In the Indian context, the supervision and governance of merchant banking operations lie squarely within the purview of the Securities and Exchange Board of India (SEBI). As the paramount regulatory body, SEBI oversees the entire spectrum of activities within the nation’s securities market. This stewardship entails SEBI’s detailed development of a comprehensive and intricate regulatory framework, meticulously tailored to monitor and facilitate merchant banking operations’ functioning. The overarching objective of these regulatory endeavours is to preserve and fortify the robustness and soundness of the financial system.
In the subsequent sections of this article, we shall explore the meticulous oversight of merchant banking licences in India, encompassing essential facets like prerequisites for licensing, qualifying criteria, and the regulatory structure in place.
What is Merchant Banking?
Merchant banking constitutes a distinctive segment within the financial services industry, encompassing a spectrum of functions such as underwriting securities, providing financial counsel to enterprises on various economic issues, administration of investment portfolios, and aiding in capital procurement endeavours. The integral role of merchant bankers in the financial landscape revolves around facilitating the seamless movement of funds between investors and corporate entities.
Within the Indian context, the sphere of merchant banking has undergone substantial expansion over the years, mainly attributable to the impetus provided by economic reforms and the liberalisation of financial markets. To uphold this burgeoning sector’s effective and transparent operation, the Securities and Exchange Board of India (SEBI) has promulgated precise regulations delineating the parameters governing merchant banking undertakings.
Regulatory Framework for Merchant Banking
The regulatory framework for merchant banking in India is primarily governed by the SEBI (Merchant Bankers) Regulations, 1992. These regulations have been amended several times to keep pace with changing market dynamics and emerging challenges. The primary objectives of these regulations are as follows:
Licensing of Merchant Bankers:
SEBI regulates the licensing of merchant bankers, ensuring that only eligible and competent entities are allowed to engage in merchant banking activities and get merchant banking licence.
Conduct of Business:
The regulations specify the code of conduct and business practices that merchant bankers must adhere to. This includes guidelines on professional conduct, client confidentiality, and conflict of interest.
Disclosure and Transparency:
Merchant bankers are required to maintain transparency in their operations. They must make full disclosures to clients and the regulator regarding their financial status, activities, and any conflicts of interest.
Regulation of Public Issues:
SEBI regulates the merchant banker’s role in public issues of securities, ensuring that they comply with the necessary legal and regulatory requirements.
Requirements to get Merchant Banking Licence
To obtain a merchant banking licence in India, an entity must meet certain eligibility criteria and follow a rigorous application process. The key requirements for obtaining a merchant banking licence are as follows:
Eligibility Criteria:
- The applicant must be a company incorporated under the Companies Act, 1956 or 2013.
- The applicant should have a minimum net worth of INR 5 crores.
- The applicant must have at least one full-time director who possesses adequate experience and expertise in merchant banking activities.
Application Process:
- The applicant must submit a formal application to SEBI, providing detailed information about its structure, financials, and key personnel.
- SEBI reviews the application and may seek additional information or clarification.
- If the applicant meets all the eligibility criteria and complies with SEBI’s requirements, a merchant banking licence may be granted.
Ongoing Compliance:
- After obtaining a merchant banking licence, compliance with SEBI’s regulations is mandatory in day-to-day operations.
- SEBI conducts periodic inspections and audits to ensure adherence.
Roles and Responsibilities of Merchant Bankers
Merchant bankers in India carry a range of roles and responsibilities that SEBI regulates to safeguard the welfare of clients and the overall financial system. These encompass:
- Advisory Services: Merchant bankers provide advisory services to companies on various financial matters, including mergers and acquisitions, capital restructuring, and raising capital through public or private placements.
- Underwriting: They may underwrite the securities issued by companies, thereby guaranteeing the purchase of unsold shares in case of a public offering.
- Due Diligence: Merchant bankers are responsible for conducting due diligence on the issuer company to ensure that all relevant information is disclosed to investors during public issues.
- Documentation: They help in the preparation of offer documents, prospectuses, and other legal documentation required for public issues.
- Compliance: Merchant bankers must ensure that the issuer company complies with all applicable laws and regulations throughout the public issue process.
- Investor Relations: They play a crucial role in managing relations between the issuer company and its investors, addressing investor queries and concerns.
- Market Making: Certain merchant bankers also participate in market-making activities, aimed at furnishing liquidity to the securities they have undertaken for underwriting.
Code of Conduct and Ethics
SEBI has established a comprehensive code of conduct for merchant bankers to ensure ethical behaviour and integrity in the industry. Some of the critical elements of this code include:
- Confidentiality: Merchant bankers must safeguard sensitive client information.
- Conflict of Interest: Disclose and mitigate any conflicts of interest.
- Fair Dealing: Conduct business fairly and transparently with all parties.
- Diligence: Conduct thorough due diligence to provide accurate information.
- Investor Protection: Ensure investors are provided with accurate and complete information.
- Transparency: Maintain open and transparent communication.
- Continuous Learning: Stay updated with industry developments.
- Reporting Violations: Report any code violations, promoting accountability and ethics.
Regulatory Oversight and Enforcement:
SEBI exercises strict oversight and enforcement powers to ensure that merchant bankers comply with regulations. The regulatory authority can take various actions in case of non-compliance, including:
- Penalties: SEBI can impose fines and penalties on merchant bankers for violations of regulations.
- Suspension or Cancellation of License: In cases of serious or repeated violations, SEBI can suspend or cancel the merchant banking licence.
- Investigations: SEBI can initiate investigations into the activities of merchant bankers to uncover any malpractices or violations.
- Market Bans: It can bar individuals or entities from participating in the securities market for a specified period.
Recent Developments in Merchant Banking Regulation:
The regulatory framework for merchant banking in India continues to evolve to address emerging challenges and market dynamics. Some recent developments include:
- Digital Transformation: SEBI has encouraged the use of technology in merchant banking operations, allowing for the digital submission of documents and applications.
- Strengthening Investor Protection: SEBI has enhanced investor protection by requiring more transparent disclosures and better communication between issuers and investors.
- Green Initiatives: The regulator has encouraged merchant bankers to promote green finance and sustainable investments.
- Integration of Financial Technology (Fintech): SEBI acknowledges the significance of fintech within the financial sector and is actively developing regulatory frameworks to seamlessly incorporate fintech solutions into merchant banking operations.
Conclusion
The oversight of merchant banking licences in India holds immense significance in preserving the integrity and effectiveness of the financial system. SEBI’s extensive regulatory structure guarantees that only eligible entities partake in merchant banking endeavours and execute their activities professionally and honestly. SEBI remains agile as the financial environment transforms, revising and enhancing its regulations to align with the evolving market demands. This, in turn, translates to advantages for both investors and enterprises, underscoring the enduring importance of merchant banking in bolstering India’s capital markets, stimulating capital circulation, and fostering economic growth.
