Introduction
SEBI (Merchant Banker) Regulations, 1992, define ‘merchant banker’ as any person who is engaged in the business of issue management, either by making arrangements regarding selling, buying, or subscribing, or acting as a manager, consultant, or advisor, or rendering corporate- advisory services in relation to such issue management.
In case of both the public issues and right issues, it is mandatory to appoint a Merchant Banker.
The task of Merchant Banker is basically that of a facilitator or coordinator. It coordinates the process of issue management by helping the underwriters, registrars and bankers, in pricing and marketing the issue and complying with the SEBI guidelines.
Merchant Bankers are prohibited from carrying on certain activities such as acceptance of deposits, leasing and bill discounting. They are not allowed to borrow any money from the market. They are also debarred from engaging in the acquisition and sale of securities on a commercial basis.
Responsibilities of Merchant Bankers as per SEBI ICDR Regulations
Communication
· In respect of all public communications, issue advertisements and publicity materials, the issuer shall obtain approval from the lead merchant bankers responsible for marketing the issue and shall also make copies of all issue related materials available with the lead merchant bankers at least till the allotment is completed.
· An announcement regarding closure of issue shall be made only after the lead merchant banker(s) is satisfied that at least ninety per cent of the offer through offer document has been subscribed and a certificate has been obtained to that effect from the registrar to the issue.
Compliance Certificate
The merchant bankers shall submit a compliance certificate in the format specified in Part D of Schedule XIII, for the period between the date of filing the draft offer document with the Board and the date of closure of the issue, in respect of news reports appearing in any of the following media:
(a) newspapers mentioned in sub-regulation (3) of regulation 9;
(b) major business magazines;
(c) print and electronic media controlled by a media group where the media group has a private treaty/shareholders‘ agreement with the issuer or Promoters of the issuer.
Copies of offer documents to be available to public
(i) The issuer and lead merchant bankers shall ensure that the contents of offer documents hosted on the websites as required in these regulations are the same as that of their printed versions as filed with the Registrar of Companies, Board and the stock exchanges.
(ii) The lead merchant bankers and the recognized stock exchange shall provide copies of the draft offer document and final offer document to the public as and when requested.
Redressal of investor grievances
The post-issue lead merchant bankers shall actively associate him with post-issue activities such as allotment, refund, dispatch and giving instructions to syndicate members, Self Certified Syndicate
Banks and other intermediaries and shall regularly monitor redressal of investor grievances arising therefrom.
Due diligence
The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents.
Audited financial statements in the offer document
The merchant banker shall ensure that the information contained in the offer document and the particulars as per audited financial statements in the offer document are not more than six months old from the issue opening date.
Other responsibilities
(i) The lead merchant bankers shall call upon the issuer, its promoters or directors or in case of an offer for sale, the selling shareholders, to fulfill their obligations as disclosed by them in the offer document and as required in terms of these Regulations.
(ii) The post-issue merchant banker shall continue to be responsible for post-issue activities till the subscribers have received the securities certificates, credit to their demat account or refund of application moneys and the listing agreement is entered into by the issuer with the stock exchange and listing/ trading permission is obtained.
(iii) The responsibility of the lead merchant banker shall continue even after the completion of issue process.
(iv) In case of absence of definite information about subscription figures, the issue shall be kept open for the required number of days to avoid any dispute, at a later date, by the underwriters in respect of their liability.
(v) The issuer shall ensure that transactions in securities by the promoter and promoter group during the period between the date of registering the offer document with the Registrar of Companies or filing the letter of offer with the designated stock exchange, as the case may be and the date of closure of the issue shall be reported to the recognized stock exchanges where the specified securities of the issuer are listed, within twenty four hours of the transactions.
The pre issue and post issue obligations of the merchant banker have been discussed in detail later.
(vi) Where the shares are not frequently traded, the price determined by the promoters or shareholders having control and the merchant banker taking into account valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such issuers.
Pre-Issue Management by Merchant Banker
Merchant Bankers play an important role in the issue management process. Besides the above
discussions on responsibilities of Merchant Banker, Pre-Issue Management by Merchant Banker has been separately discussed in the following paragraphs to induce more clarity in the minds of the students:
(i) Submitting Offer Document: Along with Offer Document, certain other documents are also required to be submitted. They are as follows:
· Memorandum of Understanding (MOU)
An MOU has to be entered into between a lead merchant banker and the issuer company, specifying their rights, liabilities and obligations. The lead merchant banker has to submit the draft offer letter along with the MOU to the Board (SEBI).
· Inter Se Allocation of Responsibilities
In case of under subscription of securities, the lead merchant banker responsible for underwriting arrangements shall fulfill the underwriting obligations and make sure that underwriters pay the amount of devolvement and the same shall be incorporated in the inter-se allocation of responsibilities.
· Due-diligence Certificate
The Merchant Banker shall exercise Due Diligence and submit a due diligence certificate to the Board confirming that all the disclosures made in the draft prospectus are true and fair and they are capable of ensuring that the investors take a well informed decision on that basis.
· In case of listed companies going for further issue of capital, a Chartered Accountant or a Company Secretary shall sign the following certificates certifying that :
a) All refund orders of the previous issue and all security certificates to the allottees have been dispatched in a prescribed manner and within the prescribed time.
b) The securities were listed in the stock exchange as specified in the offer document.
(ii) Undertaking: The merchant banker shall also submit an undertaking that transactions in securities by the promoter between the date of filing of offer documents with Registrar of Companies (ROC) and the date of closure of issue shall be reported to the stock exchange within 24 hours of the transaction.
(iii) Submission of List of Promoters’ Group and Other Details such as PAN, Bank Account No. and passport no. of the promoters to SEBI.
Appointment of Intermediaries: The merchant banker shall ensure that intermediaries (bankers to the issue, registrar to the issue etc.) are duly registered with SEBI. He shall ensure that intermediaries are capable enough to discharge their duties. He shall also make sure that the issuer company enters into an MOU with the intermediaries.(i) Underwriting: The merchant bankers shall satisfy themselves about the ability of the underwriters before their appointment. In respect of every underwritten issue, the merchant banker shall undertake a minimum underwriting obligation of 5% of the total underwriting commitment or 25 lakhs, whichever is less.
(ii) Offer document to be made public: The draft offer document filed with the SEBI shall be made public for a period of 21 days, from the date of filing the offer document with the SEBI.
(iii) No Complaint Certificate: The lead merchant banker shall file a Certificate with the SEBI after the expiry of 21 days as mentioned above highlighting the list of complaint received from the public.
(iv) The merchant banker shall ensure that every application form is accompanied by a copy of the abridged prospectus.
(v) The merchant banker shall also ensure that the issuer company has entered into an agreement with depositories for dematerialization of securities.
Post Issue Management by Merchant Bankers
Post Issue Management by Merchant Bankers has been explained in detail as below to enable the students to have more clarity on the topic:
(i) Post Issue Monitoring Reports: The post issue lead merchant banker shall submit the following post issue monitoring report –
· A 3-day monitoring report in case of issue book-building route, which shall be submitted within 3 days from the date of allocation in the book built issue.
· A 3-day monitoring report in case of fixed portion of book built issue, which shall be submitted within 3 days of the closure of the issue.
A final post issue monitoring report shall be submitted within 3 days from the date of listing or 78 days from the date of closure of the subscription of the issue, whichever is earlier.
Further, the due diligence certificate shall be submitted with the final post issue monitoring report.
(ii) Redressal of Investor Grievances: The post issue lead merchant banker shall address the investor grievances with regard to certain post issue activities, such as allotment of securities, refund of securities, dispatch of share certificates and other correspondence, giving instructions to self-certified banks etc. Coordination with Intermediaries: The post issue lead merchant banker maintains a close coordination with Registrar to the issue, and deputes officers at the offices of various intermediaries to monitor the process of application including ASBA applications till allotment is done. It supervises and ensures that security certificates are properly dispatched, refund orders completed and securities listed.
(i) Underwriters: In case of unsubscribed issue, the merchant banker shall ensure that the underwriters shall honour their commitments within 60 days from the date of closure of the issue. The lead merchant banker shall furnish information to SEBI in respect of the underwriters who have failed to meet their underwriting obligations.
(ii) Bankers to an issue: The post issue lead merchant banker shall ensure that all the money received pursuant to the issue and kept in a separate bank shall be released only when listing permission is received from all the stock exchanges where it is proposed to be listed.
(iii) Post-issue Advertisements: A post issue advertisement has to be given by the merchant banker within ten days from the date of completion of the various activities in a leading English newspaper, one Hindi National Paper and a Regional language daily, circulated at the place where the registered office of the company is situated giving details of oversubscription, basis of allotment, value and percentage of successful allottees, date of dispatch of certificates and date of dispatch of refund orders.
The post-issue merchant banker shall ensure that issuer, advisors, brokers or any other entity connected with the issue do not publish any advertisement stating that issue has been oversubscribed or indicating investors‘ response to the issue, during the period when the public issue is still open for subscription by the public.
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