Merchant Banker Registration

Introduction

Before diving into the registration process, it is essential to understand the key definition of a merchant banker. According to the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, a merchant banker is defined as an individual engaged in the business of issue management. This includes activities such as arranging the buying, selling, or subscribing to securities, as well as providing consultancy, managerial, or corporate advisory services related to issue management.

Merchant bankers act as intermediaries between companies and investors, assisting entrepreneurs from the initial idea stage to the commencement of production. They are responsible for the preparation of prospectuses, marketing the issue, and ensuring the overall success of the issuance process.

Merchant banker is a company and is a combination of consultancy and banking services. Activities of merchant bankers in India are regulated by SEBI (merchant banker) rule 1992.

As per SEBI rule:

Any person who is engaged in the business of issue management either by making arrangements regarding buying, selling or subscribing to securities or acting as manager, consultant or rendering corporate advisory services in relation to such issue management.

It may perform some of its services like investment banks but can’t as regular banks. These are specialized banker accept and underwrite or syndicate equity or bond issues.

Categories of merchant banker

Merchant bankers are categorized based on the activities they perform. The Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, classify merchant bankers into four categories:

1. Category I: These merchant bankers are authorized to act as issue managers, advisors, consultants, underwriters, and portfolio managers. They handle various tasks related to issue management, including preparing the prospectus, determining the financial structure, and final allotment and refund of subscriptions.

2. Category II: Merchant bankers in this category can act as advisors, consultants, co-managers, underwriters, and portfolio managers.

3. Category III: These merchant bankers are limited to acting as underwriters, advisors, and consultants. They are not authorized to perform issue management activities or act as co-managers. Portfolio management is also not within their scope.

4. Category IV: Merchant bankers in this category can only act as advisors or consultants to an issue.

It is important to note that each category has specific net worth requirements, which are essential for obtaining the Certificate of Registration.

Functions of Merchant Banker

Merchant bankers provide a range of financial and advisory services to assist corporate clients in conducting their business. Some of the key functions performed by merchant bankers include:

1. Financing and Loans: Merchant bankers specialize in international financing and underwriting, including real estate, trade finance, and foreign investment. They also facilitate the issuance of securities through private placements, which require less regulatory disclosure and are sold to sophisticated investors.

2. International Transactions: For multinational corporations operating in multiple countries, merchant bankers facilitate business operations and manage currency exchanges. They help companies make major purchases in foreign countries by providing funds through letters of credit.

3. Advisory Services: Merchant bankers offer valuable advice on various financial matters, including mergers and acquisitions, corporate restructuring, valuation of assets, and investment strategies. They play a crucial role in guiding companies through complex financial decisions.

4. Portfolio Management: Some merchant bankers offer portfolio management services, helping clients optimize their investment portfolios and achieve their financial goals. They provide expert insights and make informed investment decisions on behalf of their clients.

These functions highlight the diverse expertise and comprehensive support that merchant bankers provide to their clients.

Eligibility Norms for Merchant Banker

To obtain a Certificate of Registration, merchant bankers must fulfill certain eligibility norms. The key requirements include:

1. Body Corporate: The applicant must be a body corporate, as per the definition provided in the Companies Act, 1956.

2. Infrastructure: The applicant must have adequate infrastructure, including office space, equipment, and manpower, to effectively carry out merchant banking activities.

3. Experienced Personnel: The applicant must employ at least two individuals with relevant experience in the field of merchant banking.

4. Net Worth: The applicant must meet the minimum net worth requirement specified for each category of merchant banker. For example, Category I merchant bankers must have a net worth of at least INR 5 Crores.

5. Clean Track Record: The applicant, its partners, directors, or principal officers should not have been involved in any litigation connected with the securities market or convicted for any offense involving moral turpitude or economic offenses.

6. Professional Qualification: The applicant should possess professional qualifications in finance, law, or business management from a recognized institution.

7. Compliance with Regulations: The applicant must comply with the regulations and guidelines set by the Securities and Exchange Board of India (SEBI) for merchant bankers.

Meeting these eligibility norms is crucial for the successful grant of the Certificate of Registration.

Applicant Not Eligible for Grant of Certificate of Registration

There are certain conditions under which an applicant may not be eligible for the grant of a Certificate of Registration. These conditions include:

1. Non-Banking Financial Companies (NBFCs): Companies registered with the Reserve Bank of India as non-banking financial companies, as defined under Section 45-I of the RBI Act, 1934, are not eligible for a merchant banker license. However, exceptions can be made for NBFCs registered by the Reserve Bank of India as primary or satellite dealers, with restrictions on accepting or holding public deposits.

2. Rejected Applications: Any person directly or indirectly connected to an applicant whose merchant banker license application has been rejected by the Securities and Exchange Board of India (SEBI) is not eligible for a merchant banker license. This includes associates, subsidiaries, or group companies of the applicant.

These eligibility criteria ensure that only qualified and reliable entities are granted the Certificate of Registration.

Fit & Proper Criteria

The concept of being a "fit and proper person" is crucial in the process of obtaining a Certificate of Registration. The Securities and Exchange Board of India (SEBI) assesses the applicant, principal officers, and key management persons based on the following criteria:

1. Integrity, Reputation, and Character: The applicant and relevant personnel should possess a high level of integrity, a good reputation, and strong character.

2. Absence of Convictions and Restraint Orders: The applicant and relevant personnel should not have any convictions related to the securities market or be subject to any restraint orders.

3. Competence: The applicant and relevant personnel should demonstrate competence in the field of merchant banking. This includes financial solvency, net worth, and expertise in the relevant domains.

The assessment of the fit and proper criteria ensures that only individuals and entities with the necessary qualifications and ethical standards are granted the Certificate of Registration.

Prerequisites and Documents Required

a. No person shall carry on the activity as a merchant banker unless he holds a certificate granted by SEBI

b. A merchant banker is required to have a minimum net worth of not less than 5 crore

c. An applicant required to send application form A along with additional information along with a non-refundable fee of 50000 by way of demand draft.

d. Every merchant banker is required to pay 20 lakh as registration fee (as per SEBI regulation, 2014) at the time of grant of certificate of initial registration by SEBI. And this certificate of initial registration remains for 5 years. The merchant banker must apply to SEBI for a permanent certificate, 3 months before the expiry of the validity of the initial registration certificate, if he wishes to continue as a merchant banker.

e. For permanent registration, the merchant banker is required to pay 9 lakh for the first block of 3 years towards permanent registration payable in term of schedule iii of SEBI regulation 1992.

f. Merchant banker is required to take SEBI’s prior approval for change in control.

Documents Required

In addition to the information furnished in form A, the applicant is also required to furnish the detailed information on the following areas, as per the instructions contained therein.

a. MOA & AOA of company (Memorandum and Article of Association of the applicant company)

b. Provide the UIN obtained under MAPIN for the applicant.

c. Details of Directors/ Promoters & shareholding pattern

d. Details of Key personnel

e. Details of infrastructure facilities

f. Details regarding registration as NBFC

g.  Financial Accounts of the applicant

h. Report from principal bankers

i. Details of associated registered intermediaries

j. Undertakings

k. Enclosures

l. Declaration by at least two directors

Process for Regitration for Merchant Banker

The process for obtaining a Certificate of Registration as a merchant banker involves the following steps:

1. Application Submission: The applicant must submit an application in Form A to the Securities and Exchange Board of India (SEBI).

2. Compliance with Requirements: The application must comply with all the specified requirements, including providing relevant information and documentation.

3. Verification and Assessment: The SEBI will verify the application and assess the applicant's compliance with the eligibility norms and fit and proper criteria.

4. Payment of Fees: The applicant must pay the required fees at the time of making the application. The fees can be paid through various approved modes of payment.

5. Additional Information: The SEBI may request further information or clarification from the applicant to facilitate the processing of the application.

6. Personal Appearance: The applicant, principal officers, or key management persons may be required to appear before the SEBI for representation or clarification, if deemed necessary.

7. Grant of Certificate: If the SEBI is satisfied with the application and all the requirements are met, a Certificate of Registration will be granted in Form B. The applicant will be notified of the grant of the certificate.

It is crucial to adhere to the prescribed process and requirements to ensure a smooth and successful grant of the Certificate of Registration.

Services that Merchant Bankers Provide

1. Issue Management
2. Credit Syndication
3. Project Appraisal
4. Handles government consent for industrial projects
5. Security Trustee Services
6. Buy Back Assignment
7. Share valuation
8. Issuing and Paying Agent
9. Capital Structuring
10. Post Issue management
11. Underwriting

Issue Management

Initially, merchant bankers mostly performed the function of handling new public issues of corporate securities of newly established companies or existing companies and foreign companies in the FERA equity dilution process. Here, they served as issue sponsors. They get permission from the Capital Issues Controller (which is now the SEBI). They also have many other services to ensure success in the securities marketing process. These services include prospectus preparation, underwriting arrangements, the appointment of registrars, banks, issue brokers, advertisement and advertisement arrangements, and compliance with the listing standards of the applicable stock exchanges, etc. A merchant banker serves as experts on the terms, type, and timing of the corporate securities issues and makes them appropriate for investors and gives the issuing companies independence and flexibility.

Credit Syndication

A merchant banker offers specialized services in the project planning phases, the loan applications required to collect short-term and long-term loans from various banks and financial institutions, etc. They help handle Euro-issues and collect funds overseas.

Handles government consent for industrial projects

A merchant banker completes all formalities regarding government approval to grow and modernize business (necessary for businesses) and launch new businesses (necessary for businesses).

Capital Structuring

Such merchant bankers 'activities include mergers, acquisitions (over existing units), unit sales, and disinvestment. Such procedures include careful discussions, an extensive review of various documents and lengthy legal formalities to be completed. On behalf of the clients, merchant bankers meet all of these formalities.