How is merchant

Post Views: 4302

banking regulated in India

Merchant banking comprises a wide set of banking
activities which involves issues management by
trading in securities, underwriting security issuances
(e.g. an IPO), undertaking valuation of businesses and
setting up and packaging M&A deals. In business
parlance, it is distinguished from commercial banking,
which largely revolves around accepting deposits and
giving loans (nowadays, commercial banks also
provide additional services such as bill payments,
certificates of deposits etc.).

Securities and Exchange Board of India (SEBI) is the regulatory

authority for merchant banking in India. Activities of merchant banks are
regulated by the SEBI (Merchant Bankers) Regulations, 1992.
As per RBI’s Master Circular on Para-Banking
activities, banks are allowed to undertake merchant
banking activities through a separate subsidiary which
would be required to comply with SEBI regulations.
Banking Institutions performing merchant banking
activities are also required to follow the requirements
laid down in the prudential exposure norms prescribed
by RBI, as well as the statutory limits contained in
Section 19(2) & (3) of the Banking Regulation Act,
1949.
Merchant banking can also be pursued by entities
other than banks (however, they should not be NBFCs
as defined under the RBI Act), provided they are
registered with SEBI. In case a bank pursues
merchant banking activities, it would need a banking
license from RBI (to carry out banking activities) and
a SEBI registration under the SEBI Merchant Bankers
Regulations to carry out merchant banking business.
It is to be noted that, those banks and merchant
banking subsidiaries which are performing any of the
activities under Portfolio Management Scheme (or any
similar scheme) are also required to comply with the
provisions of the SEBI (Portfolio Managers) Rules and
Regulations, 1993.
However, RBI exempts a merchant banking
company from following requirements:
1 Provisions related to mandatory registration, maintenance of liquid
assets and creation of reserve funds under the RBI Act, 1934;
2 Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998; and
3 Non-Banking Financial Companies Prudential Norms (Reserve
Bank) Directions, 1998.
To be eligible for the above exemptions, a merchant
banking company would need to fulfil the following
criteria:
• It should be registered with SEBI under section 12 of the SEBI Act
1992;
• It should conduct the business of merchant banking in accordance
with rules or regulations framed by SEBI;
• It should acquire securities only as part of its merchant banking
activities;
• It should not be engaged in any other financial activities as
mentioned in section 45I(c) of the RBI Act 1934; and
• It should not accept or hold public deposits.
[See, RBI Master Circular on Exemption from the
provisions of RBI Act, 1934]
Provisions related to the registration of a merchant
bank are laid down in Chapter-II of SEBI Regulations,
which provides for mandatory registration to carry out
the business of merchant banking in India. Following
are some of the requirements which are taken into
consideration for grant of certificate:
• Applicant should be a corporate body other than a Non-Banking
Financial Company (as defined under the RBI Act);
• Applicant should not engage in any activity other than those
connected to securities market;
• Applicant should have a minimum of two employees having prior
experience in merchant banking;
• Applicant must not be related (directly or indirectly) to any other
entity which is registered as a merchant banker;
• Applicant has not been found guilty for any economic offence; and
• Applicant should have a minimum capital of 5 crore rupees (for
category-I merchant banker).
Many statutes and regulations require certain
functions [such as valuation of shares under Foreign
Exchange Management (Transfer or Issue of Security
by a Person Resident outside India) Regulations,
2000] to be performed by SEBI registered Merchant
Bankers, and hence for businesses operating in the
financial sector, obtaining a merchant banking license
can be a strategic advantage. Examples of some of
the important functions that are performed by
Merchant Bankers are given below:
1 Corporate Counselling – After conducting a detailed market
analysis to evaluate feasibility of corporate policies, merchant
bankers render commercial and strategic advice to improve
overall efficiency of a company.
2 Project Counselling – Studying the nature and scale of investment
in a business project and assisting clients with finance &
procedural aspect for the successful implementation of the
project.
3 Portfolio Management – Advising clients (such as Institutional
Investors and high net worth individuals) on managing their
investments in order to earn maximum profit in a time bound
manner.
4 Issue Management – Sponsoring of corporate securities (e.g. IPOs)
including marketing, compliance of listing requirements,
procuring private subscription and offering securities to
existing shareholders of the company.
Due to factors such as growth of primary market,
increasing need of corporate restructuring and easing
of FDI norms, merchant banking has never been more
relevant in India. Therefore, it is very much required
that the restrictive norms governing merchant
banking, especially those related to capital adequacy
and registration, should be relaxed in order to allow
small players to enter and further expand the
exclusive club of merchant bankers in India.