The country has witnessed the inundation of corporate houses, especially post
1991 LPG policy. These corporate houses, in order to survive and expand in this
competitive economy, are invariably in dire need of funds. These funds are inter
alia raised by them via a public issue of securities which includes Initial
Public Offer (IPO) and Further Public Offer (FPO). The issue of these securities
requires specialized knowledge and compliance with cumbersome procedures.
Therefore it involves a competent and specialized intermediary known as a
merchant banker to inter alia undertake the process of a public issue on behalf
of the issuing companies. These Merchant Bankers are registered under the
Security Exchange Board Of India (hereinafter referred to as SEBI) and are
governed by its regulations. In India, the scope of merchant banking has been
widening ever since 1967 when National Grindlays Bank ventured into merchant
banking following which many players like SBI, City Bank, etc, came in. It is
therefore imperative to understand the role of merchant bankers in public
Public Issue Of Securities And Merchant Bankers
Before ascertaining the role of merchant bankers in the public issue, it is
important to understand the connotations of the terms 'public issue’ and
Section 23(1) of the Companies Act, 2013 provides that public offer is the
issuance of securities by issuing a prospectus by a public company in compliance
with the provisions of Part I of Chapter 3 of the Act i.e. when the securities
are issued to the public at large for subscription by a public company. The
explanation to the Section further provides that the term public offer includes
within it Initial Public Offer (IPO) and Further Public Offer (FPO).
The term 'securities
’ include the shares, debentures, debenture stocks, bonds, and other
marketable securities (as per Section 2(h) of the Securities Contracts
(Regulation) Act, 1956
The following are the laws that regulate public issue in the securities
market in India namely:
- Initial Public Offer (IPO):
It is the fresh issue of the securities or first time issue of existing
securities of an unlisted company to the public at large for the
- Further Public Offer (FPO):
It is the issue of securities by an
already listed company either by fresh issue of securities or via an offer for
sale issued by an offer document to the public.
- The Companies Act, 2013
- Securities Contracts (Regulation) Act, 1956
- Foreign Exchange Management Act, 1999
- Securities Contracts Regulation (Rules) 1957
- SEBI (ICDR) Regulations 2009 rechristen as SEBI Regulations, 2018
- Listing Agreement.
The term has been defined under Section 2(cb) of SEBI
(Merchant) Regulations, 1992 as any person involved in the management of issue
by way of making requisite arrangements for purchase or sale or for subscription
of securities or who is rendering advisory services or engaged as a manager in
such issue management.
The Merchant Bankers are required to undertake multifarious tasks ranging from
management of the issue, private placement of the securities, stockbroking,
syndication of loans, management of the portfolio, finance consultancy, managing
international debt and equity offerings, so on and so forth. The market of
merchant bankers has rapidly developed over the past few years and as of today,
they form an an integral part of the market.
All the Merchant Bankers are regulated by the SEBI (Merchant) Regulations,
1992 which provides for qualification, registration, duties, and functions of a
merchant banker and therefore serves as a code of conduct for them. As per the
regulations, the net worth requirement of merchant bankers is more than 5 crore
Some of the leading Merchant Bankers in the country are:
- SBI capital markets ltd.
- Punjab national bank.
- Bank of Maharashtra.
- IFCI financial services ltd.
- Karur Vysya bank ltd, etc.
Merchant Banker In Public Issue
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
provide under clause 23&121 that it is mandatory for every issuer of securities
to appoint 1 or more prominent merchant bankers, these bankers shall be
registered with the SEBI and must act as the manager(s) of such issue of
securities. The process of a public issue is complex and requires knowledge and
specialization, it consists of numerous activities from deciding equity price,
issuing of the prospectus, receiving subscription, a refund in case of
non-allotment, other legal compliance, and finally the allotment of securities.
There comes the role of a merchant banker who acts as an intermediary between
the issuer of securities, the prospective investors, and the existing regulators
and plays a crucial role in public issue which can be classified as:
Pre issue of securities role – The pre-issue of securities role inter alia
includes the following:
- Role of merchant banker at Pre issue of securities stage
- Role of merchant banker at post issue of securities stage
It is provided by the Regulation 24(3) of SEBI (ICDR)
Regulations, 2018 that every merchant banker acting as a lead manager in the
issue of securities shall ensure the authentication and the credibility of all
the information disclosed by the issuer in the draft of the offer document and
make satisfy himself as to the compliance of all the SEBI regulations. This
exercise of due diligence assumes significance and may consist of the following:
- To ensure that the issuer is competent to make a public issue of the concerned
securities as per the ICDR Regulations, 2018 this includes scrutiny of tangible
assets, the AOP, and net worth, etc. of the issuer.
- To ensure that the minimum number of promoters as stipulated by the regulations
- To ensure that the information contained in such a document is not more than six
months old from the date of opening of issues.
The ICDR regulations, 2018 provide under regulation 23 for the appointment of
various intermediaries including underwriters, bankers to issue, registrar to
issue, compliance officer, depositors, etc. These intermediaries are in practice
appointed by the merchant banker who is yet another intermediary among them. The
merchant banker has to ensure that the intermediaries appointed by him have
requisite competence and are unbiased.
Draft Offer Document Filing
The merchant banker is required to file several documents with the SEBI along
with a draft offer document, these documents are as follows:-
· Certificate of Due diligence certifying that the merchant banker,
acting as the manager has exercised due diligence in the preparation of the
draft offer documents, this certificate is filed in accordance with schedule 5
of the regulation.
· The certificate to the effect that both the merchant banker and the
the issuer of the securities has duly entered into a contract signed by both
the issuer of securities and the merchant banker
· In cases, wherein 2 or more merchant bankers are appointed under
clause 23&121 of the regulation, the role, and functions performed by each of
such merchant banker has to be provided in accordance with Schedule II of the
· Provide all the required information about the promoters. Etc.
Publication Of Draft Offer Document
Regulation 26 provides that the merchant banker shall make sure that the draft
offer document filed is published on the respective websites of the SEBI and the
concerned stock exchange for at least twenty one days, moreover public
announcement via national daily id required to be made to invite public to
submit their opinions to the SEBI.
Post 21 days of such publication a statement showing the public opinions
received and proposed amendments if any on basis of such opinions shall be
submitted to the SEBI, also regulation 43 provides that a pre issue publication
of an advertisement is mandatory after registering the prospectus with ROC.
Determination Of Fees
The merchant banker appointed as a manager shall determine the quantum of fees
to be paid to SEBI along with the filing of the draft offer document and shall
also ensure that all other legal compliances have been duly met.
Post Issue Role Of Merchant Banker
The role of the merchant banker at this juncture is to deal with allotment
related work post the subscribing of the securities by the investors regulation
52(1) ICDR provides for the responsibility of a merchant banker till the
finality of the issue process and even thereafter for matters connected with
such issue. Some major post issue tasks of a merchant banker are as follows:
- The merchant banker is required to continuously involve in grievance
redressing of any investor where such grievance is related to the public
issue regulation and is responsible to the investor until they receive the
certificate of security, their Demat account has been credited or in case of non allotment
till the time their deposit is refunded. Regulation 52(2&3) ICDR
- A merchant banker is also required to regularly oversee the inflow of
application, applications processing until the securities are finally
allotted post the issue closure with different intermediaries appointed and
in case of any act of omission or commission on part of them should bring
the same to the SEBI’s notice
- Where there is devolvement of any underwrite(s) the merchant banker
shall ensure that within 10 days of closure, a notice is duly issued that
provides for their duties. Regulation 52(4) ICDR
- Where there are issues left unsubscribed and when such issues were
underwritten, it is the responsibility of the merchant banker to bring the
details of such underwriter to the SEBI’s notice as per Schedule 18. Regulation
- It has been provided under Regulation 51 ICDR,2018 that the merchant
banker is responsible for publishing an advertisement in a popular national
daily in English language and one in the local language of the region where
the issuer’s office is situated wherein all the details as to the
subscription, the percentage and the basis of allotment, etc. is given. Such
an advertisement is also to be made available on the website of the
concerned stock exchange.
- It is further provided by Regulation 53 ICDR, 2018 that it is the
responsibility of the merchant banker to assure the banker about refunding the
money in case of non allotment or to provide the money to the issuer of
securities in case of allotted securities. This is done via listing copy and
trade approvals. And that the merchant should ensure that amount to be provided
to the issuer of securities with respect to the allotted securities is duly
provided to such issuer in accordance with Section 40(3) of the Companies Act,
Post Issue Report
It has been provided under Regulation 55 ICDR, 2018 that within 7 days of the
final allotment of the securities or in case of non allotment, within 7 days of
the refund of the amount to the investors, the merchant has to mandatorily
submit to the SEBI a final post issue report besides a certificate of exercise
of due diligence by such merchant banker.
The report has to be filed in accordance with Part A of Schedule 17 and the
certificate of due diligence has to be filed in accordance with Form F of the
Schedule V of the ICDR, 2018 regulations.
Sebi (Merchant) Regulation, 1992
These regulations were amended in 2017, they inter alia provide for various
obligations on the part of a merchant banker, the compliance with these
obligations also facilitates and improve to a large extent the process of a
public issue by maintaining the quality and the credibility of a merchant banker
who is later on appointed by the issuer of securities as a lead manager in
accordance with the ICDR, Regulations, 2018 as already discussed above.
The following are some major obligations upon a merchant banker under the 1992
- Regulation 13A expressly prohibits merchant bankers, subject to certain
conditions stipulated therein to engage in any business except that of the
securities. However, all the public financial institutions are exempted therefrom. This exclusion from carrying on any other business leads to
specializing merchant bankers in the securities market and therefore leads to
better management of public issues.
- It is provided under regulation 22 that every merchant banker who is
appointed as a lead manager in any issue of securities should mandatorily
undertake the underwriting obligation to the extent of 5% of the total
underwritings or up to 5 lakh rupees, whichever is less
- Regulation 20 prohibits the merchant bankers from involving in the
issuance of any securities unless the role and responsibilities of such
merchant banker have been categorically ascertained and the same is conveyed
to the SEBI
in form of a statement of such ascertained roles and responsibilities not less
than a month prior to the date of issuance of subscription of the securities
The regulations also ensure that in order to protect the investors the
impartiality and independence of a merchant banker, acting as manager of a
public issue is maintained. For this purpose the regulations contain the
- It is provided under regulation 21A that no merchant banker shall engage
himself in managing the issuance of securities or in any other work done by
virtue of the regulations of SEBI if such merchant banker is either a
promoter or director or is an associate of any person who is either issuing the
securities for public subscription or is any manner offering to sell or to buy
- Regulation 27 further provides that if any merchant banker has acquired
any of the securities of the issuer where such merchant banker is also
acting as a manager to issue of such securities, he shall intimate the SEBI
about any such transaction of acquisition of securities in 15 days from the date
on which the transaction took place.
- Regulation 14 provides an obligation on merchant bankers to keep and
maintain the records and books provided for therein, this includes a
statement of profiting and loss, balance sheet, auditor’s report, a dossier
of documents pertaining to the exercise of due diligence at various stages
of public issue. Furthermore, regulation 28 casts an obligation upon every
merchant banker to appraise the SEBI about his duties and responsibility in the management of any
public issue, the identity of corporates whose issue has been previously managed
by him, information regarding his role as an underwriter, consultant, etc.
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
- SEBI (Merchant Bankers) Regulations, 1992 (as amended as of March 06,
2017) available at - https://www.sebi.gov.in/legal/regulations/mar-2017/sebi-merchant-bankers-regulations-1992-as-amended-as-on-march-6-2017-_35135.html
- The Companies Act, 2013
- Securities Contracts (Regulation) Act, 1956