Investment Banking Regulations - India - Part 3

Merchant Banking Regulations in India

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


CHAPTER III
GENERAL OBLIGATIONS AND RESPONSIBILITIES

Code of Conduct

13. Every merchant banker shall abide by the Code of Conduct as specified in Schedule III.
19*[Merchant banker not to associate with any business other than that of the securities market
13A ? No merchant banker, other than a bank or a 20*[public financial institution], who has been granted a certificate of registration under these regulations shall 21*[after June 30th, 1998] carry on any business other than that in the securities market.
Notwithstanding anything contained above, a merchant banker who prior to the date of notification of the securities and exchange board of India (Merchant Bankers) Amendment Regulations, 1997, has entered into a contract in respect of a business other than that of the securities market, may, if he so desires, discharge his obligations under such contract.

Explanation - for the purposes of this regulation:

(i) A "bank" shall mean a banking company as defined under section 5 of the Banking Regulation Act, 1949 (10 of 1949) and the corresponding new bank set up under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 (5 of 1970) and Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980 (40 of 1980), State Bank of India Act, 1955 (23 of 1955) and State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959)
(ii) A "public financial institution" shall have the same meaning as assigned to the term under Section 4A of the Companies Act, 1956 (1 of 1956) and shall include Industrial Development Corporations and Financial Corporations established by the Central Government or State Governments as the case may be]



22*[Provided that a merchant banker who has been granted certificate of registration to act as primary or satellite dealer by Reserve Bank of India, may carry on such business as may be permitted by Reserve Bank of India]
Maintenance of books of accounts, records etc.
14. (1) Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:-
(a) a copy of balance sheet as at the end of each accounting period;
(b) a copy of profit and loss account for that period;

(c) a copy of the auditor's report on the accounts for that period; and

(d) a statement of financial position.

(2) Every merchant banker shall intimate to the Board the place where the books of accounts, records and documents are maintained.
(3) Without prejudice to sub- regulation (1), every merchant banker shall, after the end of each accounting period furnish to the Board copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the Board.

Submission of Half-yearly results

15. Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker.
Maintenance of books of account, records and other documents
16. The merchant banker shall preserve the books of accounts and other records and documents maintained under regulation 14 for a minimum period of five years.
Report on steps taken on Auditor's report
17. Every merchant banker shall within two months from the date of the auditors' report take steps to rectify the deficiencies, made out in the auditor's report.
Appointment of lead merchant bankers
18. (1) All issues should be managed by atleast one merchant banker functioning as the lead merchant banker:
Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential.

(2) Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund.

Restriction on appointment of lead managers
19. The number of lead merchant bankers may not, exceed in case of any issue of Size of issue No. of Merchant Bankers
(a) Less than rupees fifty crores Two
(b) Rupees fifty crores but lessthan rupees one hundred crores Three
(c) Rupees one hundred crores but less than rupees two hundred crores Four
(d) Rupees two hundred crores but less than rupees four hundred crores Five
(e) Above Rupees four hundred crores five or more as may be agreed by the board

Responsibilities of lead managers
20. (1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription:
Provided that, where there are more than one lead merchant bankers to the issue the responsibilities of each of such lead merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription.

(2) No lead merchant banker shall, agree to manage the issue made by any body corporate, if such body corporate is an associate of the lead merchant banker.

Lead merchant banker not to associate with a merchant banker without registration
21. A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue.
Underwriting obligations
22. (1) In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum Underwriting obligation of five percent of the total underwriting commitment or rupees twenty-five lacs, whichever is less:
Provided that, if the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement for having the issue underwritten to that extent by a merchant banker associated with the issue and shall keep the Board informed of such arrangement.

Submission of due diligence certificate
23. The lead merchant banker, who is responsible for verification of the contents of a prospectus or the Letter of Offer in respect of an issue and the reasonableness of the views expressed therein, shall submit to the Board at least two weeks prior to the opening of the issue for subscription, a due diligence certificate in Form C.
Documents to be furnished to the Board
24. (1) The lead manager responsible for the issue shall furnish to the Board, the following documents, namely: -
(i) particulars of the issue;
(ii) draft prospectus or where there is an offer to the existing shareholders, the draft letter of offer;

(iii) any other literature intended to be circulated to the investors, including the shareholders; and

(iv) such other documents relating to prospectus or letter of offer as the case may be.

(2) The documents referred to in sub-regulation (1) shall be furnished at least two weeks prior to date of filing of the draft prospectus or the letter of offer, as the case may be, with the Registrar of Companies or with the Regional Stock Exchanges, or with both.
(3) The lead manager shall ensure that the modifications and suggestions, if any, made by the Board on the draft prospectus or the Letter of Offer as the case may be, with respect to information to be given to the investors are incorporated therein.

23*[Payment of fees to the Board
24A. The draft prospectus or draft letter of offer referred to in regulation 24 shall be submitted along with such fees and in such manner as may be specified in Schedule IV]
Continuance of association of lead manager with an issue
25. The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to be associated with the issue till the subscribers have received the share or debenture certificates or refund of excess application money;
Provided that where a person other than the lead manager is entrusted with the refund or allotment of securities in respect of any issue, the lead manager shall continue to be responsible for ensuring that such other person discharges the requisite responsibilities in accordance with the provisions of the Companies Act and the listing agreement entered into by the body corporate with the stock- exchange.

Acquisition of shares prohibited
26. No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.
Information to the Board
27. Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of any body corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction.
Disclosures to the Board
28. A merchant banker shall disclose to the Board as and when required, the following information, namely: -
(i) his responsibilities with regard to the management of the issue;

(ii) any change in the information or particulars previously furnished, which have a bearing on the certificate granted to it;

(iii) the names of the body corporate whose issues he has managed or has been associated with;

(iv) the particulars relating to breach of the capital adequacy requirement as specified in regulation 7;

(v) relating to his activities as a manager, underwriter, consultant or adviser to an issue as the case may be.

24*[Appointment of compliance officer
28A. (1) Every merchant banker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc., issued by the Board or the Central Government and for redressal of investors? grievances.

(2) The compliance officer shall immediately and independently report to the Board any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on \ in the draft prospectus or the Letter of offer as the case may be, do not recur.]



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Foot notes
19. Regulation 13A was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 06.06.1996.
20. Substituted for the words "Financial Institution" by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 06.06.1996.

21. "after June 30th, 1998" inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 06.06.1996.

22. Proviso to regulation 13A was inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 17.11.1999.

23. Regulation 24A inserted by SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette of India dated 06.06.1996.

24. Regulation 28A was inserted by SEBI (Investment advice by intermediaries) (Amendment) Regulations, 2001 published in the Official Gazette of India dated 29.05.2001.



CHAPTER IV
PROCEDURE FOR INSPECTION

Board's right to inspect

29. (1) The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records and documents of the merchant banker for any of the purposes specified in sub-regulation (2).
(2) The purposes referred to in sub-regulation (1) may be as follows namely: -

(a) to ensure that the books of account are being maintained in the manner required;
(b) that the provisions of the Act, rules, regulations are being complied with;

(c) to investigate into the complaints received from investors, other merchant bankers or any other person on any matter having a bearing on the activities of the merchant banker; and

(d) to investigate suo-moto in the interest of securities business or investors interest into the affairs of the merchant banker.

Notice before inspection

30. (1) Before undertaking an inspection under regulation 29 the Board shall give a reasonable notice to the merchant banker for that purpose.
(2) Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors no such notice should be given, it may by an order in writing direct that the inspection of the affairs of the merchant banker be taken up without such notice.

(3) During the course of inspection, the merchant banker against whom an inspection is being carried out shall be bound to discharge his obligations as provided under regulation 31.

Obligations of merchant banker on inspection by the Board
31. (1) It shall be the duty of every director, proprietor, partner, officer and employee of the merchant banker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to his activities as a merchant banker within such time as the inspecting authority may require.
(2) The merchant banker shall allow the inspecting authority to have reasonable access to the premises occupied by such merchant banker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the merchant banker or any such other person and also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant for the purposes of the inspection.

(3) The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any principal officer, director, partner, proprietor and employee of the merchant banker.

(4) It shall be the duty of every director, proprietor, partner, officer or employee of the merchant banker to give to the inspecting authority all assistance in connection with the inspection which the merchant banker may reasonably be expected to give.


Submission of Report to the Board
32. The inspecting authority shall, as soon as may be possible submit, an inspection report to the Board.
25*[Action on inspection or investigation report
33. The Board or the Chairman shall after consideration of inspection or investigation report take such action as the Board or Chairman may deem fit and appropriate including action under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002."
Appointment of Auditor
34. The Board may appoint a qualified auditor to investigate into the books of account or the affairs of the merchant banker:
Provided that the auditor so appointed shall have the same powers of the inspecting authority as are mentioned in regulation 29 and the obligations of the merchant banker in regulation 31 shall be applicable to the investigation under this regulation.

Explanation: For the purposes of this regulation the expression "qualified auditor" shall have the same meaning as given in Section 226 of the Companies Act, 1956 (1 of 1956).


Foot notes
25. Following regulation 33 was substituted 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
Communication of findings etc. to the merchant banker


33. (1) The Board shall after consideration of the inspection report communicate the findings to the merchant banker to give him an opportunity of being heard before any action is taken by the Board on the findings of the inspecting authority.
(2) On receipt of the explanation if any, from the merchant banker, the Board may call upon the merchant banker to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act, rules and regulations.



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CHAPTER V
PROCEDURE FOR ACTION IN CASE OF DEFAULT

26*[Liability for action in case of default

35. A merchant banker who ?

(a) fails to comply with any conditions subject to which certificate has been granted;
(b) contravenes any of the provisions of the Act, rules or regulations, shall be dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002."

27*[******]



Foot notes
26. Following regulation 35 was substituted 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


Liability for action in case of default
35. (1) A merchant banker who ?

(a) fails to comply with any conditions subject to which certificate has been granted;
(b) contravenes any of the provisions of the Act, rules or regulations;

shall be liable to any of the penalties specified in sub-regulation (2).



(2) The penalties referred to in sub-regulation (1) may be either:-
(a) suspension of registration; or
(b) cancellation of registration.



27. Following regulations 36 to 43 were omitted 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
Suspension of registration

36. (1) A penalty of suspension of registration of a merchant banker may be imposed where ?
(i) the merchant banker violates the provisions of the Act, rules or regulations;
(ii) the merchant banker ?

(a) fails to furnish any information relating to his activity as merchant banker as required by the Board;
(b) furnishes wrong or false information;

(c) does not submit periodical returns as required by the Board;

(d) does not co-operate in any enquiry conducted by the Board;

(iii) the merchant banker fails to resolve the complaints of the investors or fails to give a satisfactory reply to the Board in this behalf;
(iv) the merchant banker indulges in manipulating or price rigging or cornering activities;

(v) the merchant banker is guilty of misconduct or improper or unbusinesslike or unprofessional conduct which is not in accordance with the Code of Conduct specified in Schedule III;

(vi) the merchant banker fails to maintain the capital adequacy requirement in accordance with the provisions of regulation 7;

(vii) the merchant banker fails to pay the fees;

(viii) the merchant banker violates the conditions of registration;

(ix) the merchant banker does not carry out his obligations as specified in the regulation.

Cancellation of registration
37. A penalty of cancellation of registration of a merchant banker may be imposed where
(i) the merchant banker indulges in deliberate manipulation or price rigging or cornering activities affecting the securities market and the investors interest;
(ii) the financial position of the merchant banker deteriorates to such an extent that the Board is of the opinion that his continuance as merchant banker is not in the interest of investors;

(iii) the merchant banker is guilty of fraud, or is convicted of a criminal offence;

(iv) in case of repeated defaults of the nature mentioned in regulation 36 provided that the Board furnishes reasons for cancellation in writing.


Manner of making order of suspension an cancellation

38. No order of penalty of suspension or cancellation as the case may be, shall be imposed except after holding an enquiry in accordance with the procedure specified in regulation
39.
Manner of holding enquiry before suspension or cancellation
39. (1) For the purpose of holding an enquiry under regulation 38, the Board may appoint an enquiry officer.
(2) The enquiry officer shall issue to the merchant banker a notice the registered office or the principal place of business of the merchant banker.

(3) The merchant banker may, within thirty days from the date of receipt of such notice, furnish to the enquiry officer a reply together with copies of documentary or other evidence relied on by him or sought by the Board from the merchant banker.

(4) The enquiry officer shall, give a reasonable opportunity of hearing to the merchant banker to enable him to make submissions in support of his reply made under sub-regulation (3).

(5) Before the enquiry officer, the merchant banker may either appear in person or through any person duly authorised by the merchant banker:

Provided that no lawyer or advocate shall be permitted to represent the merchant banker at the enquiry:

Provided further that where a lawyer or an advocate has been appointed by the Board as a presenting officer under sub- regulation (6), it shall be lawful for the merchant banker to present its case through a lawyer or advocate.

(6) If it is considered necessary, the enquiry officer may ask the Board to appoint a presenting officer to present its case.

(7) The enquiry officer shall, after taking into account all relevant facts and submissions made by the merchant banker, submit a report to the Board and recommend the penalty to be imposed as also the grounds on the basis of which the proposed penalty is justified.

Show-cause notice and order
40. (1) On receipt of the report from the enquiry officer, the Board shall consider the same and issue a show-cause notice as to why the penalty as proposed by the enquiry officer should not be imposed.
(2) The merchant banker shall within twenty-one days of the date of the receipt of the show- cause send a reply to the Board.

(3) The Board after considering the reply to the show-cause notice, if received, shall as soon as possible but not later than thirty days from the receipt of the reply, if any, pass such order as it deems fit.

(4) Every order passed under sub- regulation (3) shall be self- contained and give reasons for the conclusions stated therein including justification of the penalty imposed by that order.

(5) The Board shall send a copy of the order under sub- regulation (3) to the merchant banker.



Effect of suspension and cancellation of registration of merchant banker
41. (1) On and from the date of the suspension of the merchant banker he shall cease to carry on any activity as a merchant banker during the period of suspension.
(2) On and from the date of cancellation the merchant banker shall with immediate effect cease to carry on any activity as a merchant banker.



Publication of order of suspension
42. The order of suspension or cancellation of certificate passed under sub-regulation (3) of regulation 40 shall be published in at least two daily newspapers by the Board.
a*[Appeal to the Securities Appellate Tribunal
43. Any person aggrieved by an order of the Board made, on and after the commencement of the Securities Laws (Second amendment) Act, 1999, (i.e., after 16th December 1999), under these regulations may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter]
a. Substituted for the following provision by SEBI (Appeal to the Securities Appellate Tribunal) (Amendment) Regulations, 2000 published in the official Gazette of India dated 28.03.2000

"Any person aggrieved by an order of the Board may prefer an appeal to the Central Government"