Merchant bankers | Definition | Services offered | Categories

Merchant bankers, lead managers and registrars play a key role and facilitate primary market activities by their advice and guidance. Let us discuss the role of merchant bankers in this article.

Who are Merchant Banker? What are their role?

Merchant bankers provide advice to entrepreneurs right from the stage of conception of the project till the commencement of production. Merchant bankers are in charge of the issue process. They act as intermediaries between the company and the investors. They are also responsible for preparing the prospectus and marketing the issue.

Definitions of Merchant banker

As per SEBI rules, a merchant banker refers to,

“any person who is engaged in the business of issue management either by making arrangement regarding buying, selling or subscribing to securities or acting as manager, consultant or rendering corporate advisory services in relation to such issue management”.

The Webster’s New Collegiate Dictionary defines merchant bank as,

“that specializes in bankers’ acceptances and in underwriting or syndicating equity or bond issues”.

Services provided by merchant bankers

The services provided by Merchant Bankers include:

  1. Project counseling
  2. Market survey and forecasting
  3. Estimating the amount of funds required.
  4. Raising funds from capital market.
  5. Raising of funds through new instruments.
  6. Bought out deals.
  7. OTC market operations.
  8. Mergers and amalgamations.
  9. Loan syndication.
  10. Technology tie-ups.
  11. Working Capital Finance.
  12. Venture Capital.
  13. Lease Finance.
  14. Fixed deposit management.
  15. Factoring
  16. Portfolio management of mutual funds.
  17. Rehabilitation of sick units.

Regulation of Merchant Bankers

Merchant banking activity in India is regulated by the SEBI (Merchant Bankers) Rules, 1992. The Rules provide that:

a. no person shall carry on any activity as a merchant banker unless he holds a certificate granted by SEBI.

b. SEBI would grant the certificate:

  1. on payment of the registration fee.
  2. on condition that the merchant banker would redress investor grievances within I month of investors complaint and would inform
    SEBI of all such complaints received.
  3. only if the applicant has the necessary infrastructure and manpower to carry out the functions as a merchant banker.
  4. a minimum of two persons who have the experience to conduct the business of merchant banking should be under the employment of the applicant.
  5. the applicant fulfills the capital adequacy requirements. The capital adequacy requirement should not be less than the net worth of the applicant and the minimum shall be Rs.1,00,00,000 for category I merchant banking, Rs.50,00,000 for category II and Rs.20,00,000 for category III.
  6. the applicant should be professionally qualified in law, business or management.
  7. the applicant should not have been involved in any litigation involving the securities market.
  8. the applicant should not have been convicted of any offense involving moral turpitude.

Categories of Merchant Bankers

The following are the categories of merchant bankers:

1. Category I – can carry on all activities relating to management of issues such as preparation of prospectus, determining financial structure, conduct of market surveys, raising funds from capital market, raising of funds through new instruments, arranging bought out deals and to provide advice on: mergers and amalgamations, loan syndication, technology tie-ups, working capital finance, venture capital, lease finance, fixed deposit management, factoring, portfolio management of mutual funds, rehabilitation of sick units etc.

2. Category II – to act as advisor, consultant, co-manager, underwriter and portfolio manager.

3. Category III – to act as underwriter, advisor and consultant to an issue.

4. Category IV – to act only as advisor or consultant to an issue.

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