PART 5.docx

REQUIREMENTS FOR SETTING UP A MERCHANT BANK  1. Formation of the Business Organisation

SEBI act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the various types of organizations are listed as below: a.  b. c. d. e.

Sole proprietorship Partnership firm Hindu Undivided Family (HUF) Corporate Enterprises Co-operative Society

It is essential that the Merchant Banking outfit must be a registered company. Merchant Banks are generally setup as subsidiary companies of banks (Public or Private). For example, SBI caps, ICICI Securities etc. 2. Adoption of a viable business plan

All the basic tests required to find out whether the business to be undertaken is viable or not are also applicable to a Merchant Banking setup. Capital adequacy, profitability, growth opportunities and current market size are some of the factors which need to be looked into. 3. Registration of Merchant Bankers [1] a) Application for grant of certificate [of initial ini tial registration]

An application for grant of a certificate [of initial registration] shall be made to SEBI in Form A. [ 2] The application for registration shall be accompanied by a nonrefundable application fee of 25,000 rupees. [ 3] The application for registration shall  be made for any one of the following following categories of the merchant banker namely:

Category I, that is  –  To carry on any activity of the issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and To act as adviser, consultant, manager, underwriter, portfolio manager. 

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

Chapter II of SEBI (Merchant Bankers) Regulations, 1992  – Regulation 3 to 12 Regulation 3 (1) 3 Regulation 3 (1A) 2

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Category IV, that is to act only as adviser or consult ant to an issue. [ 4]

With effect from 9th December, 1997  –  an application for initial registration can be made only for carrying on the activities mentioned in Category I and to carry on the activity as a portfolio manager a separate certificate of registration needs to be obtained from SEBI under the provisions of the SEBI (Portfolio Manager) Regulations, 1993. [ 5] b) Application to conform to the requirements

The application should conform to all the requirements under the SEBI guidelines, otherwise it may be rejected. However, before rejecting any such application, the applicant shall be given an opportunity to remove within the time specified such objections as may be indicated by the SEBI. [ 6] c) Furnishing of information, clarification and personal representation

The SEBI may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker for the purpose of  disposal of the application. The applicant or its principal officer may appear before the SEBI for personal representation, if so required. [ 7] d) Consideration of application

The SEBI shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely: [ 8] 

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the applicant shall be a body corporate other than a non- banking financial company the merchant banker who has been granted registr ation by the Reserve Bank of  India to act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit the applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities the applicant has in his employment minimum of two persons who have the experience to conduct the business of the merchant banker 

Regulation 3 (2) Regulation 3 (2A) 6 Regulation 4 7 Regulation 5 8 Regulation 6 5

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a person directly or indirectly connected with the applicant has not been granted registration by the SEBI. the applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant and have not at any time been convicted for  any offence involving moral turpitude or has been found guilty of any economic offence the applicant has the professional qualification from an institution recognised  by the Government in finance, law or business management

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the applicant is a fit and proper person

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grant of certificate to the applicant is in the interest of investors, and

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the applicant fulfils the capital adequacy requirement. The capital adequacy requirement shall be a net worth of not less than 5 crore rupees. [ 9]

e) Grant of certificate of Initial Registration

The SEBI on being satisfied that the applicant is eligible, shall grant a certificate of  initial registration in Form B. [ 10] The certificate shall be valid for a period of five years from the date of its issue to the applicant. [ 11] On the grant of a certificate of  initial registration the merchant banker shall pay a sum of thirteen lakhs thirty three thousand and three hundred rupees as registration fee at the time of grant of certificate of initial registration. The fees of rupees 13,33,300 shall be paid by the merchant  banker within 15 days from the date of receipt of intimation from the SEBI. [ 12] f) Grant of certificate of permanent registration

The merchant banker who has been granted a certificate of initial registration may, 3 months before the expiry of the period of certificate of initial registration (5 years), make an application for grant of a certificate of permanent registration in Form A. [ 13] The application shall be accompanied by a non-refundable application fee of 25,000 rupees. [14] The application for permanent registration shall be dealt with in the same manner as if  it were a fresh application for grant of a certificate of initial registration. [ 15] The SEBI, on being satisfied that the application is eligible, shall grant a certificate of   permanent registration in Form B. [16] 9

Regulation 7 Regulation 8 (1) 11 Regulation 8 (2) 12 Regulation 8 (4) read with Schedule II of these regulations 13 Regulation 8A (1) 14 Regulation 8A (3) 15 Regulation 8A (5) 16 Regulation 8A (6) 10

On the grant of a certificate of permanent registration the merchant banker shall pay a fee of 5 lakh rupees every 3 years from the sixth year from the date of grant of  certificate of initial registration, or from completion of the period of renewed certificate of registration, as the case may be. The fees of 5 lakh rupees shall be paid  by the merchant banker, at the time of grant of permanent registration, within 15 days from the date of receipt of intimation from the SEBI and thereafter the fee shall be  paid 3 months before expiry of the block for which fee has been paid. [ 17] Any applicant, whose application for grant of a certificate of permanent registration has been refused by the SEBI, on or from the date of receipt of the communication, shall not carry on any activity as a merchant banker. [18] g) Conditions of registration

Any initial registration or any permanent registration shall be subject to the following conditions, namely  –  Where the merchant banker proposes change in control, it shall obtain prior  approval of the Board for continuing to act as such after the change. 

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It 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 the SEBI informed about the number, nature and other particulars of the complaints received. It shall maintain capital adequacy requirements of rupees 5 crore at all times during the period of the initial or permanent registration. It shall abide by the regulations made under the Act in respect of the activities carried on by it as merchant banker. [ 19]

h) Procedure where registration is not granted

Where an application for grant of a certificate of initial registration or of permanent registration does not satisfy the criteria set out in regulation 6, the SEBI may reject the application after giving an opportunity of being heard. [ 20] The refusal to grant initial registration or permanent registration, as the case may be, shall be communicated by the SEBI within 30 days of such refusal to the applicant stating therein the grounds on which the application has been rejected. [ 21] Any applicant, being aggrieved by the decision of the SEB, may apply within a period of 30 days from the date of receipt of such intimation to the SEBI for reconsideration

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Regulation 8A (7) read with Schedule II of these regulations Regulation 11 19 Regulation 9A 20 Regulation 10 (1) 21 Regulation 10 (2) 18

of its decision. [ 22] The SEBI shall reconsider an application and communicate its decision as soon as possible in writing to the applicant. [ 23] i) Consequences of failure to pay fees

Where a merchant banker fails to pay the Annual fees, the SEBI may suspend the registration certificate, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists. [ 24]

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Regulation 10 (3) Regulation 10 (4) 24 Regulation 12 (2) 23