How to Get a Merchant Banking License in India

Vaibhav Rathi

30 Mar, 2024

Introduction

Since 17^th and 18^th century there has been a presence of merchant banking in the society of Italy and France. Some of the biggest merchant banks in the word are Citibank, Bank of America, UBS investment bank etc. Lending to and investing in businesses have typically been the main responsibilities of a merchant bank. Within the perspective of contemporary Britain, it is equivalent to an investment bank. Mediaeval businesses, particularly textile merchants, founded these banks, which later evolved into modern financial institutions. Notably, in 1970, Citibank partnered with National Grindlays Bank to launch merchant banking in India. In 1973, the State Bank of India established a distinct Merchant Banking Division, which ICICI took over in 1974.

What is merchant banking?

In merchant banking, specialised financial services along with banking services, are given to companies, organisations, governments, or individuals with high incomes. Merchant banking is a type of professional service given to its clients in relating to financial matters. Financial services such as advising, underwriting, trading in securities, etc, are given in merchant banking by the merchant bankers. A merchant bank will never give its services to general public. People often confuse investment banks with merchant banks.

What is a merchant banker?

A merchant banker plays the role of an intermediary in between the customers and the financial market. A merchant banker will assist the clients in capital raising, risk management, and investing. A merchant banker will alone play many roles like broker, lender, financial advisor, manager for portfolio, underwriter, etc. Merchant bankers play a variety of roles in the market, which aids businesses in managing finances. With their extensive experience, they assist in solving any issues that can occur in the corporations of their clients.

What is merchant banking license?

A formal permission which is given by an authority or the government to carry out some specific activities is called a license. The license which is needed by the merchant bankers to work is known as a merchant banking license. The application to grant a license or certificate can be made in Form A to SEBI. Along with the license, a fee is to be paid, which will be non-refundable.

Perquisites for application of merchant banking license

• Every Merchant Banker is required to give the Board full information on every transaction for the purchase of securities of any corporate body whose issue he is handling within 15 days of the transaction date.
• Each merchant banker is obligated to provide a periodic report in the format that may occasionally be needed.
• The Code of Conduct listed in Schedule III must be adhered to by every Merchant Banker.
• For merchant bankers, affiliation with any business other than the business of the securities is prohibited.
• An RBI-issued certificate allowing a commercial banker to act as a primary or satellite dealer allows them to do business in whatever way the RBI considers fit.
• Following the end of each accounting year, each Merchant Banker is required to deliver copies of the Balance Sheet, Profit & Loss Account, Auditor Report, and Statement of Financial Position to the Board upon request. They must also be maintained for a period of five years.
• Each merchant banker is expected to appoint a compliance officer to oversee the Act, rules and regulations set by the Board, and handle investor complaints.
• A merchant banker who breaches any of the provisions of the Act or any rules or regulations promulgated thereunder shall be subject to the sanctions specified in such provisions for at least one of the offences enumerated above.

Who can be considered for a merchant banking license?

• The applicant must be a Body Corporate that is not an NBFC, as that term is defined in Section 45-I of the RBI Act of 1934¹, as modified from time to time.
• The applicant must be morally and physically fit.
• The applicant must have the necessary infrastructure, including ample office space, equipment, and staff, in order to conduct his business successfully.
• The Board has not granted registration to any person who is directly or indirectly associated to the applicant.
• The applicant presently employs at least two individuals who have the essential abilities to run a merchant banker license.
• The investor will have benefit is the certificate is granted.
• The application satisfies the required capital adequacy requirement (5 crore).
• The applicant has received a professional degree from any institution recognized by the Government of India.
• The applicant, his director, partner, or principal officer has not at any time been convicted of any offence involving Moral Turpitude or has been found guilty of any economic offence.

If the application is approved, the Board will issue a certificate of initial registration in Form B and inform the applicant. The validity of the certificate will be of five years from the date of application. The same procedures that are used to handle new requests for the issuing of certificates of initial registration must also be used to handle applications for permanent registration.

Conclusion

Merchant banking mainly offers high-income individuals, companies, & governments specialized financial support. Merchant bankers act as brokers who offer services for investment advising, risk management, and capital raising. One needs a merchant banking licence, which has stringent standards, to do these operations.

Frequently Asked Questions

1. https://incometaxindia.gov.in/pages/acts/reserve-bank-india-act.aspx