NISM Series III A – Merchant Bankers, Takeovers, Delisting, Underwriters and ICDR Regulations
Welcome to Part 10 of the NISM Series III A Short Notes series on PassNISM.in. This post covers four important regulatory chapters for the NISM Series III A exam:
- SEBI (Merchant Bankers) Regulations, 1992
- SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011
- SEBI (Underwriters) Regulations, 1993
- SEBI (Issue of Capital and Disclosure Requirements / ICDR) Regulations, 2009
SEBI (Merchant Bankers) Regulations, 1992 Who Is a Merchant Banker?
A merchant banker is any person engaged in the business of issue management — either by making arrangements regarding selling, buying, or subscribing to securities, or by acting as manager, consultant, adviser, or rendering corporate advisory services in relation to such issue management.
Primary Activities of Merchant Banks
- Providing fee-based advice to corporations and governments on issuance of securities
- Financing foreign trade
- Underwriting of equity issues
- Portfolio management
- Undertaking foreign security and loan business
- Project appraisal
Capital Adequacy Requirements for Merchant Bankers
Under Regulation 7 of the SEBI (Merchant Bankers) Regulations, applicants seeking registration must have a net worth of not less than ₹5 crore. Net worth here means paid-up capital and free reserves at the time of application.
Restriction on Business Activities
The SEBI (Merchant Bankers) Regulations restricts merchant bankers from associating with any business other than that of the securities market.
Solvency and Financial Stability
Maintaining solvency and financial stability is critical to the merchant banking business. Regulation 14 specifies the requirements that a merchant banker must comply with in this regard.
SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011
The acquirer company is required to appoint a SEBI-registered Merchant Banker as manager to the open offer before making any public announcement. Key requirements:
- The merchant banker must not be an associate or group entity of the acquirer or the target company
- For a voluntary offer, the public announcement must be made on the same day the acquirer decides to make it
- After the public announcement, a detailed public statement must be published within the time prescribed by the regulations
SEBI (Bankers to an Issue) Regulations, 1994
Key compliance requirements for Bankers to an Issue:
- Must maintain all required records for a minimum period of 8 years
- Must furnish required information to SEBI on demand
- Must appoint a Compliance Officer responsible for monitoring regulatory compliance and redressal of investor grievances
- Must enter into an agreement with the body corporate for which they are acting as banker to an issue
SEBI (Underwriters) Regulations, 1993
An underwriter is a person who engages in the business of underwriting issues of securities of a body corporate. Key points:
- Merchant bankers generally register themselves as underwriters with SEBI
- The certificate of registration is valid unless suspended or cancelled by SEBI
- Capital adequacy requirement: net worth must be not less than ₹20 lakh
- A stock broker who acts as underwriter must also fulfill the capital adequacy requirements of their stock exchange
- Every underwriter must enter into an agreement with each body corporate on whose behalf they underwrite
- The underwriter must also inform SEBI about the place where their books, records, and documents are maintained
SEBI (Issue of Capital and Disclosure Requirements / ICDR) Regulations, 2009
The ICDR Regulations lay down general conditions for capital market issuances — IPOs, rights issues, FPOs, QIPs, preferential issues, bonus issues, and IDRs.
Applicability of ICDR Regulations
SEBI ICDR applies to:
- Initial Public Offer (IPO) by an unlisted issuer
- Rights issue by a listed issuer where aggregate value is ₹10 crore or more
- Further Public Offer (FPO) by a listed issuer
- Preferential issue by a listed issuer
- Qualified Institutions Placement (QIP) by a listed issuer
- Initial Public Offer of Indian Depository Receipts (IDRs)
- Rights issue of IDRs
- IPO by a Small and Medium Enterprise (SME)
- Listing on the Innovators Growth Platform — through an issue or without an issue
- Bonus issue by a listed issuer
Allocation of Responsibilities
Lead merchant bankers are required to make inter-se allocation of responsibilities and disclose the same in the offer document. These allocations are notified under Schedule I of the ICDR Regulations.
Disclosures in the Offer Document
- The draft offer document and offer document must contain all material disclosures that are true and adequate for applicants to make informed investment decisions
- The lead manager must exercise due diligence and verify the veracity and adequacy of all disclosures
Pricing of Public Issues
- The issuer determines the price of equity shares in consultation with lead manager(s) or through the book building process
- Differential Pricing: The issuer may offer specified securities at different prices subject to certain conditions
Role of the Merchant Banker (Lead Manager) in ICDR
- Due Diligence: Responsible for carrying out due diligence on the issuer company — covering all business, legal, and financial aspects. Files due diligence certificates with SEBI at various stages
- Drafting of Offer Document: Ensures all disclosures in the offer document are true, fair, accurate, and complete
- Drafting of Letter of Offer: The letter of offer must contain all material disclosures adequate for informed investment decision-making
Public Availability of Draft Offer Document
The draft offer document submitted to SEBI must be made public — by hosting it on the websites of SEBI, the relevant stock exchanges, and the merchant bankers — for at least 21 days from the date of filing.
Post-Issue Responsibilities
- The post-issue merchant banker is responsible for all post-issue activities until:
- Subscribers have received securities certificates or demat credits
- Refund of application money is completed
- The listing agreement is entered into and listing/trading permission is obtained
- The lead merchant banker is responsible for dispatching the issue material — offer document, ASBA forms — to all relevant parties in advance
Post-Issue Reports
- Initial post-issue report: submitted within 3 days of closure of the issue
- Final post-issue report: submitted within 15 days of the date of finalization of basis of allotment
General Obligations of Merchant Bankers
- No Incentives: No person connected with the issue can offer any incentive (direct or indirect, in cash or kind) for making applications for allotment
- Research Reports: No public communication, advertisement, research report, or publicity material containing projections or estimates may be issued during the issue period
- Investor Grievances: Post-issue lead merchant bankers must handle allotment, refund, and dispatch; coordinate with syndicate members, SCBs, and other intermediaries
- Post-Issue Advertisements: The post-issue merchant banker must ensure that no advertisements state the issue has been oversubscribed or indicate investor response during the subscription period
Role as Underwriter in Public Issues
Underwriting is an agreement to subscribe to the securities of an issuer when existing shareholders or the public do not subscribe to them. When an issuer makes a public issue (other than through the book building process) or rights issue and wishes to have the issue underwritten, underwriters must be appointed under the SEBI (Underwriters) Regulations, 1993.
Quick Revision – Key Numbers for ICDR and Merchant Banker Chapters
| Fact | Detail |
|---|---|
| Rights issue applicability threshold | Aggregate value ₹10 crore or more |
| Draft offer document public availability period | At least 21 days |
| Initial post-issue report submission | Within 3 days of issue closure |
| Final post-issue report submission | Within 15 days of allotment finalization |
| Merchant banker minimum net worth | ₹5 crore |
| Underwriter minimum net worth | ₹20 lakh |
| Banker to an issue – record retention | Minimum 8 years |
Frequently Asked Questions (FAQs) What is the minimum net worth required to register as a merchant banker?
The minimum net worth requirement for registration as a merchant banker is ₹5 crore (paid-up capital plus free reserves).
For how long must a banker to an issue maintain records?
A banker to an issue must maintain all required records for a minimum period of 8 years.
What is the ICDR regulation applicability for rights issues?
ICDR Regulations apply to rights issues by listed issuers where the aggregate value of the issue is ₹10 crore or more.
Continue to Part 11: Depositories Act 1996 and SEBI (Depositories and Participants) Regulations 1996.
NISM Series III A – Depositories Act 1996 and SEBI (Depositories and Participants) Regulations 1996
Welcome to Part 11 of the NISM Series III A Short Notes series on PassNISM.in. This post covers:
- Chapter XV: Depositories Act, 1996
- Chapter XVI: SEBI (Depositories and Participants) Regulations, 1996
Depositories Act, 1996 Purpose of the Depositories Act
The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy, and security through:
- Making securities freely transferable (subject to certain exceptions)
- Enabling dematerialization of securities in the depository mode
- Providing for maintenance of ownership records in a book entry form
The Act facilitates electronic transfer of ownership of securities through book entries, restricting companies from using discretion in effecting transfers. It also dispensed with procedural and transfer deed requirements under the Companies Act.
Enquiry and Inspection
SEBI may call upon any issuer, depository, depository participant, or beneficial owner to furnish information relating to securities held in a depository. SEBI may also authorize any person to make an enquiry or inspection in relation to the affairs of the issuer, beneficial owner, or depository participant, who must submit a report within the specified period.
Penalties – Section 19A
Section 19A of the Depositories Act lays down penalties for failure to furnish information, returns, or other requirements by any person subject to the Act or rules, regulations, or bye-laws made thereunder.
Composition of Certain Offences
Any offence punishable under the Depositories Act — not being one punishable with imprisonment only or with both imprisonment and fine — may be compounded by SAT or a court before which proceedings are pending. This can be done before or after the institution of any proceeding.
Power to Grant Immunity
The Central Government may, on SEBI's recommendation, grant immunity from prosecution or penalty to a person alleged to have violated the Depositories Act, provided:
- The person has made a full and true disclosure of the alleged violation
- Prosecution proceedings have not already been initiated before the immunity application is received
Appeals Under the Depositories Act
- Appeals to SAT: Any person aggrieved by an order of SEBI or an Adjudicating Officer (AO) may appeal to SAT. No appeal lies to SAT from an order made with the consent of the parties.
- Appeals to Supreme Court: Any person aggrieved by a SAT order may file an appeal to the Supreme Court within 60 days from the date of communication of the SAT order, on any question of law. The Supreme Court may allow up to an additional 60 days if satisfied.
SEBI (Depositories and Participants) Regulations, 1996
The relationship between Depository Participants (DPs) and the depository is governed by an agreement made under the Depositories Act, 1996, the SEBI (Depositories and Participants) Regulations, 1996, and the bye-laws of the depository.
Before commencing business, a DP must be registered with SEBI as a Depository Participant.
Registration of Depository Participants
- DPs must register with SEBI
- Registration applications must be routed through the concerned depository
- The certificate of registration is valid for 5 years and must be renewed thereafter
Record of Services – DPs Must Maintain
- Records of all transactions with the depository and clients (beneficial owners)
- Details of securities dematerialized and rematerialized on behalf of clients
- Records of instructions received from clients and statements of account provided to clients
- Records of approval, notice, entry, and cancellation of pledge or hypothecation
Investor Grievance Redressal
Depository participants must redress investor grievances within 30 days of receiving the complaint. They must also keep the depository informed about the number and nature of grievances redressed and pending.
Investment Advice Restriction
A DP or any of its employees must not directly or indirectly render investment advice about any security in publicly accessible media — whether real-time or not — unless they have disclosed their interest (including long or short position) in the security while rendering such advice.
Compliance Officer – DP Obligation
Every DP must appoint a Compliance Officer responsible for monitoring compliance with all applicable acts, rules, regulations, notifications, and guidelines, and for redressing investor grievances.
Duties During Inspection
When the affairs of a DP are being inspected or investigated, it is the DP's duty to produce all books, accounts, securities, records, and other documents, and to furnish all statements and information within the time specified by the inspecting officer.
Default by a Depository or DP
Any depository or DP that defaults is dealt with under Chapter V of the SEBI (Intermediaries) Regulations, 2008.
Code of Conduct for DPs
Regulation 20A of the Third Schedule of the SEBI (Depositories and Participants) Regulations, 1996 prescribes the Code of Conduct for depository participants.
Quick Revision – Key Numbers and Timelines
| Fact | Detail |
|---|---|
| DP registration validity | 5 years (must be renewed thereafter) |
| Investor grievance redressal by DP | Within 30 days of receipt |
| Appeal to Supreme Court against SAT order | Within 60 days (extension of up to 60 more days possible) |
| Default proceedings for DPs | Governed by Chapter V, SEBI (Intermediaries) Regulations, 2008 |
Frequently Asked Questions (FAQs) What is the main purpose of the Depositories Act, 1996?
The Depositories Act enables free, accurate, and secure transfer of securities in electronic (dematerialized) form, through book entries rather than physical transfer deeds.
For how long is a DP's registration certificate valid?
A Depository Participant's certificate of registration is valid for 5 years, after which it must be renewed.
Within how many days must a DP redress investor grievances?
A DP must redress investor grievances within 30 days of receiving the complaint.
Can a DP employee give investment advice?
A DP or its employees must not render investment advice on any security in publicly accessible media without disclosing their interest (long or short position) in that security.
Continue to Part 12: SEBI (Registrars to an Issue), Research Analyst and Investment Adviser Regulations.