MERCHANT BANKING

SEBI grants the certificate if the applicant is : A body corporate Has necessary infrastructure Have at least two persons with experience in merchant banking business Should not be involved in any litigation connected with the securities market Have recognized professional qualification in finance , law or business management
Registration Registration with SEBI is mandatory in order to carry out activities likes determining the financial structure ; preparation of prospectus ; tie-up with financiers ; final allotment of securities. To carry out activities as underwriters and portfolio managers , they should obtain separate certificate of registration from SEBI

S.N. 1

Category Category I

Eligibility carry out issue management, can act as an advisor, consultant, manager, underwriter and portfolio manager

Minimum Net Worth Rs 5 crore

Category II

act as an advisor, consultant, manager, underwriter and portfolio manager. act as an advisor, consultant, underwriter act only as an advisor and consultant

Rs 50 lakh

3 4

Category III Category IV

Rs 20 lakh nil

Restriction on Business A merchant banker is prohibited from carrying on fund / asset based business such as leasing etc. A merchant banker who is registered with RBI as a Primary Dealer may carry on such business as may be permitted by RBI.

Merchant Banker

Issue Management
* structuring of instruments * preparation of offer document * due diligence certificate * appointment of intermediaries * management of book building issue * post issue monitoring

Project Advisory Services

* gives concrete shape to business ideas * does appraisal for technical feasibility, commercial viability & financial viability * prepare an action plan

Portfolio Management
manage the portfolio of the client on the basis of terms and conditions such as * risk and return * composition of securities, * reporting requirement, * repayment as specified by the client.

Corporate Advisory Services

* advises the corporate for its survival & growth * investigate & analyze the business problems and try to solve those with their skill & experience * assist in equity & business valuation * privatization * rehabilitation of weak units

Merchant Banker

Financial Structuring
* assist the client company to conduct activities involved in mergers and acquisitions divestitures etc. * target screening, identification & evaluation * financial analysis & valuation of target company * advising means & source of financing * arranging necessary finance * counseling on bidding strategy * negotiating with the parties * complying with regulatory norms

Underwriting
* agrees to subscribe to a portion of the capital to be issued incase the issue is not fully subscribed * total underwriting obligations at a point of time should not exceed 20 times his own net worth * the maximum liability of an underwriter is limited the amount underwritten by him. * underwriting can be done for public issue & rights issue * the company can appoint more than one underwriter.

Credit Syndication
* arrange domestic currency & foreign currency loans by analyzing their cash flow pattern * provide assistance in loan documentation procedures * arrange buyers` line of credit / suppliers` line of credit / guarantee assistance * advice for resolving inter-creditor issues

Issue Management It is now a days mandatory that all public issues should be managed by merchant bankers. Maximum Number of Merchant Bankers Issue Size less than Rs 50 crores : 2 MB Issue Size between Rs 50 cr to Rs 100 cr : 3 MB Issue Size between Rs 100 cr to Rs 200 cr : 4 MB Issue Size between Rs 200 cr to Rs 400 cr : 5 MB Issue Size above Rs 400 cr : more than 5 MB

Responsibilities of Lead Manager Every lead manager has to enter into an agreement with the issuing company , setting out their mutual rights and obligations relating to such issue and in particular to disclosures , allotment and refunds. A statement specifying these is to be furnished to the SEBI at least 1 month before the opening of the issue for subscription. Incase of more than one lead managers , the statement has to provide details about the respective responsibilities. It is necessary for the lead manager to accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs 25 lakh , whichever is less .

 A merchant banker is prohibited from acquiring securities of any company on the basis unpublished price sensitive information obtained during the course of any professional assignment either from the client or otherwise . He has to submit to SEBI , the complete particulars of any acquisition of securities of a company whose issue is being managed by him , within 15 days from the date of transaction. Code of Conduct Make efforts to protect the interest of the investors Maintain high standards of integrity , dignity and fairness in the conduct of its business Ensure that adequate disclosures are made to the investors in a timely manner

 Inquiries from investors are adequately dealt with and grievances are redressed on time Avoid conflict of interest Render best possible advice to the client Not to divulge to anybody the confidential information Not to make untrue statements or suppress any material facts Ensure that good corporate policies and corporate governance are in place Should not be a party to : * creation of false market ; * price manipulation ; * passing unpublished price sensitive information Should not discriminate among its clients Should not indulge in unfair competition

PRE-ISSUE OBLIGATIONS PRE-

1 Structuring of Instruments Determining the composition of the capital structure. Whether an equity or a debt instrument is to be floated is decided. Decision is made after * analyzing the capital structure , * financial requirement of the company and * the market condition in consultation with the promoters. In case of debt convertible or non convertible.

2 Preparation of Offer Document Responsible for drafting of prospectus and application form.
The maximum grading of a prospectus can be 10 Default in Prospectus attract negative points : Absence of risk factors [-1] Absence of listing [-0.5] Irrelevant contents of prospectus , if stated [-0.5] prospectus scoring greater than or equal to 8 points are categorized as A+ those with 6 or less than 8 points as A those with 4 or less than 6 points as B those with less than 5 points as C

3 Due Diligence Certificate

The lead manager to an issue has to submit to SEBI , at least 2 weeks before the date of filing with the registrar of companies / stock exchanges or both : * Particulars of the issue * Draft prospectus * Other literature to be circulated to investors These documents are submitted along with the prescribed fee * Issue Size of Rs 100-500 crores : Rs 2.5lac * Issue Size of more than Rs 500 crores : Rs 5lac The lead manager is responsible for the verification of the contents of a prospectus / letter of offer of an issue and the reasonableness of the views expressed in them . He has to submit , a due diligence certificate to the SEBI , at least 2 weeks before the opening of the issue for subscription , to the effect that : the prospectus is in conformity with the material facts / documents all legal requirements have been fully complied with the disclosures are true , fair and adequate

4 Undertaking Issuer should submit an undertaking to the Sebi to the effect that transaction in securities , by the promoters and their immediate relatives , during the period between the date of filing the offer document with the ROC and the date of closure of the issue would be reported to the stock exchange , within 24 hours. 5 Appointment of Intermediaries Selection and appointment of : brokers bankers to the issue registrar to the issue underwriters / sub-underwriters 6 Management of Book Building Issue
Compliance of procedural formalities related to :

Listing of securities Placing of issues Advertising of the issue

B POST ISSUE OBLIGATIONS

1 Allotment Assisting Registrar to the Issue in determining the basis of allotment of securities in consultation with Executive Director/Managing Director of the designated stock exchange. Supervising the allotment procedure wherein * applicants are categorized according to the number of shares applied for * total number of share to be allotted to each category as a whole is arrived at on a proportionate basis. Ensuring the dispatch of the allotment letters to the allottees and refund orders to the non-allottees. 2 Submission of Documents to Sebi Post-issue monitoring report Dispatch to allottees Certificates showing refunds Listing of securities in stock exchanges

Default by Merchant Bankers and Penalty Points SEBI imposes penalties for non-compliance of basic conditions .The default are categorized as follows: I General Default Following defaults attract 1 penal point : non-receipt of draft prospectus non-receipt of responsibility allocation prior to opening of issue non-receipt of due diligence certificate failure to ensure submission of certificate showing 90 % subscription to the issue failure to ensure dispatch of refund orders

II Minor Default These defaults attract 2 penal points : advertisement / circular / press release not in conformation to the contents in prospectus exaggerated information delay in refund / allotment of securities failure to exercise due diligence in verifying the contents of the offer failure to provide fair disclosure to the investors non- handling of investors grievances promptly

IV Major Default These defaults attract 3 penalty points: mandatory underwriting not taken by merchant banker excess number of lead managers than permitted association of unauthorized merchant bankers in an issue

Serious Default These defaults attract 4 penal points : unethical practices violation of code of conduct non-cooperation with SEBI On reaching cumulative penalty points of 8 , a merchant banker attracts action from SEBI in terms of : * suspension * cancellation of authorization Note : Incase of joint responsibility , the same penalty point is awarded to all lead managers .

BANKERS TO AN ISSUE The bankers to an issue are engaged in activities such as : acceptance of applications along with application money from the investors refund of application money

Registration To carry on activity as a banker to issue , the applicant must obtain a certificate of registration from the SEBI . SEBI grants the certificate if : the applicant has necessary infra-structure , communication and data processing facilities and manpower to effectively discharge his activities the applicant is not involved in any litigation connected with the securities market the applicant is a scheduled bank grant of certificate is in the interest of the investor Registration Fee Since 1999 , schedule of fee is : Rs 5 lakh as initial registration fee and Rs 2.5 lakh renewal fee every 3 years from the 4rth year from the date of initial registration . Non payment of prescribed fee may lead to the suspension of the registration certificate.

General Obligations and Responsibilities I Furnish Information to SEBI

number of issues for which he was engaged as a banker to an issue number of applications / details of the applications received the dates on which applications from investors were forwarded to the issuing company / registrar to an issue the dates / amounts of refund to the investors .

II Books of Accounts/Records/Documents A banker to an issue has to maintain books of accounts / records /documents for a minimum period of 3 years . III Agreement with Issuing Companies Every banker to an issue enters into an agreement with the issuing company.The agreement provides for: * the number of collection centres at which the applications / application money is received is forwarded to the registrar for issuance and * submission of daily statement .

Disciplinary Action by the RBI

If the RBI takes any disciplinary action against a banker to an issue in relation to issue payment , the latter should immediately inform SEBI. If the banker is prohibited from carrying on his activities as a result of the disciplinary action , the SEBI registration is automatically deemed as suspended / cancelled .

Code of Conduct make efforts to protect the interest of the investors fulfill its obligations in a prompt , ethical and professional manner prompt in disbursing dividends , interests or any such accrual income received or collected by him on behalf of his client

Should Not :
allow blank application forms bearing brokers stamp to be kept in the bank premise or sold near the entrance of the bank premise accept applications after the office hours or after the date of closure of the issue or on a holiday after the closure of the public issue accept any cheque/draft

 part with the issue proceeds until listing permission is granted by the stock exchange to the body corporate delay in issuing the final certificate pertaining to the collection figures : *to the registrar to the issue , *lead manager and *body corporate within 7 working days from the closure date.

BROKERS TO THE ISSUE These are the persons mainly concerned with the procurement of subscription to the issue from the prospective investors . The appointment of broker is not compulsory The companies are not free to appoint any number of brokers . The company in consultation with the stock exchange writes to all active brokers of all exchanges and obtains their consent to act as brokers to the issue . A copy of the consent letter should be filed along with the prospectus to the ROC . The names and addresses of the brokers to the issue are required to be disclosed in the prospectus .

 The brokerage rate applicable to all types of public issue of industrial securities is fixed at 1.5% , whether the issue is underwritten or not . The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5% Brokerage is not allowed in respect of : * promoters quota including the * amounts taken up by the directors , * their friends * employees * in respect of the rights issues taken by or renounced by the existing shareholders.

 Brokerage is not payable when applications are made by : * the institutions / bankers against their underwriting commitments on the amounts devolving on them as underwriters consequent to the under subscription of the issues.

The issuing company is expected to pay brokerage within 2 months from the date of allotment and furnish to the brokers , on request , the particulars of allotment made against applications bearing their stamps, without any charge. The cheques relating to brokerage on new issues and underwriting commission , if any, should be made payable at par at all centres where the recognized stock exchanges are situated The rate of brokerage payable must be disclosed in the prospectus.

* The mailing cost and * Other out-of-pocket expenses for canvassing of public issue Is to be borne by the stock brokers and no payment on that account is made by the companies . A clause to this effect must be included in the agreement to be entered into between the broker and the company.

REGSITRAR TO AN ISSUE AND SHARE TRANSFER AGENT The registrar to an issue is an intermediary in the primary market and carries out activities such as : collecting application from the investors keeping a proper record of applications and money received from investors assisting companies in determining the basis of allotment of securities in consultation with stock exchanges ,

 finalizing the allotment of securities processing and dispatching allotment letters , refund orders etc, maintains a record of holders of securities on behalf of the companies deals with all matters connected with transfer / redemption of securities

To carry out these activities they must be registered with Sebi Category I : to carry on activities as a registrar to an issue and share transfer agent Category II: to carry on activities either as a registrar or as a share transfer agent Capital Adequacy Category I : Rs 6 lakh Category II: Rs 3 lakh

With effect from Nov 1999 , Category I is required to pay: * a registration fee of Rs 50,000 and * a renewal fee of Rs 40,000 every three years. Category II is required to pay : * a registration fee of Rs 30,000 and * a renewal fee of Rs 25,000 every three years.

Maintain Records relating to: all applications received from investors in respect to an issue all rejected applications together with reasons basis of allotment of securities in consultation with stock exchanges terms and conditions of allotment of securities list of allottees and non-allottees , refund orders These have to be preserved by them for a period of 3 years.

 Thank you