Investment Banking Regulations - India - Part 2

Merchant Banking Regulations in India

SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
CONTENTS

CHAPTER I: PRELIMINARY

1. Short title and commencement
2. Definitions

CHAPTER II: REGISTRATION OF MERCHANT BANKERS

3. Application for grant of certificate
4. Application to conform to the requirements
5. Furnishing of information, clarification and personal representation
6. Consideration of application
7. Capital Adequacy Requirement
8. Procedure for Registration
9. Renewal of certificate
10. Procedure where registration is not granted
11. Effect of refusal to grant certificate
12. Payment of fees and the consequences of failure to pay fees

CHAPTER III: GENERAL OBLIGATIONS AND RESPONSIBILITIES

13. Code of Conduct
13A. Merchant banker not to associate with any business other than that of the securities market
14. Maintenance of books of accounts, records etc.
15. Submission of Half-yearly results
16. Maintenance of books of account, records and other documents
17. Report on steps taken on Auditor's report
18. Appointment of lead merchant bankers
19. Restriction on appointment of lead managers
20. Responsibilities of lead managers
21. Lead merchant banker not to associate with a merchant banker without registration
22. Underwriting obligations
23. Submission of due diligence certificate
24. Documents to be furnished to the Board
24A. Payment of fees to the Board
25. Continuance of association of lead manager with an issue
26. Acquisition of shares prohibited
27. Information to the Board
28. Disclosures to the Board

CHAPTER IV: PROCEDURE FOR INSPECTION

29. Board's right to inspect
30. Notice before inspection
31. Obligations of merchant banker on inspection by the Board
32. Submission of Report to the Board
33. Action on inspection or investigation report
34. Appointment of Auditor

CHAPTER V: PROCEDURE FOR ACTION IN CASE OF DEFAULT

35. Liability for action in case of default

SCHEDULE I: FORMS

FORM A: APPLICATION FOR GRANT OF CERTIFICATE / RENEWAL OF CERTIFICATE
FORM B: CERTIFICATE OF REGISTRATION
FORM C: DUE DILIGENCE CERTIFICATE

SCHEDULE II: FEES

SCHEDULE III: CODE OF CONDUCT FOR MERCHANT BANKERS

SCHEDULE IV


THE GAZETTE OF INDIA
EXTRAORDINARY

PART III - SECTION 4

PUBLISHED BY AUTHORITY

NOTIFICATION

THE 22 ND DAY OF DECEMBER, 1992

BOMBAY

SECURITIES AND EXCHANGE BOARD OF INDIA

(MERCHANT BANKERS) REGULATIONS, 1992

No.LE/11112/92. In exercise of the powers conferred by Section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board with the previous approval of the Central Government hereby makes the following regulations, namely: -
CHAPTER I

PRELIMINARY

Short title and commencement

1. (1) These regulations may be called the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992.
(2) They shall come into force on the date of their publication in the Official Gazette.

Definitions
2. In these regulations, unless the context otherwise requires, -

1*[******]
(b) "form " means a form specified in Schedule I;
(c) "inspecting authority" means one or more persons appointed by the Board to exercise powers conferred under Chapter IV;

(d) "principal officer " means ?

(i) proprietor, in the case of a proprietary concern;
(ii) partner, in the case of a partnership firm;

(iii) director, in the case of a body corporate, who is responsible for the activities of the merchant banker;



(e) "rules" means Securities and Exchange Board of India (Merchant Bankers) Rules, 1992;
(f) Words and expressions used and not defined in these regulations but defined in the Act and the rules shall have the meanings respectively assigned to them in the Act or the rules as the case may be.



Foot notes
1. Following clause (a) of regulation 2 was deleted by the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 published in the Official Gazette of India dated 27.09.2002

(a) "enquiry officer" means any officer of the Board, or any other person, having experience in dealing with the problems relating to the securities market, who is authorised by the Board under Chapter V;

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CHAPTER II
REGISTRATION OF MERCHANT BANKERS

Application for grant of certificate

3. (1) An application by a person for grant of a certificate shall be made to the Board in Form A.
(2) The application under sub- regulation (1) shall be made for any one of the following categories of the merchant banker namely:-

(a) Category I, that is ?
(i) to carry on any 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 financiers and final allotment and refund of the subscription; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.

(b) Category II, that is, to act as adviser, consultant, co-manager, underwriter, portfolio manager;
(c) Category III, that is to act as underwriter, adviser, consultant to an issue;

(d) Category IV, that is to act only as adviser or consultant to an issue.

2*[(2A) Notwithstanding anything contained in this regulation, with effect from 9th December, 1997,
(i) an application under sub-regulation (2) can be made only for carrying on the activities mentioned in clause (a) therein, and
(ii) an applicant can carry on the activity as underwriter only if he obtains separate certificate of registration under the provisions of Securities and Exchange Board of India (Underwriters) Regulations, 1993, and

(iii) an applicant can carry on the activity as portfolio manager only if he obtains separate certificate of registration under the provisions of Securities and Exchange Board of India (Portfolio Manager) Regulations, 1993.]

(3) Notwithstanding anything contained in sub-regulation (1), any application made by a merchant banker prior to coming into force of these regulations containing such particulars or as near thereto as mentioned in Form A shall be treated as an application made in pursuance of sub-regulation (1) and dealt with accordingly.
Application to conform to the requirements
4. Subject to the provisions of sub-regulation (3) of regulation 3, any application, which is not complete in all respects and does not conform to the instructions specified in the form, shall be rejected:
Provided that, before rejecting any such application, the applicant shall be given an opportunity to remove within the time specified such objections as may be indicated by the Board.

Furnishing of information, clarification and personal representation
5. (1) 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.
(2) The applicant or its principal officer shall, if so required, appear before the Board for personal representation.


Consideration of application
6. 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 the applicant complies with the following requirements, namely: -
3*[(a) 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, (2 of 1934) as amended from time to time,]
4*[Provided 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]

5*[(aa)] the applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities;]

(b) the applicant has in his employment minimum of two persons who have the experience to conduct the business of the merchant banker;

(c) a person directly or indirectly connected with the applicant has not been granted registration by the Board;

Explanation: For the purposes of this clause the expression "directly or indirectly connected" means any person being an associate, subsidiary, inter-connected or group Company of the applicant in case of the applicant being a body corporate.

(d) the applicant fulfils the capital adequacy requirement specified in regulation 7;

(e) the applicant, his partner, director 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;

(f) 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;

(g) the applicant has the professional qualification from an institution recognised by the Government in finance, law or business management;

6*(gg) the applicant is a fit and proper person,]

(h) grant of certificate to the applicant is in the interest of investors.

Capital Adequacy Requirement
7. (1) The capital adequacy requirement referred to in sub- regulation (d) of regulation 6 shall not be less than the net worth of the person making the application for grant of registration.
(2) For the purposes of sub- regulation (1), the networth shall be as follows, namely: -

Category Minimum Amount

Category I 7*[Rs. 5, 00, 00, 000]

Category II Rs. 50, 00, 000

Category III Rs. 20, 00, 000

Category IV Nil

Explanation: For the purposes of this regulation "networth" 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 the time of making application under sub-regulation (1) of regulation 3.

Procedure for Registration
8. (1) The Board on being satisfied that the applicant is eligible shall grant a certificate in Form B 8*[******].
9*[******]
10*[******]

(4) On the grant of a certificate the applicant shall be liable to pay the fees 11*[******] in accordance with Schedule II;
12*[******]

Renewal of certificate
9. (1) Three months before expiry of the period of certificate, the merchant banker, may if he so desires, make an application for renewal in Form A.
(2) The application for renewal, under sub-regulation (1) shall be dealt with in the same manner as if it were a fresh application for grant of a certificate.

13*[Provided that in case of an application for renewal of certificate of registration, the provisions of clause (a) of regulation 6 shall not be applicable upto June 30th, 1998]

(3) The Board on being satisfied that the applicant is eligible for renewal of certificate shall grant a certificate in Form B and send intimation to the applicant 14*[***]

15*[***]

16*[***]

(6) On the grant of a certificate the applicant shall be liable to pay the fees 17*[***] in accordance with Schedule II;

18*[***]

Procedure where registration is not granted
10. (1) 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.
(2) The refusal to grant registration shall be communicated by the Board within thirty days of such refusal to the applicant stating therein the grounds on which the application has been rejected.

(3) 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 its decision.

(4) 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
11. 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 any activity as merchant banker.
Payment of fees and the consequences of failure to pay fees
12. (1) Every applicant eligible for grant of a certificate shall pay such fees in such manner and within the period specified in Schedule II.
(2) 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.


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Foot notes
2. Sub-regulation 2A to regulation 3 was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997.
3. Clause (a) to regulation 6 was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997.

4. Proviso to clause (a) to regulation 6 was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 17.11.1999.

5. Clause (a) to regulation 6 was renumbered as (aa) by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette dated 09.12.1997.

6. Clause (gg) to regulation 6 was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997.

7. The figure "1, 00, 00, 000" in sub-regulation (2) of regulation 7 was Substituted by SEBI (Merchant Bankers) (Amendment) Regulations, 1995 published in the Official Gazette of India dated 07.09.1995.

8. The following part of sub-regulation (1) of regulation 8 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official of India Gazette dated 09.12.1997

"and send an intimation to the applicant mentioning the category for which the Board has granted certificate"

9. Sub-regulation (2) of regulation 8 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997.

10. Sub-regulation (3) of regulation 8 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997.

11. The following part of sub-regulation (4) of regulation 8 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"for the category for which the registration is granted"

12. Following proviso to sub-regulation (4) of regulation 8 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"Provided that the amount of fees payable shall be proportionately reduced by the amount of fees already paid by the merchant banker for the year in which the registration is granted in the higher category."

13. Proviso to sub-regulation (2) of regulation 9 was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 21.01.1998.

14. Following part of sub-regulation (3) of regulation 9 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"mentioning the category for which the Board has granted certificate"

15. Following sub-regulation (4) of regulation 9 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"Notwithstanding anything contained in sub-regulation (1), where a certificate has been granted for a category lower than for what has been applied for, the applicant, may make an application to the Board at any time after the expiry of one year from the date of grant of such registration."

16. Following sub-regulation (5) of regulation 9 was omitted by the SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"An application made under sub-regulation (4) shall be considered in the same manner as an application made under regulation 3."

17. Following part of sub-regulation (6) of regulation 9 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"for the category for which the registration is granted"

18. Following proviso to sub-regulation (6) of regulation 9 was omitted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 09.12.1997

"Provided that the amount of fees payable shall be proportionately reduced by the amount of fees already paid by the merchant banker for the year in which the registration is granted in the higher category."