all the regulations which a merchant banker needs to follow are included here

1. MERCHANT BANKS’
GUIDELINES
PREPARED BY:
MD TAHER AHMED
ROLL NO:08
COURSE CODE: MC-
404(FM)
TH

2. MERCHANT BANKING
Merchant banking may be defined as an ‘institution which covers a
wide range of activities such as underwriting of shares, portfolio
management, project counseling, insurance, credit syndication
etc…They render all these services for a fee.
ORIGIN:
The term merchant banking originated from the London who started
financing foreign trade through acceptance of bills
Later they helped government of under developed countries to raise
long term funds
Later these merchants formed an association which is now called
“Merchant Banking and Securities House Association”

3. Contd..
 Merchant banking is a non-banking financial activity similar to banking;
 Merchant banking is a fee based business, where the bank assumes market
risk but no long-term credit risk.
These are financial institutions providing valuable solutions such as:-
● Acceptance of bills of exchange;
● Corporate finance;
● Portfolio management;
● Other non-banking services.

4. Merchant Banking in India
 Need for merchant banking was felt with rapid growth in number
& size of issues made in primary market.
 Merchant banking services were started by foreign banks, namely
National Grindlays in 1967 & City bank in 1970 .
 Merchant banking services were offered along with other traditional
banking services.
 SBI was first Indian bank to set up Merchant banking division in
1972.

5. DIFFERENCE BETWEEN MERCHANT BANKS &
COMMERCIAL BANKS:
COMMERCIAL BANKS
 Deal in debt & debt related finance
 Asset oriented
 Avoid risks
 Mere financiers
MERCHANT BANKS
 Deal in equity & equity-related
finance
 Management oriented
 Willing to take risks
 Their activities include project
counselling, corporate counselling,
issue management, loan
syndication, underwriting etc.

6. SL
No
Particulars Summary
1 Corporate Counseling Covers the entire field of merchant
banking, limited to giving suggestions
2 Project Counseling Preparing project report for govt.
approval , financial assistance
Services of Merchant Banks

7. 3 Loan Syndication Assistance rendered to get term loan
for project, help client make appraisal,
designing capital structure etc
4 Issue Management Marketing corporate securities,
intermediary in transfer of capital
from one who owns to needy
5 Underwriting Guarantee given by the underwriter,
make raising of external resource easy
6 Managers to Issue Drafting, completion of formalities,
appoint Registrar etc

8. 7 Portfolio
Management
Helping the investors in making
investment in different kind of
securities
8 Mergers and
takeovers
Middlemen in setting negotiation
9 Off Shore Finance Help in areas involving foreign
currency
10 Non- Resident
Investment
Provide help in better and
smooth trade to NRIs

9. REGULATIONS OF MERCHANT BANKING:
The merchant banking activity in India is governed by SEBI (Merchant Bankers)
Regulations, 1992. Registration with SEBI is mandatory to carry out the business of
merchant banking in India. An applicant should comply with the following norms:
i) The applicant should be a corporate body.
ii) The applicant should not carry on any business other than those connected with the
securities market.
iii) The applicant should have necessary infrastructure like office space, equipment,
manpower, etc.
iv) The applicant must have at least two employees with prior experience in merchant
banking.
v) Any associate company, group company, subsidiary or interconnected company of the
applicant should not have been a registered merchant banker.
vi) The applicant should not have been involved in any securities scam or proved guilt for
any offence.
vii) The applicant should have a minimum net worth Rs. 5 Crores

10. CATEGORIES OF MERCHANT BANKS:
The categories for which registration may be granted are given below:
• Category I – they are allowed to carry on the activity of issue management and to act as
adviser, consultant, manager, underwriter, portfolio manager.
• Category II –they are allowed to act as adviser, consultant, co-manager, underwriter,
portfolio manager.
• Category III –they are permitted to act as underwriter, adviser or consultant to an
issue.
• Category IV – they can act only as adviser or consultant to an issue.
CAPITAL ADEQUACY NORMS:
 Category I : Rs. 5 crores
 Category II : Rs.50 lakhs
 Category III : Rs.20 lakhs
 Category IV : Nil
Note: With effect from December 9, 1997, different categories of merchant bankers were abolished and only
Category-I merchant bankers are registered by the SEBI.

11. RESTRICTION ON APPOINTMENT OF LEAD MANAGERS:
The regulations state that the number of lead merchant bankers (issue manager
to the issue) may not exceed in the case of any issue of –
Size of the issue No. of Lead Managers
(a) Less than Rs. 50 crore Two
(b) Rs. 50 crore but less than Rs. 100 crore Three
(c) Rs. Rs. 100 crore but less than Rs. 200 crore Four
(d) Rs. 200 crore but less than Rs. 400 crore Five
(e) Above Rs. 400 crore Five or more as may be
agreed by the board.
This restriction on the number of lead managers for an issue was omitted by an
amendment in regulations on April 19, 2006.

12. CODE OF CONDUCT:
The code of conduct stipulates that in the performance of duties, merchant
banker should:
(1) act in an ethical manner, (2) inform the client that he is obliged to comply
with the code of conduct, (3) render high standard of service and exercise due
diligence, (4)not to indulge in unfair practices, (5)not to make
misrepresentations, (6)give best advice, (7) not to divulge confidential
information about the clients, (8) endeavor to ensure that true and adequate
information is provided to investors.
Finally merchant bankers have to deal adequately with complaints from
investors. Merchant bankers should not be a party in respect of issue of
securities, creation of false market, price rigging or manipulation or pass
price sensitive information, to abide by all rules, regulations, guidelines,
resolutions issued by the Government of India and SEBI from time to time.

13. MERCHANT BANKERS’ COMMISSION:
As determined by the Finance Ministry, GoI, merchant bankers are eligible to charge
commission/fee from their clients as detailed below:
≈ A merchant banker can charge 0.5% as the maximum commission for whole of the issue.
≈ They can charge project appraisal fees.
≈ A Lead Manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in excess of
Rs. 25 crore.
≈ Underwriting commission.
≈ Brokerage commission 1.5%.
≈ Other expenses like advertising, printing, Registrar’s expenses, stamp duty etc., in
connection with the issue can be reimbursed from its clients.

14. GUIDELINES FOR MERCHANT BANKERS
 Every merchant banker should maintain copies of balance sheet, Profit and loss account,
statement of financial position
 Half-yearly unaudited result should be submitted to SEBI
 Merchant bankers are prohibited from buying securities based on the unpublished price
sensitive information of their clients
 SEBI has been vested with the power to suspend or cancel the authorization in case of
violation of the guidelines
 Every merchant banker shall appoint a ‘Compliance Officer’ to monitor compliance of the Act
 SEBI has the right to send inspecting authority to inspect books of accounts, records etc… of
merchant bankers
 Inspections will be conducted by SEBI to ensure that provisions of the regulations are
properly complied
 An initial authorization fee, an annual fee and renewal fee may be collected by SEBI
 A lead manager holding a certificate under category I shall accept a minimum underwriting
obligation of 5% of size of issue or Rs.25 lakhs whichever is less

15. SEBI GUIDELINES FOR MERCHANT BANKERS
REGARDING ISSUES:
For each issue managed by an M.B, the matters to be disclosed mandatorily on
their website are:
 Three years track record of companies whose IPOs/FPOs were managed by
them.
 Issue size
 Extent of over/under subscription
 The shareholding of QIBs at the end of each of the three subsequent years
 Financials of the company for three years
 EPS and Price-Earning multiple at the end of each of the financial year
 Post-listing vis-à-vis the peer as well as the industry average
 The extent of trading of shares whether thin or active

16. The M.B. Registered with SEBI classified
according to the category :-
MERCHANT
BANKER
PUBLIC SECTOR
COMMERCIAL
BANKS :- 24
FINANCIAL
INSTITUTION :- 6
STATE
INSTITUTION :-
4
PRIVATE
SECTOR
BANKS :- 10
FINANCE &
INVESTMENT :-
231
LEASING
INTERNATIONAL
BANKER :- 10

17. CONCLUSION:
 Merchant Banking is difficult to define. The function of Merchant Bankers
varies from country to country. Merchant banks are known as “Accepting and
issuing houses” in UK and as “Investment banks” in USA
 In India merchant bankers are allowed to undertake only those activities
which are related to securities market including issue management activities
and are prohibited from carrying on fund based activities other than those
related exclusively to the capital market. This reduces the scope of merchant
banking in India.