Merchant Banking

SEBI Guidelines
BIET MBA
DAVANGERE
  Responsibilities of Lead Manger:

– Agreement with issuer detailing mutual

rights, obligations and liabilities; break
up of responsibilities between multiple
MBs- details submitted to SEBI before
one month of opening of issue
– Not associate with unregistered persons
to act as co-bankers or managers
– Min underwriting of 5% or 25 lakhs, WIL

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  Due diligence certificate:
– Verify the contents of P/LO and submit due
diligence certificate to SEBI 2 weeks before
opening of issue
– The DD certificate has to state that the P/LO
are in conformity with relevant supporting
documents
– It has to state that all legal requirements have
been fully complied with
– It has to state that disclosures are true, fair
and adequate
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  Submission of documents: LM has to:

– Submit to SEBI- before filing with ROC or

designated Stock Exchange- particulars of
issue, P/LO and any other literature to be
circulated among investors
– SEBI vets them and may suggest
modifications, which are to be incorporated
 Fees to be paid while submitting these documents:
public issue- INR 10,000 for less than issue size of
INR 1 crore and 0.01 percent for sizes above INR 1
crore; Rights issue – up to INR 2 crore INR 10,000; 2-
500 crore, 0.005 percent; more than 500 crore, flat INR
25 lakhs
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 Restriction on acquisition of shares
of issuer based on unpublished price
sensitive information-
Prohibited from such practices-
further, he has to furnish information
on any shares acquired by him in the
issuer co to SEBI, within 15 days

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  Disclosures to SEBI – make disclosures to SEBI on
– his responsibilities in issue management
– any changes in the status of details which were originally furnished
– names of companies, the issues of which he has managed and with
which he has been associated
– any particulars with regard to breach of capital adequacy
– information on his activities as manager, underwriter, consultant, adviser
etc, of the issue

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  Appointment of a compliance officer:

–Every merchant banker has to

appoint a CO
–He would be responsible to monitor
and independently report to the SEBI
on the state of compliances
–He is also responsible to ensure that
the P/LO would incorporate any
suggestions made by SEBI before
release to investors
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  SEBI’s power to inspect:

–SEBI can undertake inspection of

books and other records of merchant
bankers
–Act either on a complaint by investors
or suo moto
–All books and other information to be
furnished
–MB will be allowed to present his
defense
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  Defaults by MBs and Penalty points:
 Types of default:

1) General;
2) Minor;
3) Major;
4) Serious; and
5) Defaults in prospectus

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  General defaults: (one penalty point)

– Failure to submit DP/LO to SEBI

– Failure to file inter-se responsibility
allocation
– Failure to file due diligence certificate
– Failure to file minimum subscription
certificate
– Failing to ensure prompt dispatch of
refund orders/share certificates

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  Minor defaults: (two penalty points)
– Communicating info that is not part of Prospectus
– Publicizing exaggerated info or extraneous info
– Failure to substantiate material details of prospectus
– Violating regulations regarding ads about issue
– Failure to exercise due diligence in verifying P/LO
– Failure to provide adequate info about risks involved
– Delay in refund/allotment
– Non-handling of investor grievances properly

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 Major defaults: (three penalty points)
– Mandatory underwriting not undertaken
– Excess number of lead managers
– Association with unregistered MBs
 Serious defaults: (four penalty points)
– Unethical practices/violation of code of
conduct
– Non-cooperation with SEBI in
investigations
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 General negative points: in case
highlights are provided in an issue:
absence of statement of risk factors-
one point; failing to give listing details-
half a point; stating matters
extraneous to prospectus- half a point.
 Suspension/cancellation: cumulative
score of eight points leads to
suspension/cancellation; one issue,
max four penalty points
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  MANAGEMENT OF EQUITY AND RIGHTS ISSUES

 Types of issues:
– Public Issues; and
– Rights Issues
 Public issues might include: IPOs, FPOs, and
Offers for sale; they might be issued by listed
or unlisted companies; they need prospectus
 Rights issues are issued only by existing
listed companies- letter of offer is the mode
of communication
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  Conditions to be satisfied OR Eligibility norms

–Filing of offer document: DP filed

through an eligible MB 21 days
before filing with ROC; changes
suggested by SEBI need to be
incorporated before filing with ROC
 NOTE: in case of Rights issues of less than 50 lakhs, LO is to be
prepared and filed with SEBI

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 –Applying for listing: public
issues
–Enter into agreement with a
registered depository
 NOTE: the norms discussed here apply to issues of equity shares and
convertible securities of listed or unlisted companies

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 IPOs by unlisted companies
– Net tangible assets of INR 3 crores in each of
the preceding 3 full years; not more than half of
these can be in non-committed monetary form
– Track record of distributable profits in at least 3
out of five immediately preceding years (in case
of proprietary and partnership firms converted
into corporate form, the accounts would be
considered only when their financial statements
conform to OR have been restated in the
prescribed form under the Companies Act; and
they have been duly audited by a CA)
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 – Has a minimum networth of INR 1 crore in
each of the preceding 3 full years of 12
months each
– In case of change of name, at least 50
percent of its revenue of the preceding one
year has been derived from the proposed
type of activity
– Aggregate of the proposed issue and all
previous issues in the same financial year
does not exceed five times its pre-issue
networth as per audited balance sheet of the
last FY
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  NOTE: an unlisted co can issue securities to public even when it does
not satisfy the above five conditions, provided that:

– Book-building method is used and 50

percent of net offer to public is offered to
QIBs; or
– The project has at least 15 percent
participation by banks/FIs of which at
least 10 percent comes from the
appraisers- in addition, at least 10
percent has to be allotted to QIBs

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 – Minimum post-issue face value of capital
would be 10 crores or
– Compulsory market-making is arranged for-
with a depth of at least 300 shares; and bid-
ask spread is less than 10 percent; and,
inventory of market makers on each of stock
exchanges as on the date of allotment of
securities is at least five percent of the
proposed issue

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 Meaning of QIB:

PFI; Banks; MFs; FIIs registered

with SEBI; bilateral and
multilateral DFIs; VCFs registered
with SEBI; SIDCs; Insurance
companies registered with IRDA;
PFs and pension funds with a
minimum corpus of 25 crores;

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  Public Issues by listed companies
 Eligibility conditions:

–Size of issue, -inclusive of all those

done within one year past- does not
exceed five times pre-issue networth;
–In case of change in name, at least 50
percent of revenue..........
NOTE: A listed co can issue securities to public
even when it does not satisfy the above
conditions, provided that:
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  Listed companies can also raise funds by issuances of securities in the
form of Qualified Institutional Placement or QIP route.
 Exemptions from the above conditions: the above conditions do not
apply to: private and public sector banks; Infrastructure companies; rights
issues by listed companies.
 An unlisted company having outstanding warrants or other such
instruments with promoters or others which are to be converted into
shares, cannot issue securities to public

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 Before making a public issue, all
existing partly paid up shares need to
be converted into fully paid shares/or
forfeited
A company cannot make public or
rights issue unless it has made firm
arrangements of finance towards 75
percent of the stated means of
finance, excluding the amount to be
raised through the proposed issue.
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  Pricing of Issues:
– Listed company- free to issue at any price
– Unlisted company- when proposes to list on a recognized exchange, free
to price
– An infrastructure co- free to price, subject to the compliance with
disclosure norms laid down by SEBI
 Differential pricing:
– Prices for public and firm categories of issues can be different- firm
allotment price higher
– Listed companies making a composite issue can price its securities
differentially to public and rights segments; it can also adopt further
differentiation in regards to the splits of public segment between firm and
pro-rata allotments to public
 Price band: when filing the draft offer document with SEBI, an issuer can show an
indicative band of issue price with a 20 percent spread- cap should not be set at more
than 20 percent of floor; the actual price can be decided later on, by passing a Board
resolution or in consultation with the designated exchange
 Note: discounts and commissions cannot be offered to any firm allottee
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  Denomination of shares: Sec 13 (4) of Companies Act and provisions
of SEBI:

– IPO- FV below INR 10 if issue price is INR

500 or more, subject to a min of INR 1,
without decimal denominations; FV of
INR 10, if issue price is less than INR 500
– Other points- no decimal denomination;
only one denomination at a given time;
subject to MA and AA provisions;
disclose all relevant aspect clearly

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 Promoters’ contribution and lock-in
requirements:
– Unlisted co- IPO/OFS- 20% of post issue
capital
– Listed co- PI- 20% compliance
– Composite issues by listed co- 20% of
proposed issue is contributed OR 20
percent of post-issue capital is
maintained, excluding rights issue

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 – Other than cash considerations; revaluation of assets, capitalization of
intangible assets, bonus shares out of revaluation reserves- NOT
COUNTED
– Securities issued at a lesser price to promoters within the last 12
months- promoters have to make good the difference- NOT COUNTED
– Subscriptions solicited form unrelated persons as private placements-
NOT COUNTED
– Securities for which written consent has not been obtained from the
holders (like friends and relatives)- NOT COUNTED
 Subscription by promoters to Convertible securities- when the issue
is of shares, the subscription by promoters to CSs will be counted if
the price at which they are to be converted is stated in the
prospectus; if the issue is of the convertible securities themselves,
the promoters contribution shall be counted only when they bind
themselves to full conversion on the proposed dates.
 Promoters’ contribution has to be brought in at least one day before
the opening of the issue- it shall be held in an Escrow account with
a bank.
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  Exemption from promoters’ contribution requirement:
– Listed co; public issue; 3 year dividend track record;
– No identifiable group of promoters exists
– Rights issues- they however have to disclose existing shareholding
 Lock-in requirement: 3 years; start day from date of allotment and
last day from the date of commercial production or the date of
allotment, WIL
 In case of excess contribution by promoters of unlisted co, lock in period
is one year; for listed company, this one year lock in period will not be
applicable; if a shortfall in firm allotment category is met by promoter, it
will be subject to lock-in
 The entire pre-issue subscriptions in case of unlisted companies will be
locked in for one year- shares lent to Stabilizing Agents (SAs) are
exempted from lock-in requirement.

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  Lock-in of firm allotment securities: one year lock-in from the date
of allotment or commencement of commercial productions, WIL
 Note 1: locked in securities can be pledged with only approved
banks and FIs
 Note 2: Inter-se transfers among the promoters is permitted- they
can also be transferred to a new promoter
 Note 3: Inscription of non-transferability is necessary

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 Advertisement Code:
– True, fair and clear
– Full form of OD, not extracts
– Not misleading- explanatory and qualifying
statements
– avoid technical and complex language
– No ‘guaranteeing’ kind of statements about
profitability increases
– No use of crawlers on TV
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 – No slogans or brand names, mere commercial name in use
– No celebrity or other endorsements
– No expletives or non-factual statements
– If financial data is presented, sales, GP, NP, SC, Reserves, EPS, DPS, BV
have to be there
– Contain risk factor statements clearly, highlighted
– All publicity material duly authorized by directors
– Prominent display of any SEBI, ROC and DSE information

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 – Prompt, true and fair disclosure of all
material developments relating to
business, securities, subsidiaries etc
– Product ad should not hint directly or
indirectly refer to the performance of the
issue when it is open
– No ad to continuously advert the extent of
subscription
– Announcement of the closure of issue only
after MB ascertains from registrars that 90
percent subscriptions have been received
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 – No payment of any incentive to anyone,
but for contracted brokerage
– When NRI reservation is present, specify
wherefrom they can obtain application
forms
– MB to take undertaking from issuer that
ads comply with all directives
– Ensure that issuer takes approval from
him

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  Research reports:
– Prepared only on the basis of published information
– Information should be made available to all analysts- no selectivity has to
be there in terms of reports
– No research report should be circulated commencing from the date 45
days immediately preceding the filing of the offer document with the
SEBI
– Ad code applies to research reports to the relevant extent

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