by The regulatory framework governing merchant banking in India is comprehensive, ensuring that the activities of merchant bankers are conducted in a transparent, fair, and orderly manner. The primary regulatory authority overseeing merchant banking operations is the Securities and Exchange Board of India (SEBI), which plays a pivotal role in ensuring the protection of investor interests and maintaining the integrity of the capital markets.
Regulatory Authorities
The main regulatory authorities governing merchant banking activities in India:
- Securities and Exchange Board of India (SEBI):
SEBI is the apex regulatory authority for the capital markets in India. It regulates and supervises the functioning of merchant bankers in the country, ensuring that they comply with the norms and regulations laid out for investor protection and market integrity.
- Reserve Bank of India (RBI):
While the RBI primarily oversees the financial institutions and banking system in India, its policies can also impact merchant bankers, especially with regard to their activities related to financial products and services.
- Stock Exchanges (NSE, BSE):
The stock exchanges also play an essential role in ensuring that the activities of merchant bankers comply with the rules governing listing, trading, and market conduct.
Regulations by SEBI
SEBI regulates the operations of merchant bankers through the SEBI (Merchant Bankers) Regulations, 1992, which provide a comprehensive set of guidelines and compliance requirements for merchant bankers. These regulations are framed to ensure the smooth functioning of the capital markets, protect investors, and promote transparency. Some key provisions under the SEBI Merchant Bankers Regulations:
a) Registration of Merchant Bankers:
According to the SEBI (Merchant Bankers) Regulations, merchant bankers must register with SEBI before they can provide merchant banking services. This registration is mandatory and is categorized based on the nature of services provided and the level of operations:
- Category I Merchant Bankers: These can undertake all types of activities, including underwriting, management of public issues, portfolio management, etc.
- Category II Merchant Bankers: These can only perform certain activities like advisory services or private placements.
- Category III Merchant Bankers: These provide only specific services such as acting as intermediaries for private placements and advising clients on securities.
b) Eligibility and Net Worth Requirements:
SEBI has set certain eligibility criteria for entities to qualify as merchant bankers. These criteria include having a minimum net worth requirement, which ensures that merchant bankers have adequate financial strength to undertake their responsibilities. The minimum net worth requirements for different categories of merchant bankers are specified in the regulations.
c) Compliance with Code of Conduct:
Merchant bankers are required to follow a code of conduct as laid down by SEBI. This code includes ethical practices, proper conduct with clients, protection of investor interests, and transparency in dealings. Violations of this code may lead to penalties or suspension of registration.
Role of SEBI in Regulation:
SEBI ensures that merchant bankers comply with a range of regulatory requirements:
- Disclosure and Reporting Obligations:
Merchant bankers must ensure full disclosure of relevant information to investors. They are also required to report to SEBI and stock exchanges regarding the progress and status of public issues, IPOs, and FPOs.
- Due Diligence Requirements:
Merchant bankers must conduct thorough due diligence for public offerings to ensure the authenticity of the information provided by the issuer. They need to ensure that all disclosures made in the prospectus are true, complete, and accurate.
- Investor Protection:
Merchant bankers must act in the best interest of investors, safeguarding their rights and ensuring they are fully informed about the risks associated with an offering. The protection of investor interests is a top priority for SEBI.
- Handling of Complaints and Grievances:
Merchant bankers are responsible for handling complaints and grievances from investors. SEBI monitors these complaints and takes action against any entity found in violation of regulations.
Other Key Regulations:
Apart from the SEBI (Merchant Bankers) Regulations, other important regulations impacting merchant bankers:
-
SEBI (Issue of Capital and Disclosure Requirements) Regulations (ICDR), 2018:
These regulations govern the process of public offerings, including IPOs, rights issues, and private placements. Merchant bankers play an essential role in managing these offerings, ensuring compliance with disclosure norms and other requirements.
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:
These regulations govern the acquisition of shares and control of listed companies. Merchant bankers assist companies in navigating these regulations during mergers, acquisitions, and takeover bids.
- SEBI (Prohibition of Insider Trading) Regulations, 2015:
Merchant bankers are required to adhere to insider trading regulations and ensure that any confidential or material non-public information is not misused for trading purposes.
Role of Stock Exchanges:
Stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) play an essential role in the functioning of merchant bankers. They provide the platform for listing, trading, and settling securities. Merchant bankers must adhere to the listing and trading rules set by the exchanges for the securities they manage or advise on.
