The legal and operational framework governing merchant bankers is covered by-

1. Securities and Exchange Board of India (Merchant Bankers) Rules, 1992, and

2. Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992

The aforesaid Rules defines the term as under:

"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 as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management;

The term Issue is defined as - "issue' means -

1. public offer of securities for sale;

2. sale or purchase of securities or transfer thereof by any other means, by any body corporate or any person on his own behalf or on behalf of the body corporate through a merchant banker;

As per Rule No.3 of the aforesaid Rules "No person shall carry on any activity as a merchant banker unless he holds a certificate granted by the Board under the regulations".

The Board may grant or renew a certificate to a merchant banker subject to the following conditions, namely;

1. the merchant banker, in case of any change in its status and constitution, shall obtain the prior permission of the Board to carry on its activities as a merchant banker'

2. he shall pay the amount of fees for registration or renewal, as the case may be, in the manner provided in the regulations;

3. he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received;

4. he shall abide by the rules and regulations made under the Act in respect of the activities carried on by the merchant banker.

5. The certificate of registration or its renewal, as the case may be, issued under rule 4 shall be valid for a period of three years from the date of its issue to the applicant as per Rule 5.

1. An application by a person for grant of a certificate shall be made to the Board in Form A given in the Schedule of the Regulations

2. The application under sub- regulation (1) shall be made for any one of the following categories of the merchant banker namely:-

   1. Category I, that is -

      1. to carry on any activity of the issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and

      2. to act as adviser, consultant, manager, underwriter, portfolio manager.

   2. Category II, that is, to act as adviser, consultant, co- manager, underwriter, portfolio manager;

   3. Category III, that is to act as underwriter, adviser, consultant to an issue;

   4. Category IV, that is to act only as adviser or consultant to an issue.

2. A) Notwithstanding anything contained in this regulation, with effect from 9th December, 1997,

   1. an application under sub-regulation (2) can be made only for carrying on the activities mentioned in clause (a) therein, and

   2. an applicant can carry on the activity as underwriter only if he obtains separate certificate of registration under the provisions of Securities and Exchange Board of India (Underwriters) Regulations, 1993, and

   3. (iii) an applicant can carry on the activity as portfolio manager only if he obtains separate certificate of registration under the provisions of Securities and Exchange Board of India (Portfolio Manager) Regulations, 1993.

The Board shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely: -

1. the applicant shall be a body corporate other than a non- banking financial company as defined under clause (f) of section 45-I of the Reserve Bank of India Act, 1934, (2 of 1934) as amended from time to time,

       Provided that the merchant banker who has been granted registration by the Reserve Bank of India to act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit.

aa) the applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities;

2. the applicant has in his employment minimum of two persons who have the experience to conduct the business of the merchant banker;

3. a person directly or indirectly connected with the applicant has not been granted registration by the Board;

Explanation:

For the purposes of this clause the expression "directly or indirectly connected" means any person being an associate, subsidiary, inter-connected or group Company of the applicant in case of the applicant being a body corporate.

4. the applicant fulfils the capital adequacy requirement specified in regulation 7;

5. the applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant;

6. the applicant, his director, partner or principal officer has not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence;

7. the applicant has the professional qualification from an institution recognised by the Government in finance, law or business management;

gg) the applicant is a fit and proper person,

8. grant of certificate to the applicant is in the interest of investors.

1. The capital adequacy requirement referred to in sub- regulation (d) of regulation 6 shall not be less than the net worth of the person making the application for grant of registration.

2. For the purposes of sub- regulation (1), the networth shall be as follows, namely: -

Explanation:

For the purposes of this regulation "networth" means in the case of an applicant which is a partnership firm or a body corporate, the value of the capital contributed to the business of such firm or the paid up capital of such body corporate plus free reserves as the case may be at the time of making application under sub-regulation (1) of regulation 3.

Every merchant banker shall abide by the Code of Conduct as specified in Schedule III of the Regulation (Regulation 13)

    Provided that a merchant banker who has been granted certificate of registration to act as primary or satellite dealer by Reserve Bank of India, may carry on such business as may be permitted by Reserve Bank of India

Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:(Regulation 14.(1))

1. a copy of balance sheet as at the end of each accounting period;

2. a copy of profit and loss account for that period;

3. a copy of the auditor's report on the accounts for that period; and

4. a statement of financial position.

Every merchant banker shall, after the end of each accounting period furnish to the Board copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the Board

Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker.

1. All issues should be managed by at least one merchant banker functioning as the lead merchant banker:

       Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential.

2. Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund.

No merchant banker, other than a bank or a public financial institution, who has been granted a certificate of registration under these regulations shall after June 30th, 1998 carry on any business other than that in the securities market.

The number of lead merchant bankers may not, exceed in case of any issue as per table below

1. No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription:

       Provided that, where there are more than one lead merchant bankers to the issue the responsibilities of each of such lead merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription.

2. No lead merchant banker shall, agree to manage the issue made by any body corporate, if such body corporate is an associate of the lead merchant banker.

A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue (Regulation 21)