Registration of Merchant Banker – An overview

Akshay Gupta

02 Aug, 2021

Merchant Banker is a person that helps Company/entity to raise funds by way of Initial Public offerings (IPOs) / Further Public Offerings (FPOs) and in certain other ways

The merchant Banker also advises on various matters relating to Initial Public offerings (IPOs) / Further Public Offerings (FPOs) and also acts as the underwriter, portfolio manager, or Banker to an issue.

Merchant Banker also provides consultancy to Companies relating to financial, marketing, and managerial and other legal matters. 

Important Definition

Body Corporate – Body Corporate shall have the meaning assigned to it in or under clause (7) of section 2 of the Companies Act, 1956

Merchant Banker –  Merchant Banker means any person 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.

Net worth – Net worth means the sum of paid-up capital and free reserves of the applicant at the time of making an application under sub-regulation (1) of regulation 3.

Principal Officer – principal officer, means

• proprietor, in the case of a proprietary concern,
• partner, in the case of a partnership firm,
• director, in the case of a body corporate who is responsible for the activities of the merchant banker.

Categories of Merchant Banker

The Merchant Banker has been divided into four categories on the basis of activities done by them, which are as follows:

(a) Category I, that is—

1. 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, a tie-up of financiers and final allotment and refund of the subscriptions; and
2. to act as an adviser, consultant, manager, underwriter, portfolio manager;

(b) Category II – that is to act as an adviser, consultant, co-manager, underwriter, portfolio manager

(c) Category III – that is to act as underwriter, adviser, and consultant to an issue

(d) Category IV – that is to act only as adviser or consultant to an issue

Functions of Merchant Banker

The functions performed by Merchant Banker include the following:

1. Banker to an issue in Public Offerings
2. Portfolio Management
3. Managing IPOs / FPOs of Companies
4. Advice and Manages Corporate Restructuring Matters
5. Valuation of equity and other assets of Companies
6. Acting as a Broker in Stock Exchange
7. Undertaking Money Market Operations
8. Undertaking and managing Leasing Services and Project Management

Apart from the abovementioned functions, the Merchant Banker is qualified to perform various other functions as may be specified by different regulators.

Eligibility Norms for grant of Certificate of Registration of Merchant Banker

1. The applicant shall be a body corporate
2. The applicant shall have necessary infrastructure like perform adequate office space, equipment, and manpower to carry on the business activities and to discharge his activities and services effectively
3. The applicant shall employ at least two persons having experience in the field of merchant banking activities
4. The applicant shall fulfil the minimum capital adequacy requirement i.e. the applicant must have a net worth of at least Rupees Five Crores
5. The applicant, his partner, director, or his principal officer shall not at any time been:

(i) involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant

(ii) convicted for any offence involving moral turpitude or has been found guilty of any economic offence;

1. The applicant shall Possess the professional qualification in finance, law or business management from any Government recognized institution

Applicant Not eligible for grant of Certificate of Registration of Merchant Banker

• The Company registered with Reserve Bank of India as a non-banking financial company as defined under Clause (f) of Section 45-I of RBI Act, 1934, as amended from time to time. shall not be eligible for Merchant Banker License

• Any person who is directly or indirectly connected to an “applicant” whose application for grant of Merchant Banker license has been rejected by the Board

Fit and Proper Criteria

For grant of Certificate of Registration of Merchant Banker, the Board ensures that the applicant making the application shall be a “fit and proper person.”

The Board can reject the application for grant of Certificate of Registration of Merchant Banker on the ground that the Applicant or any of his Principal Officer or the key management persons does not fulfil the “Fit and Proper Criteria.”

“Fit and Proper Person” here includes that the applicant, the principal officer, and the key management persons by whatever name called shall possess the following:

• integrity, reputation, and character
• absence of convictions and restraint orders
• competence including financial solvency and net worth

Further, it must be noted that the Board has the power to take into account some other considerations while assessing whether the applicant is a “fit and proper person” or not.

Process for grant of Certificate of registration

• The Applicant shall make an application for grant of certificate of Registration of Merchant Banker to the Board in Form A

Special note:

The Application as mentioned above shall be made for carrying on the activities as done by category I Merchant Banker

A separate certificate of registration is required under Securities and Exchange Board of India (Portfolio Manager) Regulations, 1993 for a Merchant Banker to carry on the Business Activity as Portfolio Manager

• The applicant shall at the time of making an application for registration, pay a non-refundable application fee of Rupees fifty thousand 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 the respective regional office.
• The applicant shall furnish the further information or clarification as may be called upon by the Board, for disposal of Application, which may be regarding:

1. any other matter as may be prescribed by the Board
2. matters related to the activity of a merchant banker or
3. information as filed in the application or

• The applicant, its principal officer or Key managerial Persons shall personally Appear before the Board for making the representation, if so required by the Board
• The Board, after making full inquiry in the application made for grant of Certificate of Registration and on being satisfied that the applicant is eligible, shall grant a certificate of registration in Form B and shall send intimation to the applicant.
• The merchant Banker shall pay a fee upon the grant of Certificate of Registration to act as Merchant Banker.

Consequences where Certificate of registration of Merchant Banker is not granted

• The Board has the power to reject the application for grant of a certificate of registration of Merchant Banker, where the application does not satisfy the set-out criteria, after giving an opportunity of being heard to the applicant.

• The Board shall within thirty days of such refusal for grant of registration, communicate to the applicant the Grounds on which the application has been rejected.

• The applicant can apply to the Board for reconsideration of his application for grant of Certificate of Registration within thirty days of receipt of such intimation from the Board regarding rejection.

• The Board shall reconsider the application received for reconsideration and shall communicate its decision as soon as possible in writing to the applicant.

Payment of fees by Merchant Banker

1. At the time of grant of the Certificate of Registration, the merchant Banker shall pay a fee of Rupees Twenty lacs only.
2. Merchant Bankers holding a certificate of Registration shall pay a fee of Rupees nine lakh only for every three years from:

• the date of grant of certificate of registration or
• from the date of the 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

Time Limit for Payment of Fees

1. The fees payable at the time of grant of Certificate of Registration shall be paid within fifteen days from the date of receipt of intimation regarding grant Certificate of Registration from the Board
2. Fees payable by Merchant Bankers holding Certificate of Registration shall be paid within three months before the expiry of the block for which fee has been paid.

Consequences of Non – Payment of fees

Where a merchant banker fails to pay the annual fees, the Board may suspend the certificate of registration of merchant banker, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists.

The validity of Certificate of Registration

The certificate of registration granted to the merchant Banker shall be valid unless it is suspended or cancelled by the Board.

Conclusion

Hence, in view of the above discussion, it can be understood that a Registered Merchant banker has a variety of functions and areas to serve the Companies. Regulators like Securities and Exchange Board of India, Reserve Bank of India, and certain other regulators have recognised only Merchant Banker for providing specified services. Apart from this, the Income Tax Act 1961 has also recognised merchant banker for making valuation under the Act, which also makes the Merchant Banker an important Professional in the industry.

While applying for Certificate of Registration, one should carefully go through the documents and forms as submitted to the Securities and Exchange Board of India. To ensure the chances of getting a Certificate of Registration, Merchant Banker shall appoint a professional having vast knowledge and experience in the field of Merchant Banking License.