SEBI (MERCHANT BANKERS) REGULATIONS, 1992 defines ‘merchant banker’ as 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. A merchant banker provides various services such as Promotional activities, Credit syndication, Project counseling, and Portfolio management, etc. However, one of the primary functions of the merchant banker is issue management, be it IPO, FPO, or right issue. The purpose of this article is to practically analyze the role of a merchant banker in IPO management right from due diligence aspect to allotment/refund of the securities while also discussing applicable provision of SEBI(ICDR) Regulations,2018 and relevant notifications or circulars by SEBI.

The Roles and obligation of the merchant banker can be classified into three groups-

  • Pre-issue role
  • Post issue role
  • Operational guidelines prescribed by SEBI

Pre-issue role of Merchant Banker in IPO Management

The pre-issue stage is the stage before issuing the securities to the subs. The pre-issue role and obligation of the merchant banker generally involve activities such as due diligence, requisite fee, submission of documents, the appointment of intermediaries, underwriting, etc. Some of the major activities done by the merchant banker in relation to IPO management at this stage are-

♦ Due Diligence of the issuer

Regulation 24 of SEBI (ICDR) Regulation, 2018 mandate that lead manager shall exercise due diligence and satisfy themselves about all aspects of the issue including the veracity and adequacy of disclosure in the draft offer document and the offer document which means merchant banker shall ensure that the framework provided by the SEBI shall be complied with and implemented in draft offer documents. A checklist that may be useful for conducting pre-issue due diligence is-

  • Check whether the issuer fulfills the eligibility criteria relating to a minimum tangible asset, Net worth, and average operating profit limited mentioned in regulation 6 of ICDR Regulations
  • Check whether the issuer is not ineligible to make an IPO under regulation 5 of ICDR Regulations.
  • Check whether the issuer satisfies the general conditions for IPO mentioned in Regulation 7 of ICDR regulation
  • Check whether the issuer has made all the material disclosure in draft offer documents and verifying the content of offer documents
  • Check whether the minimum promoter contribution requirement mentioned in Regulation 14 is fulfilled

Merchant banker is obligated to submit a due diligence certificate along with a Draft offer document to SEBI.

♦ Appointment of intermediaries-

Regulation 23 of the ICDR Regulation imposes the duty to appoint merchant bankers and other intermediaries with merchant banker consultation on the issuer. However, practically it is the merchant who gets the issuer in touch with other intermediaries. This regulation also imposes an obligation on the merchant banker to assess the capability and independence of the intermediaries. As per ICDR Regulation, some of the intermediaries involved in an IPO are-

  • Merchant banker
  • Underwriters
  • Banker to the issue
  • Registrar to the issue
  • Compliance officer
  • Depositories
  • Monitoring agency if issue size exceeds 100 crore

♦ Filling draft offer document with requisite document

In accordance with Regulation 25 of the ICDR Regulation and other applicable guidelines, the lead manager along with a draft offer letter shall file the following documents with SEBI-

  • Due diligence certificate as per schedule V
  • Memorandum of Understanding entered between the issuer and the merchant banker
  • In case a public or rights issue is managed by more than one merchant banker the rights, obligations, and responsibilities of each merchant banker shall be demarcated as specified in Schedule II.
  • Details of Promoter of the issuer and list of the promoter group
  • an undertaking to the Board by the issuer to the effect that transactions in securities by the `promoter’ the ‘promoter group’ and the immediate relatives of the `promoters during the period between the date of filing the offer documents with the Registrar of Companies or Stock Exchange as the case may be and the date of closure of the issue shall be reported to the Stock exchanges concerned within 24 hours of the transaction(s).

♦ Making public the offer document and advertisement of the issue

As per regulation 26 of ICDR merchant banker should ensure that draft offer letter is available for the public on SEBI and stock exchange website for at least 21 days from the date of filling. A public announcement is also needed to be made within 2 days of the filling of the offer document in an English and Hindi national newspaper inviting the public to give their comments to the SEBI. A pre-issue advertisement is also required to be made as per regulation 43 after registering the prospectus with ROC containing the disclosure specified in part A of Schedule X. After 21 days of filing the draft offer document, the merchant banker shall file a statement showing the complaints received by the public and highlights of the proposed amendments to SEBI.

♦ Setting up mandatory collection center and authorized collection agents

As per regulation 23 read with schedule XII, a merchant banker needs to ensure that the issuer designates a collection center in Mumbai,Kolkata, Delhi,Chennai, and at such place where the recognized stock exchange is located. The issuer company can also appoint authorized collection agents in consultation with the Lead Merchant Banker subject to necessary disclosures including the names and addresses of such agents made in the offer document.

♦ Calculating requisite fee and ensuring legal compliances

It is the duty of the merchant banker to calculate the required fee needed to be paid with the draft offer document mentioned in Schedule III and ensure that the issue complies with all the relevant legal compliance

Post-issue role of Merchant Banker in IPO Management

The post-issue obligation is the stage after the securities are issued to the subscribers. The major post-issue obligations relate to association with allotment procedure, post-issue monitoring reports, redressal of investor grievances and coordination with intermediaries, etc. This includes-

♦ Allotment procedure and basis of allotment

Merchant banker along with MD of the recognized stock exchange and registrar of the issue is responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with Regulation 49 of ICDR Regulations. The allotment of such shares should be in such a way that the minimum allotment would be equal to the minimum application size as determined and disclosed in the offer document.

♦ Post issue monitoring report

The merchant banker in case of IPO shall submit a post-issue monitoring report on the 3rd day from the date of closure of the subscription of the issue.

♦ Post-issue advertisement

Regulation 51 of ICDR regulation impose a duty on merchant banker to ensure that a post-issue advertisement giving details relating to subscription, the basis of allotment, value, and percentage of all applicants, date of filing of listing application, etc is released within ten days from the date of various activities in at least one nationwide English and Hindi newspaper.

♦ Redressal of investors grievance

The Post -issue Lead Merchant Banker shall actively associate himself with post-issue activities namely, allotment, refund and despatch and shall regularly monitor redressal of investor grievances arising therefrom.

♦ Coordination with intermediaries

It includes coordinating with various agencies connected with the post-issue activity such as registrar to issue, bankers to the issue, bankers to the issue, self-certified banks, and underwriter.

♦ Certificate regarding the realization of stock investors and other requirement

The Post-Issue Lead Merchant Banker shall submit within two weeks from the date of allotment, a Certificate to the Board certifying that the stock invests on the basis of which allotment was finalized, has been realized

Operational guidelines prescribed by SEBI

The compliance requirements of merchant banker(s) in relation to operational guidelines cover submission of the draft and final offer documents, instruction on post-obligations, issue of penalty points, and so on. These guidelines can be accessed on the website of SEBI

Case study related to Role of Merchant Banker in IPO Management

The recent hit public issue of Burger king India limited is a classic example of how a well-managed issue can benefit all the stakeholders. Burger King is India’s fastest growing quick-service restaurant chain which opened up its issue from 2nd December to 4th December 2020. Due to the uncertainties in the market and COVID-19, the role of the merchant became more important than ever. Activities in the secondary market picked up pace after the benchmarks rebounded on the optimism stemming from the fiscal and monetary stimulus announced by the government and central bank, a faster-than-expected pickup in economic activities after lockdown curbs were eased, robust foreign flows, and a potential Covid-19 vaccine. This issue was managed by 4 merchant bankers being Kotak Mahindra Capital limited, CLSA India private limited, Edelweiss Financial services limited, and JM Financial limited. The IPO was getting delayed due to regulatory requirements and then COVID  which created uncertainties in the mind of the investors. The company came up with 810 crores rs issue and the issue got fully subscribed within 2 hours and was 156 times oversubscribed. One of the major challenges before the merchant banker to gain the trust of the investors as the risk involved was higher. The key risks were-

  •  The outbreak of the Covid-19 pandemic 
  • Real and perceived health concerns arising from food-borne illnesses, health epidemics, food quality, allergic reactions or other negative food-related incidents 
  • The termination of master franchise and development agreement 
  • Demand for products may decrease due to changes in consumer preferences and food habits
  • Business depends in part on the continued international success and reputation of the Burger King brand globally, and any negative impact on the brand may have an adverse impact 
  • Deterioration in the performance of, or its relationships with, third-party delivery aggregators
  • Inability to identify suitable locations and successfully develop and roll out new restaurants, and expand into new regions.

Even besides all the issues the merchant bankers involved did their pre and post-issue duties diligently. The offer letter of the IPO got accepted by SEBI and the public issue was a hit. This showed how important the role of the merchant banker is and how proper due diligence can be beneficial for everyone.


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