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 issues.

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 'Merchant Bankers.

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

• 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 subscription.
   
• 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 following are the laws that regulate public issue in the securities market in India namely:

1. The Companies Act, 2013
2. Securities Contracts (Regulation) Act, 1956
3. Foreign Exchange Management Act, 1999
4. Securities Contracts Regulation (Rules) 1957
5. SEBI (ICDR) Regulations 2009 rechristen as SEBI Regulations, 2018
6. Listing Agreement.

Merchant Bankers:
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 rupees.

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:

• Role of merchant banker at Pre issue of securities stage
• Role of merchant banker at post issue of securities stage

Pre issue of securities role � The pre-issue of securities role inter alia includes the following:

Due Diligence:

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 are there
• To ensure that the information contained in such a document is not more than six months old from the date of opening of issues.

Appointing Intermediaries:

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 regulations.
� 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 52(5) ICDR
   
• 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, 2013.

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 Regulations:

• 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 following provisions
   
• 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 such securities.
   
• 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.

References:

1. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 available at -https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-_40328.html
2. 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
3. The Companies Act, 2013
4. Securities Contracts (Regulation) Act, 1956
5. https://taxguru.in/sebi/sebi-issue-capital-disclosure-requirements-regulations-2018.html