“Discover the pivotal roles and ethical responsibilities of Merchant Bankers in the securities market. Uncover the regulations governing their conduct, from managing public issues to advising on international offerings. Explore the stringent Code of Conduct they must adhere to, emphasizing integrity and due diligence. Learn about the post-issue involvements, emphasizing continuous monitoring and coordination. Understand the significance of Merchant Bankers in protecting investor interests, ensuring regulatory compliance, and upholding the integrity and stability of the securities market.”
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 or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.
Roles
In terms of Regulations 13A of SEBI (Merchant Banker) Regulations, 1992 (MB Regulations) read with RMB Circular No. 1(98-99) dated June 05, 1998, with effect from July 01, 1998, a merchant banker shall undertake only those activities which are relating to Securities market and which do not require registration/ granted exemption from registration as an NBFC from RBI.
In particular, a merchant banker inter-alia undertakes the following activities:
1. Managing Public Issue of Securities
2. Underwriting connected with the aforesaid Public Issue Management Business
3. Managing/advising on International Offerings of Debt/Equity i.e., GDR, ADR, bonds and other instruments
4. Private Placement Securities
5. Corporate Advisory Services related to Securities Market e.g. take-overs, acquisitions, Disinvestment
6. Advisory services for Projects
7. International Financial Advisory Services
8. Filing placement memorandum and issuance of due diligence certificates for AIFs
Code of Conduct
Under Regulation 13 of the MB Regulations, a merchant banker is required to abide by the Code of Conduct as specified in Schedule III thereof. It imposes an onerous duty on the merchant banker to provide clients with the best advice feasible while simultaneously protecting the interests of investors and ensuring that proper disclosures are provided promptly and without making false or inflated claims. The merchant banker must conduct its business with a high degree of integrity, decency, and fairness, and it must immediately notify SEBI of any violations of the regulatory framework that come to its attention.
“For failure on the part of the Merchant Banker in complying with the requirements of the regulations, penalty has been provided, which includes even cancellation of the registration itself. Such a severe penalty for default is indicative of the extent of the responsibility vested in the Merchant Banker in dealing with public issues.” (SEBI vs Shriyam Broking Intermediary Ltd.). It is pertinent to note that the various clauses in the code of conduct are meant to be illustrative in nature and can not be construed in a manner which could be totally inconsistent with the basic roles and responsibilities of a merchant banker which are primarily to protect the interest of the investors at all cost.
Integrity and Due Diligence
A merchant banker has to exercise due care and diligence and maintain high standards of integrity in the conduct of its business. Further, it is the Merchant Banker’s responsibility to ensure that investors receive accurate and timely information. Furthermore, it has a position of significant trust and responsibility in any public issue, and investors rely on the merchant banker’s activities to protect their interests. “Without Merchant Banker acting diligently and complying strictly with the letter and spirit of guidelines and regulations, the issue cannot be properly regulated and small investors are put to grave danger.” (SEBI vs Vatsa Corporation Ltd.).
“One of the reasons for appointing the merchant banker for the purpose of public offer is, that the merchant banker, being a professional body, is required to ensure regulatory compliance with reference to the public offer and, therefore it is expected to carry out utmost care and compliance with the regulations applicable to the public offer. Therefore, a merchant banker’s responsibility is to ensure that the corporate entity is acting in accordance with the norms laid down and in case of violation bring the said violation to the notice of the regulator for appropriate action. The Code of Conduct prescribes that a merchant banker shall all times exercise due diligence and ensure proper case and exercise independent professional judgment.” (Corporate Professionals Capital Private Limited vs SEBI)
Securities Appellate Tribunal (SAT) in the matter of SEBI vs HSBC Securities and Capital stated “The role of the Merchant Banker is important while preparing and filing the offer document as the general investors are carried away by the contents of the said offer document and accordingly a decision is taken by them. The prospectus should contain all the information about the company. Typically, the merchant banker is required to verify the content of the issue prospectus and to exercise ‘due diligence’ in the process.”
Post issue involvements
Merchant Bankers right from the beginning are associated with the public offering of securities of a Company. Nonetheless, their role does not end with the mere closure of the public issue. SEBI RMB(G1 series), Circular No.1 (92-93) dated March 1, 1993 stated as under:
“Lead manager responsible for post-issue activities shall maintain closed co-ordination with the Registrar to the issue and arrange to depute its officers from regular intervals after the closure of issue to monitor the flow of applications from collecting bank branches, processing the applications including those accompanied by stock invests and other matters till the basis of allotment is decided, dispatch is completed and listing done. Any act of omission or commission on the part of Registrars noticed during such inspections should be duly reported to SEBI…..”
Furthermore, the completion of the IPO does not relieve the merchant bankers from their liabilities. In a recent case, SEBI conducted an investigation in respect of April 2011 IPO of Paramount Printpackaging Limited (PPL). Additionally, proceedings were also initiated against the appellants, notably One Life Capital Advisors Limited, to examine its role as a merchant banker in PPL’s IPO. After seven years of the issuance of the IPO, SEBI issued summons in the year 2018 calling upon the appellants to produce the material to show what diligence was carried out by them with regard to certain statements made in the prospectus.
Conclusion
The aforementioned statements help us in understanding how crucial it is for merchant bankers to fulfil their roles and obligations in the securities market with integrity, ethics, and impendence in order to align its primary role with that of SEBI, one of which is “to protect the interest of investors in the securities market.” The regulators and investors have a specific level of trust in merchant bankers. Without the presence of merchant bankers, the securities market would lack the necessary expertise, oversight, and trust that is essential for the smooth functioning and protection of investors. Their contribution is crucial in upholding the integrity and stability of the market, making them an indispensable component of the securities market.
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