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Department of Management Studies, GCEM
Services of Merchant Banking
ß Corporate Counseling
ß Project Counseling
ß Capital Restructuring Services
ß Credit Syndication
ß Issue Management and Underwriting
ß Portfolio Management
ß Working capital Finance
ß Merger and Acquisition
ß Venture Financing
ß Lease financing
ß Mutual Finance
ß Relief to sick Industries
ß Project Appraisal
ß SEBI Guidelines for Merchant Banking
ß All merchant bankers will require authorization by SEBI to carry out business.
ß An initial authorization fee, an annual fee and renewal fee may be collected by SEBI.
ß All issue must be managed at least by on authorized banker.
ß Each merchant banker is required to furnish to the SEBI half yearly unaudited financial
result.
ß SEBI has prescribed the code of conduct for the each merchant banker.
ß SEBI has the power to suspend or cancel the authorization in case of violation.
ß To ensure the transference and accountability in operation of the merchant banker and
protect the investors.
ß Inspections will be conducted by SEBI to ensure that provisions of the regulation are
properly complied.
Issue management
Issue management involves marketing of corporate securities, like equity share, preference
shares and debentures or bonds by offsetting them to public. Merchant banks act as intermediary
whose main jobs are to transfer capital from those who own it to those who need it.
Equity issues
Equity issue otherwise known as Public issue or Initial public Offering. It is a marketable of
securities to general public. Under this method, the issuing company directly offers to the general
public or institutions a fixed number of shares at a stated price through a document called
prospectus. This is the most common method followed by joint stock companies to raise capital
through the issue of security.
Principal steps of a Public Issue
Public issue, as already stated refers to the issue of new share to the public. The new shares or
debentures may be offered either directly to the public through a prospectus (offer document)or
indirectly through an offer for sale involving financial intermediaries or issuing houses.
The main steps involved in public issue are the following:
i) Draft prospectus
A draft prospectus is prepared giving all details as mentioned earlier. Any company or a listed
company making a public issue or a right issue of value of more than Rs.50, 00,000 has to file a
draft offer document with SEBI for its observation. The company can proceed further only after
getting observations from the SEBI. The company has to open its issue within three months from.
vi) Brokers to the issue
Then recognized members of the stock exchanges are appointed as brokers to the issue for
marketing the issue. They are eligible for a maximum brokerage of 1.5%
vii) Filling of documents: The draft prospectus along with the copies of the agreements entered
into with the lead manager, underwriter, banker, registrars and brokers to the issue have to be
filed with the registrar of companies of the state where the registered office of the company is
located.
viii) Printing of Prospectus and Application forms
After filling the above documents, the prospectus and application forms are printed and
dispatched to all merchant bankers, underwriters and brokers to the issue.
ix) Listing the issue
It is essential to send a letter to the stock Exchange concerned where the issue is proposed to be
listed giving all necessary details and stating the intention of getting the shares listed on the stock
exchange. The initial listing application has to be sent with a fee of Rs. 7,500.
x) Publication in Newspapers
The next step is to publish an abridged version of the prospectus and the issue‟s commencing
andclosing dates in major English dailies and vernacular newspapers.
xi) Allotment of shares
After the close of the public issue all application forms are scrutinized, tabulated and then shares
are allotted against those applications received.
xii) Underwriters Liability
In case, the issue is not fully subscribed, then the liability for the subscription to the extent of
under subscription falls on the shoulders of underwriters who have to subscribe to the shortfall.
SEBI guidelines for equity issue
∑ Disclose to be made in the prospectus
∑ Company profile
∑ Pricing of issue
∑ Promoters contribution
∑ Issue of convertible
∑ Proportionate allotment of shares
∑ Firm allotment to mutual funds, foreign institutional investors and financial institution
∑ Underwriting has been made mandatory
∑ The collection center and collection agencies.
Pre issue and Post issue obligations
Pre-Issue Obligations
∑ Documents to be submitted along with Offer Document by the Lead Manager
∑ MOU
∑ Inter-se Allocation of Responsibilities
∑ Diligence Certificate
∑ Certificates signed by Company Secretary or Chartered Accountant
∑ List of Promoters‟ Group & other details
∑ Promoter individual shareholding.
∑ Stock exchanges on which securities proposed to be listed, Permanent A/c No.
By „promoter‟, „promoter group‟ & relatives of „promoters‟ b/w date of filling offer
documents & date of closure of issue.
∑ Appointment of Intermediaries
∑ Merchant Banker not lead manage issue:
∑ If he is a promoter or a director of issuer company.
∑ Can manage if securities listed/proposed to be listed on OTCEI.
∑ Merchant Banker lead manage issue:
∑ Associate of Issuer Company.
∑ Involved in marketing of issue.
Underwriting: The lead merchant banker shall satisfy themselves about the ability of the
underwriters to discharge their underwriting obligations. The lead merchant banker shall:
∑ Incorporate a statement in the offer document to the effect that in the opinion of the
lead merchant banker, the underwriters ‟ assets are adequate to meet their
underwriting obligations.
∑ Obtain the underwriters written consent before including their names as underwriter’s
inthe final offer document. In respect of every underwritten issue, the lead merchant
bankershall undertake a minimum underwriting obligation of 5% of the total
underwritingcommitment or Rs. 25 Lakhs, whichever is less .Offer document to be
made public the draft offer document filed with the SEBI shall be made public for a
period of 21 days, from the date of filing the offer document with the SEBI.
The lead merchant banker shall:
1. While filing the draft- offer document with the board can also file the draft offer document
with the stock exchange.
2. While filing the copy of the red-herring prospectus, prospectus or letter of offer , as thecae
may be , with the board, can also file the copy of red herring prospectus , prospectus with the
stock exchange.
3. Make copies of the draft offer-document available to the public and final-offer documents on
the websites of all the lead managers associated with the issue No complaint certificate After a
period of 21 days from the date the draft offer document was made public , the lead merchant
banker shall file a statement with the board:
1. Giving a list of complaints received by it.
2. A statement whether it is proposed to amend or not
Mandatory collection centres the minimum number of collection centres for an issue of capital
shall be:
∑ The four metropolitan centre situated at Mumbai, Delhi , Calcutta and Chennai,
∑ All such canters where stock exchange are located in the region in which the registered
office of the company is situated.
∑ The regional division of collection centres.
Authorized collection agents: The issuer company can appoint authorized collection agents in
consultation with the lead merchant banker, subject to necessary disclosures including the names
and addresses of such agents are made in the offer document. The collection agents may collect
such applications, as are accompanied by payment of application monies paid by cheque, drafts.
The application forms, along with the duly reconciled schedules, shall be forwarded by the Agreements with depositors the lead manager shall ensure the issuer company have entered into
agreements with all the depositories for dematerialization of securities. He shall also ensure that
an option be given to the investors to receive the allotment of securities in a dematerialized form,
through any of the depositors.
Post-Issue Obligations
Post issue monitoring reports the post issue lead merchant banker shall
ensurethesubmissionofthepost issue monitoring reports Due-diligence certificate to be submitted
with the final postissue monitoring report. The post issue lead merchant banker shall file a
duediligence certificatein the format specified along with the final post issue monitoring
reportRedressal of the investor grievances the post-issue lead merchant banker shall actively
associatehimself with post-issue activities namely allotment, refund and despatch and
shallregularly
monitor redressal of investor. Coordination with the intermediaries the post-issue lead
merchantbanker shall maintain close coordination with the Registrars to the Issue. Any act of
omission orcommission on the part of intermediaries shall be reported to the BoardUnderwriters
the lead merchant banker shall satisfy himself that the issue is fully subscribedbefore announcing
closure of the issue the lead merchant banker shall ensure that theunderwriters honor their
commitment within 60 days from the date of closure of the issue. Thelead merchant banker shall
furnish information in respect of underwriters who failed to meettheir underwriting
developments
Bank to issue: The post-issue lead merchant banker shall ensure that moneys received
pursuantto the issue are kept in a separate bank (i.e Bankers to issue) as per the provisions of
section73(3) of the companies act, 1956. Post issue advertisements Post- issue lead merchant
bankershall ensure that in all issues, advertisement giving details relating to oversubscription,
basis onallotment, number, value and percentage of application received etc. is released within
10 days.Basis of allotment in a public issue of securities, the managing director along with the
leadmerchant banker and the registrar to an issue, shall ensure that basis of allotments is finalized
ina fair and proper manner Proportionate-allotment Procedure an allotment shall be made on
aproportionate basis within the specified categories. The proportionate allotments of securities in
an issue that is over subscribed shall be subject to reservation for their tail individual investors as
described in the following:
A minimum 50% of the net offer of securities to the public shall initially be made available
forthe allotment to retail individual investors as the case may be the balance net offer of
securities
to the public shall be made available for allotment to:
a) Individual applicants other than retail individual investors
b) Other investors including corporate bodies/institutions, irrespective of the number of shares,
debentures and so on, applied for.
SEBI Guidelines for Debenture Issue
The amount of working capital debenture should not exceed 20% of the gross current assets.
∑ The debt equity ratio should not exceed 2:1
∑ The rate of interest can be decided by the company
∑ Credit rating is compulsory for all debentures excepting debentures issued by public
sector
∑ Companies, private placement of Non-convertible Debenture (NCD) with financial
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