Understanding SEBI and Merchant Banking Regulations

The Securities and Exchange Board of India (SEBI) regulates merchant bankers to ensure transparency, efficiency, and investor protection in financial markets. Merchant bankers play a crucial role in managing public issues, mergers, acquisitions, and corporate finance activities. This guide covers SEBI’s guidelines for merchant bankers, their responsibilities, and compliance requirements.

Who are Merchant Bankers?

Merchant bankers are financial institutions that provide advisory and investment services to companies. Their key functions include:

• Managing initial public offerings (IPOs) and follow-on public offerings (FPOs).
• Assisting in mergers – acquisitions, and takeovers.
• Providing corporate restructuring and financial advisory services.
• Handling private placements of securities.
• Managing underwriting of securities and fundraising activities.

Importance of SEBI Regulations for Merchant Bankers

SEBI regulations ensure that merchant bankers operate fairly, maintain financial stability, and safeguard investor interests. Compliance with these guidelines is mandatory for all entities engaged in merchant banking activities.

SEBI Guidelines for Merchant Bankers

1. Registration with SEBI

• Any entity wishing to act as a merchant banker must register with SEBI under the SEBI (Merchant Bankers) Regulations, 1992.
• Application is submitted via Form A, along with prescribed fees.
• SEBI grants registration in four categories:
  1. Category I – Can conduct issue management, portfolio management, and financial advisory services.
  2. Category II – Can act as an advisor, consultant, and co-manager in issue management.
  3. Category III – Can undertake issue management and advisory services but cannot be an underwriter.
  4. Category IV – Only provides advisory services.

2. Capital Adequacy Requirements

SEBI mandates minimum net worth requirements for merchant bankers:

• Category I: ₹5 crore minimum net worth.
• Category II & III: ₹50 lakh minimum net worth.
• Category IV: No minimum net worth requirement.

Merchant bankers must maintain these financial standards at all times to ensure financial stability and operational credibility.

3. Responsibilities in Issue Management

Merchant bankers managing public issues must:

• Conduct due diligence on the issuer company.
• Ensure disclosure of accurate financial and business information.
• File a draft red herring prospectus (DRHP) with SEBI.
• Appoint registrars, bankers, and underwriters for the issue.
• Ensure compliance with SEBI’s Listing Obligations and Disclosure Requirements (LODR).

4. Due Diligence and Compliance

Merchant bankers must:

• Conduct detailed background checks on client companies.
• Verify financial statements, legal compliances, and disclosures.
• Ensure compliance with SEBI (Prohibition of Insider Trading) Regulations.
• Maintain a code of conduct to uphold investor confidence.

5. Underwriting and Pricing Regulations

• SEBI allows flexible pricing mechanisms for public issues.
• Merchant bankers can act as underwriters but must have the financial capability to absorb under-subscribed portions.
• All pricing details must be fully disclosed in the prospectus.

6. Corporate Governance and Fair Practices

Merchant bankers must adhere to ethical business practices:

• Avoid conflicts of interest in transactions.
• Maintain confidentiality of sensitive client data.
• Disclose all risks and conflicts of interest to stakeholders.
• Ensure compliance with SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations.

7. Ongoing Compliance and Reporting Requirements

Merchant bankers must:

• File annual compliance reports with SEBI.
• Report any changes in financial structure, management, or business operations.
• Maintain records of all transactions for a minimum of five years.
• Submit a certificate of compliance from a qualified auditor.

Penalties and Regulatory Actions

Failure to comply with SEBI’s guidelines can result in:

• Monetary penalties and fines.
• Suspension or cancellation of registration.
• Legal proceedings under SEBI’s enforcement framework.
• Debarment from capital markets for repeated violations.

SEBI has the authority to inspect and investigate merchant bankers to ensure strict adherence to regulations.

Conclusion: The Role of SEBI in Strengthening Merchant Banking

SEBI’s guidelines ensure transparency, accountability, and efficiency in the merchant banking sector. Compliance with these regulations helps in fostering a stable financial environment and protecting investors from fraudulent activities. Businesses and financial professionals must stay updated with SEBI’s evolving regulations to operate seamlessly in the financial market.

Stay Updated with SEBI Guidelines!

Merchant bankers play a pivotal role in the financial ecosystem. Understanding SEBI’s regulatory framework is essential for maintaining legal compliance and business integrity. Join SignifyHR’s expert-led courses to stay informed about the latest regulatory changes and best practices in the industry.