Merchant Banking
Content
MERCHANT BANKING
History
Merchant Banking is not a new subject in the field of Finance. It
started in the fifteenth century in Italy and later spread to France and
the UK in the eighteenth century. The name Merchant Banking
originates from the fact that it was started by Merchants, who added
banking activities to their operations, and through innovations, came
up with what is the real merchant banking of the modern ages. The
main activities of these middle ages merchant bankers were to remit
foreign currencies from one place to the other.
In the UK, merchant bankers started with bill discounting for their
customers, even though they were more of merchants than bankers.
Baring Brothers was the oldest merchant banker in the UK while in the
US indigenous merchant bankers started operating by 1880 and
started helping the conversion of privately held companies into public
companies. Kidder Peabody, Drexel, Brown Brothers and Morgan & Co.
were the major merchant bankers at the beginning of the twentieth
century.
The foreign banks monopolized Merchant banking services in the
country. The banking commission, in its report in 1972, took not of
this with concern and recommended setting up of merchant banking
institutions by commercial banks and financial institutions.
State bank of India ventured into this business by starting a
Merchant Banking bureau in 1972. In 1973, ICICI became the
first financial institution to offer Merchant Banking services. JM
Finance was set up by Mr. Nimesh Kampani as an exclusive Merchant
bank in 1993. The growth of the industry was very slow during this
period. By 1980, the number of Merchant Bankers rose to 33 and was
set up by Commercial banks, financial institutions and private sector.
Merchant Bankers/Lead Managers
Corporates raise funds by issuing securities in the market. Merchant
Bankers act as intermediaries between the issuers of Capital and the
ultimate investors who invest or purchase these securities. Merchant
Banking can be broadly defined as financial intermediation that
matches the entities that need capital and those that have capital.
Merchant Banking facilitates the process of flow of capital in the
market.
efinition:
The Securities Exchange Board of India (Merchant Bankers) Rules
1992 defines Merchant Banker as below:
"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 as manager, consultant,
adviser or rendering corporate advisory service in relation to such
issue management.
Importance:
The importance of merchant bankers as sponsors of capital issues is
reflected in their major services/functions as described below:
O Determining the composition of the capital structure (type of
securities to be issued)
O Draft of prospectus (offer documents) and application forms
O Compliance with procedural formalities
O ppointment of registrars to deal with the share application and
transfers
O isting of securities
O rrangement of underwriting/sub-underwriting, placing of issues
O Selection of brokers and bankers to the issue
O Publicity and advertising agents
O Printers etc
O In view of the overwhelming importance of merchant bankers in
the process of capital issues, it is now mandatory that all
public issues should be managed by merchant banker(s)
functioning as the lead manager(s). In the case of rights
issues not exceeding Rs.50 lakh, such appointments may
not be necessary.
The salient features of the SEBI framework of their operations are
summarized. The pre-issue and post-issue of merchant bankers/lead
managers are also briefly outlined.
Guidelines of SEBI:
Registration with SEBI is mandatory to carry the business of Merchant
Banking in India. n application for grant of Certificate of Registration
must be made to SEBI in Form . The applicant should comply with
the following norms:
O The applicant should be a body corporate.
O The applicant should not carry on any business other than those
connected with the securities market.
O The applicant should have necessary infrastructure.
O The applicant has at least 2 employees with prior experience in
Merchant Banking.
O The applicant should have a minimum net worth of Rs. 5 crores.
fter processing the application, SEBI will grant the Certificate of
Registration. The registration is valid for a period of 3 years. t the
end of 3 years, the Merchant Banker is required to apply for renewal of
registration. It has been further described in detail.
Registration
Compulsory Registration: Merchant bankers require compulsory
registration with SEBI to carry out their activities. Earlier they fell
under four categories.
Category 1: Merchant bankers could carry on any activity
related to issue management, that is, the preparation of
prospectus and other information relating to the issue,
determining the financial structure, tie-up of financiers, final
allotment of securities, refund of the subscription and so on.
They could also act as advisors, consultants, managers,
underwriters of portfolio managers.
Category 2: Merchant Bankers could act as advisors,
consultants, co-managers, underwriters and portfolio managers;
and
Category 3: Merchant bankers could act as underwriters,
advisors, and consultants to an issue.
Category 4: Merchant bankers could act only as portfolio
managers.
Thus, only Category1 merchant bankers could act as lead
managers to an issue. With effect from ecember 9, 1997,
however, only Category 1 merchant bankers are registered by
the SEBI. To carry on activities as underwriters and
portfolio managers, they have to obtain separate
certificates of registration from the SEBI.
Grant of Certificate:
The SEBI grants a certificate of registration on consideration of
all matters that are relevant to the activities related to the merchant
banker
O Merchant bankers should also be a body corporate other than a
non-banking financial company. However, a merchant banker who
has been granted registration by the RBI to act as Primary Dealer
or Satellite Dealer may carry on such activity subject to the
condition that it would not accept/hold public deposit,
O They are expected to have the necessary infrastructure like
adequate office space, equipment and manpower to effectively
discharge their activities;
O They should have employed at least two persons with experience to
conduct merchant banking business;
O ny person directly or indirectly connected with the applicant, that
is, an associate/subsidiary/interconnected or group company, does
not have a certificate of registration from the SEBI;
O They/partners/directors/principal offices should not be involved in
any litigation connected with the securities market, which has an
adverse effect on their business;
O Have recognized professional qualification in finance, law or
business management and or their registration is in the interest of
the investors.
Capital Adequacy Requirement: merchant banker was granted
recognition by the SEBI in different categories on the basis of
capital adequacy norms in terms of its net worth comprising of
paid-up capital and free reserves. The minimum net worth
requirement for each category was; Rs. 5 crore (Category I), Rs.0.5
crore (Category II), Rs.02 crore (Category III), and nil for Category
IV. To monitor the capital adequacy, the SEBI may require half
yearly unaudited financial results of a merchant banker.
ee: merchant banker had to pay a fee, as detailed below, at the
time of original registration as well as renewal.
Registration ee :
(i) Category I: Rs.2.5 lakh, annually, for the first two years and
Rs.1 lakh for the third year,
(ii) Category II: Rs. 1.5 lakh, annually, for the first two years
and Rs.50, 000 for the third year,
(iii) Category III: Rs.1 lakh, annually, for the first two years
and Rs.25, 000 for the third year, and
(iv) Category IV: Rs.5, 000 annually, for the first two years
and Rs.1, 000 for the third year. Since 1999, the registration fee
was raised to Rs.5 lakh.
Renewal fee: The original registration of merchant bankers was
for three years and it could be renewed for further period of three
years each. The merchant banker had to apply for renewal of his
registration three months before the expiry of the period of
registration. The schedule of renewal fees was as detailed as
follows:
Category
of merchant
bankers
First
tow
years (Rs)
Third
year
(Rs)
I
II
III
IV
1,00,000
75,000
50,000
5,000
20,000
10,000
5,000
2,000
With effect from 1999, the renewal fee is Rs.2.5 lakh every three
years from the fourth year, from the date of initial registration. If a
merchant banker fails to pay the annual fees, his registration may
be suspended by the SEBI.
ees charged by a Merchant banker at the time of
Public Issue:
There shall be charged on every draft offer document submitted by
merchant banker to the Board, a fee at the following rates:
Public Issues:
Size of the issue,
including intended
retention of
oversubscription
Amount / Rate of fees
ess than or equal to one
crore rupees.
flat charge of ten thousand
rupees (Rs.10, 000/-).
More than one crore
rupees, but less than or
equal to five thousand
crore rupees.
0.1 per cent. Of the issue size.
More than five thousand
crore rupees, but less than
or equal to twenty five
thousand crore rupees.
Five crore rupees
(Rs.5, 00,00,000/-)
plus 0.025 per cent of the portion
of the issue size in excess of five
thousand crore rupees
(Rs.5000, 00, 00,000/-).
More than twenty five
thousand crore rupees.
flat charge of ten crore
rupees (Rs.10, 00, 00,000/-).
Rights Issues:
Size of the issue,
including intended
retention of
oversubscription
Amount / Rate of fees
ess than or equal to two
crores rupees.
flat charge of ten thousand
rupees (Rs.10, 000/-).
More than two crores
rupees and less than or
equal to five hundreds
crores rupees.
0.05 per cent. Of the issue size.
More than five hundreds
crores rupees.
flat charge of twenty five
lakhs rupees (Rs.25, 00,000/-
).¨
BY M. Damodaran,
Chairman,
SEBI
(Source: sebi.com)
O Along with the fact that for both right issues and public
issues Merchant banker charges different rates, he also
charges different rates for equity shares and debentures. or
debenture issues he charges lower rates than equity issues.
Process of Merchant Banking
SECURITIES
CASH
Merchant Banking Process
(Source: Book-Investment Banking and Financial Services
By: The Institute of Charted financial nalysis of India)
Role of Merchant Banker
The Merchant Banker plays a vital role in channelizing the financial
surplus of the society into productive investment avenues. The
Merchant Banker has a fiduciary role in relation to the investors. He
has to ensure that only quality paper emanates from his firm.
He is required to exercise due to diligence to ensure the adequacy and
appropriateness of the disclosures made in the offer document. The
Merchant Banker is the leader among all the intermediaries associated
with the issue. He is required to guide and co-ordinate the activities of
the Registrar to the issue, Bankers to issue, dvertising gency,
Printer, Underwriters, Brokers, etc.
The Merchant Banker has to ensure the compliance of all the laws and
regulations governing the securities market. He may also be called
upon to assist the statutory authorities in developing a regulatory
framework for orderly growth of capital market.
SSUER 'ESTOR
MERCHANT
BANKING
Major Areas to perform the Role
Regulatory Compliance
Framework
Capital Returns
Market Returns
Information protection
uidance Coordination
Relationships of the Merchant Banker
(Source: Book-Investment Banking and Financial Services
By: The Institute of Charted financial nalysis of India)
This is the traditional `bread and butter´ operation for most of the
merchant bankers in India. The role of the Merchant Bankers is
dynamic and he has to be nimble footed to capitalize on available
opportunities. He has to assist his corporate clients in raising funds
from the market. He may also be required to counsel them on various
issues that affect their finances. The main area of his role includes:
O Instrument esigning
Merchant Banker designs the structure of the issue that is size of
equity issue and debenture issue.
O Pricing the Issue
He decides upon the prices at which shares or debentures are to
be issued, rather he fixes the price band of the issue.
O Registration of the Offer ocument
He registers the offer document that is prospectus of the
company as per the rule of SEBI.
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MRCHANT
ANKR
O &nderwriting Support
He ensures the support of underwriter and in some cases if he
acts as underwriter of the company if he has obtained separate
certificate of underwriter from the SEBI.
O Marketing of the Issue
He markets the issue of the company to fetch the investors.
O Allotment and Refund
Shares are allotted as per the allotment ratio and remaining
amount has been refunded to the investors.
O Listing on Stock Exchange
The same shares are listed on stock exchange and roc before 21
days.
O Corporate Advisory Services
Merchant Banker offers customized solutions to the financial
problems of their clients. One of the key areas of advisory role is
financial structuring. He may also explore possibility of
refinancing high cost funds with attractive cheaper funds. Incase
of sick units MB may design a revival package in co-ordination
with banks and financial institution. Merchant banker assists
their clients in management of risk by suggesting appropriate
hedging strategies.
O Project Advisory
Merchant bankers assist the companies in conceptualizing the
project idea. Merchant bankers provide inputs to their clients in
preparation of the detailed project report. They also offer project
appraisal services to clients.
O Loan Syndication
Merchant bankers arrange to tie up loans for their clients. The
Merchant banker also helps the client in loan documentation
procedures.
O Mergers and Acquisitions
Mergers and acquisition are becoming increasingly significant in
terms of services offered by Merchant banker.
Types of Merchant Bankers
In India Merchant Bankers can be segregated as follows,
depending on the sector to which they belong:
Public Sector Merchant Bankers:
O Commercial Banks
4 HDFC Bank
O National Financial Institutions
4 Industrial Development Bank of India (IDBI)
4 Industrial Finance Corporation of India (IFCI)
O State Financial Institutions
4 SFS capitals & Securities td.
Private Sector Merchant Bankers:
O Foreign Banks
4 HSBC Securities and Capital Market (India) pvt. td.
O Indian Private Banks
4 ICICI securities td.
O easing Banks
4 Citibank
O Financial and Investment Companies
4 Kotak Mahindra Capital Company td.
The major Merchant Bankers in Indian Markets are listed below:
O ICICI Securities td.
O Kotak Mahindra Capital Company td.
O Karvy Computershare Pvt. td.
O HSBC Securities and Capital Market (India) Pvt. td.
O llianz Securities td.
O ENM Financial Consultants Pvt. td.
O SFS Capital and Securities td.
O State Bank of India Capital Market td.
O Citibank
O CMS (India) td.
Many oreign Investment Banks have started entering Indian
Markets with some successful tie-ups with the domestic banks and
has entered into joint ventures with them. Some of the successful
tie-ups are:
O JM Finance-Morgan Stanley
O DSP Financial Consultants-Merrill ynch
O Kotak Mahindra-oldman Sachs
O Ind lobal Fin Trust-Salomon Bros
O Creditcapital-azard Bros
O SBI Capital Markets-ehman Bros
Activities of Merchant Bankers
merchant banker should:
Make all efforts to protect the interests of investors.
Maintain high standards of integrity, dignity and fairness in the
conduct of its business.
Fulfill its obligations in prompt, ethical, and professional manner.
t all times exercise due diligence, ensure proper care and
exercise independent professional judgment.
Endeavor to ensure that: (a) inquiries from investors are
adequately dealt with; (b) grievances of investors are redressed
in a timely and appropriate manner; (c) where a complaint is
not remedied promptly, the investor is advised of any further
steps which may be available to him under the regulatory
system.
Ensure that adequate disclosures are made to the investors in a
timely manner in accordance with the applicable regulations and
guidelines so at to enable them to make a balanced and
informed decision.
Endeavor to ensure that the investors are provided with true and
adequate information without making any misleading or
exaggerated claims or any misrepresentation and are made
aware of the attendant risk before taking any investment
decision.
Endeavor to ensure that copies of the prospectus, offer
documents, letter of offer or any other related literature is made
available to the investors at the time of issue or the offer.
Not discriminate amongst its clients, save and except on ethical
and commercial considerations.
Not make any statement, either oral or written, which would
misrepresent the services that the merchant banker is capable of
performing for any client or has rendered to any client.
void conflict of interest and make adequate disclosure of its
interest.
Put in place a mechanism to resolve any conflict of interest
situation that may arise in the conduct of its business or where
any conflict of interest arises, should take reasonable steps to
resolve the same in an equitable manner.
Make appropriate disclosure to the client of its possible sources
or potential areas of conflict of duties and interest while acting
as merchant banker which would impair its ability to render fair,
objective and unbiased services.
lways endeavor to render the best possible advice to the clients
having regard to their needs.
Not divulge to anybody either orally or in writing, directly or
indirectly, any confidential information about its clients which
has come to its knowledge, without taking prior permission of its
clients, except where such disclosures are required to be made
in compliance with any law for the time being in force.
Ensure that any change in registration status/any penal action
taken by the SEBI or any material change in the merchant
banker´s financial status, which may adversely affect the
interests of clients/investors, is promptly informed to the clients
and any business remaining outstanding is transferred to
another registered intermediary in accordance with any
instructions of the affected clients.
Not indulge in any unfair competition, such as weaning away the
clients on assurance of higher premium or advantageous offer
price or which is likely to harm the interests of other merchant
bankers or investors or is likely to place such other merchant
bankers in a disadvantageous position while competing for or
executing any assignment.
Marinating arms length relationship between its merchant
banking activity and any other activity.
Have internal control procedures and financial and operational
capabilities which can be reasonably expected to protect its
operations, its clients, investors and other registered entities
from financial loss arising from theft, fraud, and other dishonest
acts, professional misconduct or omissions.
Not make untrue statement or suppress any material fact in any
documents, repots or information furnished to the SEBI.
Maintain an appropriate level of knowledge and competence and
abide by the provisions of the SEBI ct/regulations/circulars and
guidelines, which may be applicable and relevant to the activities
carried on by it. They should also comply with the award of the
Ombudsman passed under the SEBI (Ombudsman) Regulations,
2003.
Ensure that the SEBI is promptly informed about any action,
legal proceedings, etc., initiated against it in respect of material
breach or non-compliance by it, of any law, rules, and
regulations, directions of the SEBI or of any other regulatory
body.
(a) Not render, directly or indirectly, any investment advice
about any security in any publicly accessible media, whether
real-time or non real-time, unless a disclosure of his interest
including a long or short position, in the security has been made,
while rendering such advice; (b) In the event of employee of the
merchant banker rendering such advice, the merchant banker
should ensure that such employee should also disclosed the
interests of himself, his dependent family members and the
employer merchant banker, including their long or short position
in the security.
Demarcate the responsibilities of the various intermediaries
appointed by it clearly so as to avoid any conflict or confusion in
their job description.
Provide adequate freedom and powers of its compliance officer
for the effective discharge of his duties.
Develop its own internal code of conduct for governing its
internal operations and laying down its standards of appropriate
conduct for its employees and officers in carrying out their
duties. Such a code may extend to the maintenance of
professional excellence and standards, integrity, confidentiality,
objectivity, avoidance or resolution of conflict of interests,
disclosure of shareholdings and interests, etc.
Ensure that good corporate policies and corporate governance
are in place.
Ensure that any person it employs or appoints to conduct
business is fit and proper and otherwise qualified to act in the
capacity so employed or appointed (including having relevant
professional training or experience).
Ensure that it has adequate resources to supervise diligently and
does supervise diligently persons employed or appointed by it in
the conduct of its business, in respect of dealings in securities
market.
That the senior management, particularly decision makers have
access to all relevant information about the business on a timely
basis.
Not be a party to or instrument for: (a) creation of false market;
(b) price rigging or manipulation pr; (c) passing of unpublished
price sensitive information in respect of securities which are
listed and proposed to listed in any stock exchange to any
person or intermediary in the securities market.
Obligation & Responsibilities of Merchant Bankers
Restriction on Business: No merchant banker, other than a
bank/public financial institution (PFI) is permitted to carry on
business other than that in the securities market. In other words,
he is prohibited from carrying on fund/asset-based business such as
leasing and so on. However, a merchant banker who is registered
with RBI as a Primary Dealer/Satellite Dealer may carry on such
business as may be permitted by the RBI.
Maximum Number of Lead Managers: The maximum of lead
managers is related to the size of the issue. For an issue of a size
less than Rs. 50 crore, two lead managers are appointed. For size
groups of Rs. 50 crore to Rs.100 crore and Rs.100 crore to Rs.200
crore. The maximum permissible lead managers are three and four
respectively. company can appoint five and five or more (as
approved by the SEBI) lead managers in case of issue sizes
between Rs.200 crore and Rs.400 crore, and above Rs.400 crores
respectively.
Responsibilities of Lead Managers: Every lead manager has to
enter into an agreement with the issuing companies, setting out
their mutual rights, liabilities and obligations relating to such issues,
and in particular to disclosures allotment and refund. statement
specifying these is to be furnished to the SEBI at least one month
before the opening of the issue for subscription. In case of more
than one lead manager/merchant banker, the statement has to
provide details about their respective responsibilities. leader
merchant banker cannot manage an issue if the issuing company is
its associate. He can also not associate with a merchant banker who
does not hold a certificate of registration with the SEBI. It is
necessary for a lead manager to accept a minimum underwriting
obligation of 5 per cent of the total underwriting commitment or
Rs.25 lakh, whichever is lesser. If he is unable to do so, he has to
make arrangements for underwriting an equal amount by a
merchant banker associated with that issue under intimation to the
SEBI.
ue iligence Certificate: The lead manager is responsible for
the verification of the contents of a proponents/letter of offer of an
issue and the reasonable of the views expressed in them. He has to
submit, a due diligence certificate to the SEBI, at least two weeks
before the opening of the issue for subscription, to the effect that
(a) the prospectus/letter of offer are in conformity with the
documents/materials and papers relevant to the issue, (b) all legal
requirements connected with the issue have been fully complied
with, and (c) the disclosures are true, fair and adequate to enable
the investors to make a well informed decision regarding
investment in the proposed issue.
Submission of ocuments : The lead manager(s) to an issue has
(have) to submit, at least two weeks before the date of filing with
the registrar of companies/regional stock exchanges or both,
particulars of the issue, draft prospectus/letter of offer, other
literature to be circulated to the investors/ shareholders and so on
to the SEBI. They have to ensure that the
modifications/suggestions made by it with respect to the SEBI.
They have to ensure that the medications/suggestions made by it
with respect to the information to be given to the investors are duly
incorporated. The draft prospectus/draft letter of the offer should
be submitted to the SEBI along with the prescribed fee specified
below:
Issue size including premium
and intended retention of
oversubscription
ee per
document
(Rs.)
Up to Rs.3 crore
Rs. 5 crore - Rs.10 crore
Rs.50 crore - R.50 crore
Rs.10 crore - Rs.100 crore
Rs.100 crore - Rs.500 crore
More than Rs.500 crore
10,000
15,000
25,000
50,000
2,50,000
5,00,000
They have to continue to be associated with the issue till the
subscribers have received the share/debenture certificates or the
refund of excess application money.
Acquisition of Shares : merchant banker is prohibited from
acquiring securities of any company on the basis of unpublished
price sensitive information obtained during the course of any
professional assignment either from the client or otherwise. He has
to submit to the SEBI, the complete particulars of any acquisition of
securities of a company whose issue is being managed by him,
within 15 days from the date of transaction.
isclosures to the SEBI : s and when required, a merchant
banker has to disclose to the SEBI :
O His responsibilities with regard to the management of the
issue,
O ny change in the information/particulars previously
furnished, which have a bearing on the certificate of
registration granted to it
O The names of the companies whose issues he has managed
or has been associated with,
O The particulars related to the breach of capital adequacy
requirements
O Information related to his activities as manager, underwriter,
consultant or advisor to an issue.
Every merchant banker should appoint a compliance officer who
would be responsible for monitoring compliance with SEBI
acts/rules/regulations/notifications/guidelines/instructions,
issued by the SEBI/overnment, and for redressed of investors
grievance. He should immediately and independently report to
the SEBI any non-compliance observed by him and ensure that
the observations made/deficiencies pointed out by the SEBI
on/in the draft prospectus / letter of offer do not recur.
Procedure for Inspection :The SEBI can undertake the inspection
of the books of accounts, records and documents of a merchant
banker to ensure that the books are maintained in the manner
required, the provisions of the SEBI ct, rules and regulations are
being complied with and to investigate complaints from
investors/other merchant bankers/any other person or any matter
having a bearing on his activities as a merchant banker and suo
moto, in the interest of the securities business/inventor´s interest
into the affairs of the merchant banker.
4 The merchant banker has an obligation to furnish all the
information called for, allow reasonable access to the premises,
extend reasonable facility for the examination of
books/records/documents/computer data and provide copied of
the same and give all assistance to the inspecting authority in
connection with the inspection.
4 On the basis of the inspection report and after giving him an
opportunity to make an explanation, the SEBI can call upon the
merchant banker to take such measures as it deems fit in the
interest of the securities market and for the compliance with the
provisions of the SEBI ct, rules and regulations. In place of the
inspection authority, the SEBI can appoint a qualified auditor,
with the above powers of the inspection committee, to
investigate into the books of accounts or the affairs and
obligations of the merchant banker.
Action in Case of efault: merchant banker who fails to comply
with any conditions subject to which the certificate of registration
has been granted by the SEBI and/or contravenes any of the
provisions of the SEBI ct, rules or regulations, is liable to any of
the two penalties;
O (a) Suspension of registration or
O (b) Cancellation of registration.
Suspension of Registration: penalty of suspension of
registration of a merchant banker may be imposed where the
merchant banker
O Violates the provisions of the SEBI ct, rules or regulations;
O
4 Fails to furnish any information relating to his activity as
merchant banker as required by the SEBI;
4 furnishes wrong or false information;]
4 does not submit periodical returns, as required by the
SEBI and
4 Does not cooperate in any enquiry conducted by the SEBI.
O Fails to resolve complaints of the investors or fails to give a
satisfactory reply to the SEBI in this behalf;
O Indulges in manipulating, price rigging or cornering activities;
O Is guilty of misconduct, improper or unbusiness like or
unprofessional conduct which is not in accordions;
O Fails to maintain the capital adequacy requirement in accordance
with the provisions of these regulations;
O Fails to pay the fees;
O Violates the conditions of registration and
O Does not carry out his obligations as specified in these
regulations.
Cancellation of Registration : penalty of cancellation of
registration of a merchant banker may be imposed where:
O The merchant banker indulges in deliberate manipulation or price
rigging or cornering activities affecting the securities market and
the investors´ interests.
O The financial position of the merchant banker deteriorates to
such an extent that the SEBI is of the opinion that his
continuance as a merchant banker is not in the interests of
investors.
O The merchant banker is guilty of fraud, or is convicted of a
criminal offence and
O In case of repeated defaults of the nature leading to suspension
of registration, provided that the SEBI furnishes the reasons for
cancellation in writing.
On and from the date of suspension and cancellation of registration
of the merchant banker, he ceases to carry on any activity as a
merchant banker. The order of suspension of cancellation of his
certificate is published by the SEBI in two daily newspapers at least.
efault by Merchant Bankers and Penalty Points
The SEBI imposes penalties for non-compliance of conditions for
registration and contravention of the regulations on the basis of which
registration is suspended/cancelled. The defaults are categorized into
4 eneral,
4 Minor,
4 Major and
4 Serious.
General efaults: For the purpose of penalty points, the following
activities are classified under general defaults, and attract one
penal point.
O Non-receipt of draft prospectus/letter of offer from the lead
manager by the SEBI, before filing under the registrar of
companies/stock exchanges.
O Non-receipt of inters allocation of responsibilities of lead
managers in an issue by the SEBI, prior to the opening of the
issue.
O Non-receipt of the due diligence certificate, in the prescribed
manner by the SEBI, before opening of the issue.
O Failure to ensure the submission of a certificate showing
minimum 90 per cent subscription to the issue.
O Failure to ensure expending of dispatch of refund orders,
shares/debentures certificates, filing of listing application by
the issuer.
Minor efaults: The following activities are categorized under
minor defaults and attract two penalty points
O dvertisement, circular, brochure, press release and other
issue related materials not being in conformity with the
contents of the prospectus.
O Exaggerated information or information extraneous to the
prospectus is given by the issuer or associated merchant
banker in any press conference, investor´s conference,
broker´s conference or other such conference/meet prior to
the marketing of the issue, arranged/participated by the
merchant banker.
O Failure to substantiate matters contained in highlights to the
issue in the prospectus.
O Violation of regulations relating to advertisement on capital
issues.
O Failure to exercise due diligence in verifying the contents of
prospectors/letter of offer.
O Failure to provide adequate and fair disclosure to investors
and objective information about risk factors in the prospectus
and other issue literature.
O Delay in refund/allotment of securities.
O Non-handling of investor grievances promptly.
Major efaults: The following activities are categorized under
major defaults and attract three penalty points:
O Mandatory underwriting not taken by the managers.
O Excess number of lead managers than permissible.
O ssociation of unauthorized merchant banker(s) in an issue.
Serious efaults: The following activities are categorized under
serious defaults and attract four penalty points;
O Unethical practice by a merchant banker and/or violation of
code of conduct.
O Non-cooperation with the SEBI in furnishing desired
information, documents or evidence, as may be called for.
On reaching cumulative penalty points of eight (8), a merchant
banker attracts action from the SEBI in terms of
suspension/cancellation of authorization. To enable a merchant
banker to take corrective action, the maximum penalty points
awarded in a single issue managed by a merchant banker are
restricted to four. In the event of joint responsibility, the same
penalty point is awarded to all lead managers. In the absence of
receipt of inter se allocation of responsibilities, all lead managers
to the issue are awarded the penalty point.
efault in Prospectus: If the highlights are provided, the
following deficiencies attract negative points.
O bsence of risk factors
O bsence of listing
O Extraneous contents of prospectus, if stated
The maximum grading points of a prospectus can be 10 and
prospectuses scoring greater than or equal to 8 points are categorized
as , those with 6 or less than 8 points as , those with 4 or less
than 6 points as B and in those with score of less than 5 points, the
prospectus falls in category C.
Pre-Issue Obligations /Activities:
The company selects the Merchant Banker(s) for handling the issue.
The lead merchant banker should maintain a standard of due diligence
that he would satisfy himself about all the aspects of offering, veracity
and adequacy of disclosure in the offer documents. The ead Manager
should submit the following documents along with the offer document:
O Memorandum of Understanding (MOU)
O Inter se llocation of Responsibilities
O Due Diligence Certificate
O Undertaking
O ist of Promoter´s roup
Merchant Banker can be associated with the issue in any of the
following capacities:
O ead Manager to the issue
O Co-Manager to the issue
O Underwriter to the issue
O dvisor/Consultant to the issue
SEBI has set certain limits on the maximum number of intermediaries
associated with the issue:
Size of the Issue No. of Lead Managers
ess than Rs. 50 cr. 2
Rs. 50 cr. To Rs. 100 cr. 3
Rs. 100 cr. To Rs. 200 cr. 4
Rs. 200 cr. To Rs. 400 cr. 5
bove Rs. 400 cr. No limit but subject to SEBI´s
pproval
In etail:
The pre-issue obligations of merchant banker(s) are detailed as under:
ue iligence: The lead merchant banker should exercise due
diligence. The standard of due diligence should be such that he
should satisfy himself on all the aspects of offering, veracity and
adequacy of disclosure in the offer documents. Such a liability on
his part would continue even after the completion of the issue
process.
Requisite ee : The lead merchant banker should pay the requisite
fee in accordance with Regulation 24- of the SEBI Merchant
Bankers Rules and Regulations (as specified in the preceding
chapter of this book) together with draft offer document field with
SEBI.
Submission of ocuments :The documents to be submitted,
along with the offer document by the lead manager (merchant
banker), are as listed below :
O Memorandum of &nderstanding (MO&):To make an issue
of a security through a public or rights issue, an MOU must be
entered into between the lead manager (merchant banker)
and the issuing company, specifying their mutual rights,
liabilities and obligations relating to the issue. The MOU
should contain, in addition to the clauses specified in
ppendix 13-, such other clauses as are considered
necessary by both the parties. However, it should not contain
any clause which would diminish their mutual liabilities and
obligations under the (i) Companies ct and (ii) SEBI
Merchant Banker Rules and Regulations. The lead
manager/merchant banker who drafts the offer documents
must ensure that a copy of the MOU is submitted to the SEBI
along with the offer document.
O Inter-se Allocation of Responsibilities: When a
public/rights issue is managed by more than one merchant
banker, the rights/obligations/responsibilities of each of
them should be demarcated as specified in ppendix 13-B.
In the case of under subscription of an issue, the
merchant banker responsible for underwriting arrangement
should invoke underwriting obligations and ensure that the
underwriters pay the devolved amount and the same
should be incorporated in the inter-se allocation of
responsibilities accompanying the `due diligence certificate´
submitted by him to the SEBI.
O ue iligence Certificate: The lead merchant banker
should furnish to the SEBI a due diligence certificate, as
specified in ppendix 13-C, along with the draft
prospectus. In case of debenture issues, he should also
furnish to the SEBI a due diligence certificate given by the
debenture trustees as specified in ppendix-13-C- along
with the offer document. In addition, he should also;
4 Certify that all amendments/suggestions/observations
made by the SEBI have been incorporated in the offer
document;
4 furnish a fresh due diligence certificate at the time of filing
the prospectus with the Registrar of Companies (ROCs), as
specified in ppendix 13-D.
4 Furnish a fresh certificate immediately before the opening
of the issue, stating that no corrective action is needed on
its part, as specified in ppendix 13-E.
4 Furnish a fresh certificate after the issue has opened but
before it closes for subscription (ppendix 13-F).
The lead managers who are responsible for conducting due
diligence exercise with respect to the contents of the offer
document as per inter se allocation of responsibilities
should sign due diligence certificate.
O Certificate in Case of urther Issues by Listed
Companies The lead merchant banker should furnish the
following certificates, duly signed by a company
secretary/chartered accountant, along with the offer
document; showing (a) all refund orders of the previous
issue, (b) all security certificates were dispatched to the
allottees within the prescribed time and in the prescribed
manner and (c) the securities were listed on the stock
exchange(s) as specified in the offer documents.
O &ndertaking: The issuer should submit an undertaking to
the SEBI to the effect that transactions in securities, by
promoter/promoter group and their immediate relatives,
during the period between the date of filing the offer
documents with the Registrar of Companies (ROCs) / tock
exchange(s and date of the closure of the issue would be
reported to the stock exchange concerned, within 24 hours
of the transaction(s).
O List of Promoter's Group: Similarly, a list of promoters
who constitute the promoters group and their individual
shareholdings should be submitted to the SEBI by the
issuer. The issuer company should submit to the stock
exchange on which securities are proposed to be listed the
Permanent ccount Number (PN) bank account number
and passport account number of the promoters at the time
of filing the offer document.
Appointment of Intermediaries :
Obligations relating to the appointment of intermediaries are
discussed below:
O Merchant Bankers: merchant banker who is associated
with the issuer company as a promoter/director/associate
should not lead/manage its issue. However, a merchant
banker holding securities of a company can lead/manage its
issue (i) if the securities are/proposed to be listed on the
OTCEI and (ii) market makers have been/are proposed to the
appointed as per the offer document. merchant banker
would be deemed to be an associate of the issuer if (i) either
of them controls directly/indirectly though itself/its subsidiary
or holding company at least 15 per cent of the voting power
of the other or (ii) either of them directly/indirectly by itself or
in combination with other persons exercises control over the
other or (iii) there is a common director excluding nominee
director amongst the body corporate/its subsidiary or holding
company and the merchant banker.
O Co-managers: The lead merchant bankers must ensure that
the number of co-managers does not exceed the number of
merchant bankers to an issue, and there is only one advisor
to the issue.
O Other Intermediaries: It is the responsibility of the lead
merchant bankers to ensure that other intermediaries being
appointed are duly registered with the SEBI, wherever
applicable. They should independently assess their
capability/capacity to carry out the assignment.
They should further ensure that (I) issuer companies
would enter into an MOU with intermediary/intermediaries
concerned, whenever required, and (ii) bankers to the issue
are appointed in all the mandatory collection centers.
Moreover, they cannot act as registrar to an issue in which
they are also handling the post-issue responsibilities.
Moreover, it is also the responsibility of the lead merchant
bankers to ensure that (I) only registrars registered with the
SEBI for a particular issue are appointed in all public/rights
issues and (ii) an independent outside registrar to an issue is
appointed to process the issue in case the issuer company
itself is a registered registrar to an issue.
The registrar to an issue, associated with an issuer
company as a promoter/director, cannot act as its registrar to
the issue. The (designated) registrar to an issue would be
primarily responsible for all the activities assigned to him for
issue management. But where the number of applications in a
public issue is expected to be large, the issuer company, in
consultation with the lead merchant banker, may associate
one or more SEBI registered registrars for the limited purpose
of collecting the application forms at different centers and
forwarding them to the designated registrar to the issue, as
mentioned in the offer document.
&nderwriting :The lead merchant banker(s) should:
4 Satisfy themselves about the ability of the underwriters to
discharge their underwriting obligations;
4 Incorporate a statement in the offer document to the effect
that in their opinion the underwriters assets are adequate
to meet their underwriting obligations;
4 Obtain written of the underwriters before including their
names in the offer document;
4 Undertake in respect of every underwritten issue a
minimum underwriting obligation of five per cent of the
total underwriting commitment or Rs. 25 lakh, whichever
is less; the outstanding underwriting commitments of a
merchant banker should not exceed 20 times of its net
worth at any point of time;
4 Ensure that the relevant details of underwriters are
included in the offer document.
Offer ocument Made Public: The offer document should be
made public for a period 21 days from the date of filing the draft
offer document with the SEBI. The lead merchant banker should (I)
while filing the draft offer document with the SEBI, also file it with
the stock exchange where the securities are proposed to be listed
and (ii) make its copies available to the public, host the draft and
final offer documents on the website of all the lead managers/
syndicate members associated with the issue and also ensure that
the contents of the documents hosted are the same as that of their
printed versions and (iii) obtain and furnish to the SEBI an `in-
principle´ approval of the stock exchange(s) for listing within 15
days of filing of the offer document with them.
ispatch of Issue Material: The lead merchant banker should
ensure that (I) offer documents and other issue materials in a
public issue are dispatched to the various stock
exchanges/brokers/underwriters/bankers to the issue/investor
association and so on, in advance as agreed upon and (ii) letters of
offer in a rights issue are dispatched to all shareholders at least one
week before the opening date of the issue. fter filing the
prospectors/letter of offer with the ROCs/stock exchange(s), they
should be forwarded to the SEBI at least 10 days prior to the issue
opening date.
No Complaints Certificate: fter 21 days, from the date of draft
offer document is made public, the lead merchant banker should file
a statement with the SEBI (I) giving a list of complaints received
by it; (ii) stating whether it proposes to amend the draft or not and
(iii) highlighting those amendments.
Mandatory Collection Centers: The issuing companies are free to
appoint as many collection centers as they may deem fit. However,
the minimum number of collection centers for an issue of capital
should be (I) the four metropolitan centers situated at Mumbai,
Delhi, Calcutta and Chennai and (ii) all such centers where the
stock exchanges are located in the region in which the registered
office of the company is situated.
Authorized Collection Agents: The issuer company can also
appoint authorized collection agents in consultation with the lead
merchant banker subject to necessary disclosures, including their
names and addresses, in the offer document. The modalities of
selection and appointment of collecting agents can be made at
discretion of the lead merchant banker who should ensure that the
collection agents selected are properly equipped for the purpose,
both in terms of infrastructure and manpower requirements. The
collection agent(s) may collect such application as are accompanied
by application money (ies) paid by cheques draft/stock invest. They
cannot collect application money in cash.
O The application(s) collected by them should be deposited in a
special share application account with a designated scheduled
bank, either on the same date or latest by the next working day.
The application forms along with duly reconciled schedules
should be forwarded by them to the registrars to the issue after
realization of cheques and after weeding out the applications in
respect of `cheques-returned´ cases, within a period of two
weeks from the date of closure of the public issue.
O The applications accompanied by stock invests should be sent
directly by the collection agents to the registrars to the issue,
along with the schedules, within one week from the date of
closure of the issue.
O The offer documents and application forms should specifically
indicate that the acknowledgement of receipt of application
money (ies) given by the collection agents would be valid and
binding on the issuer companies and other persons connected
with the issue.
O Investors from places other than those where the mandatory
collection centers and authorized collection agents are located,
can directly send their applications along with stock invests to
the registrars to the issue by registered post. The applications
received through registered post would be dealt with, in the
normal course, by the registrar to the issue.
Advertisement for Right Post-Issues: The lead merchant banker
should ensure that in the case of a right issue, an advertisement
giving the date of completion of dispatch of offer letters should be
relapsed in at least one English daily with nationwide circulation,
one Hindi national paper and a regional language daily circulated at
the place where the registered office of the issuer company is
situated, at least seven days before the date of opening of the
issue. The advertisement should indicate the centers, other than
the registered office of the company, where the shareholders or
persons entitled to rights may obtain duplicate copies of composite
application forms, in case they do not receive the original
application form within a reasonable time even after opening of the
rights issue.
O Where the shareholders neither received the original composite
application forms nor are in a position to obtain the duplicate
forms, they may make applications to subscribe to the rights on
a plain paper.
O The advertisement should also contain a format to enable the
shareholders to make the application on a plain paper containing
the necessary particulars like name, address, ratio to right issue,
issue price, number of shares held, ledger folio numbers,
number of shares entitled and applied for, additional shares if
any, amount to be paid along with application, particulars of
cheque to be drawn in favour of the company account and so on.
O It should further mention that applications can be directly sent
by the shareholders, though registered post, together with
application money (ies) to the company´s designated official at
the address given in the advertisement.
O It may also invite the attention of the shareholders to the fact
that those making the application on forms other than the
standard ones would not be entitled to renounce their rights and
should not utilize the standard form for any purpose, including
renunciation, even if it is received subsequently.
O If the shareholder makes an application on a plain paper and
also in standard form, he may face the risk of rejection of both
the applications.
Appointment of Compliance Office :
n issuer company should appoint a compliance officer who
would directly liaise with the SEBI with regard to compliance with
various laws, rules, regulations and other directives issued by the
SEBI, and matters related to investor´s complaints. The name of the
compliance officer should be intimated to the SEBI.
Abridged Prospectus :
The lead merchant banker should ensure that every application form
distributed by the issuer company or anyone else is accompanied by a
copy of the abridged prospectus. The application form may be stapled
to form part of the abridged prospectus. lternatively, it may be a
performed part of the abridged prospectus. The abridged prospectus
should not contain matters that are extraneous to the contents of the
prospectus should be printed at least in point seven size, with proper
spacing. Enough space should be provided in the application form to
enable the investors to fill in various details like name, address and so
on.
Agreement with epositories :
The lead managers should ensure that (I) the issuer company has
entered into an agreement with depository(ies) for dematerialilsation
(demat) of securities, (ii) an option be given to the investors to
receive allotment of securities in demat form.
Branding of Securities :
Securities may be branded describing their nature but not the quality.
Post-Issue Obligations/Activities
Once the lead merchant banker is through with the formalities of the
subscription, he submits the post monitoring reports within 3 days
from the due dates. The due date for the 3-day post issue monitoring
report is the 3
rd
day from the date of closure of subscription of the
issue and for the 78-day post issue monitoring report; it is the 78 day
from the date of closure of the subscription. The post-issue lead
manager actively associates himself with post-issue activities like
allotment, refund and dispatch and regularly monitors redressal of
investor grievances.
Major Activities of Lead Manager/ Book Run Lead Manager
(BRLM)
1. Management of Public Issues and Initial Public Offerings
2. Registration of the Offer Document
3. Pricing of the Issue
4. Marketing of the Issue
5. llocation/llotment Procedure in case of Book Building
6. Issue Pre-Writing - towards wholesale marketing.
In detail
The post-issue obligations/requirements of lead manager(s)/merchant
banker(s) to an issue are discussed in detail as under:
Post-Issue Monitoring Reports: Irrespective of the level of
subscription, the post-issue lead merchant banker must ensure the
submission of the post-issue monitoring repots as per the formats
specified in ppendix 13-. The due date for submitting post-issue
monitoring reports in the case of public issues by listed/unlisted
companies are; (a) 3-daymonitoring report for book-built portion, in
case of issue through book building; the due date of the report
would be the third day from the date of allocation in the book-built
portion, or one day prior to the opening of the fixed price portion,
whichever is earlier, (b) 3-day monitoring report in other cases,
including fixed price portion of book-built issue; the due date for
the report would be the third day from the date of closure of the
issue, (c) final post-issue monitoring report for all issues. The due
date for this report would be the third day from the date of listing
or 78 days from the date of closure of the subscription of the issue,
whichever is earlier.
The post-issue monitoring report in case of rights issues should
be submitted within three working days from the due dates.
Public Issues :
In case of public issues, 3-day and 78-day monitoring reports
are to be submitted.
O 3-Day Post-Issue Monitoring Report the due date for this
report would be the third day from the date of closure of
subscription of the issue.
O Final Post-Issue Monitoring Report the due date for this report
would be the 78
th
day from the date of closure of subscription
of the issue.
Rights Issues: For rights issues, 3-day and 50-day monitoring
reports are required.
O 3-Day Post-Issue Monitoring Report the due date for this
report would be the third day from the date of closure of
subscription of the issue.
O 50-Day Post-Issue Monitoring Report the due date for this
report would be the 50
th
day from the date of closure of
subscription of the issue.
Redressed of Investors' Grievances :
The post-issue lead merchant banker should actively associate himself
with post-issue activities namely, allotment, refund and dispatch and
regularly monitor the redressed of investors´ grievances arising there
from.
Co-ordination With Intermediaries :
The post-issue lead merchant banker should maintain close
coordination with the registrars to the issue and arrange to depute its
officers to the offices of various intermediaries at regular intervals,
after the closure of the issue, to monitor the flow of applications from
collecting branches of banks, processing of the applications, including
those accompanied by the stock invest, and other matters till the basis
of allotment is finalized, dispatch of security certificates and refund
orders completed and securities listed. ny act of omission or
commission on the part of any of the intermediaries noticed during
such visits should be duly reported to the SEBI.
Stock invest :
The lead merchant banker should ensure compliance with the
instructions issued by the RBI on the handling of stock invest by any
person, including registrars to an issue.
&nderwriters: If the issue is proposed to the closed at the earliest
closing date, the lead merchant banker must satisfy himself that
the issue is fully subscribed before announcing closure of the issue.
In case there is no definite information about subscription figures,
the issue should be kept open for the required number of days to
take care of the underwriters´ interests and avoid any dispute, at a
later date, by the underwriters, with respect to their liability. In
case there is a devolvement on underwriters, the lead merchant
banker should ensure that the underwriters honour their
commitments within 60 days of the date of closure of the issue. In
the case of undersubscribed issues, he should furnish information in
respect of underwriters who have failed to meet their underwriting
devolvement to the SEBI.
Bankers to an Issue: The post-issue lead merchant banker should
ensure that money (ies) received pursuant to the issue and kept in
a separate bank (i.e. bankers to an issue), us per the provisions of
Section 73(3) of the Companies ct, 1956, is released by the bank
only after the listing permission has been obtained from all the
stock exchanges where the security was proposed to be listed as
per the offer document.
Post-issue Advertisements :The post-issue lead merchant banker
should ensure that (i) in all issue advertisements giving details
relating to oversubscription, basis of allotment, number, value and
percentage of applications received along with stock invest;
number, value and percentage of successful allottees who have
applied through stockiest; date of completion of dispatch of refund
orders; date of dispatch of certificates and date of filing of listing
application are released within 10 days from the date of completion
of the various activities, in at least one English national daily with a
nationwide circulation, one Hindi national paper and one regional
language daily circulated in the place where the registered office of
the issuer company is situated and (ii) the issuer company /
advisor/ brokers or any other agencies connected with the issue do
not publish any advertisement stating that the issue has been
oversubscribed or indicate investors´ response to the issue, during
the period when the issue is still open for subscription by the public.
n advertisement stating that the subscription to the issue has
been closed may be issued after the actual closure of the issue.
Basis of Allotment: In a public issue of securities, the Executive
Director/Managing Director of the designated stock exchange along
with the post-issue lead merchant banker and the registrar to the
issue would be responsible to ensure that the basis of allotment is
finalized in a fair and proper manner on the basis of proportionate
allotment. However, in the book building portion of book-built issue,
the allotment would be made in accordance with the prescribed
guidelines.
4 Pro- rata issue
It means the proportion is determined by the ratio which the number
of shares to be allotted to the number of shares applied for.
E.g. Number of issue share =10,000
Number of application being received = 20000
1 share would be allotted to the applicant for every 2 shares applied.
(10,000:20,000) on the basis of pro- rata allotment.
4 Proportionate Allotment Procedure : The allotment
should be subject to allotment in marketable lots, on a
proportionate basis, as explained below:
O pplicants should be categorized according to the number of
shares applied for.
O The total number of shares to be allotted to each category as a
whole should be arrived at on a proportionate basis, that is, the
total number of shares applied for in that category (number of
applicants in the category multiplied by the number of shares
applied for) multiplied by the inverse of the oversubscription
ratio.
Total number of applicants in category of 100s = 1, 500
Total number of shares applied for = 1, 50,000
Number of times oversubscribed = 3
Proportionate allotment to category = 1, 50,000 x 1/3 = 50,000
O The number of shares to be allotted to the successful allottees
should be arrived at on a proportionate basis, that is, total
number of shares applied for by each applicant in that category
multiplied by the invest of the oversubscription ratio, as shown
in Exhibit 13.2.
Number of shares applied for by each applicant = 100
Number of times oversubscribed = 3
Proportionate allotment to each successful applicant = 100 x 1/3
= 33 (to be rounded off to 100)
O In the case of all the applications where the proportionate
allotment works out to less than 100 shares per applicant, the
allotment should be made in a manner that each successful
applicant is allotted a minimum of 100 securities; and the
successful applicants out of the total applicants for that category
should be determined by a draw of lots in such manner that the
total number of shares allotted in that category is equal to the
number of shares worked out above.
O If the proportionate allotment to an applicant works out to a
number is more than 100, but is not a multiple of 100 (which is
the marketable lot), the number in excess of the multiple of 100
should be rounded off to the higher multiple of 100, if that
number is 50 or higher. If that number is lower than 50, it
should be rounded off to the lower multiple of 100. s an
illustrating, if the proportionate allotment works out to 250, the
applicant would be allotted 300 shares. If, however, the
proportionate allotment works out to 240, the applicant should
be allotted 200 shares. ll applicants in such categories should
be allotted shares arrived at after such rounding off.
O If the shares allocated on a proportionate basis to any category
is more than the shares allotted to the applicants in that
category, the balance available shares for allotment should be
first adjusted against any other category where the allocated
shares are not sufficient for proportionate allotment to the
successful applicants in that category. The balance shares, if
any, remaining after such adjustment, should be added to the
category comprising applicants applying for the minimum
number of shares.
O s the process of rounding off to the nearer multiple of 100 may
result in the actual allocation being higher than the shares
offered, it may be necessary to allow a 10 per cent margin, that
is, the final allotment may be higher by to per cent of the net
offer to the public.
Reservation for Small Individual Applicants : The above
proportionate allotment of securities in an issue that is
oversubscribed should also be subject to reservation for small
individual applicants, as described below:
O minimum 50 per cent of the net offer of securities to the public
should initially be made available for allotment to retail individual
investors (i.e. investors applying or bidding for securities up to
Rs.50, 000). The minimum of the 50 per cent of the public offer
means that if the category of retail individual investors was
entitled to get 70 per cent of the public offer in accordance with
the proportional formula, the category should get 70 per cent. If
the category is entitled to 30 per cent, there should be a
reservation of a minimum 50 per cent of the net public offer.
O The balance net offer of securities to the public should be made
available for allotment to; (I) individual applicants other then
retail individual investors and (ii) other investors, including
corporate bodies/institutions, irrespective of the number of
shares, debentures and so on applied for.
O The unsubscribed portion of the net offer to anyone of the
categories specified in (a) or (b) should/may be made available
for allotment to applicants in the other category, if so required.
Other Responsibilities :The lead merchant banker should ensure
that the dispatch of share certificates/refund orders/cancelled stock
invests and demat credit is completed and the allotment and listing
documents submitted to the stock exchanges within two working
days of the finalization of the basis of allotment. The post-issue lead
manager should also ensure that all steps for completion of
necessary formalities for listing and commencement of trading at
the stock exchange(s) are taken within seven working days of the
finalization of the basis of allotment. He should also ensure (I)
payment of interest to the applicants for delayed dispatch of
allotment letters, refund orders, and so on, as prescribed in the
offer document, and (ii) that the dispatch of refund
orders/allotment letters/ share certificates is done by way of
registered post/certificate of posting, as may be applicable.
For issues, advertisement(s) giving details related to
oversubscription; basis of allotment; number, value and percentage
of applications received along with stock invest; number, value and
percentage of successful allottees who have applied through
stockiest; date of completion of dispatch of refund order; date of
dispatch of certificates and date of filing of listing application should
be released within 10 days from the date of completion of the
various activities.
The post-issue lead merchant banker would continue to be
responsible for post-issue activities till subscribers have received
the shares/debentures certificates or refund of application money
(ies), and the issuer company enters into a listing agreement with
the stock exchange and listing/trading permission is obtained.
Allotment of security within 30 days of the closure of
public issue. Payment interest @15% P.A if the allotment
letters/refund orders have not been dispatch to the
applicants within 30 days from the date of the closure of the
issue. The refund is been given within 15 days of closure of
issue. The listing should be done within 7 days from
finalization of issue.
Certificate Regarding Realization of Stock invests: The post-
issue lead merchant banker should submit, within tow weeks from
the date of allotment, a certificate to the SEBI certifying that the
stock invests, on the basis of which allotment was finalized, have
been realized.
Bibliography
www.sebi.com
www.hsbc.com
www.icici.com
MFS - by M.Y. Khan
Financial System - by M.Y. Khan
Financial Markets and Intermediaries - ICFI
Investment Banking and Financial Services
- The Institute of Charted financial nalysis of India
