Merchant Banking Regulations in India (SEBI)

Definition (SEBI Rules 1992)

A merchant banker is any person involved in issue management by:

• Making arrangements for selling, buying, or subscribing to securities.
• Acting as a manager, consultant, or advisor.
• Rendering corporate advisory services related to issue management.

Guidelines for Merchant Banking

Merchant banking activity is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory. Applicants must meet these norms:

1. Be a corporate body.
2. Conduct business only related to the securities market.
3. Possess necessary infrastructure (office space, equipment, manpower).
4. Have at least two employees with prior merchant banking experience.
5. Have no associate, group, subsidiary, or interconnected company that is a registered merchant banker.

SEBI (Merchant Bankers) Regulations, 1992: Category Restructuring

• Initially, SEBI classified merchant bankers into four categories based on activities and responsibilities (see table below).
• However, as of December 9, 1997, all categories except Category I were abolished.
• Therefore, merchant bankers can now only be registered under Category I by SEBI.

Historical Category Descriptions (Pre-1997)

Current Category I Activities

• Allowed to carry on the activity of issue management.
• Act as an advisor, consultant, manager, underwriter, and portfolio manager.

Capital Adequacy Norms

• The minimum net worth required for Category I merchant bankers (the only current category) was initially ₹1 crore. It was later raised to ₹5 crores in 1995.

Other Key Regulations

• Financial Reporting: Maintain balance sheets, profit & loss accounts, and statements of financial position.
• Half-Yearly Reporting: Submit unaudited half-yearly results to SEBI.
• Insider Trading Prohibition: Prohibited from buying securities based on unpublished price-sensitive information.
• Enforcement: SEBI can suspend or cancel authorization for guideline violations.
• Compliance Officer: Appoint a 'Compliance Officer' to monitor adherence to regulations.
• Inspection Authority: SEBI can inspect books of accounts and records.
• Authorization Validity: SEBI authorization is valid for 3 years only; renewal is required.
• Fees: SEBI collects initial authorization, annual, and renewal fees.
• Underwriting Obligation: A lead manager (Category I) must accept a minimum underwriting obligation of the lesser of 5% of the issue size or ₹25 lakhs.
• Issue Management: It is mandatory under SEBI rules that every issuing company must appoint one or more SEBI registered merchant bankers as lead manager(s) for the management of issue.

Lead Manager Requirements (Number)

The limit to the maximum number of lead managers to be appointed in a single issue was omitted through amendment in this regulations on April 19, 2006

Important Note: The limit to the maximum number of lead managers to be appointed in a single issue was omitted through amendment in this regulations on April 19, 2006

Exemption from RBI Regulations

RBI exempted merchant banking companies (registered with SEBI and conducting business as per SEBI rules) from certain regulations related to:

• Compulsory registration (section 45 IA).
• Maintenance of liquid assets (section 45 IB).
• Creation of reserve fund (section 45 IC).
• Deposit acceptance and prudential norms.

Conditions:

• Companies must be registered with SEBI and operate according to SEBI rules.
• They require securities only as part of their merchant banking business.
• They do not accept or hold public deposits.