Nismadmin NISM SERIES IX Merchant Banking (2019)
Nismadmin NISM SERIES IX Merchant Banking (2019)
Nismadmin NISM SERIES IX Merchant Banking (2019)
Workbook for
NISM-Series-IX: Merchant
Banking Certification
Examination
1
NISM-Series-IX: Merchant Banking Certification Examination
This workbook has been developed to assist candidates in preparing for the National
Institute of Securities Markets (NISM) Certification Examination for Merchant Banking.
Published by:
All rights reserved. Reproduction of this publication in any form without prior permission
of the publishers is strictly prohibited.
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NISM-Series-IX: Merchant Banking Certification Examination
Foreword
NISM is a leading provider of high end professional education, certifications, training and
research in financial markets. NISM engages in capacity building among stakeholders in
the securities markets through professional education, financial literacy, enhancing
governance standards and fostering policy research. NISM works closely with all
financial sector regulators in the area of financial education.
NISM Certification programs aim to enhance the quality and standards of professionals
employed in various segments of the financial services sector. NISM’s School for
Certification of Intermediaries (SCI) develops and conducts certification examinations
and Continuing Professional Education (CPE) programs that aim to ensure that
professionals meet the defined minimum common knowledge benchmark for various
critical market functions.
NISM certification examinations and training programs provide a structured learning plan
and career path to students and job aspirants who wish to make a professional career in
the Securities markets. Till March 2018, NISM has certified nearly 7 lakh individuals
through its Certification Examinations and CPE Programs.
NISM supports candidates by providing lucid and focused workbooks that assist them in
understanding the subject and preparing for NISM Examinations. This book covers all
important aspects of the functioning of the Merchant Bankers. These include the basic
understanding of the Indian securities markets; various terminologies used in the issue
management process; the process of issue management and underwriting; general
obligations and due diligence to be taken care of during the issue management process;
the role of merchant bankers in acquisitions, takeovers, buyback of securities,
disinvestment etc. This book will be immensely useful to all those who want to learn
about the various functional aspect of Merchant Bankers.
Dr. M Thenmozhi
Director
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NISM-Series-IX: Merchant Banking Certification Examination
Disclaimer
The contents of this publication do not necessarily constitute or imply its endorsement,
recommendation, or favoring by the National Institute of Securities Market (NISM) or the
Securities and Exchange Board of India (SEBI). This publication is meant for general
reading and educational purpose only.
The statements/explanations/concepts are of general nature and may not have taken
into account the particular objective/ move/ aim/ need/ circumstances of individual user/
reader/ organization/ institute. Thus NISM and SEBI do not assume any responsibility
for any wrong move or action taken based on the information available in this
publication.
Therefore before acting on or following the steps suggested on any theme or before
following any recommendation given in this publication user/reader should
consider/seek professional advice.
The publication contains information, statements, opinions, statistics and materials that
have been obtained from sources believed to be reliable and the publishers of this title
have made best efforts to avoid any errors. However, publishers of this material offer no
guarantees and warranties of any kind to the readers/users of the information contained
in this publication.
Since the work and research is still going on in all these knowledge streams, NISM and
SEBI do not warrant the totality and absolute accuracy, adequacy or completeness of
this information and material and expressly disclaim any liability for errors or omissions
in this information and material herein. NISM and SEBI do not accept any legal liability
what so ever based on any information contained herein.
While the NISM Certification examination will be largely based on material in this
workbook, NISM does not guarantee that all questions in the examination will be from
material covered herein.
Acknowledgement
This workbook has been developed jointly by the Certification Team of National Institute
of Securities Markets and Ms. Ramadevi Iyer, Company Secretary.
NISM gratefully acknowledges the contribution of AIBI and all the Examination
Committee for NISM-Series-IX: Merchant Banking Certification Examination consisting
of nominated representatives from the AIBI.
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NISM-Series-IX: Merchant Banking Certification Examination
About NISM
National Institute of Securities Markets (NISM) was established by the Securities and
Exchange Board of India (SEBI), in pursuance of the announcement made by the
Finance Minister in his Budget Speech in February 2005.
Towards accomplishing the desire of Government of India and vision of SEBI, NISM
delivers financial and securities education at various levels and across various
segments in India and abroad. To implement its objectives, NISM has established six
distinct schools to cater to the educational needs of various constituencies such as
investors, issuers, intermediaries, regulatory staff, policy makers, academia and future
professionals of securities markets.
NISM also conducts numerous training programs and brings out various publications on
securities markets with a view to enhance knowledge levels of participants in the
securities industry.
The skills, expertise and ethics of professionals in the securities markets are crucial in
providing effective intermediation to investors and in increasing the investor confidence
in market systems and processes. The School for Certification of Intermediaries (SCI)
seeks to ensure that market intermediaries meet defined minimum common benchmark
of required functional knowledge through Certification Examinations and Continuing
Professional Education Programmes on Mutual Funds, Equities, Derivatives Securities
Operations, Compliance, Research Analysis, Investment Advice and many more.
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NISM-Series-IX: Merchant Banking Certification Examination
This workbook has been developed to assist candidates in preparing for the National
Institute of Securities Markets (NISM) Certification Examination for Merchant Banking.
NISM-Series-IX: Merchant Banking Certification Examination seeks to create a common
minimum knowledge benchmark for employees working with SEBI registered Merchant
Bankers and performing various SEBI regulated functions such as those relating to IPO,
FPO, Open offer, Buy-back, Delisting etc., and are involved in, or deal with any of the
following:
The investors, issuers or clients of intermediaries
Assets or funds of investors or clients
Redressal of investor grievances
Internal control or risk management
Activities having a bearing on operational risk
Maintain books and records pertaining to above activities.
The book covers various aspects of capital market functions, the importance of the
different rules and regulations governing the Indian securities market and the processes
involved in various functions of registered Merchant Bankers and the regulatory
environment in which it operates.
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NISM-Series-IX: Merchant Banking Certification Examination
In order to create a common minimum knowledge benchmark for employees working with SEBI
registered Merchant Bankers and performing various SEBI regulated functions such as those
relating to IPO, FPO, Open offer, Buy-back, Delisting etc., and are involved in, or deal with
any of the following:
The investors, issuers or clients of intermediaries
Assets or funds of investors or clients
Redressal of investor grievances
Internal control or risk management
Activities having a bearing on operational risk
Maintain books and records pertaining to above activities.
The exam will further seek to ensure basic understanding of various aspects of capital market
functions, the processes involved in various functions of registered Merchant Bankers and the
regulatory environment in which it operates.
Examination Objectives
The examination consists of 100 questions of 1 mark each and should be completed in 2
hours. The passing score on the examination is 60%. There shall be negative marking
of 25% of the marks assigned to a question.
To find out more and register for the examination please visit www.nism.ac.in
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NISM-Series-IX: Merchant Banking Certification Examination
Table of Contents
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NISM-Series-IX: Merchant Banking Certification Examination
LEARNING OBJECTIVES:
In this chapter, the structure of the Indian Capital Market, the different products available
in the securities market, various participants and the role of different regulators of the
market will be discussed in brief to give an overview of the capital market in India.
Capital Market provides a platform for the issuers and the investors to come together. It
helps the issuers to raise capital for productive deployment in creating economic wealth.
At the same time, the capital market offers investment avenues to investors with
appetite for higher risks and returns as compared to the safe investment option with
banks. Capital Market is further divided into the Primary Market and Secondary Market
whereas Money Market is classified into Organized Money Market and Unorganized
Money Market.
Primary Market is the new issue market, which provides opportunity to issuers of
securities, Government as well as corporates, to raise resources to meet their
requirements of investments and/or discharge some obligation. If securities are allotted
to the public for the first time for the purpose of listing, it is called Initial Public Offer
(IPO). Once the securities are listed on the Stock Exchanges, the same shares traded
will be on the secondary market, between investors themselves. If securities are already
listed and the issuer company wants to issue further class of securities to the investors
again, it is called Further Public Offer (FPO).
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NISM-Series-IX: Merchant Banking Certification Examination
Secondary Market helps in providing liquidity to the securities which has already been
issued in the primary market. In this market, an investor liquidates his own investments.
Since the securities are traded on the stock exchange and the transactions are between
two investors, the issuer does not come into picture. Secondary Markets operate
through two mediums, namely, the Over-The-Counter (OTC) market and the Exchange
Traded Market. OTC markets are the informal type of markets where trades are
negotiated. In this type of market, the securities are traded and settled bilaterally over
the counter. The other option of trading is through the stock exchange route, where
trading and settlement is done through the stock exchanges and the buyers and sellers
may not be in touch with each other. The transaction is carried out through SEBI
registered stock brokers or sub-brokers.
Money market is a market for financial assets that are close substitutes for money. It is a
market for short term, medium term and long term funds. The money market deals
primarily in securities and investments, such as banker’s acceptances, negotiable
certificates of deposit (CDs), repos and Treasury Bills (T-bills), call/notice money market,
commercial papers. Government securities such as infrastructure bonds and oil bonds
are also a part of the money market.
Indian Securities Markets cover a wide range of products depending upon the risk
appetite of the investors. For example, if an investor wants to invest in risky products he
has the option to invest in products of the equity market, whereas a risk-averse investor
can invest in bond markets which are comparatively less risky. Product portfolio of
Indian securities markets can be broadly classified into 3 categories:
a) Equity Market Products: The equity segment of the stock exchange allows trading
in shares, debentures, warrants, mutual funds and exchange traded funds (ETFs).
Equity Shares represent a form of fractional ownership in a business venture.
Equity shareholders collectively own the company and also bear the risk and
enjoy the rewards of ownership.
Debentures are instruments for raising long term debt. Debentures in India are
typically secured by tangible assets. There are fully convertible, optionally fully
convertible, non convertible and partly convertible debentures. Fully convertible
debentures will be converted into ordinary shares of the same company under
specified terms and conditions. Optionally fully convertible debentures will be
converted into equity shares of the same company at the option of the investor.
Partly convertible debentures (PCDs) will be partly converted into ordinary shares
of the same company under specified terms and conditions. Thus it has features
of both debenture as well as equity. Non-Convertible
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NISM-Series-IX: Merchant Banking Certification Examination
Debentures (NCDs) are pure debt instruments without the feature of conversion.
The NCDs are repayable on maturity.
Warrants entitle an investor to buy equity shares after a specified time period at a
given price.
Mutual Funds pools money from numerous investors who wish to save or make
investments having similar investment objective. The Mutual Fund invests in
different types of funds in consonance with the investment objectives. A mutual
fund company pools money from many investors and invests the money in
stocks, bonds, short-term money-market instruments, other securities or assets,
or some combination of these investments, depending on the objectives of the
fund. There are funds which invest in equities, better known as equity MF
schemes which are considered riskier than debt mutual funds.
Exchange Traded Fund is a fund that can invest in either all of the securities or a
representative sample of securities included in the index. Importantly, the ETFs
offer a one-stop exposure to a diversified basket of securities that can be traded
in real time like individual stock example gold exchange traded fund
Index / Stock Options are of two types - calls and puts. Calls give the buyer the
right, but not the obligation, to buy a given quantity of the underlying asset, at a
given price on or before a given future date. Puts give the seller the right, but not
the obligation, to sell a given quantity of the underlying asset at a given price on
or before a given date.
Currency Derivatives trading was introduced in the Indian financial markets with
the launch of currency futures trading in the USD-INR pair on the National Stock
Exchange of India Limited (NSEIL) on August 29, 2008. Few more currency pairs
have also been introduced thereafter. As at end January 2013, currency futures
are traded on the USD
INR, GBP-INR, EUR-INR and JPY-INR on NSE, MCX-SX and USE.
Commodity Derivatives markets are markets where raw or primary products are
exchanged. These raw commodities are traded on regulated commodities
exchanges, in which they are bought and sold on the basis of standardized
contracts for a specified
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NISM-Series-IX: Merchant Banking Certification Examination
c) Debt Market Products: Debt market consists of Bond markets, which provide
financing through the issuance of Bonds, and enable the subsequent trading
thereof. Instruments like bonds/debentures are traded in this market. These
instruments can be traded in OTC or Exchange traded markets. In India, the debt
market is broadly divided into government securities (G-Sec) market and the
corporate bond market.
Corporate Bond Market: Corporate bonds are bonds issued by firms, corporate
and are issued to meet needs for expansion, modernization, restructuring
operations, mergers and acquisitions. The corporate bond/debt market is a
market wherein debt securities of corporates are issued and traded therein. The
investors in this market are banks, financial institutions, insurance companies,
mutual funds, FIIs etc. Corporates adopt either the public offering route or the
private placement route for issuing debentures/bonds.
Some of the other instruments available for trading in the debt segment are
Treasury Bills, Commercial Papers and Certificate of Deposits.
There are different participants who play an important role in the securities market.
Entities develop, issue, register and sell securities for the purpose of financing their
operations. There are people who invest in these securities and there are some entities
that provide the service of intermediation. Some of them are discussed here:
i. Issuer means any company/corporate making an offer of securities. They are the
persons who actually approach the market stating their specific objectives and
collect funds from the general public by offering securities.
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NISM-Series-IX: Merchant Banking Certification Examination
ii. Investors are the persons who actually invest their funds in the securities offered by
the issuer. They are broadly categorised as Retail Investors, Institutional
Investors and Non Institutional Investors. Investors investing upto Rs. Two lakh in
a single public issue transaction is termed as Retail investors, whereas
institutional investors comprise of domestic financial institution, mutual funds, FIIs
etc commonly known as Qualified Institutional Buyers (QIBs).1
iii. Intermediaries: There are many intermediaries in the Indian securities market. As per
the SEBI Act, 1992, intermediaries include stock brokers, sub-brokers, share
transfer agents, bankers to an issue, self-certified syndicate bank (SCSBs),
trustees of trust deeds, registrars to an issue, merchant bankers, underwriters,
portfolio managers, investment advisers, mutual funds and such other
intermediaries who may be associated with securities markets in any manner,
depositories, participants, custodians of securities, credit rating agencies and
such other intermediaries as SEBI may, by notification, specify in this behalf.
Some of them are discussed below:
Stock Brokers & Sub-Brokers: Stock brokers have been defined as a member of a
stock exchange. Stock Brokers are the members of the Stock Exchange and can
either be individuals or corporate. They give their advice and recommendations
relating to investment opportunities to their clients. Their clients may be retail
investors or institutional clients and they execute the trade on their client’s behalf
on the exchange. Further, SEBI has decided to discontinue the category of
sub-broker as a market intermediary and their migration to Authorized Person
and/or Trading member within a
Specified period of time. Authorised Person or “AP” would mean a person
–individual, partnership firm, LLP or body corporate – who is appointed by a stock
broker (including trading member) and who provides access to trading platform of
a stock exchange as an agent of the stock broker.
1
CBDT vide Notification No. 59/2015 dated 6th July, 2015 has stated that for the purpose of issue of
tax-free, secured, redeemable, and non-convertible bonds, Retail individual Investors means those
individual investors, Hindu Undivided Family (through Karta), and Non Resident Indians (NRIs), on
repatriation as well as non-repatriation basis, applying for upto Rupees Ten lakhs in each issue and
individual investors investing more than Rupees Ten lakhs shall be classified as High Net Worth
Individuals.
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NISM-Series-IX: Merchant Banking Certification Examination
Merchant Bankers: means any entity who is engaged in the business of issue
management either by making arrangements regarding selling, buying or
subscribing to securities or acting as manager, consultant, adviser or rendering
corporate advisory service in relation to such issue management. They need to
be registered with SEBI to act & perform as Merchant Banker. They perform a
variety of activities including managing capital issues, managing individual funds
and advising clients on proper valuation of their security and often the
underwriting of issues. Most of these activities are also performed by
money-market dealers, commercial banks and financial institutions, share brokers
and investment funds and unit trust managers under registration as Merchant
Bankers.
Registrars and Transfer Agents: Registrars to an issue are entities, who on behalf
of anybody corporate collect applications from investors in respect of an issue,
keep proper record of applications and monies received from investors and
assists body corporate to determine basis of allotment, process and despatch
allotment letters, refund orders or certificates in respect of an issue. Share
transfer agents maintain the record of holders of securities issued by such body
corporate and deal with all matters connected with the transfer and redemption of
its securities. Share transfer agent can also be a department or division (by
whatever name called) of a body corporate performing the above activities if, at
any time the total number of the holders of securities issued exceed one lakh.
In addition to the Self Certified Syndicate Banks (SCSBs), Syndicate Members and
Registered Brokers of Stock exchanges, the Registrars to an Issue and share transfer
Agents (RTAs) and Depository Participants (DPs) registered with SEBI are also
permitted to accept application forms (both physical as well as online) in public issues.
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NISM-Series-IX: Merchant Banking Certification Examination
In order to have effective functioning and proper development of the market, there is a
need for a regulator. Amongst other tasks, the first and foremost task of the regulator
would be to protect the interest of investors and to ensure that there is no violation of
rules and regulations. In India, securities markets are regulated by different regulators
and hence there may be instances where there is a regulatory overlap.
The Securities and Exchange Board of India (SEBI) is the securities market regulator2.
As per SEBI Act 1992, it is “responsible for protecting the interests of investors in
securities and to promote the development of, and to regulate the securities market and
for matters connected therewith or incidental thereto”. It also regulates the issue of new
securities, has the power to make rules for regulating the stock exchange, provides
license to dealers and brokers and deals with frauds and inconsistencies in the capital
market.
The money market which deals with bonds and deposits is regulated by the Reserve
Bank of India (RBI). It looks at the macroeconomic conditions and decides the rate of
interest to be paid on government securities as well as important factors like the
Statutory Lending Ratio (SLR) and the Cash Reserve Ratio (CRR). It works with the
Government to balance the growth of the country with factors such as inflation, current
account deficits and the exchange rates of the rupee vis-à
vis the global currencies.
Ministry of Company Affairs (MCA) through the Registrar of Companies regulates the
Corporate Sector. The Ministry is primarily concerned with administration of the
Companies Act, 2013, other allied Acts and rules & regulations framed there-under
mainly for regulating the functioning of the corporate sector in accordance with law. The
Ministry is also responsible for administering the Competition Act, 2002.
Insurance Regulatory and Development Authority of India (IRDAI) is the watchdog for
the insurance sector. Its mission is “to protect the interests of the policyholders, to
regulate, promote and ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto”. It regulates the insurance and re-insurance
business and has the mandate to register new insurance issuers, deal with issues of
policyholders and to specify the code of conduct of the insurance business.
Pension Fund Regulatory and Development Authority (PFRDA) is mandated to regulate
the pension sector in India. It was formed through the PFRDA Act of 2003. It is
responsible for carrying out the Government of India’s effort to find a sustainable
solution to providing adequate retirement income to the citizens. Since 2008, the
pension contributions of the central government employees are being invested by
professional pension fund managers in accordance with Government of India
guidelines, under the regulation of the PFRDA.
Ministry of Finance (MOF) works through the Reserve Bank of India to regulate the
securities market to the extent of investments into India by foreign or Non-Resident
Indian investors.
2
SEBI regulates Commodity derivatives which is included in the definition of derivatives under the
Securities Contracts (Regulation) Act, 1956. Commodity derivatives have been defined in the Act. SEBI
has now introduced options trading in commodity futures also.
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NISM-Series-IX: Merchant Banking Certification Examination
Foreign Exchange Management Act, 1999 came into force in 2000. The Act along with
the Regulations and Rules thereunder specify the conditions to be fulfilled and the
compliances to be made for investment into India.
All the authorities have an interrelation with each other. Example: If a company is issuing
equity shares in the securities market for the first time, MCA is the primary regulator
along with SEBI. Apart from this, if the issue is subscribed to, by the foreign investors or
Non-resident Indians, the company will be subject to the RBI regulations as well.
Further, if a company is a bank or an insurance company, it is primarily regulated by RBI
or IRDAI respectively, once the company decides to come with an IPO and lists its
shares, it also comes within the jurisdiction of SEBI, the securities market regulator.
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NISM-Series-IX: Merchant Banking Certification Examination
Review Questions:
3. The SLR and CRR rates are decided by which of the following regulatory
bodies? (a) Securities and Exchange Board of India
(b) Reserve Bank of India
(c) Insurance and Regulatory Authority of India
(d) Competition Commission of India
Ans: (b)
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NISM-Series-IX: Merchant Banking Certification Examination
LEARNING OBJECTIVES:
In the earlier chapter, we have discussed the capital market products and participants in
the Indian context. This chapter delves into the evolution of merchant banking, the role
of merchant bankers, concept and the regulations governing the activities of merchant
banking in Indian context. The merchant banking activities with respect to international
markets such as United States and United Kingdom have also been dealt with briefly.
There is a fine line of distinction between Merchant Banking and Investment Banking,
which we try to highlight in this section. ‘Merchant Banking’ as the term suggests, is the
function of intermediation in the capital market. It consists of assisting issuers to raise
capital by placement of securities issued by the issuers with investors. The merchant
banker has an onerous responsibility towards the investors who invest in such
securities. The regulatory authorities require the merchant banking firms to promote
quality issues, maintain integrity and ensure compliance with the law on own account
and on behalf of the issuers as well. Therefore, merchant banking is a fee based service
for management of public offers, popularly known as
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NISM-Series-IX: Merchant Banking Certification Examination
‘issue management’ and for private placement of securities in the capital market. In
India, the merchant banker leading a public offer is popularly known as the ‘Lead
Manager’.
On the other hand, the term ‘Investment Banking’ has a much wider connotation and is
gradually becoming more of an inclusive term to refer to all types of capital market
activity, both fund based and non-fund based. This development has been driven more
by the way the American investment banks have evolved themselves over the past
century. Investment banking encompasses not merely merchant banking but other
related capital market activities such as stock trading, market making and underwriting,
stock broking and asset management as well. Besides the above, investment banks
also provide a host of specialized corporate advisory services in the areas of project
advisory, business and financial advisory and mergers and acquisitions.3
Merchant banking originated in Italy then came to France in the seventeenth and
eighteenth centuries. In France, a merchant banker was a merchant who added the
banking business to his various activities and utilized his accumulated profits better.
Merchant bankers’ activities differed from those of any other ‘money changer’ and
involved dealing in bills of exchange with correspondents abroad and speculated on the
rate of exchange. Merchant banks flourished in the United Kingdom in the late
eighteenth and early nineteenth centuries as England became a rich trading nation.
Profits from colonial trade were diverted into merchant banking activities and the chief
activity was accepting commercial bills for domestic and international trade.
Investment banks as is called in the United States are one of the most important
participants in the US capital market. They help businesses and governments sell their
new security issues in the debt or equity markets to raise capital, through primary
market transactions. Once the securities are sold, they also create the secondary
markets for these securities as brokers and dealers. The Glass-Steagall Act of 1933
differentiated the activities between the commercial banks and investment banks and
prevented depositories from underwriting.
The Securities Exchange Act (1934) in the United States sought to correct practices in
securities trading with the formation of the Securities Exchange Commission (SEC).
However, the relaxation of the rules set out in Glass Steagall Act in 1997, led to a wider
consolidation in the investment and commercial banking space.
3
Reference: Investment Banking – An Odyssey in High Finance by Pratap Subramanyam.
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NISM-Series-IX: Merchant Banking Certification Examination
Merchant Banking in UK
The primary role of the merchant bankers was to discount bills and to provide safety in
transactions for merchants going from country to country. Later on, merchant banks
diversified into capital issue, advisory as well as management of funds. They also
continued the business of financing foreign trade as well as managing funds for
themselves and other wealthy merchants. They all showed characteristics such as a
short chain of command, sophistication in services and high liquidity. Merchant banks
are expected to be more focused on fee income rather than profits from investing funds.
In the United States, merchant banks have evolved in to investment banks. Along with
all the functions of a merchant bank, investment banks also risk their own capital and
aim to earn profits from their proprietary trading activities. In the United States,
commercial banks and investment banks have been separated in terms of the sources
of capital as well as allowed activities.
Grindlays Bank began merchant banking operations in 1967 with a license obtained from
the RBI followed by Citibank in 1970. These two banks were providing services for
syndication of loans and raising of equity apart from other advisory services. In 1972,
the Banking Commission Report asserted the need for merchant banking services in
India to be provided by public sector banks. Based on the Glass Steagall Act of 1933
passed by the US, the commission recommended a separate structure for merchant
banks so as to separate them from commercial banks and financial institutions.
Following the recommendation of the Banking Commission Report4, SBI set up its
merchant banking division in 1972. Other banks such as Bank of India, Syndicate Bank,
Punjab National Bank, and Canara Bank also followed suit to set up their merchant
banking outfits. ICICI was the first financial institution to set up its merchant banking
division in 1973. The later entrants were IFCI and IDBI with the latter setting up its
merchant banking division in 1992. The post liberalization era (1991 onwards) brought
about a marked transformation in the banking arena. The merchant banking industry
during those days was mainly driven by the issue management activity which fluctuated
with the trends in the primary markets. In order to
4
The Banking Commission Report of 1972 has indicated the necessity of merchant banking service in view
of the wide industrial base of the Indian economy. The commission was in favour of a separate institution
to render merchant banking services. The commission suggested that they should offer investment
management and advisory services particularly to the medium and small savers (Reference: Merchant
Banking, Principles and Practice – H R Machiraju, 3rd ed.).
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NISM-Series-IX: Merchant Banking Certification Examination
stabilize their businesses, several of the banks engaged in merchant banking activity
diversified to offer a broader spectrum of capital market services.
The bigger investment banks now have several group entities in which the core and
non-core business segments are distributed. Some of them such as SBI, IDBI, ICICI,
IL&FS, Kotak Mahindra etc. offer almost the entire gamut of investment banking
services permitted in India. SBI set up SBI Capital markets in 1986 and ICICI set up the
ICICI Securities in 2003.
From simply providing advisory services, merchant banks have added a variety of other
services. The growth of Indian industry has given rise to further opportunities in mergers
and acquisitions and takeovers. Merchant banks are also working on asset valuation,
investment management and promotion of investment trusts.
SEBI was established on April 12, 1992 in accordance with the provisions of the SEBI
Act, 1992. The preamble of the SEBI describes the basic functions of the Securities and
Exchange Board of India as “...to protect the interests of investors in securities and to
promote the development of and to regulate the securities market and for matters
connected therewith or incidental thereto...”
As per Section 11(1) of SEBI Act, SEBI is empowered under the various regulations of
the SEBI Act to;
a) Regulate the business in stock exchanges and any other securities markets. b)
Register and regulate the working of stockbrokers, sub-brokers, and share transfer
agents, bankers to an issue, debenture trustee, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and others
associated with the securities market. SEBI’s powers also extend to registering and
regulating the working of depositories and depository participants, custodians of
securities, foreign institutional investors, credit rating agencies, and others as may
be specified by SEBI. c) Register and regulate the working of venture capital funds
and collective investment schemes including mutual funds
d) Promote and regulate SROs
e) Prohibit fraudulent and unfair trade practices relating to the securities market.
f) Promote investors’ education and training of intermediaries in the securities
market. g) Prohibit insider trading in securities
h) Regulate substantial acquisition of shares and takeover of companies i) Require
disclosure of information, to undertake inspection, to conduct inquiries and audits of
stock exchanges, mutual funds, other persons associated with the securities
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NISM-Series-IX: Merchant Banking Certification Examination
SEBI Act also empowers SEBI to impose penalties and initiate adjudication
proceedings against intermediaries who default on the following grounds such as
failure to furnish information, return etc. or failure by any person to enter into
agreement with clients etc. Some of them have been discussed below:
SEBI Act provides for maximum penalty amount for each of the non-compliance of
provisions as mentioned in the below mentioned sections.
15B- Penalty for failure by any person to enter into agreement with clients
Section 15B prescribes the penalty payable by an intermediary for failing to enter into an
agreement with his/her client in violation of such a requirement under the SEBI Act,
1992.
Section 15C prescribes the penalty applicable to a listed company or any person who is
registered as an intermediary, for failing to redress investors’ grievances after having
been directed in writing by SEBI to do so within a specified time period.
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NISM-Series-IX: Merchant Banking Certification Examination
Section 15HA prescribes a penalty for people indulging in fraudulent and unfair trade
practices relating to securities. Any person indulging in such activities would be liable to
a penalty which shall not be less than five lakh rupees but which may extend to
twenty-five crore rupees or three times the amount of profits made out of such practices,
whichever is higher.
Section 15HB states that whoever fails to comply with any provision of the SEBI Act, the
rules or the regulations made or directions issued by SEBI thereunder, for which no
separate penalty has been provided, shall be liable to a penalty which shall not be less
than one lakh rupees but which may extend to one crore rupees.
The Securities Appellate Tribunal has been set up under the SEBI act, which looks into
the appeal of any person who has been aggrieved by any order of SEBI. This section
elaborates on the different Regulations under the SEBI which discusses the
establishment and the role of SAT. Section 15K (1) of the SEBI Act, 1992, empowers
the Central Government to establish Securities
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NISM-Series-IX: Merchant Banking Certification Examination
Appellate Tribunal (SAT) to exercise jurisdiction, powers and authority under the said act
or any other law in force. A SAT shall consist of a presiding officer and two other
members, to be appointed by the Central Government. The qualification for appointment
is that the person should be a sitting or retired judge of the Supreme Court or a retired
Chief Justice of a High Court.
Any person aggrieved by the following may appeal to the SAT, provided the aggrieved
person had not granted his consent to the order against which the appeal is being
made. The appeal must be filed within a period of 45 days from the date on which a
copy of the order is received:
a. An order of SEBI made on or after the commencement of the Securities Laws (Second
Amendment) Act, 1999, under the SEBI Act 1992, or related rules and regulations. OR
As per Section 15U (1) of the SEBI Act, 1992, the SAT shall not be bound by the
procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the
principles of natural justice. Further, subject to other provisions of the SEBI Act, 1992,
and other rules, the SAT shall have powers to regulate its own procedure.
As per Section 15U (2)of the SEBI Act, 1992, the SAT shall have, for discharging its
functions, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908, while trying a suit, in respect of the following matters:
a) Summoning and enforcing the attendance of any person and examining him
on oath b) Requiring the discovery and production of documents
c) Receiving evidence on affidavits
d) Issuing commissions for the examination of witnesses or documents
e) Reviewing its decisions
f) Dismissing an application for default or deciding it ex-parte
g) Setting aside any order of dismissal of any application for default or any order
passed by it ex-parte
h) Any other matter which may be prescribed
According to Section 15U (3) of the SEBI Act, 1992, every proceeding before the SAT
shall be deemed to be a judicial proceeding and SAT shall be deemed to be a civil court.
Section 15V states that the appellant may either appear in person or authorize one or
more chartered accountants or company secretaries or cost accountants or legal
practitioners or any of its officers to present his or its case before the SAT.
Section 15W of the SEBI Act, 1992 states that the provisions of the Limitation Act, 1963
shall apply to an appeal made to a SAT. Section 15Y of the SEBI Act, 1992 specifies
that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of
any matter which SAT constituted under the SEBI Act is empowered to decide upon.
Further, no injunction shall be
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NISM-Series-IX: Merchant Banking Certification Examination
Section 15Z of the SEBI Act, 1992 states that any person aggrieved by any decision or
order of the SAT may file an appeal to the Supreme Court within 60 days from the date
of communication of the decision or order of the SAT to him, on any question of law
arising out of the order.
The SEBI (Merchant Bankers) Regulations, 1992 lists out the different criteria for
registration of a merchant banker as an intermediary with SEBI. The different on-going
compliances such as the capital adequacy requirement, general obligation and
responsibilities, conditions of registrations, grant and renewal of certificate etc. which
are required to be adhered to by a merchant banker are detailed out in the Regulation.
The SEBI (Merchant Bankers) Regulations, 1992 would be discussed in detail in
Chapter 3 of this workbook.
SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 were notified in
September, 2018 and it substituted the SEBI (Issue of Capital and Disclosure)
Regulations, 2009
SEBI (ICDR) Regulations requires that an issuer making an issue of securities to public
or to QIBs or to its existing shareholders by way of rights issue is required to appoint a
Merchant Banker registered with SEBI. Therefore, it would be important to know and
understand various provisions of SEBI (ICDR) Regulations which govern the issue
process and specifies rights and obligations of various parties involved in the entire
process.
SEBI (ICDR) Regulations lays down general conditions for capital market issuances like
public and rights issuances, Institutional Placement Programme (IPP), Qualified
Institutions Placement (QIP) etc; eligibility requirements; general obligations of the
issuer and intermediaries in public and rights issuances; regulations governing
preferential issues, qualified institutional placements and bonus issues by listed
companies; Issue of IDRs. SEBI (ICDR) also has detailed requirements laid out with
respect to disclosure and process requirements for capital market transactions by listed
and unlisted companies which are in the process of listing. The different provisions of the
SEBI (ICDR) Regulations have been discussed in detail in the Chapter 3 of this
workbook.
Merchant Bankers provide various services to the companies. Most of the operational
aspects pertaining to a company is administered and regulated by the provision
contained in the Companies Act 2013. The Companies Act, 2013 is a legislation to
consolidate and amend the law relating to companies, some Sections came into force
on 12th September, 2013 and there were
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NISM-Series-IX: Merchant Banking Certification Examination
some more sections notified which came into force on April 1, 2014 and further sections
have been notified from time to time. Certain sections of the Companies Act which have
an impact on the issue process of a company are as discussed hereunder:
Chapter III of the Act deals with “Prospectus and Allotment of securities” and is further
divided into two parts, Part I deals with Public Offer and Part II deals with Private
Placement.
Section 23 of the Act provides that a company whether public or private may issue
securities. A public company may issue securities:
(a) to public through prospectus ("public offer") by complying with the provisions of Part I
of Chapter III of the Act; or
(b) through private placement by complying with the provisions of Part II of Chapter III of
the Act; or
(c) through a rights issue or a bonus issue in accordance with the provisions of this Act
and in case of a listed company or a company which intends to get its securities listed
also with the provisions of the SEBI Act, 1992 and the rules and regulations made
thereunder.
Section 25 specifies the documents which could be deemed to be a prospectus and the
enactments applicable thereto.
The penalties on default or non-compliance with any provisions of the Companies Act
have also been stated in Sections 36-38.
Section 26(2) states that section 26(1) does not apply to:
(a) to the issue to existing members or debenture-holders of a company, of a prospectus
or form of application relating to shares in or debentures of the company, whether an
applicant has a right to renounce the shares or not under sub-clause (ii) of clause (a) of
sub-section (1) of section 62 in favour of any other person; or
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NISM-Series-IX: Merchant Banking Certification Examination
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NISM-Series-IX: Merchant Banking Certification Examination
4. Upon the closing of the offer of securities, the prospectus stating therein the total
capital raised, whether by way of debt or share capital, and the closing price of the
securities and any other details as are not included in the red herring prospectus shall
be filed with the Registrar and the SEBI.
Companies Act, 2013 has also specified the requirements with respect to Abridged
Prospectus as under:
Section 33 states that no form of application can be issued for the purchase of any
securities of a company unless it is accompanied by an abridged prospectus. There are,
however, four exceptions to this rule:
(a) where the offer is made in connection with the bona fide invitation to a person to
enter into an underwriting agreement with respect to such securities;
(b) where the securities are not offered to the public;
(c) where the offer is made only to the existing members or debenture holders of the
company with or without a right to renounce;
(d) where the shares or debentures offered are in all respects uniform with shares or
debentures already issued and quoted on a recognised stock exchange.
A copy of the prospectus shall be furnished to a person on a request being made by him
before the closing of the subscription list and the offer. If a company makes any default
in complying with the provisions of this section, it shall be liable to a penalty of fifty
thousand rupees for each default.
The merchant bankers who are involved with the issue management process shall
ensure adherence to the provisions of the Companies Act, 2013 as well as the Rules
made thereunder.
Readers are advised to refer to the Companies Act for better understanding of these
The Issuer is required to enter into a listing agreement with the Stock Exchanges, where
the securities of an issuer are proposed to be listed. The Listing Agreement prescribes
the initial conditions and the requirements for continuous listing on the Stock
Exchanges. The compliances to be fulfilled are both time-based and event based
compliances. It is a standard set of Agreement to be entered into by the Companies
seeking listing from the stock exchanges.
There are three main stages in the listing process, viz., in-principle approval from stock
exchanges, listing of the securities and trading permission.
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NISM-Series-IX: Merchant Banking Certification Examination
There are certain listing requirements with respect to Articles of Association (AoA) also
which need to be complied with. The main requirements with respect to Articles of
Association are as given below:
i. There should be no clauses which are restrictive in nature
ii. A few clauses need to be incorporated in the AoA, if they do not already form part of
the same, example fully paid shares shall be free from all lien and in the case of
partly paid shares the Issuer’s lien shall be restricted to moneys called or payable
at a fixed time in respect of such shares. The exchanges also have certain
eligibility criteria for companies getting listed through an IPO. The important ones
are tabulated below:
Sr. No. Particulars National Stock Bombay Stock Exchange
Exchange
Note: The detailed eligibility criteria of the respective exchanges have been detailed on
their website.
In-principle approval:
As per Schedule XIX read with Regulations 7, 62, 104 and 183 of SEBI ICDR, the
issuer or the issuing company is required to obtain in-principle approval from
recognised Stock Exchange as follows:
(a) in case of an initial public offer or an issue of Indian Depository Receipt, from
all recognised stock exchanges on which the issuer or issuing company
proposes to get its specified securities listed and
(b) in case of other issues, before issuance of further securities, as follows:
(i) where the securities are listed only on recognised stock exchange(s)
having nationwide trading terminals, from all such stock exchange(s);
(ii) where the securities are not listed on any recognised stock exchange
having nationwide trading terminals, from all the stock exchange(s) on which
the securities of the issuer are proposed to be listed;
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NISM-Series-IX: Merchant Banking Certification Examination
(iii) where the specified are listed on recognised stock exchange(s) having
nationwide trading terminals as well as on the recognised stock exchange(s)
not having nationwide trading terminals, from all recognised stock
exchange(s) having nationwide trading terminals.
(1) The issuer or the issuing company, as the case may be, shall complete the
pre-listing formalities within the time lines specified by the Board from time to time.
(2) The issuer or the issuing company, as the case may be, shall, make an
application for listing, within such period from the date of allotment as may be
specified by SEBI from time to time, to one or more recognized stock exchange(s)
along with the documents specified by stock exchange(s) from time to time.
(3) In the event of failure to make an application for listing by the issuer within the
time stipulated in (2) above, or non-receipt of the listing permission by the issuer
from the stock exchange(s) or withdrawal of the ‘Observation Letter’ issued by SEBI,
wherever applicable, the securities shall not be eligible for listing and the issuer shall
be liable to refund the subscription monies, if any, to the respective allottees
immediately, along with penal interest for each day of delay at the rate of fifteen per
cent per annum from the date of allotment..
Every issuer or the issuing company desirous of listing its securities on a recognised
stock exchange shall execute a listing agreement with such stock exchange in terms
of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
The stock exchange(s) shall grant in-principle approval/list the securities or reject the
application for in-principle approval /listing by the issuer or issuing company, as the
case maybe, within thirty days from the later of the following dates:
(a) the date of receipt of application for in-principle approval/listing from issuer;
(b) the date of receipt of satisfactory reply from the issuer, as the case may be, in
cases where the stock exchange(s) has sought any clarification from them.
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NISM-Series-IX: Merchant Banking Certification Examination
shares or securities. Where the company is not listed on any exchange having
nationwide trading terminals, it agrees to obtain such ‘in-principle’ approval from all
the exchanges in which it is listed before issuing further shares or securities. The
company also agrees to make an application to the Exchange for the listing of any
new issue of shares or securities and of the provisional documents relating thereto.
However, for an IPO, the company seeks in
principle approval as per the clause 7(1)(a) of SEBI ICDR Regulations s. Exchanges
provide the In-principle approval and SEBI gives its observation.
The next stage is to apply for listing on the stock exchange for which a letter of
application and a form of Listing Application is prescribed by the Exchanges.
The third stage is obtaining trading permission, which is granted after fulfilment of the
requirements which is stated by the respective exchanges.
One of the requirements at this stage is to enter into the Listing Agreement between
the Issuer and the Stock Exchange.
Some of the important clauses of the Listing Regulations which every issuer is
required to comply with as per the Listing Agreement are mentioned below:
7. 46 Company website
5
Appendix 'E' - Schedule of Distribution; Appendix 'G'- Application Letter for Listing of further issues;
Appendix 'H' - Listing Application providing details of securities; Appendix 'I' - Checklist for supporting
documents submitted (as applicable).
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NISM-Series-IX: Merchant Banking Certification Examination
The Securities Contracts (Regulation) Act, 1956 provides for the definition of “securities”
which includes the following:
i. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate;
ii. Derivatives 6;
iii. Units or any other instrument issued by any collective investment scheme to the
investors in such schemes;
iv. Security receipt as defined in clause (zg) of section 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; v.
Units or any other such instrument issued to the investors under any mutual fund
scheme; vi. Any certificate or instrument, issued to an investor by any issuer being a
special purpose
distinct entity which possesses any debt or receivable, including mortgage debt,
assigned to such entity, and acknowledging beneficial interest of such investor in
such debt or receivable, including mortgage debt, as the case may be;
vii. Government Securities
viii. Such other instruments as may be declared by the Central Government to be
securities, and
ix. Rights or interest in securities
The Regulations provides for direct and indirect control of virtually all aspects of
securities trading and the running of stock exchanges. This act aims to prevent
undesirable transactions in securities by regulating the business of dealing therein and
by providing for certain other matters connected therewith. It gives the central
government the regulatory jurisdiction over (a) stock exchanges through a process of
recognition and continued supervision, (b) contracts and options in securities, and (c)
listing of securities on stock exchanges. The objective of SCRA is to prevent
undesirable speculation and to regulate contracts and transactions in securities. A
transaction in securities between two persons is essentially a contract. The law that
specifically applies in the case of a securities contract is the SCRA.
Section 21 and 22 deals with listing of securities, section 21A deals with delisting of
securities and sections 23 to 26 provides for the different penalties and procedures to
be imposed upon any person /intermediary on non-compliance with any of the
provisions given under the various rules and regulations governing the securities market
in India.
Section 23 specifies the penalties and the procedures for various non-compliances and
failures. Some of them are discussed below:
Section 23A of SCRA provides that any person, who is required under the SCRA or SCRR –
6
As per SCRA, derivatives include a security derived from a debt instrument, share, loan, whether secured
or unsecured, risk instrument or contract or differences or any other form of security; a contract which
derives its value from the prices, or index prices, of underlying securities; commodity derivatives; and such
other instruments as may be declared by the Central Government to be derivatives. [Amended by the
Finance Act 2017].
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NISM-Series-IX: Merchant Banking Certification Examination
SCRR provides for the actual procedures to be followed by applicants for recognition as
a recognised stock exchange and the requirements with respect to listing of securities
on a recognised Stock Exchange. It lays down conditions for the percentage of shares
which need to be offered to the public in order to get the shares listed and also the
percentage of shares which need to remain with public in order to remain listed. SCRR
needs to be read in conjunction with SCRA. SCRR are the rules created for compliance
of SCRA.
Rule 19(2)(b) states that the minimum offer and allotment to public in terms of an offer
document shall be as per the following sub-rules:
Rule 19 (2)(b)(i) specifies that at least 25% of each class or kind of equity shares or
debentures convertible into equity shares issued by the company, if the post issue
capital of the company calculated at offer price is less than or equal to one thousand
six hundred crore rupees.
Rule 19(2)(b)(ii) specifies that at least such percentage of each class or kind of equity
shares or debentures convertible into equity shares issued by the company
equivalent to the value of four hundred crore rupees, if the post issue capital of the
company calculated at offer price is more than one thousand six hundred crore
rupees but less than or equal to four thousand crore rupees.
Rule 19(2)(b)(iii) at least ten percent of each class or kind of equity shares or
debentures convertible into equity shares issued by the company, if the post issue
capital of the company calculated at offer price is above four thousand crore rupees.
Provided that the company referred to in sub-clause (ii) or sub-clause (iii) shall
increase its public shareholding to at least twenty five percent within a period of 3
years from the date of listing of the securities in the manner specified by SEBI.
Rule 19(3) specifies that a company applying for listing shall, as a condition
precedent, undertake inter alia—
(a) (i) that letters of allotment be issued simultaneously and that, in the event of its
being impossible to issue letters of regret at the same time, a notice to that effect will
be inserted in the press so that it will appear on the morning after the letters of
allotment have been posted,
(ii) that letters of right be issued simultaneously,
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NISM-Series-IX: Merchant Banking Certification Examination
(b) to issue, when so required, receipts for all securities deposited with it whether for
registration, sub-division, exchange or for other purposes; and not to charge any fees
for registration of transfers, for sub-division and consolidation of certificates and for
sub-division of letters of allotment, renounceable letters of right, and split,
consolidation, renewal and transfer receipts into denominations of the market unit of
trading;
(c) when documents are lodged for sub-division or consolidation or renewal through
the clearing house of the exchange:
(i) to accept the discharge of an official of the stock exchange clearing house on
the company’s split receipts and consolidation receipts and renewal receipts as
good and sufficient discharge without insisting on the discharge of the registered
holders, and (ii) to verify when the company is unable to issue certificates or split
receipt or consolidation receipts or renewal receipts immediately on lodgement
whether the discharge of the registered holders, on the documents lodged for
sub-division or consolidation or renewal and their signatures on the relative
transfers are in order;
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NISM-Series-IX: Merchant Banking Certification Examination
(f) to advise the stock exchange of the date of the board meeting at which the
declaration or recommendation of a dividend or the issue of right or bonus share will
be considered;
(g) to recommend or declare all dividends and/or cash bonuses at least five days
before the commencement of the closure of its transfer books or the record date
fixed for the purpose and to advise the stock exchange in writing of all dividends
and/or cash bonuses recommended or declared immediately after a meeting of the
board of the company has been held to finalise the same;
(h) to notify the stock exchange of any material change in the general character or
nature of the company’s business;
(i) to notify the stock exchange of any change (a) in the company’s directorate by
death, resignation, removal or otherwise, (b) of managing director, managing agent
or secretaries and treasurers, (c) of auditors appointed to audit the books and
account of the company;
(j) to forward to the stock exchange copies of statutory and annual reports and
audited accounts as soon as issued, including directors’ report;
(k) to forward to the stock exchange as soon as they are issued, copies of all other
notices and circulars sent to the shareholders including proceedings of ordinary and
extraordinary general meetings of the company and to file with the stock exchange
certified copies of resolutions of the company as soon as such resolutions become
effective;
(l) to notify the stock exchange prior to intimating the shareholders of any new issue
of securities whether by way of right, privilege bonus or otherwise and the manner in
which it is proposed to offer or allot the same;
(m) to notify the stock exchange in the event of re-issue of any forfeited securities or
the issue of securities held in reserve for future issue;
(n) to notify the stock exchange of any other alteration of capital including calls;
(o) to close the transfer books only for the purpose of declaration of dividend or issue
of right or bonus shares or for such other purposes as the stock exchange may
agree and to give notice to the stock exchange as many days in advance as the
exchange may from time to time reasonably prescribe, stating the dates of closure of
its transfer books (or, when the transfer books are not to be closed, the date fixed for
taking a record of its shareholders or debenture holders) and specifying the purpose
or purposes for which the transfer books are to be closed (or the record is to be
taken); and in the case of a right or bonus issue to so close the transfer books or fix
a record date only after the sanctions of the competent authority subject to which the
issue is proposed to be made have been duly obtained, unless the exchange agrees
otherwise;
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NISM-Series-IX: Merchant Banking Certification Examination
(p) to forward to the stock exchange an annual return immediately after each annual
general meeting of at least ten principal holders of each class of security of the
company along with particulars as to the number of shares or debentures held by,
and address of, each such holder;
(q) to grant to shareholders the right of renunciation in all cases of issue of rights,
privileges and benefits and to allow them reasonable time not being less than four
weeks within which to record, exercise, or renounce such rights, privileges and
benefits and to issue, where necessary, coupons or fractional certificates or provide
for the payment of the equivalent of the value of the fractional right in cash unless
the company in general meeting or the stock exchange agrees otherwise;
(r) to promptly notify the stock exchange (a) of any action which will result in the
redemption, cancellation or retirement in whole or in part of any securities listed on
the exchange, (b) of the intention to make a drawing of such securities, intimating at
the same time the date of the drawing and the period of the closing of the transfer
books (or the date of the striking of the balance) for the drawing, (c) of the amount of
securities outstanding after any drawing has been made;
(s) to intimate the stock exchange any other information necessary to enable the
shareholders to apprise the position of the company and to avoid the establishment
of a false market in the shares of the company;
(t) that in the event of the application for listing being granted, such listing shall be
subject to the rules and bye-laws of the exchange in force from time to time and that
the company will comply within a reasonable time, with such further listing
requirements as may be promulgated by the exchange as a general condition for
new listings.
The SCRR, Rule 19 (4) states that an application for listing shall be necessary in
respect of the following:
(a) all new issues of any class or kind of securities of a company to be offered to the
public; (b) all further issues of any class or kind of securities of a company if such
class or kind of securities of the company are already listed on a recognised stock
exchange.
Rule 19(5) states that a recognised stock exchange may suspend or withdraw
admission to dealings in the securities if a company or body corporate either for a
breach of or non compliance with, any of the conditions of admission to dealings or
for any other reason, to be recorded in writing which in the opinion of the stock
exchange justifies such action. Provided that no such action shall be taken by a
stock exchange without affording to the company or body corporate concerned a
reasonable opportunity by a notice in writing, stating the reasons, to show cause
against the proposed action.
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NISM-Series-IX: Merchant Banking Certification Examination
Rule 19(6) states that a recognised stock exchange may, either at its own discretion
or shall in accordance with the order of the SAT under sub-rule (5) restore or
re-admit to dealings any securities suspended or withdrawn from the list.
Rule 19(7) states that SEBI may at its own discretion or on the recommendations of a
recognised stock exchange, waive or relax the strict enforcement of any or all the
requirements with respect to listing prescribed by these rules.
The SEBI (Prohibition of Insider Trading) Regulations, 2015 has come into force w.e.f
May 2015. Any dealing/trading done by an insider based on information which is not
available in public domain, gives an undue advantage to insiders and affects market
integrity. This is not in line with the principle of fair and equitable markets. In order to
protect integrity of the market, the SEBI (Prohibition of Insider Trading) Regulations
have been put in place. The Regulations mainly provide for who can be insiders, what
all is prohibited for them and the systemic provisions which need to be laid down and
followed by listed company as well as intermediaries.
The regulations define “insider” as any person who is, or was, connected with a
company or is deemed to have been connected with the company and who is
reasonably expected to have access to unpublished price sensitive information in
respect of securities of a company, or who has received or has had access to such
unpublished price “Any person who is or has during the six months prior to the
concerned act been associated with a company, directly or indirectly, in any capacity
including by reason of frequent communication with its officers or by being in any
contractual, fiduciary or employment relationship or by being a director, officer or an
employee of the company or holds any position including a professional or business
relationship between himself and the company whether temporary or permanent, that
allows such person, directly or indirectly, access to unpublished price sensitive
information or is reasonably expected to allow such access.
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NISM-Series-IX: Merchant Banking Certification Examination
Regulation 2(e) defines the term "generally available information" means information that
is accessible to the public on a non-discriminatory basis; It is intended to define what
constitutes generally available information so that it is easier to crystallize and
appreciate what unpublished price sensitive information is. Information published on the
website of a stock exchange, would ordinarily be considered generally available.
Regulation 2(f) defines the term ‘immediate relative’ as a spouse of a person, and
includes parent, sibling, and child of such person or of the spouse, any of whom is either
dependent financially on such person, or consults such person in taking decisions
relating to trading in securities.
Regulation 2(g) of the SEBI Insider regulations, defines an ‘insider’ any person
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NISM-Series-IX: Merchant Banking Certification Examination
demonstrate that he was not in such possession or that he has not traded or he could
not access or that his trading when in possession of such information was squarely
covered by the exonerating circumstances.
(ii) dividends;
Regulation 3(1) is intended to cast an obligation on all insiders who are essentially
persons in possession of unpublished price sensitive information to handle such
information with care and to deal with the information with them when transacting their
business strictly on a need-to know basis. It is also intended to lead to organisations
developing practices based on need-to know principles for treatment of information in
their possession. Regulation 3(2) is intended to impose a prohibition on unlawfully
procuring possession of unpublished price sensitive information. Inducement and
procurement of unpublished price sensitive information not in furtherance of one’s
legitimate duties and discharge of obligations would be illegal under this provision.
Regulation 3 states that an insider shall not communicate, provide, or allow access to
any unpublished price sensitive information, relating to a company or securities listed or
proposed to be listed, to any person including other insiders except where such
communication is in furtherance of legitimate purposes, performance of duties or
discharge of legal obligations. Regulation 3(2) states that no person shall procure from
or cause the communication by any insider of unpublished price sensitive information,
relating to a company or securities listed or proposed to be listed, except in furtherance
of legitimate purposes, performance of duties or discharge of legal obligations.
Regulation 3(3) further states that an unpublished price sensitive information may be
communicated, provided, allowed access to or procured, in connection with transactions
that would:
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NISM-Series-IX: Merchant Banking Certification Examination
(i) entail an obligation to make an open offer under the takeover regulations where the
board of directors of the company is of informed opinion that the proposed transaction is
in the best interests of the company;
(ii) not attract the obligation to make an open offer under the takeover regulations but
where the board of directors of the company is of informed opinion that the proposed
transaction is in the best interests of the company and the information that constitute
unpublished price sensitive information is disseminated to be made generally available
at least two trading days prior to the proposed transaction being effected in such form
as the board of directors may determine.
For this purpose Regulation 3(4) states that the board of directors shall require the
parties to execute agreements to contract confidentiality and non-disclosure obligations
on the part of such parties and such parties shall keep information so received
confidential, except for the purpose of sub-regulation (3), and shall not otherwise trade
in securities of the company when in possession of unpublished price sensitive
information.
As per Regulation 4, no insider shall trade in securities that are listed or proposed to be
listed on a stock exchange when in possession of unpublished price sensitive
information. However, the insider may prove his innocence by demonstrating the
circumstances including the following:
(i) the transaction is an off-market inter-se transfer between promoters who were in
possession of the same unpublished price sensitive information without being in breach
of regulation 3 and both parties had made a conscious and informed trade decision;
(ii) in the case of non-individual insiders: –
(a) the individuals who were in possession of such unpublished price sensitive
information were different from the individuals taking trading decisions and such
decision-making individuals were not in possession of such unpublished price
sensitive information when they took the decision to trade; and
(b) appropriate and adequate arrangements were in place to ensure that these
regulations are not violated and no unpublished price sensitive information was
communicated by the individuals possessing the information to the individuals taking
trading decisions and there is no evidence of such arrangements having been
breached;
(iii) the trades were pursuant to a trading plan set up in accordance with regulation 5.
Regulation 5 deals with Trading Plans which can be formulated by an insider and the
procedure related thereto. It states as under:
(1) An insider shall be entitled to formulate a trading plan and present it to the
compliance officer for approval and public disclosure pursuant to which trades may be
carried out on his behalf in accordance with such plan.
(2) Such trading plan shall:–
(i) not entail commencement of trading on behalf of the insider earlier than six months
from the public disclosure of the plan;
(ii) not entail trading for the period between the twentieth trading day prior to the last day
of any financial period for which results are required to be announced by the issuer of
the securities and the second trading day after the disclosure of such financial results;
(iii) entail trading for a period of not less than twelve months;
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NISM-Series-IX: Merchant Banking Certification Examination
(iv) not entail overlap of any period for which another trading plan is already in existence;
(v) set out either the value of trades to be effected or the number of securities to be
traded along with the nature of the trade and the intervals at, or dates on which such
trades shall be effected; (vi) not entail trading in securities for market abuse.
(3) The compliance officer shall review the trading plan to assess whether the plan
would have any potential for violation of these regulations and shall be entitled to seek
such express undertakings as may be necessary to enable such assessment and to
approve and monitor the implementation of the plan.
(4) The trading plan once approved shall be irrevocable and the insider shall mandatorily
have to implement the plan, without being entitled to either deviate from it or to execute
any trade in the securities outside the scope of the trading plan.
Provided that the implementation of the trading plan shall not be commenced if any
unpublished price sensitive information in possession of the insider at the time of
formulation of the plan has not become generally available at the time of the
commencement of implementation and in such event the compliance officer shall
confirm that the commencement ought to be deferred until such unpublished price
sensitive information becomes generally available information so as to avoid a violation
of sub-regulation (1) of regulation 4.
(5) Upon approval of the trading plan, the compliance officer shall notify the plan to the
stock exchanges on which the securities are listed.
Regulation 8 specified that the board of directors of every company, whose securities
are listed on a stock exchange, shall formulate and publish on its official website, a code
of practices and procedures for fair disclosure of unpublished price sensitive information
that it would follow in order to adhere to each of the principles set out in Schedule A to
these regulations, without diluting the provisions of these regulations in any manner.
(2) Every such code of practices and procedures for fair disclosure of unpublished price
sensitive information and every amendment thereto shall be promptly intimated to the
stock exchanges where the securities are listed.
Code of Conduct
(1) The board of directors of every listed company and market intermediary shall
formulate a code of conduct to regulate, monitor and report trading by its employees
and other connected persons towards achieving compliance with these regulations,
adopting the minimum standards set out in Schedule B to these regulations, without
diluting the provisions of these regulations in any manner.
(2) Every other person who is required to handle unpublished price sensitive information
in the course of business operations shall formulate a code of conduct to regulate,
monitor and report trading by employees and other connected persons towards
achieving compliance with these
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NISM-Series-IX: Merchant Banking Certification Examination
regulations, adopting the minimum standards set out in Schedule B to these regulations,
without diluting the provisions of these regulations in any manner.
(3) Every listed company, market intermediary and other persons formulating a code of
conduct shall identify and designate a compliance officer to administer the code of
conduct and other requirements under these regulations.
The Regulations have prescribed the Principles of Fair Disclosure for purposes of Code
of Practices and Procedures for Disclosure of Unpublished Price Sensitive Information
as under:
1. Prompt public disclosure of unpublished price sensitive information that would impact
price discovery no sooner than credible and concrete information comes into being
in order to make such information generally available.
2. Uniform and universal dissemination of unpublished price sensitive unpublished price
sensitive information to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with
dissemination of information and disclosure of unpublished price sensitive information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed
selectively, inadvertently or otherwise to make such information generally available. 5.
Appropriate and fair response to queries on news reports and requests for verification of
market rumours by regulatory authorities.
6. Ensuring that information shared with analysts and research personnel is not
unpublished price sensitive information.
7. Developing best practices to make transcripts or records of proceedings of meetings
with analysts and other investor relations conferences on the official website to
ensure official confirmation and documentation of disclosures made.
8. Handling of all unpublished price sensitive information on a need-to-know basis.
It has also prescribed the minimum standards for Code of Conduct to regulate, monitor
and report trading by insiders as under:
1. The compliance officer shall report to the board of directors and in particular, shall
provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of
the board of directors at such frequency as may be stipulated by the board of
directors.
2. All information shall be handled within the organisation on a need-to-know basis and
no unpublished price sensitive information shall be communicated to any person
except in furtherance of the insider’s legitimate purposes, performance of duties or
discharge of his legal obligations. The code of conduct shall contain norms for
appropriate Chinese Walls procedures and processes for permitting any designated
person to “cross the wall”.
3. Employees and connected persons designated on the basis of their functional role
(“designated persons”) in the organisation shall be governed by an internal code of
conduct governing dealing in securities. The board of directors shall in consultation
with the compliance officer specify the designated persons to be covered by such
code on the basis of their role and function in the organisation. Due regard shall be
had to the access that such
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NISM-Series-IX: Merchant Banking Certification Examination
role and function would provide to unpublished price sensitive information in addition
to seniority and professional designation.
4. Designated persons may execute trades subject to compliance with these regulations.
Towards this end, a notional trading window shall be used as an instrument of
monitoring trading by the designated persons. The trading window shall be closed
when the compliance officer determines that a designated person or class of
designated persons can reasonably be expected to have possession of unpublished
price sensitive information. Such closure shall be imposed in relation to such
securities to which such unpublished price sensitive information relates. Designated
persons and their immediate relatives shall not trade in securities when the trading
window is closed.
5. The timing for re-opening of the trading window shall be determined by the
compliance officer taking into account various factors including the unpublished price
sensitive information in question becoming generally available and being capable of
assimilation by the market, which in any event shall not be earlier than forty-eight
hours after the information becomes generally available. The trading window shall
also be applicable to any person having contractual or fiduciary relation with the
company, such as auditors, accountancy firms, law firms, analysts, consultants etc.,
assisting or advising the company.
6. When the trading window is open, trading by designated persons shall be subject to
preclearance by the compliance officer, if the value of the proposed trades is above
such thresholds as the board of directors may stipulate. No designated person shall
apply for pre clearance of any proposed trade if such designated person is in
possession of unpublished price sensitive information even if the trading window is
not closed.
7. The compliance officer shall confidentially maintain a list of such securities as a
“restricted list” which shall be used as the basis for approving or rejecting
applications for preclearance of trades.
8. Prior to approving any trades, the compliance officer shall be entitled to seek
declarations to the effect that the applicant for pre-clearance is not in possession of
any unpublished price sensitive information. He shall also have regard to whether
any such declaration is reasonably capable of being rendered inaccurate.
9. The code of conduct shall specify any reasonable timeframe, which in any event shall
not be more than seven trading days, within which trades that have been pre-cleared
have to be executed by the designated person, failing which fresh pre-clearance
would be needed for the trades to be executed.
10. The code of conduct shall specify the period, which in any event shall not be less
than six months, within which a designated person who is permitted to trade shall
not execute a contra trade. The compliance officer may be empowered to grant
relaxation from strict application of such restriction for reasons to be recorded in
writing provided that such relaxation does not violate these regulations. Should a
contra trade be executed, inadvertently or otherwise, in violation of such a
restriction, the profits from such trade shall be liable to be disgorged for remittance
to the Board for credit to the Investor Protection and Education Fund administered
by the Board under the Act.
11. The code of conduct shall stipulate such formats as the board of directors deems
necessary for making applications for pre-clearance, reporting of trades executed,
reporting of decisions
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NISM-Series-IX: Merchant Banking Certification Examination
not to trade after securing pre-clearance, recording of reasons for such decisions and
for reporting level of holdings in securities at such intervals as may be determined as
being necessary to monitor compliance with these regulations.
12. Without prejudice to the power of the Board under the Act, the code of conduct shall
stipulate the sanctions and disciplinary actions, including wage freeze, suspension
etc., that may be imposed, by the persons required to formulate a code of conduct
under sub regulation (1) and sub-regulation (2) of regulation 9, for the contravention
of the code of conduct.
13. The code of conduct shall specify that in case it is observed by the persons required
to formulate a code of conduct under sub-regulation (1) and sub-regulation (2) of
regulation 9, that there has been a violation of these regulations, they shall inform
SEBI promptly.
2.3.9 Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 deals
with issues such as initial and continual disclosures of shareholding and control,
substantial acquisition of shares or voting rights, bailout takeovers and investigation and
action by SEBI.
According to Regulation 3(1), no acquirer shall acquire shares or voting rights in a target
company which taken together with shares or voting rights, if any, held by him and by
persons acting in concert with him in such target company, entitle them to exercise 25%
or more of the voting rights in such target company unless the acquirer makes a public
announcement of an open offer for acquiring shares of such target company in
accordance with these regulations.
Further Regulation 5 states that for the purposes of regulation 3 and regulation 4,
acquisition of shares or voting rights in, or control over, any company or other entity that
would enable any person and persons acting in concert with him to exercise or direct
the exercise of such percentage of voting rights in, or control over, a target company,
the acquisition of which would otherwise attract the obligation to make a public
announcement of an open offer for acquiring shares under these regulations, shall be
considered as an indirect acquisition of shares or voting
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NISM-Series-IX: Merchant Banking Certification Examination
rights in, or control over the target company. It further specifies the obligations of the
acquirer in such a case.
Regulation 5A specifies that in the event the acquirer makes a public announcement of
an open offer for acquiring shares of a target company in terms of regulations 3, 4 or 5,
he may delist the company in accordance with provisions of the SEBI (Delisting of
Equity Shares) Regulations, 2009 provided certain conditions are fulfilled.
Regulation 6A states that no person who is a wilful defaulter shall make a public
announcement of an open offer for acquiring shares or enter into any transaction that
would attract the obligation to make a public announcement of an open offer for
acquiring shares under these regulations
Regulation 6B states that no person who is a fugitive economic offender shall make a
public announcement of an open offer or make a competing offer for acquiring shares or
enter into any transaction, either directly or indirectly, for acquiring any shares or voting
rights or control of a target company.
Regulation 7 deals with the offer size. The open offer for acquiring shares to be made by
the acquirer and persons acting in concert with him under regulation 3 and regulation 4
shall be for at least twenty six per cent of total shares of the target company, as of tenth
working day from the closure of the tendering period subject to certain conditions.
Regulation 8 deals with the offer price. The open offer for acquiring shares under various
regulations (Regulation 3, 4, 5 or 6) shall be made at a price not lower than the price
determined in accordance with sub-regulation (2) or sub-regulation (3), as the case may
be.
Regulation 10 lay down that certain acquisitions shall be exempt from the obligation to
make an open offer under regulation 3 and 4 subject to fulfillment of the conditions
stipulated therefor —
(a) acquisition pursuant to inter se transfer of shares amongst qualifying persons,
being — (i) immediate relatives;
(ii) persons named as promoters in the shareholding pattern filed by the target
company in terms of the listing regulations or as the case may be, the listing
agreement or these regulations for not less than three years prior to the proposed
acquisition; (iii) a company, its subsidiaries, its holding company, other
subsidiaries of such holding company, persons holding not less than fifty percent
of the equity shares of such company, other companies in which such persons
hold not less than fifty per cent of the equity shares, and their subsidiaries subject
to control over such qualifying persons being exclusively held by the same
persons; For the purpose of this sub-clause, the company shall include a body
corporate, whether Indian or foreign.]
(iv) persons acting in concert for not less than three years prior to the proposed
acquisition, and disclosed as such pursuant to filings under the listing regulations
or as the case may be, the listing agreement;
(v) shareholders of a target company who have been persons acting in concert for
a period of not less than three years prior to the proposed acquisition and are
disclosed as such pursuant to filings under the listing regulations or as the case
may be, the listing agreement, and any company in which the entire equity share
capital is owned by such shareholders in the same proportion as their holdings in
the target company without any differential entitlement to exercise voting rights in
such company:
Provided that for purposes of availing of the exemption under this clause - (i) If
the shares of the target company are frequently traded, the acquisition price per
share shall not be higher by more than twenty-five per cent of the
volume-weighted average market price for a period of sixty trading days
preceding the date of issuance of notice for the proposed inter se transfer under
sub-regulation (5), as traded on the stock exchange where the maximum volume
of trading in the shares of the target company are recorded during such period,
and if the shares of the target company are infrequently traded, the acquisition
price shall not be higher by more than twenty-five percent of the price determined
in terms of clause (e) of sub-regulation (2) of regulation 8; and (ii) the transferor
and the transferee shall have complied with applicable disclosure requirements
set out in Chapter V.
(b) acquisition in the ordinary course of business by -
(i) an underwriter registered with the Board by way of allotment pursuant to an
underwriting agreement in terms of the SEBI (ICDR) Regulations, 2018;
(ii) a stock broker registered with the Board on behalf of his client in exercise of
lien over the shares purchased on behalf of the client under the bye-laws of the
stock exchange where such stock broker is a member;
(iii) a merchant banker registered with the Board or a nominated investor in the
process of market making or subscription to the unsubscribed portion of issue in
terms of Chapter IX of the SEBI (ICDR) Regulations, 2018;
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NISM-Series-IX: Merchant Banking Certification Examination
(v) a merchant banker registered with the Board acting as a stabilising agent or
by the promoter or pre-issue shareholder in terms of regulation 279 of SEBI
(ICDR) Regulations, 2018;
(vi) by a registered market-maker of a stock exchange in respect of shares for
which he is the market maker during the course of market making;
(vii) a Scheduled Commercial Bank, acting as an escrow agent; and
(viii) invocation of pledge by Scheduled Commercial Banks or Public
(c) acquisitions at subsequent stages, by an acquirer who has made a public
announcement of an open offer for acquiring shares pursuant to an agreement of
disinvestment, as contemplated in such agreement:
Provided that —
(i) both the acquirer and the seller are the same at all the stages of acquisition;
and (ii) full disclosures of all the subsequent stages of acquisition, if any, have
been made in the public announcement of the open offer and in the letter of offer.
(d) acquisition pursuant to a scheme —
(i) made under section 18 of the Sick Industrial Companies (Special Provisions)
Act, 1985 (1 of 1986) or any statutory modification or re-enactment thereto;
(ii) of arrangement involving the target company as a transferor company or as a
transferee company, or reconstruction of the target company, including
amalgamation, merger or demerger, pursuant to an order of a court or a tribunal
or a competent authority under any law or regulation, Indian or foreign; or
(iii) of arrangement not directly involving the target company as a transferor
company or as a transferee company, or reconstruction not involving the target
company’s undertaking, including amalgamation, merger or demerger, pursuant
to an order of a court or a tribunal or a competent authority under any law or
regulation, Indian or foreign, subject to —
(A) the component of cash and cash equivalents in the consideration paid being
less than twenty-five per cent of the consideration paid under the scheme; and
(B) where after implementation of the scheme of arrangement, persons directly or
indirectly holding at least thirty-three per cent of the voting rights in the combined
entity are the same as the persons who held the entire voting rights before the
implementation of the scheme.
(da) acquisition pursuant to a resolution plan approved under section 31 of the
Insolvency and Bankruptcy Code, 2016 (31 of 2016)
(e) acquisition pursuant to the provisions of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(f) acquisition pursuant to the provisions of the SEBI (Delisting of Equity Shares)
Regulations, 2009;
(g) acquisition by way of transmission, succession or inheritance;
(h) acquisition of voting rights or preference shares carrying voting rights arising out of
the operation of sub-section (2) of section 47 of the Companies Act, 2013 (18 of 2013) .
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NISM-Series-IX: Merchant Banking Certification Examination
(i) acquisition of shares by the lenders pursuant to conversion of their debt as part of a
debt restructuring scheme implemented in accordance with the guidelines specified by
the Reserve Bank of India:
Provided that the conditions specified under of regulation 158 of the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2018 are complied with.
(ia) acquisition of shares by the person(s), by way of allotment by the target company or
purchase from the lenders at the time of lenders selling their shareholding or enforcing
change in ownership in favour of such person(s), pursuant to a debt restructuring
scheme implemented in accordance with the guidelines specified by the Reserve Bank
of India:
Provided that in respect of acquisition by persons by way of allotment by the target
company, the conditions specified under of regulation 158 of the SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2018 are complied with:
Provided further that in respect of acquisition by way of purchase of shares from the
lenders, the acquisition shall be exempted subject to the compliance with the following
conditions:
(a) the guidelines for determining the purchase price have been specified by the
Reserve Bank of India and that the purchase price has been determined in accordance
with such guidelines;
(b) the purchase price shall be certified by two independent qualified valuers, and for this
purpose ‘valuer’ shall be a person who is registered under section 247 of the Companies
Act, 2013 and the relevant Rules framed thereunder:
Provided that till such date on which section 247 of the Companies Act, 2013 and the
relevant Rules come into force, valuer shall mean an independent merchant banker
registered with the Board or an independent chartered accountant in practice having a
minimum experience of ten years;
(c) the specified securities so purchased shall be locked-in for a period of at least three
years from the date of purchase;
(d) the lock-in of equity shares acquired pursuant to conversion of convertible securities
purchased from the lenders shall be reduced to the extent the convertible securities
have already been locked-in;
(e) a special resolution has been passed by shareholders of the issuer before the purchase;
(f) the issuer shall, in addition to the disclosures required under the Companies Act,
2013 or any other applicable law, disclose the following information pertaining to the
proposed acquirer(s) in the explanatory statement to the notice for the general meeting
proposed for passing special resolution as stipulated at clause (e) of this sub-regulation:
a. the identity including of the natural persons who are the ultimate beneficial owners
of the shares proposed to be purchased and/ or who ultimately control the
proposed acquirer(s);
b. the business model;
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NISM-Series-IX: Merchant Banking Certification Examination
c. a statement on growth of business over the period of time;
d. summary of audited financials of previous three financial years;
e. track record in turning around companies, if any;
f. the proposed roadmap for effecting turnaround of the issuer.
(g) applicable provisions of the Companies Act, 2013 are complied with.
(h) increase in voting rights arising out of the operation of sub-section (1) of section 106
of the Companies Act, 2013 or pursuant to a forfeiture of shares by the target company,
undertaken in compliance with the provisions of the Companies Act, 2013 and its
articles of association
The SEBI (Bankers to an Issue) regulations govern / regulate the Bankers to an Issue
(BTI) activity which includes (a) Acceptance of application and application monies; (b)
Acceptance of allotment or call monies; (c) Refund of application monies; (d) Payment
of dividend or interest warrants. The Banker to an Issue is required to be registered with
SEBI subject to complying with the eligibility conditions. SEBI regulates its activities
through reports of its activities filed with SEBI on a periodic basis.
Every banker to an issue is required to enter into an agreement with the issuer company
for which it is acting as banker to an issue. The agreement shall specify the following:
a. The number of centres at which the applications and application monies of an issue of
an issuer company will be collected from the investors;
b. The time within which the statement regarding the applications and application monies
received from the investors investing in an issue of the issuer company will be
forwarded to the registrar to an issue or the issuer company, as the case may be;
c. That a daily statement will be sent by the designated controlling branch of the bankers
to the issue to the registrar to an issue indicating the number of applications received
on that date from the investors investing in the issue of the issuer company, and the
amount of application money received.
2.3.11 SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations mainly deal
with registration, code of conduct of entities who undertake activities like collecting
applications from investors in respect of an issue and keeping proper record of
applications and monies received from investors or paid to seller of the securities. The
Registrars to the Issue also assist the issuer company or person or group of person in
(a) determining the basis of allotment of securities in consultation with stock exchange,
(b) finalizing the list of persons entitled to allotment, (c) processing and dispatching
allotment letters, refund orders or certificates and other related documents in respect of
an issue.
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NISM-Series-IX: Merchant Banking Certification Examination
(i) any person, who on behalf of anybody corporate, maintains the records of holders of
securities issued by such body corporate and deals with all matters connected with the
transfer and redemption of its securities;
(ii) a department or division, by whatever name called, of a body corporate performing
the activities referred in sub-clause (i) if at any time the total number of the holders of its
securities issued exceed one lakh;
The Registrar and Transfer Agents (RTA) have a significant role to play in a public issue
of shares. They are appointed by the issuer in consultation with the lead manager to the
issue and enter into an agreement detailing their responsibility in the issue work. The
scope of activity of the RTA encompasses the period before the issue opens, during the
period of issue and after the issue closes.
Pre-Issue Work
- To enter into an Escrow Agreement with the Company, Selling Shareholders, the
BRLMs and the Bankers to the Offer where-in the Registrar shall issue requisite
instructions to the Bankers to the Offer in terms of the Escrow Account
Agreement.
- If applicable to enter into a Share Escrow Agreement with the Company and the
Selling Shareholders (“Share Escrow Agreement”) in terms of which the Selling
Shareholders shall prior to the filing of the Red Herring Prospectus open a share
escrow account (“Share Escrow Account”) with the Registrar wherein the Selling
Shareholders shall transfer its Offered Shares. The Registrar shall operate the
said Share Escrow Account in terms of the instructions issued by the BRLMs and
in terms of the Share Escrow Account Agreement;
- To enter into the ‘Syndicate Agreement’ with the Company, the Selling Shareholders
and the BRLMs and an ‘Underwriting Agreement’ with the Company, the Selling
Shareholders, the BRLMs in terms of which the members of the Syndicate shall
fulfil their underwriting obligations and the Registrar shall provide the necessary
notices and perform such other functions as may be agreed upon in accordance
with such Underwriting Agreement;
- Liaising with the Depositories on behalf of the Company for obtaining the
International Securities Identification Number (“ISIN”) and for finalising the
tripartite agreement to be entered into with the Depositories;
- Liaising with the Company for dematerialization of the Equity Shares held by the
existing shareholders of the Company in physical form, including, the Promoters,
the Selling Shareholders and members of the Promoter Group, if any, prior to the
filing of the Draft Red Herring Prospectus;
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NISM-Series-IX: Merchant Banking Certification Examination
- Providing/ specifying the format to the Designated Intermediaries in which
information in relation to ASBA is required;
Issue Work
- Collect and report information on the daily collections/bids received to the lead
manager/ book running lead managers.
- Collection of data and forms from banks
- Liaising with clients and intermediaries to the issue
- While collecting the final certificates, the Registrar shall check the accuracy of the date
of such certificates and confirm that such certificates, duly signed on the letterhead/
stamped, have been received within specified time limit as mentioned in the
applicable regulations and relevant circulars issued by SEBI;
- To obtain from the Depositories the Demographic Details of the Bidders (including PAN
and MICR code) and to validate this data with the Bid file and highlight any
discrepancies.
a) Prepare technical rejection list based on the electronic Bid files received from the
Stock Exchanges without reference to the physical Bid cum Application Forms;
b) Deliver the Bid file received from the Stock Exchanges containing the application
numbers, number of Equity Shares, amount and any other additional fields as
may be required to all the SCSBs who shall use such information for due
validation;
c) Reconcile the compiled data received from the Stock Exchanges and all SCSBs,
and match the same with the depository database for correctness of DP ID,
Client ID and PAN;
d) To ensure that the Basis of Allotment is in accordance with the SEBI ICDR
Regulations, guidelines and notifications and as specified in the Offer
Documents;
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NISM-Series-IX: Merchant Banking Certification Examination
e) To assist in seeking approval of the Basis of Allotment with the Designated Stock
Exchange as per the SEBI ICDR Regulations and the relevant provisions of the
Offer Documents along with the BRLMs and the Company;
f) To prepare the complete list of valid applications (after all rejections), and present
the same category-wise;
i) To send the Confirmation Allocation Note (“CAN”) to the Anchor Investors and the
Allotment Advice to Bidders as applicable who have been Allotted Equity Shares
in the Offer;
j) To keep accurately, at all times, the electronic records relating to Bids received
from all SCSBs, the Designated Intermediaries and the BRLMs, including:
i. Bids from the online Bidding system of the Stock Exchanges and Bids
furnished by SCSBs, the Designated Intermediaries;
k) To specifically record cases of multiple Bids and keep them available for
inspection along with the relevant records, namely the electronic data received
from the Stock Exchanges and the data validated from the Depositories;
l) To prepare distribution schedule and analysis form (for purposes of the Stock
Exchanges or the Company);
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NISM-Series-IX: Merchant Banking Certification Examination
To give instructions to the Depositories to carry out lock-in for the pre-Offer share capital
(except the Offered Shares, ESOP and equity shares held by a venture capital fund or a
foreign venture capital investor for a period of at least one year prior to the date of filing
the draft prospectus with the SEBI) as per the SEBI ICDR Regulations.
To dispatch Allotment Advice / intimations and credit of the Equity Shares to the
Allottees’ respective demat accounts.
SEBI (Delisting of Equity Shares) Regulations, 2009 mainly deal with the process of
delisting of equity shares of a listed company which can be done in two ways, viz.,
Voluntary Delisting and Compulsory Delisting. Voluntary delisting is a condition when
the issuer company no longer wants to be on the trading platform of the exchange and
exits out of the Exchange. Whereas the involuntary delisting involves delisting by
exchanges on account of any disciplinary action initiated by either the Exchanges or by
SEBI on non-fulfillment of the listing criteria set by the exchanges. These regulations do
not apply to securities listed without making a public issue on the institutional trading
platform of a recognised stock exchange
The SEBI delisting regulations shall not apply to any delisting made pursuant to a
scheme sanctioned by the Board for Industrial and Financial Reconstruction under the
Sick Industrial Companies (Special Provisions) Act, 1985 or by the National Company
Law Tribunal under section 424D of the Companies Act, 1956, if such scheme –
(a) lays down any specific procedure to complete the delisting; or
(b) provides an exit option to the existing public shareholders at a specified
delisting
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NISM-Series-IX: Merchant Banking Certification Examination
No company shall apply for and no stock exchange shall permit delisting of equity
shares of the company:
a) Pursuant to Buy Back of equity shares or
b) Pursuant to Preferential Allotment or
c) Unless a period of 3 years has elapsed since listing or
d) Any instrument(s) which are convertible into shares that are sought to be listed are
outstanding
2. Voluntary Delisting
The company may delist equity shares from one or more stock exchanges where
they are listed and continue their listing on one or more other exchanges subject to
following:
- If the equity shares are proposed to be delisted & would not remain listed on any
of the stock exchanges having nationwide trading terminals, the issuer shall
provide an exit opportunity to the existing shareholders.
In respect of delisting where exit opportunity is required to be given the offer price
shall be determined through a book building process popularly known as
Reverse Book Building (RBB), after fixing of floor price.
The final offer price shall be determined at the price at which the maximum
number of equity shares is tendered by the public shareholders.
Acquirers/Promoters shall not be bound to accept the equity shares at the offer
price determined by the Reverse Book Building process and promoter may
decide not to accept the offer price so determined.
Issue is considered successful if promoter holding reaches more than 90% of the
issued equity share capital
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NISM-Series-IX: Merchant Banking Certification Examination
The acquirers/promoters shall continue to give post delisting exit offer for a period
of 1 year from the date of listing and Escrow account shall continue to be
maintained till the said period.
(1) A recognised stock exchange may, by order, delist any equity shares of a company
on any ground prescribed in the rules made under section 21A of the Securities
Contracts (Regulation) Act, 1956:
Provided that no order shall be made under this sub regulation unless the company
concerned has been given a reasonable opportunity of being heard.
(2) The decision regarding compulsory delisting shall be taken by a panel to be
constituted by the recognised stock exchange consisting of – (a) two directors of the
recognised stock exchange (one of whom shall be a public representative);
(b) one representative of the investors;
(c) one representative of the Ministry of Corporate Affairs or Registrar of
Companies; and (d) the Executive Director or Secretary of the recognized stock
exchange.
(3) Before passing an order under sub-regulation (1), the recognised stock exchange
shall give a notice in one English national daily with wide circulation and one regional
language newspaper of the region where the concerned recognised stock exchange is
located, of the proposed delisting, giving a time period of not less than fifteen working
days from the notice, within which representations may be made to the recognised stock
exchange by any person who may be aggrieved by the proposed delisting and shall also
display such notice on its trading systems and website.
(4) The recognised stock exchange shall while passing any order under sub-regulation
(1), consider the representations, if any, made by the company as also any
representations received in response to the notice given under sub regulation(3) and
shall comply with the criteria specified in Schedule III.
(5) The provisions of Chapter IV shall not be applicable to a compulsory delisting made
by a recognised stock exchange under this Chapter.
(6) Where the recognised stock exchange passes an order under sub-regulation (1), it shall, -
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NISM-Series-IX: Merchant Banking Certification Examination
(a) forthwith publish a notice in one English national daily with wide circulation and one
regional language newspaper of the region where the concerned recognised stock
exchange is located, of the fact of such delisting, disclosing therein the name and
address of the company, the fair value of the delisted equity shares determined under
sub-regulation (1) of regulation 23 and the names and addresses of the promoters of
the company who would be liable under sub-regulation (3) of regulation 23; and
(b) inform all other stock exchanges where the equity shares of the company are listed,
about such delisting.
4. Rights of public shareholders in case of a compulsory delisting
(1) The recognised stock exchange shall form a panel of expert valuers from whom the
valuer or valuers shall be appointed for purposes of sub-regulation (2).
(2) Where equity shares of a company are delisted by a recognised stock exchange the
recognized stock exchange shall appoint an independent valuer or valuers who shall
determine the fair value of the delisted equity shares.
(3) The promoter of the company shall acquire delisted equity shares from the public
shareholders by paying them the value determined by the valuer within three months of
the date of delisting from the recognised stock exchange, subject to their option of
retaining their shares.
(1) Where a company has been compulsorily delisted the company, its whole time
directors, its promoters and the companies which are promoted by any of them shall not
directly or indirectly access the securities market or seek listing for any equity shares for
a period of ten years from the date of such delisting.
(2) In case of such companies whose fair value is positive -
(a) such a company and the depositories shall not effect transfer, by way of sale, pledge,
etc., of any of the equity shares held by the promoters/ promoter group and the
corporate benefits like dividend, rights, bonus shares, split, etc. shall be frozen for all
the equity shares held by the promoters/ promoter group, till the promoters of such
company provide an exit option to the public shareholders in compliance with
sub-regulation (3) of regulation 23, as certified by the concerned recognized stock
exchange;
(b) the promoters and whole-time directors of the compulsorily delisted company shall
also not be eligible to become directors of any listed company till the exit option as
stated in clause (a) above is provided.
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NISM-Series-IX: Merchant Banking Certification Examination
The company has a paid-up capital not exceeding ten crore rupees and networth
not exceeding twenty five crore rupees as on the last date of preceding financial
year. The number of equity shares of the company traded on each such
recognised stock exchange during the twelve calendar months immediately
preceding the date of board meeting referred to in sub-regulation (1B) of
regulation 8 is less than ten per cent of the total number of shares of such
company.
The company has not been suspended by any of the recognised stock exchanges
having nation-wide trading terminals for any non-compliance in the preceding one
year.
In above cases promoters shall write individually to all the public shareholders
informing them about the intention to get the equity shares delisted indicating the
exit price together with justification and seeking their consent for the proposal of
delisting.
In such cases atleast 90% of public shareholders shall give positive consent in
writing to the proposal of delisting.
The application for listing of equity shares of any company which have been
delisted under voluntary delisting and under special provisions for small
companies shall not be made for a period of 5 years from the delisting.
(1) Notwithstanding anything contained in these regulations, in the event the acquirer
makes a public announcement of an open offer for acquiring shares of a target
company in terms of regulations 3, 4 or 5, he may delist the company in accordance
with provisions of the Securities and Exchange Board of India (Delisting of Equity
Shares) Regulations, 2009:
Provided that the acquirer shall have declared upfront his intention to so delist at the
time of making the detailed public statement and a subsequent declaration of delisting
for the purpose of the offer proposed to be made under sub regulation (1) will not
suffice.
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NISM-Series-IX: Merchant Banking Certification Examination
(iii) on account of the acquirer rejecting the discovered price determined by the book
building process in terms of sub-regulation (1) of regulation 16 of SEBI (Delisting of
Equity Shares) Regulations, 2009, the acquirer shall make an announcement within two
working days in respect of such failure in all the newspapers in which the detailed public
statement was made and shall comply with all applicable provisions of these
regulations.
(3) In the event of failure of the delisting offer made under sub-regulation (1), the open
offer obligations shall be fulfilled by the acquirer in the following manner:
(i) the acquirer, through the manager to the open offer, shall within five working days
from the date of the announcement under sub-regulation (2), file with the Board, a draft
of the letter of offer as specified in sub-regulation (1) of regulation 16; and
(ii) shall comply with all other applicable provisions of these regulations Provided that the
offer price shall stand enhanced by an amount equal to a sum determined at the rate of
ten per cent per annum for the period between the scheduled date of payment of
consideration to the shareholders and the actual date of payment of consideration to the
shareholders.
(5) Shareholders who have tendered shares in acceptance of the offer made under
sub-regulation (1), shall be entitled to withdraw such shares tendered, within 10 working
days from the date of the announcement under sub-regulation (2).
(6) Shareholders who have not tendered their shares in acceptance of the offer made
under sub regulation (1) shall be entitled to tender their shares in acceptance of the offer
made under these regulations.
Both the acquisition of shares and payments to be made is required to follow the Stock
Exchange mechanism specified in SEBI Circular number CFD/DCR2/CIR/P/2016/131
dated December 9, 2016. This states that transfer of shares of shareholders under the
tender offers would be made directly to the account maintained by the clearing
corporation. After such transfer of securities, the clearing corporation will be allowed to
utilize the securities towards the settlement
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NISM-Series-IX: Merchant Banking Certification Examination
obligations under such offers. Further, consideration for the accepted shares in the
tender offer and shares tendered but not accepted under such offer would be credited
directly to shareholders' bank and demat accounts respectively.
We will read in detail about the role of merchant banker in the delisting process in the
later chapters.
Every SEBI registered intermediary dealing in the Stock markets are required to be
registered under the SEBI Act, 1992. For this purpose, the SEBI (Intermediaries)
Regulations, 2008 prescribes the procedure for registration of intermediaries, general
obligations, inspection and disciplinary proceedings and inter alia, criteria for
determining a fit and proper person and code of conduct. Merchant Bankers are also
required to comply with SEBI (Intermediaries) Regulations, 2008 in addition to the SEBI
(Merchant Bankers) Regulations.
Companies are permitted to buy-back their own securities from the market under
Sections 41, 68 to 70. In case the company is listed, it is required to also comply with
the SEBI (Buy-back of Securities) Regulations, 2018. These regulations prescribe, inter
alia, the conditions of buy-back, procedure for buy-back through tender offer, procedure
for buy-back from the open market, general obligations from the Company, obligations
of the merchant banker and the action that can be taken against intermediaries by SEBI.
Section 8.2 of this workbook deals in detail about the role of Merchant Banker in
Buy-Back of Securities.
Listed companies are allowed to issue shares to their employees under the SEBI (Share
Based Employee Benefits) Regulations, 2014. The Regulations prescribe the schemes
and the companies to which these Regulations are applicable, implementation of the
scheme through trusts, eligibility of the employee to participate in ESOS of the company,
formation of compensation committee, Shareholders’ approval, pricing, lock-in period
and rights of the option-holder and disclosures required to be made in the Director’s
Report subsequent to ESOP. It also specifies the process of administration and
implementation with respect to Employees Stock Option Scheme (ESOS), Employees
Stock Purchase Scheme (ESPS), Stock Appreciation Rights Scheme (SARS), General
Employee Benefits Scheme (GEBS) and Retirement Benefit Scheme (RBS).
Compliances and Conditions are specified under Regulation 12 which includes the
appointment of registered merchant banker for implementation of schemes covered
under these Regulations
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NISM-Series-IX: Merchant Banking Certification Examination
These regulations shall apply to (a) public issue of debt securities; and (b) listing of debt
securities issued through public issue or on private placement basis on a recognized
stock exchange. These regulations specify the issue requirements for public issues, the
procedure for listing of debt securities, conditions for continuous listing and trading of
debt securities, obligations of intermediaries and issuers and procedure for action in
case of violation of regulations.
Section 8.4 of this workbook deals in detail about the role of Merchant Banker in issue of
listing of Debt Securities.
The lead merchant banker shall ensure that the draft offer document clearly specifies
the names and contact particulars of the compliance officer of the lead merchant
banker and the issuer including the postal and email address, telephone and fax
numbers.
All comments received on the draft offer document are suitably addressed and shall
also furnish to SEBI a due diligence certificate as per these regulations prior to the
filing of the offer document with the Registrar of Companies.
“REIT” or “Real Estate Investment Trust” shall mean a trust registered as such under
these regulations.
The manager of the trust, in consultation with trustee, shall appoint the valuer(s), auditor,
registrar and transfer agent, merchant banker, custodian and any other intermediary or
service provider or agent for managing the assets of the REIT or for offer and listing of
its units or any other activity pertaining to the REIT in a timely manner.
REIT, through the merchant banker shall file a draft offer document along with the
specified fee, with the designated stock exchange(s) and the SEBI, not less than thirty
working days before filing the offer document with the designated stock exchange and
the SEBI.
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NISM-Series-IX: Merchant Banking Certification Examination
The draft offer document filed with the SEBI shall be made public, for comments, if any,
by hosting it on the websites of the SEBI, designated stock exchanges and merchant
bankers associated with the issue for a period of not less than 21 days. The draft offer
document and/or offer document shall be accompanied by a due diligence certificate
signed by the lead merchant banker. The lead merchant banker shall ensure that all
comments received from SEBI on the draft offer document are suitably taken into
account prior to the filing of the offer document with the designated stock exchanges.
The manager shall submit to the trustee-
(a) quarterly reports on the activities of the REIT including receipts for all funds received
by it and for all payments made, position on compliance with these regulations,
specifically including compliance with investment conditions, related party transactions
and borrowings and deferred payments, performance report, status of development of
under-construction properties, within 30 days of end of such quarter;
(b) valuation reports within 15 days of the receipt of the valuation report from the valuer;
(c) decision to acquire or sell or develop any property or expand existing completed
properties along with rationale for the same;
(d) details of any action which requires approval from the unit holders as required under
these regulations;
(e) details of any other material fact including change of its directors, any legal
proceedings that may have a significant bearing on the activity of the REIT within 7
working days of such action.
“InvIT” or ‘Infrastructure Investment Trust’ shall mean the trust registered as such under
these regulations. The role of the manager includes the following:
Ensure that the investments made by the InvIT are in accordance with the
investment conditions specified in regulation 18 and in accordance with the
investment strategy of the InvIT.
In consultation with trustee, appoint the valuer(s), auditor, registrar and transfer
agent, merchant banker, custodian and any other intermediary or service
provider or agent as may be applicable with respect to activities pertaining to the
InvIT in a timely manner and in accordance with these regulations.
Responsible for all activities pertaining to issue of units and listing of units of the
InvIT including–
- filing of placement memorandum with SEBI;
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NISM-Series-IX: Merchant Banking Certification Examination
- filing of the offer document with SEBI and the exchanges within the
prescribed time period;
- dealing with all matters up to allotment of units to the unit holders; -
obtaining in-principle approval and final listing and trading approvals from the
designated stock exchanges;
- dealing with all matters relating to issue and listing of the units of the InvIT as
specified under these regulations and any guidelines as may be issued by
SEBI in this regard.
Ensure that disclosures made in the offer document or placement memorandum
contains material, true, correct and adequate disclosures and are in accordance
with these regulations and guidelines or circulars issued hereunder.
Ensure adequate and timely redressal of all unit holders’ grievances pertaining to
activities of the InvIT.
Ensure that the disclosures or reporting to the unit holders, SEBI, trustees and
designated stock exchanges, are in accordance with these regulations and
guidelines or circulars issued hereunder.
Submit to the trustee:
- quarterly reports on the activities of the InvIT including receipts for all funds
received by it and for all payments made, position on compliance with
these regulations, specifically compliance with investment conditions,
related parties transactions and borrowing and deferred payments,
performance report, status of development of under-construction projects,
within thirty days of end of such quarter;
- valuation reports as required under these regulations within fifteen days of
the receipt of the valuation report from the valuer;
- decision to acquire or sell or develop or bid for any asset or projector expand
existing completed assets or projects along with rationale for the same; -
details of any action which requires approval from the unit holders as may be
required under the regulations;
- details of any other material fact including change in its directors, change in
its shareholding, any legal proceedings that may have a significant
bearing on the activity of the InvIT, within seven working days of such
action.
- Ensure that the audit of accounts of the InvIT by the auditor is done not less
than twice annually and such report is submitted to the designated stock
exchange within 45 days of end of financial year ending March 31st and
half-year ending September 30th.
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NISM-Series-IX: Merchant Banking Certification Examination
The Competition Act, 2002 was passed by the Parliament in the year 2002, to which the
President accorded assent in January, 2003. It was subsequently amended by the
Competition (Amendment) Act, 2007.
In accordance with the provisions of the Amendment Act, the Competition Commission
of India and the Competition Appellate Tribunal have been established. The provisions
of the Competition Act relating to anti-competitive agreements and abuse of dominant
position were notified on May 20, 2009.
The Foreign Exchange Management Act, 1999 (FEMA) was passed to replace the
erstwhile Foreign Exchange Regulation Act. The main objective behind the Foreign
Exchange Management Act (1999) is to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and payments. It was
also formulated to promote the orderly development and maintenance of foreign
exchange market in India.
FEMA is applicable to the whole of India. The act is also applicable to all branches,
offices and agencies outside India owned or controlled by a person who is a resident of
India. The FDI related notifications are issued by RBI under the FEMA, 1999.
7
Combination defined, includes mergers &amalgamation, acquisition of shares, assets above thresholds and domestic nexus.
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NISM-Series-IX: Merchant Banking Certification Examination
Thus in simple words it can be said that when public fails to respond / subscribe to an
issue, Underwriters have to chip in and get the issue subscribed.
The Depositories Act enables setting up of multiple depositories in India. The Act
ushered in an era of efficient capital market infrastructure, improved investor protection,
reduced risks and increased transparency of transactions in the securities market. The
Act specifies, inter alia, the rights and obligations of depositories, participants, issuers
and beneficial owners.
As on date, there are two registered depositories in India viz. Central Depository
Services (India) Limited (CDSL) and National Securities Depository Ltd. (NSDL).
2.3.24 SEBI (Depositories and Participants) Regulations, 2018
These Regulations deal with the procedural requirements to be complied with by the
Depository or Depository Participant with respect to registration of depository, obtaining
of certificate of commencement of business, registration of participant, rights and
obligations of depositories, participants, issuers, manner of surrender of certificate of
security and creation of pledge or hypothecation. “Participant” as defined in The
Depositories Act, 1996 means a person registered as such under sub-section (1A) of
section 12 of the Securities and Exchange Board of India Act, 1992.
A Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the
DPs and the depository is governed by an agreement made between the two under the
Depositories Act, 1996, SEBI [Depositories and Participants] Regulations, 2018 and the
Bye laws of the Depository.
The SEBI (CAPSM) Regulations, 2007, Regulations 7 and 8, delegates the following
powers and functions to National Institute of Securities Markets:
(a) The functions of NISM in respect of certification for associated persons in the
securities market shall include putting in place and implementing the certification
process, procedure and policies.
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NISM-Series-IX: Merchant Banking Certification Examination
(b) NISM in consultation with SEBI may lay down standards which may, (i) specify that
all or any portion of such standards shall be applicable to all or any category of
associated persons working or associated with all or any class of intermediaries in
securities market; (ii) specify that no associated person in any such class may be
qualified to be employed or engaged or continued to be employed or engaged by an
intermediary unless he is in compliance with such standards of examination,
continuing professional education requirements and such other qualifications as
NISM in consultation with the SEBI may specify.
Obligation of Obtaining Certification
Regulation 3 of the SEBI (CAPSM) Regulations, 2007 provides that SEBI may by
notification in the official gazette require such categories of associated persons to obtain
requisite certificate for engagement or employment with such classes of intermediaries
and from such date as may be specified in the notification provided that an associated
person employed or engaged by an intermediary prior to the date specified by SEBI
may continue to be employed or engaged by the intermediary if he obtains the
certificate within two years from the said date.
An associated person, who as on the date specified by SEBI, holds a certificate for a
category as recognised by SEBI shall not be required to obtain a fresh certificate for the
same category during the validity of such certificate.
Regulation 4 of SEBI (CAPSM) Regulations, 2007 specifies the manner of obtaining the
certificate the first time. These are further detailed below:
(a) Passing the relevant certificate examination, as may be specified by NISM. (b)
Successfully completing a related CPE Program9, as may be specified by NISM.
(c) Delivering at least four sessions in specific CPE program, as may be specified
by NISM.
A person other than a Principal, who has attained 50 years of age or who has 10 years
of experience, may obtain the certificate by any of the following methods:
8
A Principal is a person who is actively engaged in the management of the intermediary’s securities business including
supervision, solicitation, conduct of business, and includes: a) Sole Proprietors, b) Managing Partners and c) Whole
Time Directors 9The CPE Program is as per the NISM communiqué Ref. No. NISM/Certification/ CPE General/2011/1
dated December 21, 2011.
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NISM-Series-IX: Merchant Banking Certification Examination
All other persons may obtain the certificate by the following method:
The certificate given under regulation 3 of SEBI (CAPSM) Regulations, 2007 is valid for
a period of 3 years from the date of the grant of the certificate or revalidation as the
case may be. Upon the expiry of the validity of the certificate possessed by the
associated person, the certificate shall be revalidated for a period of 3 years provided
the associated person successfully completes a programme of continuing professional
education as specified by NISM.
Upon expiry of the validity of the certificate possessed by an associated person, the
certificate may get revalidated, provided the associated person successfully completes
a programme of continuing professional education, as may be specified by NISM during
12 months preceding the date of expiry of the certificate, or by passing the relevant
NISM Certification Examination before the expiry of the existing certificate11.
The certificate will be revalidated for a period of three years from the date of expiry of the
existing certificate. Different categories of persons may get their certificate revalidated
through different methods as follows:
A Principal may get his/her certificate revalidated by any of the following ways:
(a) Passing the relevant certificate examination, as may be specified by NISM. (b)
Successfully completing a related CPE Program, as may be specified by NISM.
(c) Delivering at least four sessions in specific CPE program, as may be specified
by NISM.
A person other than a Principal, who has attained 50 years of age or who has 10 years
of experience, may get the certificate revalidated by any of the following methods:
10
Activity wherein the (a) the associated person as part of his work or operation deals or interacts with the investors,
issuers or clients of intermediaries;(b) the associated person deals with assets or funds of investor or clients; (c) the
associated person handles redressal of investor grievances;(d) the associated person is responsible for internal
control or risk management;(e) the associated person is responsible for compliance of any rules or regulations; (f) the
associated person is engaged in activities that have a bearing on operational risk of the intermediary.
11
See NISM communiqué Ref. No. NISM/Certification/ CPE General/2011/1 dated December 21, 2011.
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NISM-Series-IX: Merchant Banking Certification Examination
NISM. All other persons may get their certificate revalidated by any of the
following methods:
Under the SEBI (CAPSM) Regulations, employees working with SEBI registered
Merchant Bankers and performing various SEBI regulated functions such as those
relating to IPO, FPO, Open Offer, Buy-Back, Delisting etc. and is involved in, or deals
with any of the following: (a) The investors, issuers or clients of intermediaries; (b)
Assets or funds of investors or clients; (c) Redressal of investor grievances; (d) Internal
control or risk management; (e) Activities having a bearing on operational risk; (f)
Maintain books and records pertaining to above activities are mandatorily required to
take the NISM-Series-IX: Merchant Banking Certification Examination.12
SEBI issued the SEBI (Foreign Portfolio Investors) Regulations, 2014 on 7th January
2014. A Foreign Portfolio Investor (FPI) has been defined to mean a person who
satisfies the prescribed eligibility criteria and has been registered under the FPI
Regulations. All existing Foreign Institutional Investors (FIIs) and QFIs are to be merged
into one category called FPI.
Eligibility Criteria
An applicant desirous of FPI registration should, inter alia, satisfy the following
− against whom the Financial Action Task Force (FATF) has not issued any
warnings
12
SEBI Gazette Notification No. LAD-NRO/GN/2013-14/15/6319 dated August 2, 2013.
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NISM-Series-IX: Merchant Banking Certification Examination
Among other things, the SEBI (FPI) Regulations specifies the investment restrictions and
conditions for the Foreign Portfolio Investors. It specifies the list of securities in which the
Foreign Portfolio Investors can invest in. In cases, where a foreign institutional investor
or a sub account, prior to commencement of these regulations, holds equity shares in a
company whose shares are not listed on any recognized stock exchange, and continues
to hold such shares after initial public offering and listing thereof, such shares shall be
subject to lock-in for the same period, if any, as is applicable to shares held by a foreign
direct investor placed in similar position, under the policy of the Government of India
relating to foreign direct investment for the time being in force.
1. A foreign portfolio investor shall transact in the securities in India only on the basis of
taking and giving delivery of securities purchased or sold. However, this restriction
shall not apply to (a) any transactions in derivatives on a recognized stock
exchange; (b) short selling transactions in accordance with the framework specified
by the Board; (c) any transaction in securities pursuant to an agreement entered into
with the merchant banker in the process of market making or subscribing to
unsubscribed portion of the issue in accordance with the SEBI (ICDR) Regulations,
2018.
2. No transaction on the stock exchange shall be carried forward.
3. The transaction of business in securities by a foreign portfolio investor shall be only
through stock brokers registered by SEBI.
Regulations, 2012
“Alternative Investment Fund” means any fund established or incorporated in India in the
form of a trust or a company or a limited liability partnership or a body corporate which is
a privately pooled investment vehicle which collects funds from investors, whether
Indian or foreign, for investing it in accordance with a defined investment policy for the
benefit of its investors and which is not covered by SEBI under any other fund
management regulations SEBI has specified the eligibility criteria for an AIF. The
Regulations also specify the investment strategy and conditions for investment in all
categories of AIF. Alternative Investment Fund can raise funds through private
placement by issue of information memorandum or placement memorandum. The
Alternative Investment Fund may launch schemes subject to filing of placement
memorandum with the Board.
This Regulation also covers the requirements for Angel Fund. “Angel Fund” means a
sub-category of Venture Capital Fund under Category I- Alternative Investment Fund
that raises funds from
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NISM-Series-IX: Merchant Banking Certification Examination
angel investors and invests in accordance with the provisions of this Chapter. The
provisions of this Chapter shall apply to angel funds and schemes launched by such
angel funds.
Category II Alternative Investment Fund which does not fall in Category I and III and
which does not undertake leverage or borrowing other than to meet day-today
operational requirements and as permitted in these regulations;
Category III Alternative Investment Fund which employs diverse or complex trading
strategies and may employ leverage including through investment in listed or unlisted
derivatives.
2.3.28 SEBI (Research Analyst) Regulations, 2014
The SEBI (Research Analyst) Regulations 2014, specifies who is a research analyst and
the specific regulations to be followed by them. The regulation defines “research
analyst” as a person who is primarily responsible for
with respect to securities that are listed or to be listed in a stock exchange, whether or
not any such person has the job title of 'research analyst' and includes any other entities
engaged in issuance of research report or research analysis.
Persons acting as a Research analyst or research entity cannot hold himself out as a
research analyst, unless he holds a SEBI Registration certificate. An individual
registered as research analyst under these regulations, individuals employed as
research analyst and partners of a research analyst, if any, engaged in preparation
and/or publication of research report or research analysis shall have the following
minimum qualifications, at all times:
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NISM-Series-IX: Merchant Banking Certification Examination
(iii) a graduate in any discipline with an experience of at least five years in activities
relating to financial products or markets or securities or fund or asset or portfolio
management.
The SEBI (Research Analyst) Regulation specifies the limitations on trading, the internal
policies and control procedures governing the dealing and trading by any research
analyst. The regulation also specifies the limitations on publication of research report,
public appearance and conduct of business, etc.
Provided that investment advice given through newspaper, magazines, any electronic or
broadcasting or telecommunications medium, which is widely available to the public shall
not be considered as investment advice for the purpose of these regulations;
This Regulation specifies that any person acting as Investment Adviser needs to be
registered with SEBI, it also lists out the conditions and requirements to be followed by
Investment Advisers. The regulation specifies the general obligations and
responsibilities of the Investment Advisers, disclosures which they need to make to their
clients etc.
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NISM-Series-IX: Merchant Banking Certification Examination
Review Questions
1. The merchant banker leading a public offer is popularly known as the ‘Lead Manager’.
State whether True or False.
(a) True
(b) False
Ans: (a)
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NISM-Series-IX: Merchant Banking Certification Examination
LEARNING OBJECTIVES:
3.1Introduction
In this chapter, we will give our readers an insight into the various regulatory aspects of
the Merchant Bankers in India. Merchant Bankers are expected to deal in project
counseling and pre investment analysis, feasibility studies of capital expenditure, capital
structure designing, issue management and underwriting, loan syndication as well as
mergers, amalgamation and takeovers, venture capital investments and buy-backs.
As per the SEBI (Merchant Bankers) Regulations, 1992, a body corporate other than a
non banking financial company (NBFC) can undertake activities that are relating to
merchant banker. Some of the specific activities13 carried out by a merchant banker are
listed below: a) Managing the public issue of securities
b) Underwriting the public issue
c) Managing/advising on international debt/equity offerings like GDRs, ADRs,
FCCBs etc. d) Private placement of securities
e) Primary/satellite dealership of government securities
f) Corporate advisory services such as mergers, takeovers,
buybacks etc. g) Stock broking
h) Advisory services for projects
i) Syndication of domestic loan offerings
j) International financial advisory services
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 the Reserve
13
SEBI Circular Ref. No.: RMB CIRCULAR NO. 1(98-99) June 05, 1998
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NISM-Series-IX: Merchant Banking Certification Examination
Bank of India. A merchant banker, who has been granted certificate of registration under
these regulations, may ensure market making in accordance with Chapter IX of the
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Merchant bankers, irrespective of the activity in which they are involved / dealing are
governed by the SEBI (Merchant Bankers) Regulations, 1992 issued by SEBI and
Amendment Regulations issued thereunder from time to time and need to be registered
with SEBI under the aforementioned regulation. The requirements for the grant of
certificate of registration to merchant banker and the regulations applicable to them will
be dealt with in detail in the following sections.
(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
subscriptions; and
Stock Brokers and/ or Merchant bankers holding a valid registration certificate under
SEBI Act are entitled to act as an underwriter without obtaining a separate certificate as
per the SEBI (Underwriters) Regulation and will be governed by these regulations in
other respects. However, an applicant can carry on the activity as portfolio manager
only if he obtains separate certificate
14
For the purpose of registration, merchant bankers who were not carrying on non-securities market
activities or those who are planning to discontinue the same, should submit an undertaking to SEBI that
they will not carry on any other activity than that in securities market.
15
Definition of Merchant Banker as given in the SEBI (Merchant Bankers) Regulations, 1992.
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NISM-Series-IX: Merchant Banking Certification Examination
of registration under the SEBI (Portfolio Manager) Regulations, 1993. SEBI on being
satisfied that the applicant is eligible, shall grant a certificate of registration.
An applicant seeking registration as Merchant Banker shall comply with the requirements
such as the Capital Adequacy Requirements, Registration Fees, and Criteria for fit and
proper person etc. which would be discussed in the following sections.
(a) An applicant shall be a body corporate other than a non-banking financial company
as defined under section 45-I(f) of the RBI Act, 1934, provided that the merchant
banker who has been granted registration by the RBI to act as Primary or Satellite
Dealer may carry on such activity subject to the condition that it shall not accept or
hold public deposit;
(b) The applicant should have the necessary infrastructure like adequate office space,
equipment’s and manpower to effectively discharge his activities;
(c) The applicant should have in his employment minimum of two persons who have the
experience to conduct the business of merchant banker;
(d) A person directly or indirectly connected 16 with the applicant has not been granted
registration by the SEBI;
(e) The applicant, his partner, director or principal officer are 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 have not been 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 recognized by the
Government in finance, law or business management;
(i) The applicant satisfies the capital adequacy requirements and is Fit and proper person.
16
Directly or indirectly connected means any person being an associate, subsidiary or inter-connected or
group company of the applicant in case of the applicant being a body corporate
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NISM-Series-IX: Merchant Banking Certification Examination
The regulation 7 of the SEBI MB Regulations specify that the capital adequacy
requirements for applicants seeking registration as Merchant Bankers is that it shall
have a net worth of not less than Rs. 5 crore. Net worth here means the sum of paid-up
capital and free reserves of the applicant at the time of making application.
For purpose of granting registration to an applicant, SEBI takes into account the “Criteria
for fit and proper person” as given under the SEBI (Intermediaries) Regulations 2008. It
states:
SEBI, after being satisfied that the applicant is eligible for registration as a merchant
banker, shall grant the certificate of registration as mentioned in the SEBI (Merchant
Bankers) Regulation. On being intimated of the grant of this certificate the merchant
banker is required to pay the requisite fees as mentioned in the SEBI (Merchant
Bankers) Regulations within 15 days of receipt of such intimation from SEBI.
Every Merchant Banker is required to pay a fee of Rs. 20 lakh as registration fees. A
merchant banker who has been granted a certificate of registration, to keep its
registration in force, shall pay a fee of nine lakh rupees every three years from the sixth
year, from the date of grant of certificate of registration or from the date of grant of
certificate of initial registration granted prior to the commencement of the Securities and
Exchange Board of India (Change in Conditions of Registration of Certain
Intermediaries) (Amendment) Regulations, 2016, as the case may be
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NISM-Series-IX: Merchant Banking Certification Examination
The fees specified shall be payable by the merchant banker by way of direct credit in the
bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by a
demand draft in favour of Securities and Exchange Board of India payable at Mumbai or at
the respective regional office.
Any certificate which has been granted to the merchant banker under the SEBI
(Merchant Bankers) Regulation shall be subject to the following conditions as
mentioned below.
(a) Where the merchant banker proposes change in control, it shall obtain prior approval
of the SEBI for continuing to act as such after the change;
(b) The merchant banker shall pay the fees for registration in the manner as provided in
these regulations;
(c) The merchant banker shall take adequate steps for redressal of grievances of the
investors within one month of the date of the receipt of the complaint and keep SEBI
informed about the number, nature and other particulars of the complaints received;
(d) It shall maintain capital adequacy requirements at all times during the period
(e) It shall abide by the regulations made under the SEBI Act, 1992 in respect of the
activities carried on by it as merchant banker.
(f) It shall immediately intimate SEBI, details of changes that have taken place in the
information that was submitted, while seeking registration.
The Regulation 13 provides that each merchant banker registered with SEBI should
follow the prescribed code of conduct as given under the Schedule III of the SEBI
(Merchant Bankers), Regulation. The code of conduct emphasises the importance of
integrity, honesty and ethical behaviour expected from merchant bankers. It also lays
out the need for proper supervision of the employees and agents of a merchant bank,
since they are in contact with investors and clients very frequently. Since the business of
a merchant banker is totally client and investor driven, merchant bankers are expected
to keep in mind the interests of the investors at all times and redress any grievances
immediately as well as keep SEBI informed of the same.
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NISM-Series-IX: Merchant Banking Certification Examination
1. A merchant banker shall make all efforts to protect the interests of investors.
2. A merchant banker shall maintain high standards of integrity, dignity and fairness in
the conduct of its business.
3. A merchant banker shall fulfill its obligations in a prompt, ethical, and professional manner.
4. A merchant banker shall at all times exercise due diligence, ensure proper care and
exercise independent professional judgment.
(c) Where a complaint is not remedied promptly, the investor is advised of any further
steps which may be available to the investor under the regulatory system.
6. A merchant banker shall ensure that adequate disclosures are made to the investors
in a timely manner in accordance with the applicable regulations and guidelines so as to
enable them to make a balanced and informed decision.
7. A merchant banker shall endeavour to ensure that the investors are provided with true
and adequate information without making any misleading or exaggerated claims or any
misrepresentation and are made aware of the attendant risks before taking any
investment decision.
8. A merchant banker shall endeavour to ensure that copies of the prospectus, offer
document, letter of offer or any other related literature is made available to the investors
at the time of issue or the offer.
9. A merchant banker shall not discriminate amongst its clients, save and except on
ethical and commercial considerations.
10. A merchant banker shall not make any statement, either oral or written, which would
misrepresent the services that the merchant banker is capable of performing for any
client or has rendered to any client.
11. A merchant banker shall avoid conflict of interest and make adequate disclosure of
its interest.
12. A merchant banker shall put in place a mechanism to resolve any conflict of interest
situation that may arise in the conduct of its business or where any conflict of interest
arises, shall take reasonable steps to resolve the same in an equitable manner.
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NISM-Series-IX: Merchant Banking Certification Examination
13. A merchant banker shall make appropriate disclosure to the client of its possible
source or potential areas of conflict of duties and interest while acting as merchant
banker which would impair its ability to render fair, objective and unbiased services.
14. A merchant banker shall always endeavour to render the best possible advice to the
clients having regard to their needs.
15. A merchant banker shall not divulge to anybody either orally or in writing, directly or
indirectly, any confidential information about its clients which has come to its knowledge,
without taking prior permission of its clients, except where such disclosures are required
to be made in compliance with any law for the time being in force.
16. A merchant banker shall ensure that any change in registration status/any penal
action taken by the SEBI or any material change in the merchant banker’s financial
status, which may adversely affect the interests of clients/investors is promptly informed
to the clients and any business remaining outstanding is transferred to another
registered intermediary in accordance with any instructions of the affected clients.
17. A merchant banker shall not indulge in any unfair competition, such as weaning
away the clients on assurance of higher premium or advantageous offer price or which
is likely to harm the interests of other merchant bankers or investors or is likely to place
such other merchant bankers in a disadvantageous position while competing for or
executing any assignment.
18. A merchant banker shall maintain arm’s length relationship between its merchant
banking activity and any other activity.
19. A merchant banker shall have internal control procedures and financial and
operational capabilities which can be reasonably expected to protect its operations, its
clients, investors and other registered entities from financial loss arising from theft,
fraud, and other dishonest acts, professional misconduct or omissions.
20. A merchant banker shall not make untrue statement or suppress any material fact in
any documents, reports or information furnished to the SEBI.
21. A merchant banker shall maintain an appropriate level of knowledge and
competence and abide by the provisions of the Act, regulations made there under,
circulars and guidelines, which may be applicable and relevant to the activities carried
on by it. The merchant banker shall also comply with the award of the Ombudsman
passed under the Securities and Exchange Board of India (Ombudsman) Regulations,
2003.
22. A merchant banker shall ensure that SEBI is promptly informed about any action,
legal proceedings, etc., initiated against it in respect of material breach or
non-compliance by it, of any law, rules, regulations, and directions of SEBI or of any
other regulatory body.
23. (a) A merchant banker or any of its employees shall not render, directly or indirectly,
any investment advice about any security in any publicly accessible media, whether
real-time or non-
79