore, 0.005 percent;morethan 500 crore, flat


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Restriction on acquisition of shares

of issuer based on unpublished pricesensitive information-

Prohibited from such practices-

further, he has to furnish informationon any shares acquired by him in the

issuer co to SEBI, within 15 days


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Disclosures to SEBI makedisclosuresto SEBI on

his responsibilities in issue management

any changes in the status of details which were originally furnished

names of companies, the issues of which he has managed and with

which he has been associated

any particulars with regard to breach of capital adequacy

information on his activities as manager, underwriter, consultant, adviser

etc, of the issue


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Appointment of a compliance officer:

Every merchant banker has toappoint a CO

He would be responsible to monitor

and independently report to theSEBI on the state of compliances

He is also responsible to ensure that

the P/LO would incorporate any

suggestions made by SEBI before

release to investors


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SEBIs power to inspect:

SEBI can undertake inspection ofbooks and other records of

merchant bankers

Act either on a complaint byinvestors orsuo moto

All books and other information to

be furnished

MB will be allowed to present his

defense


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Defaults by MBs and Penalty points:

Typesofdefault:

1) General;

2) Minor;

3) Major;

4) Serious; and

5) Defaults in prospectus


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General defaults: (one penalty point)

Failure to submit DP/LO to SEBI

Failure to file inter-se responsibility

allocation

Failure to file due diligence certificateFailure to file minimum subscription

certificate

Failing to ensure prompt dispatch ofrefund orders/share certificates


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Minor defaults: (two penalty points)

Communicating info that is not part of Prospectus

Publicizing exaggerated info or extraneous info

Failure to substantiate material details of prospectus

Violating regulations regarding ads about issue

Failure to exercise due diligence in verifying P/LO

Failure to provide adequate info about risks involved Delay in refund/allotment

Non-handling of investor grievances properly


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Major defaults: (three penalty points)

Mandatory underwriting not undertaken

Excess number of lead managers

Association with unregistered MBs Serious defaults: (four penalty

points)

Unethical practices/violation of code ofconduct

Non-cooperation with SEBI in

investigations


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General negative points: in case

highlights are provided in an issue:absence of statement of risk factors-

one point; failing to give listing

details- half a point; stating mattersextraneous to prospectus- half a

point.

Suspension/cancellation: cumulativescore of eight points leads to

suspension/cancellation; one issue,

max four penalty points


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MANAGEMENT OF EQUITY AND RIGHTS ISSUES

Typesofissues:Public Issues;and

Rights Issues

Publicissuesmightinclude: IPOs,

FPOs, andOffersforsale;they mightbe

issuedby listedorunlistedcompanies;

they needprospectus

Rightsissuesareissuedonly by

existinglistedcompanies- letter of offer


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Conditions to be satisfied OR Eligibility norms

Filing of offer document: DP filedthrough an eligible MB 21 days

before filing with ROC; changes

suggested by SEBI need to beincorporated before filing with ROC

NOTE:incaseofRightsissuesoflessthan 50 lakhs, LOistobe

preparedandfiled with SEBI


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Applying for listing: public

issues

Enter into agreement with a

registered depository NOTE:thenormsdiscussed hereapply toissuesofequity sharesand

convertiblesecuritiesoflistedorunlistedcompanies


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IPOsIPOs byby unlistedunlisted companiescompanies

NetNet tangibletangible assetsassets ofof INRINR 33 crorescrores inin eacheach ofofthethe precedingpreceding 33 full full yearsyears;; not not moremore thanthan halfhalf

ofof thesethese cancan bebe inin nonnon--committedcommitted monetarymonetary

formform

TrackTrack recordrecord ofof distributabledistributable profitsprofits inin at at leastleast

33 out out of of fivefive immediatelyimmediately precedingpreceding yearsyears (in(in

casecase of of proprietaryproprietary andand partnershippartnership firmsfirms

convertedconverted intointo corporatecorporate form,form, thethe accountsaccounts

wouldwould bebe consideredconsidered onlyonly whenwhen theirtheir financialfinancial

statementsstatements conformconform toto OROR havehave beenbeen restatedrestated

inin thethe prescribedprescribed formform underunder thethe CompaniesCompanies

ActAct;; andand theythey havehave beenbeen dulyduly auditedaudited byby aa CA)CA)


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Has a minimum networth of INR 1 crore

in each of the preceding 3 full years of 12months each

In case of change of name, at least 50

percent of its revenue of the precedingone year has been derived from the

proposed type of activity

Aggregate of the proposed issue and all

previous issues in the same financial

year does not exceed five times its pre-

issue networth as per audited balance

sheet of the last FY


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NOTE:anunlistedcocanissuesecuritiestopubliceven whenitdoesnot

satisfy theabovefiveconditions, providedthat:

Book-building method is used and 50percent of net offer to public is offered to

QIBs; or

The project has at least 15 percentparticipation by banks/FIs of which at

least 10 percent comes from the

appraisers- in addition, at least 10percent has to be allotted to QIBs


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Minimum postMinimum post--issue face value of capitalissue face value of capital

would be 10would be 10 crorescrores oror

Compulsory marketCompulsory market--making is arranged formaking is arranged for--

with a depth of at least 300 shares; and bidwith a depth of at least 300 shares; and bid--

ask spread is less than 10 percent; and,ask spread is less than 10 percent; and,

inventory of market makers on each of stockinventory of market makers on each of stock

exchanges as on the date of allotment ofexchanges as on the date of allotment of

securities is at least five percent of thesecurities is at least five percent of theproposed issueproposed issue


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MeaningofQIB:

PFI; Banks; MFs; FIIs registeredwith SEBI; bilateral and

multilateral DFIs; VCFs registered

with SEBI; SIDCs; Insurancecompanies registered with IRDA;

PFs and pension funds with a

minimum corpus of 25 crores;


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Public Issues by listed companies

Eligibility conditions:

Size of issue, -inclusive of all those

done within one year past- does not

exceed five times pre-issue

networth;

In case of change in name, at least

50 percent of revenue..........NOTE: A listedcocanissuesecuritiesto

publiceven whenitdoesnotsatisfy the

aboveconditions, providedthat:


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Listedcompaniescanalsoraisefundsby issuancesofsecuritiesinthe

formofQualified InstitutionalPlacementorQIProute.

Exemptions from the above conditions: theaboveconditionsdonotapply to:privateandpublicsectorbanks; Infrastructurecompanies;rights

issuesby listedcompanies.

Anunlistedcompany havingoutstanding warrantsorothersuch

instruments with promotersorothers which aretobeconvertedinto

shares, cannotissuesecuritiestopublic


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Before making a public issue, all

existing partly paid up shares need tobe converted into fully paid shares/or

forfeited

A company cannot make public orrights issue unless it has made firm

arrangements of finance towards 75

percent of the stated means offinance, excluding the amount to be

raised through the proposed issue.


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Pricing ofIssues:

Listed company- free to issue at any price

Unlisted company- when proposes to list on a recognized exchange, freeto price

An infrastructure co- free to price, subject to the compliance with

disclosure norms laid down by SEBI

Differential pricing:

Prices for public and firm categories of issues can be different- firmallotment price higher

Listed companies making a composite issue can price its securities

differentially to public and rights segments; it can also adopt further

differentiation in regards to the splits of public segment between firm and

pro-rata allotments to public Price band: when filing the draft offer document with SEBI, an issuer can show an

indicative band of issue price with a 20 percent spread- cap should not be set at

more than 20 percent of floor; the actual price can be decided later on, by passing a

Board resolution or in consultation with the designated exchange

Note: discounts and commissions cannot be offered to any firm allottee


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Denomination of shares: Sec 13 (4) ofCompanies Actandprovisions

ofSEBI:

IPO- FV below INR 10 if issue price is INR500 or more, subject to a min of INR 1,

without decimal denominations; FV of

INR 10, if issue price is less than INR 500Other points- no decimal denomination;

only one denomination at a given time;

subject to MA and AA provisions;disclose all relevant aspect clearly


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Promoters contribution and lock-in

requirements:Unlisted co- IPO/OFS- 20% of post issue

capital

Listed co- PI- 20% compliance

Composite issues by listed co- 20% of

proposed issue is contributed OR 20

percent of post-issue capital ismaintained, excluding rights issue


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Other than cash considerations; revaluation of assets, capitalization of

intangible assets, bonus shares out of revaluation reserves- NOT

COUNTED

Securities issued at a lesser price to promoters within the last 12 months-

promoters have to make good the difference- NOT COUNTED

Subscriptions solicited form unrelated persons as private placements-

NOT COUNTED

Securities for which written consent has not been obtained from the

holders (like friends and relatives)- NOT COUNTED

Subscription by promoters to Convertible securities- when the issue

is of shares, the subscription by promoters to CSs will be counted if

the price at which they are to be converted is stated in the

prospectus; if the issue is of the convertible securities themselves,

the promoters contribution shall be counted only when they bindthemselves to full conversion on the proposed dates.

Promoters contribution has to be brought in at least one day before

the opening of the issue- it shall be held in an Escrow account with

a bank.


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Exemption from promoters contribution requirement:

Listedco;publicissue; 3 yeardividendtrackrecord;

Noidentifiablegroupofpromotersexists

Rightsissues- they howeverhavetodiscloseexistingshareholding

Lock-in requirement: 3 years; start day from date of allotment and

last day from the date of commercial production or the date of

allotment,WIL

Incaseofexcesscontributionby promotersofunlistedco, lockinperiod

isone year;forlistedcompany, thisone yearlockinperiod willnotbe

applicable;ifashortfallinfirmallotmentcategory ismetby promoter, it

willbesubjecttolock-in

Theentirepre-issuesubscriptionsincaseofunlistedcompanies willbe

lockedinforone year- shareslentto Stabilizing Agents (SAs)are

exemptedfromlock-inrequirement.


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Lock-in of firm allotment securities: one year lock-in from the date

of allotment or commencement of commercial productions,WIL

Note 1: locked in securities can be pledged with only approvedbanks and FIs

Note 2: Inter-se transfers among the promoters is permitted- they

can also be transferred to a new promoter

Note 3: Inscription of non-transferability is necessary


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Advertisement Code:

True, fairandclear

FullformofOD, notextracts

Notmisleading- explanatory andqualifying

statements

avoidtechnicalandcomplexlanguage

No guaranteeingkindofstatementsaboutprofitability increases

Nouseofcrawlerson TV


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No slogans or brand names, mere commercial name in use

No celebrity or other endorsements

No expletives or non-factual statements If financial data is presented, sales, GP, NP, SC, Reserves, EPS, DPS, BV

have to be there

Contain risk factor statements clearly, highlighted

All publicity material duly authorized by directors

Prominent display of any SEBI, ROC and DSE information


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No payment of any incentive to anyone,

but for contracted brokerageWhen NRI reservation is present, specify

wherefrom they can obtain application

forms

MB to take undertaking from issuer that

ads comply with all directives

Ensure that issuer takes approval fromhim


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Research reports:

Prepared only on the basis of published information

Information should be made available to all analysts- no selectivity has tobe there in terms of reports

No research report should be circulated commencing from the date 45

days immediately preceding the filing of the offer document with the SEBI

Ad code applies to research reports to the relevant extent

Merchant Banking Sebiguidelines

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