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NISM-Series-IX: Merchant Banking Certification Examination

Workbookfor

NISMSeriesIX:MerchantBanking

CertificationExamination

NationalInstituteofSecuritiesMarkets
www.nism.ac.in

NISM-Series-IX: Merchant Banking Certification Examination


ThisworkbookhasbeendevelopedtoassistcandidatesinpreparingfortheNationalInstitute
ofSecuritiesMarkets(NISM)CertificationExaminationforMerchantBanking.

WorkbookVersion:August2015

Publishedby:

NationalInstituteofSecuritiesMarkets

NationalInstituteofSecuritiesMarkets,2015

Plot82,Sector17,Vashi

NaviMumbai400703,India

Allrightsreserved.Reproductionofthispublicationinanyformwithoutpriorpermissionofthe
publishersisstrictlyprohibited.

NISM-Series-IX: Merchant Banking Certification Examination


Foreword

NISM is a leading provider of high end professional education, certifications, training and
research in financial markets. NISM engages in capacity building among stakeholders in the
securities markets through professional education, financial literacy, enhancing governance
standardsandfosteringpolicyresearch.NISMworkscloselywithallfinancialsectorregulators
intheareaoffinancialeducation.

NISM Certification programs aim to enhance the quality and standards of professionals
employedinvarioussegmentsofthefinancialservicessector.NISMsSchoolforCertificationof
Intermediaries (SCI) develops and conducts certification examinations and Continuing
ProfessionalEducation(CPE)programsthataimtoensurethatprofessionalsmeetthedefined
minimumcommonknowledgebenchmarkforvariouscriticalmarketfunctions.

NISM certification examinations and educational programs cater to different segments of


intermediariesfocusingonvariedproductlinesandfunctionalareas.NISMCertificationshave
establishedknowledgebenchmarksforvariousmarketproductsandfunctionssuchasEquities,
MutualFunds,Derivatives,Compliance,Operations,AdvisoryandResearch.

NISMcertificationexaminationsandtrainingprogramsprovideastructuredlearningplanand
career path to students and job aspirants who wish to make a professional career in the
Securities markets. Till May 2015, NISM has certified nearly 4 lakh individuals through its
CertificationExaminationsandCPEPrograms.

NISM supports candidates by providing lucid and focused workbooks that assist them in
understandingthesubjectandpreparingforNISMExaminations.Thisbookcoversallimportant
aspectsofthefunctioningoftheMerchantBankers.Theseincludethebasicunderstandingof
theIndiansecuritiesmarkets;variousterminologiesusedintheissuemanagementprocess;the
process of issue management and underwriting; general obligations and due diligence to be
taken care of during the issue management process; the role of merchant bankers in
acquisitions, takeovers,buyback ofsecurities, disinvestment etc. This book will beimmensely
usefultoallthosewhowanttolearnaboutthevariousfunctionalaspectofMerchantBankers.

SandipGhose
Director

NISM-Series-IX: Merchant Banking Certification Examination


Disclaimer

The contents of this publication do not necessarily constitute or imply its endorsement,
recommendation, or favoring by the National Institute of Securities Market (NISM) or the
SecuritiesandExchangeBoardofIndia(SEBI).Thispublicationismeantforgeneralreadingand
educationalpurposeonly.

The statements/explanations/concepts are of general nature and may not have taken into
accounttheparticularobjective/move/aim/need/circumstancesofindividualuser/reader/
organization/ institute. Thus NISM and SEBI do not assume any responsibility for any wrong
moveoractiontakenbasedontheinformationavailableinthispublication.

Thereforebeforeactingonorfollowingthestepssuggestedonanythemeorbeforefollowing
any recommendation given in this publication user/reader should consider/seek professional
advice.

The publication contains information, statements, opinions, statistics and materials that have
beenobtainedfromsourcesbelievedtobereliableandthepublishersofthistitlehavemade
besteffortstoavoidanyerrors.However,publishersofthismaterialoffernoguaranteesand
warrantiesofanykindtothereaders/usersoftheinformationcontainedinthispublication.

Sincetheworkandresearchisstillgoingoninalltheseknowledgestreams,NISMandSEBIdo
notwarrantthetotalityandabsoluteaccuracy,adequacyorcompletenessofthisinformation
andmaterialandexpresslydisclaimanyliabilityforerrorsoromissionsinthisinformationand
material herein. NISM and SEBI do not accept any legal liability what so ever based on any
informationcontainedherein.

While the NISM Certification examination will be largely based on material in this workbook,
NISMdoesnotguaranteethatallquestionsintheexaminationwillbefrommaterialcovered
herein.

Acknowledgement

This workbook has been developed by NISM in consultation with Association of Investment
Bankers of India (AIBI) and cooperation with the Examination Committee for NISMSeriesIX:
MerchantBankingCertificationExaminationconsistingofnominatedrepresentativesfromthe
AIBI.NISMgratefullyacknowledgesthecontributionofAIBIandallthecommitteemembers.

AbouttheAuthor

ThisworkbookhasbeendevelopedbytheCertificationTeamofNationalInstituteofSecurities
Markets.ThisworkbookhasbeenreviewedbyMs.RamadeviIyer,CompanySecretary.

NISM-Series-IX: Merchant Banking Certification Examination


AboutNISM

NationalInstituteofSecuritiesMarkets(NISM)wasestablishedbytheSecuritiesandExchange
BoardofIndia(SEBI),inpursuanceoftheannouncementmadebytheFinanceMinisterinhis
BudgetSpeechinFebruary2005.

SEBI, by establishing NISM, articulated the desire expressed by the Government of India to
promotesecuritiesmarketeducationandresearch.

Towards accomplishing the desire of Government of India and vision of SEBI, NISM delivers
financial and securities education at various levels and across various segments in India and
abroad. To implement its objectives, NISM has established six distinct schools to cater to the
educational needs of various constituencies such as investors, issuers, intermediaries,
regulatorystaff,policymakers,academiaandfutureprofessionalsofsecuritiesmarkets.

NISM is mandated to implement Certification Examinations for professionals employed in


varioussegmentsoftheIndiansecuritiesmarkets.

NISM also conducts numerous training programs and brings out various publications on
securities markets with a view to enhance knowledge levels of participants in the securities
industry.

AboutNISMCertifications

The School for Certification of Intermediaries (SCI) at NISM is engaged in developing and
administering Certification Examinations and CPE Programs for professionals employed in
varioussegmentsoftheIndiansecuritiesmarkets.TheseCertificationsandCPEProgramsare
beingdevelopedandadministeredbyNISMasmandatedunderSecuritiesandExchangeBoard
ofIndia(CertificationofAssociatedPersonsintheSecuritiesMarkets)Regulations,2007.

Theskills,expertiseandethicsofprofessionalsinthesecuritiesmarketsarecrucialinproviding
effective intermediation to investors and in increasing the investor confidence in market
systemsandprocesses.TheSchoolforCertificationofIntermediaries(SCI)seekstoensurethat
market intermediaries meet defined minimum common benchmark of required functional
knowledge through Certification Examinations and Continuing Professional Education
Programmes on Mutual Funds, Equities, Derivatives Securities Operations, Compliance,
ResearchAnalysis,InvestmentAdviceandmanymore.

Certificationcreatesqualitymarketprofessionalsandcatalyzesgreaterinvestorparticipationin
themarkets.Certificationalsoprovidesstructuredcareerpathstostudentsandjobaspirantsin
thesecuritiesmarkets.

NISM-Series-IX: Merchant Banking Certification Examination


AbouttheWorkbook

ThisworkbookhasbeendevelopedtoassistcandidatesinpreparingfortheNationalInstitute
of Securities Markets (NISM) Certification Examination for Merchant Banking. NISMSeriesIX:
Merchant Banking Certification Examination seeks to create a common minimum knowledge
benchmark for employees working with SEBI registered Merchant Bankers and performing
various SEBI regulated functions such as those relating to IPO, FPO, Open offer, Buyback,
Delistingetc.,andareinvolvedin,ordealwithanyofthefollowing:
Theinvestors,issuersorclientsofintermediaries
Assetsorfundsofinvestorsor clients
Redressalofinvestorgrievances
Internalcontrolorriskmanagement
Activitieshavingabearingonoperationalrisk
Maintainbooksandrecordspertainingtoaboveactivities.
The book covers various aspects of capital market functions, the importance of the different
rules and regulations governing the Indian securities market and the processes involved in
various functions of registered Merchant Bankers and the regulatory environment in which it
operates.

NISM-Series-IX: Merchant Banking Certification Examination


AbouttheCertificationExaminationforMerchantBanking

In order to create a common minimum knowledge benchmark for employees working with SEBI
registeredMerchantBankersandperformingvariousSEBIregulatedfunctionssuchasthoserelatingto
IPO,FPO,Openoffer,Buyback,Delistingetc.,andareinvolvedin,ordealwithanyofthefollowing:
Theinvestors,issuersorclientsofintermediaries
Assetsorfundsofinvestorsor clients
Redressalofinvestorgrievances
Internalcontrolorriskmanagement
Activitieshavingabearingonoperationalrisk
Maintainbooksandrecordspertainingtoaboveactivities.
Theexamwillfurtherseektoensurebasicunderstandingofvariousaspectsofcapitalmarketfunctions,
the processes involved in various functions of registered Merchant Bankers and the regulatory
environmentinwhichitoperates.

ExaminationObjectives

TheexaminationaimstoenableabetterunderstandingofvariousregulationsintheMerchant
Banking Domain. The examination also covers knowledge competencies related to the
understandingofthefinancialstructureinIndiaandtheimportanceofthedifferentrulesand
regulationsgoverningtheIndiansecuritiesmarket.
Onsuccessfulcompletionoftheexaminationthecandidateshould:
KnowthebasicsoftheMerchantBankinginIndia.
UnderstandthefunctioningofMerchantBankersrelatedtoIssueManagementProcess,
Substantial Acquisition of Equity Shares, Buyback of Equity Shares and Delisting of
Shares.
KnowtheregulatoryenvironmentinwhichtheMerchantBankersoperatesinIndia.
AssessmentStructure

Theexaminationconsistsof100questionsof1markeachandshouldbecompletedin2hours.
The passing score on the examination is 60%. There shall be negative marking of 25% of the
marksassignedtoaquestion.

Howtoregisterandtaketheexamination

Tofindoutmoreandregisterfortheexaminationpleasevisitwww.nism.ac.in

NISM-Series-IX: Merchant Banking Certification Examination


TableofContents

Chapter1IntroductiontotheCapitalMarket........................................................11
1.1 IntroductiontotheIndianCapitalMarket.................................................................11
Chapter2IntroductiontotheMerchantBanking....................................................19
2.1 ConceptandEvolutionofMerchantBanking.............................................................19
2.2 MerchantBankinginIndia..........................................................................................21
2.3 RegulatoryFrameworkforMerchantBankersinIndia..............................................22
Chapter3Registration,CodeofConduct&GeneralObligationsofMerchant
BankersinIndia...........................................................................................................63
3.1 Introduction................................................................................................................63
3.2 RegistrationofMerchantBankers..............................................................................64
3.3 CodeofConductforMerchantBankers.....................................................................68
3.4 GeneralobligationsandResponsibilities...................................................................71
3.5 RedressalofInvestorGrievancesandSCORES...........................................................75
Chapter4:IssueManagementImportantTerms..................................................77
4.1 UnderstandthevarioustermsrelatedtoOffering....................................................77
Chapter5:IssueManagementProcessandUnderwriting.....................................86
5.1 IssueManagement.....................................................................................................86
5.2 PricingofIssue............................................................................................................95
5.3 Underwriting...............................................................................................................97
5.4 MinimumSubscription...............................................................................................97
5.5 Allotment,RefundandPaymentofInterest..............................................................98
Chapter6:IssueManagementGeneralObligationsofMerchantBankersandDue
Diligence..............................................................................................................100
6.1 GeneralObligationsofMerchantBankerswithregardstoIssueManagement......101
6.2 OfferForSalethroughStockExchangeMechanism................................................114
6.3 PreferentialIssue......................................................................................................121
6.4 QualifiedInstitutionalPlacement.............................................................................124
6.5 Rightsissue...............................................................................................................126

NISM-Series-IX: Merchant Banking Certification Examination


6.6 InstitutionalPlacementProgramme........................................................................128
6.7 IndianDepositoryReceipts.......................................................................................130
6.8 DueDiligence............................................................................................................132
Chapter7:OtherMerchantBankingActivitiesMergers,Acquisitions&Takeovers
.............................................................................................................................136
7.1 Mergers,Acquisitions&Takeovers..........................................................................137
7.2 RoleofMerchantBankerinMergersandAcquisitionandTakeovers.....................138
7.3 SEBI(SubstantialAcquisitionofSharesandTakeovers)Regulations,2011............139
Chapter8:OtherMerchantBankingActivitiesDisinvestment,BuybackofEquity
Shares..................................................................................................................160
8.1 Disinvestment...........................................................................................................161
8.2 RoleofMerchantBankerinBuybackofEquityShares...........................................163
8.3 RoleofMerchantBankerinDelistingofShares.......................................................165
8.4 RoleofMerchantBankersinIssueandListingofDebtSecurities...........................166
8.5 RoleofMerchantBankerinShareBasedEmployeeBenefits..................................170

NISM-Series-IX: Merchant Banking Certification Examination


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NISM-Series-IX: Merchant Banking Certification Examination


Chapter1IntroductiontotheCapitalMarket

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

StructureoftheIndiancapitalmarket
Productsavailableinthesecuritiesmarket

ParticipantsintheIndiansecuritiesmarket

Roleofdifferentregulatorsofthemarket

In this chapter, the structure of the Indian Capital Market,the different products available in
thesecuritiesmarket,variousparticipantsandtheroleofdifferentregulatorsofthemarketwill
bediscussedinbrieftogiveanoverviewofthecapitalmarketinIndia.

1.1 IntroductiontotheIndianCapitalMarket
Capital Markets play a very important role in the development of the economy. It helps in
allocating the unutilized resources i.e. transfer of funds from savers to its efficient users. It
provideschannelsforallocationofsavingstoinvestments.Theyconsistofinvestors,whoare
thebackboneoftheeconomy,issuers,regulatorybodiesandintermediaries.Themovementof
capitalintheeconomyfromthesavingspooltotheinvestmentpoolisperformedbytwomain
platformsofinstitutionalintervention(a)Financialinstitutionandbankingframeworkand(b)
thecapitalmarketframework.Thecapitalmarketplaystheprimaryroleofafacilitatorandan
intermediaryinraisingcapitalanddeploymentofthesameintheeconomy.

1.1.1 CapitalMarket

CapitalMarketbringstheissuersofandtheinvestorsinequityanddebttogetherandhelpsthe
issuers to raise capital for productive deployment in creating economic wealth. At the same
time,thecapitalmarketoffersinvestmentavenuestoinvestorswithappetiteforhigherrisks
and returns as compared to the safe investment option with banks. Capital Market is further
dividedintothePrimaryMarketandSecondaryMarketwhereasMoneyMarketisclassifiedinto
OrganizedMoneyMarketandUnorganizedMoneyMarket.

Primary Market is the new issue market, which provides opportunity to issuers of securities,
Government as well as corporates, to raise resources to meet their requirements of
investments and/or discharge some obligation. If securities are allotted to the public for the
firsttimeforthepurposeoflisting,itiscalledInitialPublicOffer(IPO).Oncethesecuritiesare
listed on the Stock Exchanges, the same shares traded will be on the secondary market,
betweeninvestorsthemselves.Ifsecuritiesarealreadylistedandtheissuercompanywantsto
issuefurtherclassofsecuritiestotheinvestorsagain,itiscalledFurtherPublicOffer(FPO).

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NISM-Series-IX: Merchant Banking Certification Examination


SecondaryMarkethelpsinprovidingliquiditytothesecuritieswhichhasalreadybeenissuedin
the primary market. In this market, an investor liquidates his own investments. Since the
securities are traded on the stock exchange and the transactions are between two investors,
the issuer does not come into picture. Secondary Markets operate through two mediums,
namely, the OverTheCounter (OTC) market and the Exchange Traded Market. OTC markets
are the informal type of markets where trades are negotiated. In this type of market, the
securities are traded and settled bilaterally over the counter. The other option of trading is
through the stock exchange route, where trading and settlement is done through the stock
exchangesandthebuyersandsellersmaynotbeintouchwitheachother.Thetransactionis
carriedoutthroughSEBIregisteredstockbrokersorsubbrokers.

Money market is a market for financial assets that are close substitutes for money. It is a
marketforshortterm,mediumtermandlongtermfunds.Themoneymarketdealsprimarilyin
securities and investments, such as bankers acceptances, negotiable certificates of deposit
(CDs), repos and Treasury Bills (Tbills), call/notice money market, commercial papers.
Governmentsecuritiessuchasinfrastructurebondsandoilbondsarealsoapartofthemoney
market.

1.1.2 ProductsinIndianSecuritiesMarket

IndianSecuritiesMarketscoverawiderangeofproductsdependingupontheriskappetiteof
theinvestors.Forexample,ifaninvestorwantstoinvestinriskyproductshehastheoptionto
invest in products of the equity market, whereas a riskaverse investor can invest in bond
marketswhicharecomparativelylessrisky.ProductportfolioofIndiansecuritiesmarketscan
bebroadlyclassifiedinto3categories:

a) EquityMarketProducts
b) DerivativeMarketProducts
c) DebtMarketProducts

a) Equity Market Products: The equity segment of the stock exchange allows trading in
shares,debentures,warrants,mutualfundsandexchangetradedfunds(ETFs).

Equity Shares represent a form of fractional ownership in a business venture. Equity


shareholderscollectivelyownthecompanyandalsobeartheriskandenjoytherewards
ofownership.

Debenturesareinstrumentsforraisinglongtermdebt.DebenturesinIndiaaretypically
securedbytangibleassets.Therearefullyconvertible,optionallyfullyconvertible,non
convertible and partly convertible debentures. Fully convertible debentures will be
converted into ordinary shares of the same company under specified terms and
conditions.Optionallyfullyconvertibledebentureswillbeconvertedintoequityshares
of the same company at the option of the investor. Partly convertible debentures
(PCDs) will be partly converted into ordinary shares of the same company under
specifiedtermsandconditions.Thusithasfeaturesofbothdebentureaswellasequity.

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NISM-Series-IX: Merchant Banking Certification Examination


NonConvertible Debentures (NCDs) are pure debt instruments without the feature of
conversion.TheNCDsarerepayableonmaturity.

Warrantsentitleaninvestortobuyequitysharesafteraspecifiedtimeperiodatagiven
price.

MutualFundsareinvestmentvehicleswherepeoplewithsimilarinvestmentobjective
cometogethertopooltheirmoney.TheMutualFundinvestsindifferenttypesoffunds
in consonance with the investment objectives. A mutual fund company pools money
frommanyinvestorsandinveststhemoneyinstocks,bonds,shorttermmoneymarket
instruments, other securities or assets, or some combination of these investments,
dependingontheobjectivesofthefund.Therearefundswhichinvestinequities,better
knownasequityMFschemeswhichareconsideredriskierthandebtmutualfunds.

Exchange Traded Fund is a fund that can invest in either all of the securities or a
representativesampleofsecuritiesincludedintheindex.Importantly,theETFsoffera
onestop exposure to a diversified basket of securities that can be traded in real time
likeindividualstockexamplegoldexchangetradedfund

b) Derivative Market Products: Derivative is a product whose value is derived from the
valueofoneormorebasicvariables,calledbases(underlyingasset,index,orreference
rate),inacontractualmanner.Theunderlyingassetcanbeequity,forex,commodityor
anyotherasset.ThederivativessegmentinIndiaallowstradingintheequities,currency
and commodities. There are two types of derivatives instruments viz., Futures and
OptionsthataretradedontheIndianstockexchanges.

Index/Stock Future is an agreement between two parties to buy or sell an asset at a


certain time in the future at a certain price. Futures contracts are special types of
forward contracts in the sense that the former are standardized exchangetraded
contracts.Futurescontractsareavailableoncertainspecifiedstocksandindices.

Index/StockOptionsareoftwotypescallsandputs.Callsgivethebuyertheright,
butnottheobligation,tobuyagivenquantityoftheunderlyingasset,atagivenprice
onorbeforeagivenfuturedate.Putsgivethesellertheright,butnottheobligation,to
sellagivenquantityoftheunderlyingassetatagivenpriceonorbeforeagivendate.

Currency Derivatives trading was introduced in the Indian financial markets with the
launchofcurrencyfuturestradingintheUSDINRpairontheNationalStockExchangeof
India Limited (NSEIL) on August 29, 2008. Few more currency pairs have also been
introducedthereafter.AsatendJanuary2013,currencyfuturesaretradedontheUSD
INR,GBPINR,EURINRandJPYINRonNSE,MCXSXandUSE.

Commodity Derivatives markets are markets where raw or primary products are
exchanged.Theserawcommoditiesaretradedonregulatedcommoditiesexchanges,in
which they are bought and sold on the basis of standardized contracts for a specified

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NISM-Series-IX: Merchant Banking Certification Examination


future date. Commodity markets facilitate the trading of commodities such as gold,
silverandvariousagriculturalgoods.

InterestRateFuturestradingisbasedonnotional10yearcouponbearingGovernment
of India (GOI) security. These contracts are settled by physical delivery of deliverable
grade securities using electronic book entry system of the existing depositorys viz.,
NSDL and CDSL and the Public Debt Office of the Reserve Bank unlike the cash
settlementoftheotherderivativeproducts.

c) DebtMarketProducts:DebtmarketconsistsofBondmarkets,whichprovidefinancing
throughtheissuanceofBonds,andenablethesubsequenttradingthereof.Instruments
like bonds/debentures are traded in this market. These instruments can be traded in
OTC or Exchange traded markets. In India, the debt market is broadly divided into
governmentsecurities(GSec)marketandthecorporatebondmarket.

Government Securities Market: The Government needs enormous amount of money


and one of the important sources of borrowing funds is the government securities
market. The government raises short term and long term funds by issuing securities.
Thesesecuritiesdonotcarrydefaultriskasthegovernmentguaranteesthepaymentof
interest and the repayment of principal. They are therefore referred to as gilt edged
securities. Government securities are issued by the central government, state
government and semigovernment authorities. The major investors in this market are
banks, insurance companies, provident funds, state governments, FIIs. Government
securitiesareoftwotypestreasurybillsandgovernmentdatedsecurities..

CorporateBondMarket:Corporatebondsarebondsissuedbyfirms,corporateandare
issued to meet needs for expansion, modernization, restructuring operations, mergers
andacquisitions.Thecorporatebond/debtmarketisamarketwhereindebtsecurities
of corporates are issued and traded therein. The investors in this market are banks,
financial institutions, insurance companies, mutual funds, FIIs etc. Corporates adopt
either the public offering route or the private placement route for issuing
debentures/bonds.

Some of the other instruments available for trading in the debt segment are Treasury
Bills,CommercialPapersandCertificateofDeposits.

1.1.3 ParticipantsinIndianSecuritiesMarket

There are different participants who play an important role in the securities market. Entities
develop,issue,registerandsellsecuritiesforthepurposeoffinancingtheiroperations.There
arepeoplewhoinvestinthesesecuritiesandtherearesomeentitiesthatprovidetheserviceof
intermediation.Someofthemarediscussedhere:

i. Issuer means any company/corporate making an offer of securities. They are the
persons who actually approach the market stating their specific objectives and collect
fundsfromthegeneralpublicbyofferingsecurities.

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NISM-Series-IX: Merchant Banking Certification Examination



ii. Investorsarethepersonswhoactuallyinvesttheirfundsinthesecuritiesofferedbythe
issuer.TheyarebroadlycategorisedasRetailInvestors,InstitutionalInvestorsandNon
Institutional Investors. Retail investors are people who invest upto Rs. Two lakh in a
single transaction, whereas institutional investors comprise of domestic financial
institution, mutual funds, FIIs etc commonly known as Qualified Institutional Buyers
(QIBs).

iii. Intermediaries:TherearemanyintermediariesintheIndiansecuritiesmarket.Asper
the SEBI Act, 1992, intermediaries include stock brokers, subbrokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers,underwriters,portfoliomanagers,investmentadvisers,mutualfundsandsuch
other intermediaries who may be associated with securities markets in any manner,
depositories,participants,custodiansofsecurities,creditratingagenciesandsuchother
intermediaries as SEBI may, by notification, specify in this behalf. Some of them are
discussedbelow:

StockBrokers&SubBrokers:Stockbrokershasbeendefinedasamemberofastock
exchangewhileasubbrokermeansanypersonnotbeingamemberofstockexchange
whoactsonbehalfofastockbrokerasanagentorotherwiseforassistingtheinvestors
inbuying,sellingordealinginsecuritiesthroughsuchstockbrokers;StockBrokersare
the members of the Stock Exchange and can either be individuals or corporate. They
give their advice and recommendations relating to investment opportunities to their
clients.Theirclientsmayberetailinvestorsorinstitutionalclientsandtheyexecutethe
tradeontheirclientsbehalfontheexchange.

Custodians: mean any person who carries on or proposes to carry on the business of
providingcustodialservices.Custodialservicesincludesafekeepingofthesecurities.A
Custodianisanentitythathelpssafeguardthesecuritiesofitsclients.Custodiansmay
also be clearing members like Professional Clearing Members (PCMs) but not trading
members. They settle trades on behalf of the clients of the trading members, when a
particulartradeisassignedtothemforsettlement.

Depositories:meansadepositoryasdefinedinclause(e)ofsubsection(1)ofsection2
of the Depositories Act, 1996. Depositories offer various services to their clients,
however,theprincipalfunctionistoprovideafacilityforinvestorstoholdandtransfer
securitiesindematerialisedform.Throughasystemofpaperlesssecurities,depositories
havemadethegoingeasiertootherinstitutionsaswellsuchasStockExchangesandits
clearinghouses,stockbrokingfirms,issuingcompanies,sharetransferagentsetc.Ason
June 2015, there are two Depositories in India, Central Depository Services Limited
(CDSL)andNationalSecuritiesDepositoryLimited(NSDL).

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NISM-Series-IX: Merchant Banking Certification Examination


Depository Participants (DPs): Depository Participant means a person registered as a


participant with the SEBI. The Depository provides its services to clients through its
agents called depository participants. These agents are appointed by the depository
with the approval of SEBI. According to SEBI regulations, amongst others, three
categories of entities, i.e. Banks, Financial Institutions and body corporate engaged in
providingfinancialservicesprovidedcertainconditionsarefulfilledcanbecomeDPs.

Merchant Bankers: means any entity who is engaged in the business of issue
managementeitherbymakingarrangementsregardingselling,buyingorsubscribingto
securities or acting as manager, consultant, adviser or rendering corporate advisory
serviceinrelationtosuchissuemanagement.TheyneedtoberegisteredwithSEBIto
act & perform as Merchant Banker. They perform a variety of activities including
managing capital issues, managing individual funds and advising clients on proper
valuationoftheirsecurityandoftentheunderwritingofissues.Mostoftheseactivities
are also performed by moneymarket dealers, commercial banks and financial
institutions, share brokers and investment funds and unit trust managers under
registrationasMerchantBankers.

Registrars and Transfer Agents: Registrars to an issue are entities, who on behalf of
anybody corporate collect applications from investors in respect of an issue, keep
proper record of applications and monies received from investors and assists body
corporate to determine basis of allotment, process and despatch allotment letters,
refundordersorcertificatesinrespectofanissue.Sharetransferagentsmaintainthe
recordofholdersofsecuritiesissuedbysuchbodycorporateanddealwithallmatters
connectedwiththetransferandredemptionofitssecurities.Sharetransferagentcan
also be a department or division (by whatever name called) of a body corporate
performing the above activities if, at any time the total number of the holders of
securitiesissuedexceedonelakh.

1.1.4 RegulatorsinIndianSecuritiesMarket

Inordertohaveeffectivefunctioningandproperdevelopmentofthemarket,thereisaneed
foraregulator.Amongstothertasks,thefirstandforemosttaskoftheregulatorwouldbeto
protect the interest of investors and to ensure that there is no violation of rules and
regulations.InIndia,securitiesmarketsareregulatedbydifferentregulatorsandhencethere
maybeinstanceswherethereisaregulatoryoverlap.

TheSecuritiesandExchangeBoardofIndia(SEBI)isthesecuritiesmarketregulator.AsperSEBI
Act1992,itisresponsibleforprotectingtheinterestsofinvestorsinsecuritiesandtopromote
thedevelopmentof,andtoregulatethesecuritiesmarketandformattersconnectedtherewith
orincidentalthereto.Italsoregulatestheissueofnewsecurities,hasthepowertomakerules
for controlling stock exchange, provides license to dealers and brokers and deals with frauds
andinconsistenciesinthecapitalmarket.

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NISM-Series-IX: Merchant Banking Certification Examination


The money market which deals with bonds and deposits is regulated by the Reserve Bank of
India(RBI).Itlooksatthemacroeconomicconditionsanddecidestherateofinteresttobepaid
ongovernmentsecuritiesaswellasimportantfactorsliketheStatutoryLendingRatio(SLR)and
the Cash Reserve Ratio (CRR). It works with the Government to balance the growth of the
country with factors such as inflation, current account deficits and the exchange rates of the
rupeevisvistheglobalcurrencies.

MinistryofCompanyAffairs(MCA)throughtheRegistrarofCompaniesregulatestheCorporate
Sector. The Ministry is primarily concerned with administration of the Companies Act, 2013,
other allied Acts and rules & regulations framed thereunder mainly for regulating the
functioningofthecorporatesectorinaccordancewithlaw.TheMinistryisalsoresponsiblefor
administeringtheCompetitionAct,2002.

Insurance Regulatory and Development Authority of India (IRDAI) is the watchdog for the
insurance sector. Its mission is to protect the interests of the policyholders, to regulate,
promote and ensure orderly growth of the insurance industry and for matters connected
therewithorincidentalthereto.Itregulatestheinsuranceandreinsurancebusinessandhas
themandatetoregisternewinsuranceissuers,dealwithissuesofpolicyholdersandtospecify
thecodeofconductoftheinsurancebusiness.

Pension Fund Regulatory and Development Authority (PFRDA) is mandated to regulate the
pension sector in India. It was formed through the PFRDA Act of 2003. It is responsible for
carrying out the Government of Indias effort to find a sustainable solution to providing
adequate retirement income to the citizens. Since 2008, the pension contributions of the
central government employees are being invested by professional pension fund managers in
accordancewithGovernmentofIndiaguidelines,undertheregulationofthePFRDA.

MinistryofFinance(MOF)worksthroughtheReserveBankofIndiatoregulatethesecurities
market to the extent of investments into India by foreign or NonResident Indian investors.
Foreign Exchange Management Act, 1999 came into force in 2000. The Act along with the
RegulationsandRulesthereunderspecifytheconditionstobefulfilledandthecompliancesto
bemadeforinvestmentintoIndia.

All the authorities have an interrelation with each other. Example: If a company is issuing
equitysharesinthesecuritiesmarketforthefirsttime,MCAistheprimaryregulatoralongwith
SEBI. Apart from this, if the issue is subscribed to, by the foreign investors or Nonresident
Indians,thecompanywillbesubjecttotheRBIregulationsaswell.Further,ifacompanyisa
bankoraninsurancecompany,itisprimarilyregulatedbyRBIorIRDAIrespectively,oncethe
companydecidestocomewithanIPOandlistsitsshares,italsocomeswithinthejurisdiction
ofSEBI,thesecuritiesmarketregulator.Givenaboveisaperfectexampleofregulatoryoverlap.

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NISM-Series-IX: Merchant Banking Certification Examination


ReviewQuestions:

1. Inwhichmarket,securitiesareissuedtoinvestorsforthefirsttime?
(a) PrimaryMarket
(b) SecondaryMarket
(c) RepoMarket
(d) CurrencyMarket
Ans:(a)


2. WhoarethemajorinvestorsingovernmentsecuritiesmarketinIndia?
(a) BanksandInsuranceCompanies
(b) ProvidentFunds
(c) StateGovernments
(d) AlloftheAbove
Ans:(d)


3. TheSLRandCRRratesaredecidedbywhichofthefollowingregulatorybodies?
(a) SecuritiesandExchangeBoardofIndia
(b) ReserveBankofIndia
(c) InsuranceandRegulatoryAuthorityofIndia
(d) CompetitionCommissionofIndia
Ans:(b)

4. DerivativesinwhichoftheunderlyingassetsareallowedintheIndianMarket?
(a) Equities
(b) Currency
(c) Commodities
(d) Alloftheabove
Ans:(d)

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NISM-Series-IX: Merchant Banking Certification Examination


Chapter2IntroductiontotheMerchantBanking

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

Conceptandevolutionofmerchantbanking

MerchantbankingscenarioinIndianandinternationalmarket

RegulatoryframeworkinwhichthemerchantbankersfunctioninIndia

In the earlier chapter, we have discussed the capital market products and participants in the
Indian context. This chapter delves into the evolution of merchant banking, the role of
merchantbankers,conceptandtheregulationsgoverningtheactivitiesofmerchantbankingin
Indiancontext.Themerchantbankingactivitieswithrespecttointernationalmarketssuchas
UnitedStatesandUnitedKingdomhavealsobeendealtwithbriefly.

2.1 ConceptandEvolutionofMerchantBanking
2.1.1 ConceptofMerchantBanking

The primary activity of Merchant Banks is to provide feebased advice to corporations and
governments on the issue of securities. Merchant banks differ from commercial banks in the
sensethattheydonottakedepositsfromindividualsorbusinesses.Merchantbanksthesedays
perform a variety of other activities such as financing foreign trade, underwriting of equity
issues,portfoliomanagementandundertakingforeignsecuritybusinessaswellasforeignloan
business,projectappraisaletc.However,notallmerchantbanksofferalltheseservices.Since
thefunctionsareverysimilartothoseofInvestmentBankers,theyareoftenthoughttobethe
same. However, an investment banker will also provide investment advice and deal with
securities in secondary market, unlike a pure Merchant Banker. The difference between
merchantbankingandinvestmentbankinghasbeenhighlightedinthefollowingsection.

DifferencebetweenMerchantBankingandInvestmentBanking

ThereisafinelineofdistinctionbetweenMerchantBankingandInvestmentBanking,whichwe
try to highlight in this section. Merchant Banking as the term suggests, is the function of
intermediationinthecapitalmarket.Itconsistsofassistingissuerstoraisecapitalbyplacement
of securities issued by the issuers with investors. The merchant banker has an onerous
responsibility towards the investors who invest in such securities. The regulatory authorities
require the merchant banking firms to promote quality issues, maintain integrity and ensure
compliance with the law on own account and on behalf of the issuers as well. Therefore,
merchantbankingisafeebasedserviceformanagementofpublicoffers,popularlyknownas

19

NISM-Series-IX: Merchant Banking Certification Examination


issuemanagementandforprivateplacementofsecuritiesinthecapitalmarket.InIndia,the
merchantbankerleadingapublicofferispopularlyknownastheLeadManager.

On the other hand, the term Investment Banking has a much wider connotation and is
gradually becoming more of an inclusive term to refer to all types of capital market activity,
bothfundbasedandnonfundbased.Thisdevelopmenthasbeendrivenmorebythewaythe
American investment banks have evolved themselves over the past century. Investment
bankingencompassesnotmerelymerchantbankingbutotherrelatedcapitalmarketactivities
suchasstocktrading,marketmakingandunderwriting,stockbrokingandassetmanagement
as well. Besides the above, investment banks also provide a host of specialized corporate
advisoryservicesintheareasofprojectadvisory,businessandfinancialadvisoryandmergers
andacquisitions.1

2.1.2 EvolutionofInternationalMerchantBanking

Merchant banking originated in Italy then came to Francein the seventeenth and eighteenth
centuries.InFrance,amerchantbankerwasamerchantwhoaddedthebankingbusinesstohis
variousactivitiesandutilizedhisaccumulatedprofitsbetter.

Merchant bankers activities differed from those of any other money changer and involved
dealing in bills of exchange with correspondents abroad and speculated on the rate of
exchange. Merchant banks flourished in the United Kingdom in the late eighteenth and early
nineteenthcenturiesasEnglandbecamearichtradingnation.Profitsfromcolonialtradewere
divertedintomerchantbankingactivitiesandthechiefactivitywasacceptingcommercialbills
fordomesticandinternationaltrade.

InvestmentbanksasiscalledintheUnitedStatesareoneofthemostimportantparticipantsin
theUScapitalmarket.Theyhelpbusinessesandgovernmentsselltheirnewsecurityissuesin
the debt or equity markets to raise capital, through primary market transactions. Once the
securitiesaresold,theyalsocreatethesecondarymarketsforthesesecuritiesasbrokersand
dealers. The GlassSteagall Act of 1933 differentiated the activities between the commercial
banksandinvestmentbanksandpreventeddepositoriesfromunderwriting.

TheSecuritiesExchangeAct(1934)intheUnitedStatessoughttocorrectpracticesinsecurities
trading with the formation of the Securities Exchange Commission (SEC). However, the
relaxationoftherulessetoutinGlassSteagallActin1997,ledtoawiderconsolidationinthe
investmentandcommercialbankingspace.

2.1.3 MerchantBankingintheInternationalScenario

In this section we would be discussing the merchant banking activity as it is practiced in the
differentcountriessuchasUnitedKingdomandtheUnitedStates.

MerchantBankinginUK

1
Reference:InvestmentBankingAnOdysseyinHighFinancebyPratapSubramanyam.

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NISM-Series-IX: Merchant Banking Certification Examination


The primary role of the merchant bankers was to discount bills and to provide safety in
transactionsformerchantsgoingfromcountrytocountry.Lateron,merchantbanksdiversified
intocapitalissue,advisoryaswellasmanagementoffunds.Theyalsocontinuedthebusinessof
financingforeigntradeaswellasmanagingfundsforthemselvesandotherwealthymerchants.
Theyallshowedcharacteristicssuchasashortchainofcommand,sophisticationinservicesand
high liquidity. Merchant banks are expected to be more focused on fee income rather than
profitsfrominvestingfunds.

MerchantBankinginUSA

IntheUnitedStates,merchantbankshaveevolvedintoinvestmentbanks.Alongwithallthe
functions of a merchant bank, investment banks also risk their own capital and aim to earn
profits from their proprietary trading activities. In the United States, commercial banks and
investment banks have been separated in terms of the sources of capital as well as allowed
activities.

2.2 MerchantBankinginIndia
The forerunners of merchant banking in India were the foreign banks and they have been
createdinIndiainavarietyofforms.Nationalizedbankshavecreatednewsubsidiariestocarry
out merchant banking activities, other domestic financial institutions have created separate
divisions and share brokers and consultancies have registered themselves as public limited
companiesorpartnershipsorproprietaryfirms

Grindlays Bank began merchant banking operations in 1967 with a license obtained from the
RBI followed by Citibank in 1970. These two banks were providing services for syndication of
loansandraisingofequityapartfromotheradvisoryservices.In1972,theBankingCommission
ReportassertedtheneedformerchantbankingservicesinIndiatobeprovidedbypublicsector
banks. Based on the Glass Steagall Act of 1933 passed by the US, the commission
recommended a separate structure for merchant banks so as to separate them from
commercial banks and financial institutions. Following the recommendation of the Banking
CommissionReport2,SBIsetupitsmerchantbankingdivisionin1972.OtherbankssuchasBank
of India, Syndicate Bank, Punjab National Bank, and Canara Bank also followed suit to set up
their merchant banking outfits. ICICI was the first financial institution to set up its merchant
banking division in 1973. The later entrants were IFCI and IDBI with the latter setting up its
merchantbankingdivisionin1992.Thepostliberalizationera(1991onwards)broughtabouta
markedtransformationinthebankingarena.Themerchantbankingindustryduringthosedays
was mainly driven by the issue management activity which fluctuated with the trends in the

2
TheBankingCommissionReportof1972hasindicatedthenecessityofmerchantbankingserviceinviewofthe
wide industrial base of the Indian economy. The commission was in favour of a separate institution to render
merchant banking services. The commission suggested that they should offer investment management and
advisory services particularly to the medium and small savers (Reference: Merchant Banking, Principles and
PracticeHRMachiraju,3rded.).

21

NISM-Series-IX: Merchant Banking Certification Examination


primary markets. In order to stabilize their businesses, several of the banks engaged in
merchantbankingactivitydiversifiedtoofferabroaderspectrumofcapitalmarketservices.

Thebiggerinvestmentbanksnowhaveseveralgroupentitiesinwhichthecoreandnoncore
businesssegmentsaredistributed.SomeofthemsuchasSBI,IDBI,ICICI,IL&FS,KotakMahindra
etc.offeralmosttheentiregamutofinvestmentbankingservicespermittedinIndia.SBIsetup
SBICapitalmarketsin1986andICICIsetuptheICICISecuritiesin2003.

From simply providing advisory services, merchant banks have added a variety of other
services.ThegrowthofIndianindustryhasgivenrisetofurtheropportunitiesinmergersand
acquisitions and takeovers. Merchant banks are also working on asset valuation, investment
managementandpromotionofinvestmenttrusts.

2.3 RegulatoryFrameworkforMerchantBankersinIndia
There are various acts, regulations and guidelines which govern the different activities of
MerchantBankinginIndia.Thesehavebeendiscussedbelowinbrief:

2.3.1 SEBIAct,1992

SEBIwasestablishedonApril12,1992inaccordancewiththeprovisionsoftheSEBIAct,1992.
ThepreambleoftheSEBIdescribesthebasicfunctionsoftheSecuritiesandExchangeBoardof
Indiaas...toprotecttheinterestsofinvestorsinsecuritiesandtopromotethedevelopmentof
and to regulate the securities market and for matters connected therewith or incidental
thereto...

AsperSection11(1)ofSEBIAct,SEBIisempoweredunderthevariousregulationsoftheSEBI
Actto;

a) Regulatethebusinessinstockexchangesandanyothersecuritiesmarkets.
b) Register and regulate the working of stockbrokers, subbrokers, and share transfer
agents,bankerstoanissue,debenturetrustee,registrarstoanissue,merchantbankers,
underwriters, portfolio managers, investment advisers and others associated with the
securitiesmarket.SEBIspowersalsoextendtoregisteringandregulatingtheworkingof
depositories and depository participants, custodians of securities, foreign institutional
investors,creditratingagencies,andothersasmaybespecifiedbySEBI.
c) Register and regulate the working of venture capital funds and collective investment
schemesincludingmutualfunds
d) PromoteandregulateSROs
e) Prohibitfraudulentandunfairtradepracticesrelatingtothesecuritiesmarket.
f) Promoteinvestorseducationandtrainingofintermediariesinthesecuritiesmarket.
g) Prohibitinsidertradinginsecurities
h) Regulatesubstantialacquisitionofsharesandtakeoverofcompanies
i) Require disclosure of information, to undertake inspection, to conduct inquiries and
audits of stock exchanges, mutual funds, other persons associated with the securities

22

NISM-Series-IX: Merchant Banking Certification Examination


market,intermediariesandSROsinthesecuritiesmarket.Therequirementofdisclosure
ofinformationcanapplytoanybankoranyotherauthorityorboardorcorporation
j) Perform such functions and to exercise such powers under the Securities Contracts
(Regulation)Act,1956asmaybedelegatedtoitbytheCentralGovernment
k) Levyfeesorotherchargespursuanttoimplementationofthisregulation
l) Conductresearchfortheabovepurposes
SEBIActalsoempowersSEBItoimposepenaltiesandinitiateadjudicationproceedingsagainst
intermediaries who default on the following grounds such as failure to furnish information,
return etc. or failure by any person to enter into agreement with clients etc. Some of them
havebeendiscussedbelow:

15APenaltyforfailuretofurnishinformation,return,etc.

SEBIActprovidesformaximumpenaltyamountforeachofthenoncomplianceofprovisionsas
mentionedinthebelowmentionedsections.

Section15Aprescribespenaltypayablebyanintermediaryforfailingto

a) Furnishanydocument,returnorreporttotheSEBI.
b) File any return or furnish any information, books or other documents within the time
specifiedasintheregulations.
c) Maintainbooksofaccountorrecords.

15BPenaltyforfailurebyanypersontoenterintoagreementwithclients

Section 15B prescribes the penalty payable by an intermediary for failing to enter into an
agreementwithhis/herclientinviolationofsucharequirementundertheSEBIAct,1992.

15CPenaltyforfailuretoredressinvestors'grievances

Section 15C prescribes the penalty applicable to a listed company or any person who is
registered as an intermediary, for failing to redress investors grievances after having been
directedinwritingbySEBItodosowithinaspecifiedtimeperiod.

15GPenaltyforinsidertrading

Section15Gprescribespenaltiesforthefollowing:

a) Whenaninsideractingonhis/herownbehalforonbehalfofanotherdealsinsecurities
ofabodycorporatelistedonanystockexchangeonthebasisofanyunpublishedprice
sensitiveinformation.
b) When an insider communicates any unpublished pricesensitive information to any
person, with or without his request for such information except as required in the
ordinarycourseofbusinessorunderanylaw.

23

NISM-Series-IX: Merchant Banking Certification Examination


c) Whenaninsidercounsels,orprocuresforanyotherpersontodealinanysecuritiesof
any body corporate listed on any stock exchange on the basis of unpublished price
sensitiveinformation.

15HPenaltyfornondisclosureofacquisitionofsharesandtakeovers.

Section15Hprescribespenaltyforpeoplewhofailsto:
(a) Disclosetheaggregateofhisshareholdinginthebodycorporatebeforeheacquiresany
sharesofthatbodycorporate;or
(b) Makeapublicannouncementtoacquiresharesataminimumprice,or
(c) Make a public offer by sending letter of offer to the shareholders of the concerned
company;or
(d) Makepaymentofconsiderationtotheshareholderswhosoldtheirsharespursuantto
letterofoffer.
Any person indulging in the above mentioned activities shall be liable to a penalty of Rs. 25
croreorthreetimestheamountofprofitsmadeoutofsuchfailure,whicheverishigher.

15HAPenaltyforfraudulentandunfairtradepractices.

Section15HAprescribesapenaltyforpeopleindulginginfraudulentandunfairtradepractices
relatingtosecurities.AnypersonindulginginsuchactivitieswouldbeliabletoapenaltyofRs.
25croreorthreetimestheamountofprofitsmadeoutofsuchpractices,whicheverishigher.

15HBPenaltyforcontraventionwherenoseparatepenaltyhasbeenprovided.

Section15HBstatesthatwhoeverfailstocomplywithanyprovisionoftheSEBIAct,therulesor
the regulations made or directions issued by SEBI thereunder, for which no separate penalty
hasbeenprovided,shallbeliabletoapenaltywhichmayextendtoRs.1crore.

RoleofAppellateAuthoritySecuritiesAppellateTribunal(SAT)

The Securities Appellate Tribunal has been set up under the SEBI act, which looks into the
appealofanypersonwhohasbeenaggrievedbyanyorderofSEBI.Thissectionelaborateson
thedifferentRegulationsundertheSEBIwhichdiscussestheestablishmentandtheroleofSAT.
Section15K(1)oftheSEBIAct,1992,empowerstheCentralGovernmenttoestablishSecurities
AppellateTribunal(SAT)toexercisejurisdiction,powersandauthorityunderthesaidactorany
other law in force. A SAT shall consist of a presiding officer and two other members, to be
appointed by the Central Government. The qualification for appointment is that the person
should be a sitting or retired judge of the Supreme Court or a retired Chief Justice of a High
Court.

AnypersonaggrievedbythefollowingmayappealtotheSAT,providedtheaggrievedperson
hadnotgrantedhisconsenttotheorderagainstwhichtheappealisbeingmade.Theappeal
mustbefiledwithinaperiodof45daysfromthedateonwhichacopyoftheorderisreceived:

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NISM-Series-IX: Merchant Banking Certification Examination


a. An order of SEBI made on or after the commencement of the Securities Laws (Second
Amendment)Act,1999,undertheSEBIAct1992,orrelatedrulesandregulations.
OR

b. ByanordermadebyanadjudicatingofficerundertheAct.

AsperSection15U(1),theSATshallnotbeboundbytheprocedurelaiddownbytheCodeof
CivilProcedure,1908,butshallbeguidedbytheprinciplesofnaturaljustice.Further,subjectto
otherprovisionsoftheSEBIAct,1992,andotherrules,theSATshallhavepowerstoregulateits
ownprocedure.

AsperSection15U(2),theSATshallhave,fordischargingitsfunctions,thesamepowersasare
vestedinacivilcourtundertheCodeofCivilProcedure,1908,whiletryingasuit,inrespectof
thefollowingmatters:

a) Summoningandenforcingtheattendanceofanypersonandexamininghimonoath
b) Requiringthediscoveryandproductionofdocuments
c) Receivingevidenceonaffidavits
d) Issuingcommissionsfortheexaminationofwitnessesordocuments
e) Reviewingitsdecisions
f) Dismissinganapplicationfordefaultordecidingitexparte
g) Settingasideanyorderofdismissalofanyapplicationfordefaultoranyorderpassedby
itexparte
h) Anyothermatterwhichmaybeprescribed

AccordingtoSection15U(3),everyproceedingbeforetheSATshallbedeemedtobeajudicial
proceedingandSATshallbedeemedtobeacivilcourt.Section15Vstatesthattheappellant
may either appear in person or authorize one or more chartered accountants or company
secretariesorcostaccountantsorlegalpractitionersoranyofitsofficerstopresenthisorits
casebeforetheSAT.

Section 15W states that the provisions of the Limitation Act, 1963 shall apply to an appeal
madetoaSAT.Section15Yspecifiesthatnocivilcourtshallhavejurisdictiontoentertainany
suit or proceeding in respect of any matter which SAT constituted under the SEBI Act is
empoweredtodecideupon.Further,noinjunctionshallbegrantedbyanycourtoranauthority
inrespectofanyactiontakenortobetakeninpursuanceofanypowerconferredbyorunder
theSEBIAct.

Section15Zstatesthat anypersonaggrievedbyanydecisionor orderoftheSAT mayfilean


appealtotheSupremeCourtwithin60daysfromthedateofcommunicationofthedecisionor
orderoftheSATtohim,onanyquestionoflawarisingoutoftheorder.

25

NISM-Series-IX: Merchant Banking Certification Examination


2.3.2 SEBI(MerchantBankers)Regulations,1992

TheSEBI(MerchantBankers)Regulations,1992listsoutthedifferentcriteriaforregistrationof
a merchant banker as an intermediary with SEBI. The different ongoing compliances such as
the capital adequacy requirement, general obligation and responsibilities, conditions of
registrations, grant and renewal of certificate etc. which are required to be adhered to by a
merchantbankeraredetailedoutintheRegulation.TheSEBI(MerchantBankers)Regulations,
1992wouldbediscussedindetailinChapter3ofthisworkbook.

2.3.3 SEBI(IssueofCapitalandDisclosureRequirements)Regulations2009

SEBI (Issueof Capitaland Disclosure Requirements) Regulations 2009 were notified inAugust
2009anditsubstitutedtheSEBI(DisclosureandInvestorProtection)Guidelines,2000.

SEBI(ICDR)RegulationsrequiresthatanissuermakinganissueofsecuritiestopublicortoQIBs
ortoitsexistingshareholdersbywayofrightsissueisrequiredtoappointaMerchantBanker
registered with SEBI. Therefore it would be important to know and understand various
provisions of SEBI (ICDR) Regulations which govern the issue process and specifies rights and
obligationsofvariouspartiesinvolvedintheentireprocess.

SEBI (ICDR) Regulations lays down general conditions for capital market issuances like public
andrightsissuances,InstitutionalPlacementProgramme(IPP),QualifiedInstitutionsPlacement
(QIP)etc;eligibilityrequirements;generalobligationsoftheissuerandintermediariesinpublic
and rights issuances; regulations governing preferential issues, qualified institutional
placementsandbonusissuesbylistedcompanies;IssueofIDRs.SEBI(ICDR)alsohasdetailed
requirementslaidout withrespecttodisclosureandprocessrequirementsforcapitalmarket
transactionsbylistedandunlistedcompanieswhichareintheprocessoflisting.Thedifferent
provisionsoftheSEBI(ICDR)RegulationshavebeendiscussedindetailintheChapter3ofthis
workbook.

2.3.4 CompaniesAct,2013

MerchantBankersprovidevariousservicestothecompanies.Mostoftheoperationalaspects
pertaining to a company is administered and regulated by the provision contained in the
Companies Act 2013. The Companies Act, 2013 is a legislation to consolidate and amend the
lawrelatingtocompanies,someSectionscameintoforceon12thSeptember,2013andthere
weresomemoresectionsnotifiedwhichcameintoforceonApril1,2014.Certainsectionsof
theCompaniesActwhichhaveanimpactontheissueprocessofacompanyareasdiscussed
hereunder:

ChapterIIIoftheActdealswithProspectusandAllotmentofsecuritiesandisfurtherdivided
intotwoparts,PartIdealswithPublicOfferandPartIIdealswithPrivatePlacement.

Section23oftheActprovidesthatacompanywhetherpublicorprivatemayissuesecurities.A
publiccompanymayissuesecurities:

26

NISM-Series-IX: Merchant Banking Certification Examination


(a) to public through prospectus ("public offer") bycomplying with the provisions of Part I of
ChapterIIIoftheAct;or
(b)throughprivateplacementbycomplyingwiththeprovisionsofPartIIofChapterIIIofthe
Act;or
(c)througharightsissueorabonusissueinaccordancewiththeprovisionsofthisActandin
caseofalistedcompanyoracompanywhichintendstogetitssecuritieslistedalsowiththe
provisionsoftheSEBIAct,1992andtherulesandregulationsmadethereunder.

Section24enumeratespowersofSEBItoadministervarioussectionsofCompaniesAct,2013in
caseoflistedpubliccompaniesorCompaniesintendingtogopublic.

Section 25 specifies the documents which could be deemed to be a prospectus and the
enactmentsapplicablethereto.

Section 26 states that a prospectus issued by or on behalf of a company or in relation to an


intendedcompanyshallbedated,andthatdateshallbetakenasthedateofpublicationofthe
prospectusandlaysdownthematterstobestatedandreportswhichneedtobetobesetout
inprospectus.Itimposesrestrictiononthedirectororotherpersonwhoisresponsiblethatthe
prospectus with regards to compliance with the provisions of the Companies Act. It also
specifiesthatExpertsshouldbeunconnectedwithformationormanagementofcompanyand
Expertsconsenttoissueofprospectuscontainingstatementbyhimrespectively.
Section 26(1) is required to be read with Rule 3 of Companies (Prospectus and Allotment of
Securities)Rules2014.
ThepenaltiesondefaultornoncompliancewithanyprovisionsoftheCompaniesActhavealso
beenstatedinSections3638.
Section26(2)statesthatsection26(1)doesnotapplyto:
(a) to the issue to existing members or debentureholders of a company, of a prospectus or
formofapplicationrelatingtosharesinordebenturesofthecompany,whetheranapplicant
hasarighttorenouncethesharesornotundersubclause(ii)ofclause(a)ofsubsection(1)of
section62infavourofanyotherperson;or
(b)totheissueofaprospectusorformofapplicationrelatingtosharesordebentureswhich
are,oraretobe,inallrespectsuniformwithsharesordebenturespreviouslyissuedandforthe
timebeingdealtinorquotedonarecognisedstockexchange.
"ShelfProspectus"meansaprospectusinrespectofwhichthesecuritiesorclassofsecurities
includedthereinareissuedforsubscriptioninoneormoreissuesoveracertainperiodwithout
theissueofafurtherprospectus.AccordinglyasperSection31ofCompaniesAct,2013

1. Anyclassofcompanies,asprescribedbySEBImayfileashelfprospectuswiththeRegistrar
atthestageofthefirstofferofsecuritiesincludedthereinwhichshallindicateaperiodnot
exceedingoneyearastheperiodofvalidityofsuchprospectuswhichshallcommencefrom
thedateofopeningofthefirstofferofsecuritiesundersuchprospectus.Further,inrespect

27

NISM-Series-IX: Merchant Banking Certification Examination


ofasecondorsubsequentofferissuedduringtheperiodofvalidityofshelfprospectus,no
furtherprospectusisrequired.
2. Acompanyfilingashelfprospectusshallberequiredtofileaninformationmemorandum
containing all material facts relating to new charges created, changes in the financial
position of the company as have occurred between the first offer of securities or the
previousofferofsecuritiesandthesucceedingofferandotherprescribedchanges,withthe
Registrarwithintheprescribedtime,priortotheissueofasecondorsubsequentofferof
securitiesundersuchprospectus.
Where a company or any other person has received applications for the allotment of
securities along with advance payments of subscription before the making of any such
change,theyshallintimatethechangestosuchapplicants.Iftheapplicantsexpressadesire
to withdraw their application, the company or other person shall refund all the monies
receivedassubscriptionwithinfifteendays.

3. Where an information memorandum is filed, every time an offer of securities is made as


aforesaid,suchmemorandumtogetherwiththeshelfprospectusshallbedeemedtobea
prospectus. The concept of shelf prospectus will save expenditure and time of the
companiesinissuinganewprospectuseverytimetheywishtoissuesecuritiestothepublic
withinaperiodofoneyear.

Section 31 is required to be read with Rule 10 Companies (Prospectus and Allotment of


Securities) Rules, 2014. Section 32 of the Act deals with Red Herring Prospectus. Red Herring
Prospectus has been defined in the Companies Act, 2013 as a prospectus which does not
include complete particulars of the quantum or price of the securities included therein. It
providesthat

1.Acompanyproposingtomakeanofferofsecuritiesmayissuearedherringprospectusprior
totheissueofaprospectus.
2.AcompanyproposingtoissuearedherringprospectusshallfileitwiththeRegistraratleast
threedayspriortotheopeningofthesubscriptionlistandtheoffer.
3.Aredherringprospectusshallcarrythesameobligationsasareapplicabletoaprospectus.
Any variation between the red herring prospectus and a prospectus shall be highlighted as
variationsintheprospectus.
4. Upon the closing of the offer of securities, the prospectus stating therein the total capital
raised,whetherbywayofdebtorsharecapital,andtheclosingpriceofthesecuritiesandany
otherdetailsasarenotincludedintheredherringprospectusshallbefiledwiththeRegistrar
andtheSEBI.

CompaniesAct,2013hasalsospecifiedtherequirementswithrespecttoAbridgedProspectus
asunder:

28

NISM-Series-IX: Merchant Banking Certification Examination


AbridgedProspectusmeansamemorandumcontainingsuchsalientfeaturesofaprospectus
asmaybespecifiedbySEBIbymakingregulationsinthisbehalf.

Section33statesthatnoformofapplicationcanbeissuedforthepurchaseofanysecuritiesof
a company unless it is accompanied by an abridged prospectus. There are, however, four
exceptionstothisrule:
(a)wheretheofferismadeinconnectionwiththebonafideinvitationtoapersontoenterinto
anunderwritingagreementwithrespecttosuchsecurities;
(b)wherethesecuritiesarenotofferedtothepublic;
(c)wheretheofferismadeonlytotheexistingmembersordebentureholdersofthecompany
withorwithoutarighttorenounce;
(d) where the shares or debentures offered are in all respects uniform with shares or
debenturesalreadyissuedandquotedonarecognisedstockexchange.
Acopyoftheprospectusshallbefurnishedtoapersononarequestbeingmadebyhimbefore
theclosingofthesubscriptionlistandtheoffer.Ifacompanymakesanydefaultincomplying
with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees for
eachdefault.

The merchant bankers who are involved with the issue management process shall ensure
adherencetotheprovisionsoftheCompaniesAct,2013aswellastheRulesmadethereunder.

ReadersareadvisedtorefertotheCompaniesActforbetterunderstandingofthesesections.
2.3.5 ListingAgreementofStockExchanges

The Issuer is required to enter into a listing agreement with the Stock Exchanges, where the
securities of an issuer are proposed to be listed. The Listing Agreement prescribes the initial
conditions and the requirements for continuous listing on the Stock Exchanges. The
compliancestobefulfilledarebothtimebasedandeventbasedcompliances.Itisastandard
set of Agreement to be entered into by the Companies seeking listing from the stock
exchanges.
There are three main stages in the listing process, viz., inprinciple approval from stock
exchanges,listingofthesecuritiesandtradingpermission.
TherearecertainlistingrequirementswithrespecttoArticlesofAssociation(AoA)alsowhich
needtobecompliedwith.ThemainrequirementswithrespecttoArticlesofAssociationareas
givenbelow:
i. Thereshouldbenoclauseswhicharerestrictiveinnature
ii. AfewclausesneedtobeincorporatedintheAoA,iftheydonotalreadyformpartof
thesame,examplefullypaidsharesshallbefreefromalllienandinthecaseofpartlypaid
shares the Issuers lien shall be restricted to moneys called or payable at a fixed time in
respectofsuchshares. Theexchangesalsohavecertaineligibilitycriteriaforcompanies
gettinglistedthroughanIPO.Theimportantonesaretabulatedbelow:

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NISM-Series-IX: Merchant Banking Certification Examination


Sr.No. Particulars National Stock BombayStockExchange


Exchange
1. Paidupcapitaloftheapplicant Minimum10crores Minimum10crores
2. TrackrecordofProfitability Atleast3years
3. IssueSize MinimumRs.10crores
3. MarketCapitalisation Minimum25crores Minimum25crores
4. EntitiesintheGroupnothaving Inthepastoneyear
beendebarredetc
Note: The detailed eligibility criteria of the respective exchanges have been detailed on their
website.
Inprincipleapproval:AsperClause24(a),thecompanyisrequiredtoobtaininprinciple
approval for listing from the exchanges having nationwide trading terminals where it is
listed,beforeissuingfurthersharesorsecurities.Wherethecompanyisnotlistedonany
exchange having nationwide trading terminals, it agrees to obtain such inprinciple
approval from all the exchanges in which it is listed before issuing further shares or
securities.ThecompanyalsoagreestomakeanapplicationtotheExchangeforthelisting
ofanynewissueofsharesorsecuritiesandoftheprovisionaldocumentsrelatingthereto.
HoweverforanIPO,thecompanyseeksunprincipleapprovalaspertheclause6(2)(d)of
SEBI ICDR Regulations wherein the DHRP is filed with SEBI and the Exchanges. Exchanges
providetheInprincipleapprovalandSEBIgivesitsobservation.

Thenextstageistoapplyforlistingonthestockexchangeforwhichaletterofapplicationand
aformofListingApplicationisprescribedbytheExchanges.
The third stage is obtaining trading permission, which is granted after fulfilment of the
requirementswhichisstatedbytherespectiveexchanges.
OneoftherequirementsatthisstageistoenterintotheListingAgreementbetweentheIssuer
andtheStockExchange.SomeoftheimportantclausesoftheListingAgreementarementioned
below:
Sr.No. ClauseNumber Pertainingto
1 35 ShareholdingPattern
2 40(a) Minimumlevelofpublicshareholding
3 47 AppointmentofComplianceofficer
4 49 CorporateGovernance
5 54 Companywebsite
Note: Candidatesmaygothroughtheformatsofthelistingagreementindetailwhichisavailableonthewebsite
ofNSEandBSE.

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NISM-Series-IX: Merchant Banking Certification Examination


ListingoffurtherIssuesbyIssuersalreadylistedontheStockExchanges
IssuerswhosesecuritiesarealreadylistedontheNSEshallapplyforadmissiontolistingonthe
StockExchangesofanyfurtherissueofsecuritiesmadebythem.Theapplicationforadmission
shall be made in the forms prescribed in this regard3 or in such other form or forms as the
Relevant Authority may from time to time prescribe in addition thereto or in modification or
substitutionthereof.
ThetimelinefortheIPOprocessisgiveninAnnexure2.1.

2.3.6 SecuritiesContracts(Regulation)Act,1956

TheSecuritiesContracts(Regulation)Act,1956providesforthedefinitionofsecuritieswhich
includesthefollowing:
i. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securitiesofalikenatureinorofanyincorporatedcompanyorotherbodycorporate;
ii. Derivatives;
iii. Units or any other instrument issued by any collective investment scheme to the
investorsinsuchschemes;
iv. Security receipt as defined in clause (zg) of section 2 of the Securitisation and
ReconstructionofFinancialAssetsandEnforcementofSecurityInterestAct,2002;
v. Units or any other such instrument issued to the investors under any mutual fund
scheme;
vi. Anycertificateorinstrument,issuedtoaninvestorbyanyissuerbeingaspecialpurpose
distinct entity which possesses any debt or receivable, including mortgage debt,
assignedtosuchentity,andacknowledgingbeneficialinterestofsuchinvestorinsuch
debtorreceivable,includingmortgagedebt,asthecasemaybe;
vii. GovernmentSecurities
viii. SuchotherinstrumentsasmaybedeclaredbytheCentralGovernmenttobesecurities,
and
ix. Rightsorinterestinsecurities

The Regulations provides for direct and indirect control of virtually all aspects of securities
tradingandtherunningofstockexchanges.Thisactaimstopreventundesirabletransactionsin
securities by regulating the business of dealing therein and by providing for certain other
mattersconnectedtherewith.Itgivesthecentralgovernmenttheregulatoryjurisdictionover
(a)stockexchangesthroughaprocessofrecognitionandcontinuedsupervision,(b)contracts
andoptionsinsecurities,and(c)listingofsecuritiesonstockexchanges.TheobjectiveofSCRA
istopreventundesirablespeculationandtoregulatecontractsandtransactionsinsecurities.A
transactioninsecuritiesbetweentwopersonsisessentiallyacontract.Thelawthatspecifically
appliesinthecaseofasecuritiescontractistheSCRA.

3
Appendix'E'ScheduleofDistribution;Appendix'G'ApplicationLetterforListingoffurtherissues;Appendix'H'
ListingApplicationprovidingdetailsofsecurities;Appendix'I'Checklistforsupportingdocumentssubmitted(as
applicable).

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NISM-Series-IX: Merchant Banking Certification Examination


Section21and22dealswithlistingofsecuritiesandsections23to26providesforthedifferent
penalties and procedures to be imposed upon any person /intermediary on noncompliance
with any of the provisions given under the various rules and regulations governing the
securitiesmarketinIndia.

Section23specifiesthepenaltiesandtheproceduresforvariousnoncompliancesandfailures.
Someofthemarediscussedbelow:
Section23AofSCRAprovidesthatanyperson,whoisrequiredundertheSCRAorSCRR
to furnish any information, document, books, returns or report to a recognized stock
exchange,failstofurnishthesamewithinthespecifiedtimeshallbeliabletoapenalty
ofRs.1lakhforeachdayduringwhichsuchfailurecontinuesorRs.1crore,whicheveris
less.
to maintain books of account or records as per the listing agreements, conditions or
byelawsofthestockexchange,failstomaintainthesame,shallbeliabletoapenaltyof
Rs.1 lakh for each day during which such failure continues or Rs.1 crore, whichever is
less.

2.3.7 SecuritiesContracts(Regulation)Rules,1957(SCRR)

SCRR provides for the actual procedures to be followed by applicants for recognition as a
recognised stock exchange and the requirements with respect to listing of securities on a
recognisedStockExchange.Itlaysdownconditionsforthepercentageofshareswhichneedto
be offered to the public in order to get the shares listed and also the percentage of shares
which need to remain with public in order to remain listed. SCRR needs to be read in
conjunctionwithSCRA.SCRRaretherulescreatedforcomplianceofSCRA.

Someoftheimportantrulesaregivenhereunder:

Rule 19(2)(b) states that the minimum offer and allotment to public in terms of an offer
documentshallbeasperthefollowingsubrules:
Rule 19 (2)(b)(i) specifies that at least 25% of each class or kind of equity shares or
debenturesconvertibleintoequitysharesissuedbythecompany,ifthepostissuecapitalof
the company calculated at offer price is less than or equal to one thousand six hundred
crorerupees.
Rule19(2)(b)(ii)specifiesthatatleastsuchpercentageofeachclassorkindofequityshares
ordebenturesconvertibleintoequitysharesissuedbythecompanyequivalenttothevalue
of four hundred crore rupees, if the post issue capital of the company calculated at offer
price is more than one thousand six hundred crore rupees but less than or equal to four
thousandcrorerupees.
Rule 19(2)(b)(iii) at least ten percent of each class or kind of equity shares or debentures
convertible into equity shares issued by the company, if the post issue capital of the
companycalculatedatofferpriceisabovefourthousandcrorerupees.

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NISM-Series-IX: Merchant Banking Certification Examination


Providedthatthecompanyreferredtoinsubclause(ii)orsubclause(iii)shallincreaseits
publicshareholdingtoatleasttwentyfivepercentwithinaperiodof3yearsfromthedate
oflistingofthesecuritiesinthemannerspecifiedbySEBI.
It is further provided that this clause shall not apply to a company whose draft offer
documentispendingwithSEBIonorbeforethecommencementoftheSecuritiesContracts
(Regulation)ThirdAmendment)Rules,2014,ifitsatisfiestheconditionsprescribedinclause
(b)ofsubrule(2)ofRule19oftheSecuritiesContracts(Regulation)Rules,1956asexisted
priortothedateofsuchcommencement.
Rule 19(3) specifies that a company applying for listing shall, as a condition precedent,
undertakeinteralia
(a)(i)thatlettersofallotmentbeissuedsimultaneouslyandthat,intheeventofitsbeing
impossibletoissuelettersofregretatthesametime,anoticetothateffectwillbeinserted
inthepresssothatitwillappearonthemorningafterthelettersofallotmenthavebeen
posted,
(ii)thatlettersofrightbeissuedsimultaneously,
(iii) that letters of allotment, acceptance or rights be serially numbered, printed on
good quality paper and examined and signed by a responsible officer of the company
andthatwheneverpossible,theywillcontainthedistinctivenumbersofthesecurities
towhichtheyrelate,
(iv) that letters of allotment and renounceable letters of right contain a proviso for
splitting and that, when so required by the exchange, the form of renunciation be
printedonthebackoforattachedtothelettersofallotmentandlettersofright,
(v)thatlettersofallotmentandlettersofrightstatehowthenextpaymentofinterest
ordividendonthesecuritieswillbecalculated,

(b) to issue, when so required, receipts for all securities deposited with it whether for
registration, subdivision, exchange or for other purposes; and not to charge any fees for
registration of transfers, for subdivision and consolidation of certificates and for sub
division of letters of allotment, renounceable letters of right, and split, consolidation,
renewalandtransferreceiptsintodenominationsofthemarketunitoftrading;

(bb)toissue,whensorequired,consolidationandrenewalcertificatesindenominationsof
the market unit of trading to split certificates, letters of allotment, letters of right, and
transfer, renewal, consolidation and split receipts into smaller units, to split call notices,
issue duplicates thereof and not require any discharge on call receipts and to accept the
discharge of members of stock exchange on split, consolidation and renewal receipts as
goodandsufficientwithoutinsistingonthedischargeoftheregisteredholders;

(c) when documents are lodged for subdivision or consolidation or renewal through the
clearinghouseoftheexchange:
(i) to accept the discharge of an official of the stock exchange clearing house on the
companys split receipts and consolidation receipts and renewal receipts as good and
sufficientdischargewithoutinsistingonthedischargeoftheregisteredholders,and

33

NISM-Series-IX: Merchant Banking Certification Examination


(ii) to verify when the company is unable to issue certificates or split receipt or
consolidation receipts or renewal receipts immediately on lodgement whether the
discharge of the registered holders, on the documents lodged for subdivision or
consolidationorrenewalandtheirsignaturesontherelativetransfersareinorder;

(d) on production of the necessary documents by shareholders or by members of the


exchange,tomakeontransfersanendorsementtotheeffectthatthepowerofattorneyor
probate or letters of administration or death certificate or certificate of the Controller of
Estate Duty or similar other document has been duly exhibited to and registered by the
company;

(e) to issue certificates in respect of shares or debentures lodged for transfer within a
periodofonemonthofthedateoflodgementoftransferandtoissuebalancecertificates
withinthesameperiodwherethetransferisaccompaniedbyalargercertificate;

(f)toadvisethestockexchangeofthedateoftheboardmeetingatwhichthedeclaration
orrecommendationofadividendortheissueofrightorbonussharewillbeconsidered;

(g)torecommendordeclarealldividendsand/orcashbonusesatleastfivedaysbeforethe
commencementoftheclosureofitstransferbooksortherecorddatefixedforthepurpose
and to advise the stock exchange in writing of all dividends and/or cash bonuses
recommended or declared immediately after a meeting of the board of the company has
beenheldtofinalisethesame;

(h)tonotifythestockexchangeofanymaterialchangeinthegeneralcharacterornatureof
thecompanysbusiness;

(i) to notify the stock exchange of any change (a) in the companys directorate by death,
resignation,removalorotherwise,(b)ofmanagingdirector,managingagentorsecretaries
andtreasurers,(c)ofauditorsappointedtoauditthebooksandaccountofthecompany;

(j) to forward to the stock exchange copies of statutory and annual reports and audited
accountsassoonasissued,includingdirectorsreport;

(k)toforwardtothestockexchangeassoonastheyareissued,copiesofallothernotices
andcircularssenttotheshareholdersincludingproceedingsofordinaryandextraordinary
general meetings of the company and to file with the stock exchange certified copies of
resolutionsofthecompanyassoonassuchresolutionsbecomeeffective;

(l) to notify the stock exchange prior to intimating the shareholders of any new issue of
securitieswhetherbywayofright,privilegebonusorotherwiseandthemannerinwhichit
isproposedtoofferorallotthesame;

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NISM-Series-IX: Merchant Banking Certification Examination


(m)tonotifythestockexchangeintheeventofreissueofanyforfeitedsecuritiesorthe
issueofsecuritiesheldinreserveforfutureissue;

(n)tonotifythestockexchangeofanyotheralterationofcapitalincludingcalls;

(o) to close the transfer books only for the purpose of declaration of dividend or issue of
rightorbonussharesorforsuchotherpurposesasthestockexchangemayagreeandto
givenoticetothestockexchangeasmanydaysinadvanceastheexchangemayfromtime
totimereasonablyprescribe,statingthedatesofclosureofitstransferbooks(or,whenthe
transferbooksarenottobeclosed,thedatefixedfortakingarecordofitsshareholdersor
debentureholders)andspecifyingthepurposeorpurposesforwhichthetransferbooksare
tobeclosed(ortherecordistobetaken);andinthecaseofarightorbonusissuetoso
close the transfer books or fix a record date only after the sanctions of the competent
authority subject to which the issue is proposed to be made have been duly obtained,
unlesstheexchangeagreesotherwise;
(p) to forward to the stock exchange an annual return immediately after each annual
general meeting of at least ten principal holders of each class of security of the company
along with particulars as to the number of shares or debentures held by, and address of,
eachsuchholder;

(q)togranttoshareholderstherightofrenunciationinallcasesofissueofrights,privileges
and benefits and to allow them reasonable time not being less than four weeks within
which to record, exercise, or renounce such rights, privileges and benefits and to issue,
where necessary, coupons or fractional certificates or provide for the payment of the
equivalentofthevalueofthefractionalrightincashunlessthecompanyingeneralmeeting
orthestockexchangeagreesotherwise;

(r) to promptly notify the stock exchange (a) of any action which will result in the
redemption, cancellation or retirement in whole or in part of any securities listed on the
exchange,(b)oftheintentiontomakeadrawingofsuchsecurities,intimatingatthesame
timethedateofthedrawingandtheperiodoftheclosingofthetransferbooks(orthedate
ofthestrikingofthebalance)forthedrawing,(c)oftheamountofsecuritiesoutstanding
afteranydrawinghasbeenmade;

(s) to intimate the stock exchange any other information necessary to enable the
shareholders to apprise the position of the company and to avoid the establishment of a
falsemarketinthesharesofthecompany;

(t)thatintheeventoftheapplicationforlistingbeinggranted,suchlistingshallbesubject
totherulesandbyelawsoftheexchangeinforcefromtimetotimeandthatthecompany
will comply within a reasonable time, with such further listing requirements as may be
promulgatedbytheexchangeasageneralconditionfornewlistings.

35

NISM-Series-IX: Merchant Banking Certification Examination


TheSCRR,Rule19(4)statesthatanapplicationforlistingshallbenecessaryinrespectof
thefollowing:
(a)allnewissuesofanyclassorkindofsecuritiesofacompanytobeofferedtothepublic;
(b)allfurtherissuesofanyclassorkindofsecuritiesofacompanyifsuchclassorkindof
securitiesofthecompanyarealreadylistedonarecognisedstockexchange.

Rule19(5)statesthatarecognisedstockexchangemaysuspendorwithdrawadmissionto
dealings in the securities if a company or body corporate either for a breach of or non
compliancewith,anyoftheconditionsofadmissiontodealingsorforanyotherreason,to
be recorded in writing which in the opinion of the stock exchange justifies such action.
Provided that no such action shall be taken by a stock exchange without affording to the
company or body corporate concerned a reasonable opportunity by a notice in writing,
statingthereasons,toshowcauseagainsttheproposedaction.

Rule19(6)statesthatarecognisedstockexchangemay,eitheratitsowndiscretionorshall
inaccordancewiththeorderoftheSATundersubrule(5)restoreorreadmittodealings
anysecuritiessuspendedorwithdrawnfromthelist.

Rule 19(7) states that SEBI may at its own discretion or on the recommendations of a
recognised stock exchange, waive or relax the strict enforcement of any or all the
requirementswithrespecttolistingprescribedbytheserules.

2.3.8 SecuritiesandExchangeBoardofIndia(ProhibitionofInsiderTrading)Regulations,
2015

TheSEBI(ProhibitionofInsiderTrading)Regulations,2015hascomeintoforcew.e.fMay2015.
Any dealing/trading done by an insider based on information which is not available in public
domain, gives an undue advantage to insiders and affects market integrity. This is not in line
withtheprincipleoffairandequitablemarkets.Inordertoprotectintegrityofthemarket,the
SEBI(ProhibitionofInsiderTrading)Regulationshavebeenputinplace.TheRegulationsmainly
provide for who can be insiders, what all is prohibited for them and the systemic provisions
whichneedtobelaiddownandfollowedbylistedcompanyaswellasintermediaries.

WhoareInsiders?

Theregulationsdefineinsiderasanypersonwhois,orwas,connectedwithacompanyoris
deemed to have been connected with the company and who is reasonably expected to have
accesstounpublishedpricesensitiveinformationinrespectofsecuritiesofacompany,orwho
has received or has had access to such unpublished price sensitive information. Connected
personmeans:

Any person who is or has during the six months prior to the concerned act been associated
with a company, directly or indirectly, in any capacity including by reason of frequent

36

NISM-Series-IX: Merchant Banking Certification Examination


communication with its officers or by being in any contractual, fiduciary or employment


relationshiporbybeingadirector,officeroranemployeeofthecompanyorholdsanyposition
including a professional or business relationship between himself and the company whether
temporaryorpermanent,thatallowssuchperson,directlyorindirectly,accesstounpublished
pricesensitiveinformationorisreasonablyexpectedtoallowsuchaccess.

Personisdeemedtobeaconnectedperson,ifsuchpersonis:

(a)animmediaterelativeofconnectedpersonsspecifiedinclause(i);or
(b)aholdingcompanyorassociatecompanyorsubsidiarycompany;or
(c)anintermediaryasspecifiedinsection12oftheActoranemployeeordirectorthereof;or
(d)aninvestmentcompany,trusteecompany,assetmanagementcompanyoranemployeeor
directorthereof;or
(e)anofficialofastockexchangeorofclearinghouseorcorporation;or
(f)amemberofboardoftrusteesofamutualfundoramemberoftheboardofdirectorsofthe
assetmanagementcompanyofamutualfundorisanemployeethereof;or
(g) a member of the board of directors or an employee, of a public financial institution as
definedinsection2(72)oftheCompaniesAct,2013;or
(h)anofficialoranemployeeofaselfregulatoryorganizationrecognisedorauthorizedbythe
SEBI;or
(i)abankerofthecompany;or
(j)aconcern,firm,trust,Hinduundividedfamily,companyorassociationofpersonswhereina
directorofacompanyorhisimmediaterelativeorbankerofthecompany,hasmorethanten
percentoftheholdingorinterest;

Itisintendedthataconnectedpersonisonewhohasaconnectionwiththecompanythatis
expected to put him in possession of unpublished price sensitive information. Immediate
relativesandothercategoriesofpersonsspecifiedabovearealsopresumedtobeconnected
personsbutsuchapresumptionisadeeminglegalfictionandisrebuttable.Thisdefinitionis
alsointendedtobringintoitsambitpersonswhomaynotseeminglyoccupyanypositionina
company but are in regular touch with the company and its officers and are involved in the
know of the companys operations. It is intended to bring within its ambit those who would
haveaccesstoorcouldaccessunpublishedpricesensitiveinformationaboutanycompanyor
class of companies by virtue of any connection that would put them in possession of
unpublishedpricesensitiveinformation.

Regulation 2(e) defines the term "generally available information" means information that is
accessibletothepubliconanondiscriminatorybasis;Itisintendedtodefinewhatconstitutes
generally available information so that it is easier to crystallize and appreciate what
unpublished price sensitive information is. Information published on the website of a stock
exchange,wouldordinarilybeconsideredgenerallyavailable.

Regulation 2(f) defines the term immediate relative as a spouse of a person, and includes
parent, sibling, and child of such person or of the spouse, any of whom is either dependent

37

NISM-Series-IX: Merchant Banking Certification Examination


financially on such person, or consults such person in taking decisions relating to trading in
securities.

Regulation2(g)oftheSEBIInsiderregulations,definesaninsideranypersonwhois:

i)aconnectedperson;or

ii)inpossessionoforhavingaccesstounpublishedpricesensitiveinformation;

Sincegenerallyavailableinformationisdefined,itisintendedthatanyoneinpossessionofor
having access to unpublished price sensitive information should be considered an insider
regardless of how one came in possession of or had access to such information. Various
circumstances are provided for such a person to demonstrate that he has not indulged in
insidertrading.Therefore,thisdefinitionisintendedtobringwithinitsreachanypersonwhois
inreceiptoforhasaccesstounpublishedpricesensitiveinformation.Theonusofshowingthat
acertainpersonwasinpossessionoforhadaccesstounpublishedpricesensitiveinformation
atthetimeoftradingwould,therefore,beonthepersonlevelingthechargeafterwhichthe
personwhohastradedwheninpossessionoforhavingaccesstounpublishedpricesensitive
informationmaydemonstratethathewasnotinsuchpossessionorthathehasnottradedor
he could not access or that his trading when in possession of such information was squarely
coveredbytheexoneratingcircumstances.

Regulation2(n)definesunpublishedpricesensitiveinformationasanyinformation,relatingtoa
company or its securities, directly or indirectly, that is not generally available which upon
becominggenerallyavailable,islikelytomateriallyaffectthepriceofthesecuritiesandshall,
ordinarilyincludingbutnotrestrictedto,informationrelatingtothefollowing:

(i)financialresults;

(ii)dividends;

(iii)changeincapitalstructure;

(iv)mergers,demergers,acquisitions,delistings,disposalsandexpansionofbusinessandsuch
othertransactions;

(v)changesinkeymanagerialpersonnel;and

(vi)materialeventsinaccordancewiththelistingagreement.

WhatisprohibitedunderSEBI(ProhibitionofInsiderTrading)Regulations?

Regulation3(1)isintendedtocastanobligationonallinsiderswhoareessentiallypersonsin
possessionofunpublishedpricesensitiveinformationtohandlesuchinformationwithcareand
todealwiththeinformationwiththemwhentransactingtheirbusinessstrictlyonaneedto
knowbasis.Itisalsointendedtoleadtoorganisationsdevelopingpracticesbasedonneedto
knowprinciplesfortreatmentofinformationintheirpossession.Regulation3(2)isintendedto
impose a prohibition on unlawfully procuring possession of unpublished price sensitive
38

NISM-Series-IX: Merchant Banking Certification Examination


information. Inducement and procurement of unpublished price sensitive information not in


furtheranceofoneslegitimatedutiesanddischargeofobligationswouldbeillegalunderthis
provision.

Regulation 3 states that an insider shall not communicate, provide, or allow access to any
unpublishedpricesensitiveinformation,relatingtoacompanyorsecuritieslistedorproposed
to be listed, to any person including other insiders except where such communication is in
furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
Regulation 3(2) states that no person shall procure from or cause the communication by any
insiderofunpublishedpricesensitiveinformation,relatingtoacompanyorsecuritieslistedor
proposedtobelisted,exceptinfurtheranceoflegitimatepurposes,performanceofdutiesor
dischargeoflegalobligations.

Regulation 3(3) further states that an unpublished price sensitive information may be
communicated,provided,allowedaccesstoorprocured,inconnectionwithtransactionsthat
would:

(i)entailanobligationtomakeanopenofferunderthetakeoverregulationswheretheboard
ofdirectorsofthecompanyisofinformedopinionthattheproposedtransactionisinthebest
interestsofthecompany;
(ii)notattracttheobligationtomakeanopenofferunderthetakeoverregulationsbutwhere
theboardofdirectorsofthecompanyisofinformedopinionthattheproposedtransactionisin
the best interests of the company and the information that constitute unpublished price
sensitiveinformationisdisseminatedtobemadegenerallyavailableatleasttwotradingdays
prior to the proposed transaction being effected in such form as the board of directors may
determine.
ForthispurposeRegulation3(4)statesthattheboardofdirectorsshallrequirethepartiesto
execute agreements to contract confidentiality and nondisclosure obligations on the part of
such parties and such parties shall keep information so received confidential, except for the
purposeofsubregulation(3),andshallnototherwisetradeinsecuritiesofthecompanywhen
inpossessionofunpublishedpricesensitiveinformation.

AsperRegulation4,noinsidershalltradeinsecuritiesthatarelistedorproposedtobelisted
onastockexchangewheninpossessionofunpublishedpricesensitiveinformation.However,
the insider may prove his innocence by demonstrating the circumstances including the
following:

(i)thetransactionisanoffmarketintersetransferbetweenpromoterswhowereinpossession
ofthesameunpublishedpricesensitiveinformationwithoutbeinginbreachofregulation3and
bothpartieshadmadeaconsciousandinformedtradedecision;
(ii)inthecaseofnonindividualinsiders:
(a)theindividualswhowereinpossessionofsuchunpublishedpricesensitiveinformation
were different from the individuals taking trading decisions and such decisionmaking
individuals were not in possession of such unpublished price sensitive information when
theytookthedecisiontotrade;and

39

NISM-Series-IX: Merchant Banking Certification Examination


(b)appropriateandadequatearrangementswereinplacetoensurethattheseregulations
arenotviolatedandnounpublishedpricesensitiveinformationwascommunicatedbythe
individualspossessingtheinformationtotheindividualstakingtradingdecisionsandthere
isnoevidenceofsucharrangementshavingbeenbreached;
(iii)thetradeswerepursuanttoatradingplansetupinaccordancewithregulation5.

Regulation5dealswithTradingPlanswhichcanbeformulatedbyaninsiderandtheprocedure
relatedthereto.Itstatesasunder:

(1) An insider shall be entitled to formulate a trading plan and present it to the compliance
officerforapprovalandpublicdisclosurepursuanttowhichtradesmaybecarriedoutonhis
behalfinaccordancewithsuchplan.
(2)Suchtradingplanshall:
(i)notentailcommencementoftradingon behalfoftheinsiderearlierthansixmonthsfrom
thepublicdisclosureoftheplan;
(ii)notentailtradingfortheperiodbetweenthetwentiethtradingdaypriortothelastdayof
any financial period for which results are required to be announced by the issuer of the
securitiesandthesecondtradingdayafterthedisclosureofsuchfinancialresults;
(iii)entailtradingforaperiodofnotlessthantwelvemonths;
(iv)notentailoverlapofanyperiodforwhichanothertradingplanisalreadyinexistence;
(v) set outeither the value of trades to be effected or the number of securitiesto be traded
alongwiththenatureofthetradeandtheintervalsat,ordatesonwhichsuchtradesshallbe
effected;
(vi)notentailtradinginsecuritiesformarketabuse.

(3)Thecomplianceofficershallreviewthetradingplantoassesswhethertheplanwouldhave
any potential for violation of these regulations and shall be entitled to seek such express
undertakingsasmaybenecessarytoenablesuchassessmentandtoapproveandmonitorthe
implementationoftheplan.
(4)Thetradingplanonceapprovedshallbeirrevocableandtheinsidershallmandatorilyhave
toimplementtheplan,withoutbeingentitledtoeitherdeviatefromitortoexecuteanytrade
inthesecuritiesoutsidethescopeofthetradingplan.
Provided that the implementation of the trading plan shall not be commenced if any
unpublishedpricesensitiveinformationinpossessionoftheinsideratthetimeofformulation
of the plan has not become generally available at the time of the commencement of
implementation and in such event the compliance officer shall confirm that the
commencement ought to be deferred until such unpublished price sensitive information
becomes generally available information so as to avoid a violation of subregulation (1) of
regulation4.
(5)Uponapprovalofthetradingplan,thecomplianceofficershallnotifytheplantothestock
exchangesonwhichthesecuritiesarelisted.

CodeofFairDisclosure.

40

NISM-Series-IX: Merchant Banking Certification Examination


Regulation8specifiedthattheboardofdirectorsofeverycompany,whosesecuritiesarelisted
onastockexchange,shallformulateandpublishonitsofficialwebsite,acodeofpracticesand
proceduresforfairdisclosureofunpublishedpricesensitiveinformationthatitwouldfollowin
order to adhere to each of the principles set out in Schedule A to these regulations, without
dilutingtheprovisionsoftheseregulationsinanymanner.
(2) Every such code of practices and procedures for fair disclosure of unpublished price
sensitiveinformationandeveryamendmenttheretoshallbepromptlyintimatedtothestock
exchangeswherethesecuritiesarelisted.
CodeofConduct

9.(1)Theboardofdirectorsofeverylistedcompanyandmarketintermediaryshallformulatea
codeofconducttoregulate,monitorandreporttradingbyitsemployeesandotherconnected
persons towards achieving compliance with these regulations, adopting the minimum
standards set out in Schedule B to these regulations, without diluting the provisions of these
regulationsinanymanner.
(2)Everyotherpersonwhoisrequiredtohandleunpublishedpricesensitiveinformationinthe
courseofbusinessoperationsshallformulateacodeofconducttoregulate,monitorandreport
tradingbyemployeesandotherconnectedpersonstowardsachievingcompliancewiththese
regulations, adopting the minimum standards set out in Schedule B to these regulations,
withoutdilutingtheprovisionsoftheseregulationsinanymanner.
(3)Everylistedcompany,marketintermediaryandotherpersonsformulatingacodeofconduct
shallidentifyanddesignateacomplianceofficertoadministerthecodeofconductandother
requirementsundertheseregulations.

The Regulations have prescribed the Principles of Fair Disclosure for purposes of Code of
PracticesandProceduresforDisclosureofUnpublishedPriceSensitiveInformationasunder:

1. Promptpublicdisclosureofunpublishedpricesensitiveinformationthatwouldimpactprice
discovery no sooner than credible and concrete information comes into being in order to
makesuchinformationgenerallyavailable.
2. Uniform and universal dissemination of unpublished price sensitive unpublished price
sensitiveinformationtoavoidselectivedisclosure.
3. Designationofaseniorofficerasachiefinvestorrelationsofficertodealwithdissemination
ofinformationanddisclosureofunpublishedpricesensitiveinformation.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed
selectively,inadvertentlyorotherwisetomakesuchinformationgenerallyavailable.
5. Appropriate and fair response to queries on news reports and requests for verification of
marketrumoursbyregulatoryauthorities.
6. Ensuringthatinformationsharedwithanalystsandresearchpersonnelisnotunpublished
pricesensitiveinformation.
7. Developing best practices to make transcripts or records of proceedings of meetings with
analystsandotherinvestorrelationsconferencesontheofficialwebsitetoensureofficial
confirmationanddocumentationofdisclosuresmade.

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NISM-Series-IX: Merchant Banking Certification Examination


8. Handlingofallunpublishedpricesensitiveinformationonaneedtoknowbasis.

It has also prescribed the minimum standards for Code of Conduct to regulate, monitor and
reporttradingbyinsidersasunder:

1. Thecomplianceofficershallreporttotheboardofdirectorsandinparticular,shallprovide
reportstotheChairmanoftheAuditCommittee,ifany,ortotheChairmanoftheboardof
directorsatsuchfrequencyasmaybestipulatedbytheboardofdirectors.
2. All information shall be handled within the organisation on a needtoknow basis and no
unpublished price sensitive information shall be communicated to any person except in
furtheranceoftheinsiderslegitimatepurposes,performanceofdutiesordischargeofhis
legal obligations. The code of conduct shall contain norms for appropriate Chinese Walls
proceduresandprocessesforpermittinganydesignatedpersontocrossthewall.
3. Employees and connected persons designated on the basis of their functional role
(designatedpersons)intheorganisationshallbegovernedbyaninternalcodeofconduct
governing dealing in securities. The board of directors shall in consultation with the
complianceofficerspecifythedesignatedpersonstobecoveredbysuchcodeonthebasis
of their role and function in the organisation. Due regard shall be had to the access that
suchroleandfunctionwouldprovidetounpublishedpricesensitiveinformationinaddition
toseniorityandprofessionaldesignation.
4. Designated persons may execute trades subject to compliance with these regulations.
Towardsthisend,anotionaltradingwindowshallbeusedasaninstrumentofmonitoring
trading by the designated persons. The trading window shall be closed when the
complianceofficerdeterminesthatadesignatedpersonorclassofdesignatedpersonscan
reasonablybeexpectedtohavepossessionofunpublishedpricesensitiveinformation.Such
closure shall be imposed in relation to such securities to which such unpublished price
sensitive information relates. Designated persons and their immediate relatives shall not
tradeinsecuritieswhenthetradingwindowisclosed.
5. The timing for reopening of the trading window shall be determined by the compliance
officer taking into account various factors including the unpublished price sensitive
informationinquestionbecominggenerallyavailableandbeingcapableofassimilationby
the market, which in any event shall not be earlier than fortyeight hours after the
informationbecomesgenerallyavailable.Thetradingwindowshallalsobeapplicabletoany
person having contractual or fiduciary relation with the company, such as auditors,
accountancyfirms,lawfirms,analysts,consultantsetc.,assistingoradvisingthecompany.
6. When the trading window is open, trading by designated persons shall be subject to
preclearance by the compliance officer, if the value of the proposed trades is above such
thresholdsastheboardofdirectorsmaystipulate.Nodesignatedpersonshallapplyforpre
clearanceofanyproposedtradeifsuchdesignatedpersonisinpossessionofunpublished
pricesensitiveinformationevenifthetradingwindowisnotclosed.
7. Thecomplianceofficershallconfidentiallymaintainalistofsuchsecuritiesasarestricted
listwhichshallbeusedasthebasisforapprovingorrejectingapplicationsforpreclearance
oftrades.

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NISM-Series-IX: Merchant Banking Certification Examination


8. Priortoapprovinganytrades,thecomplianceofficershallbeentitledtoseekdeclarations
to the effect that the applicant for preclearance is not in possession of any unpublished
price sensitive information. He shall also have regard to whether any such declaration is
reasonablycapableofbeingrenderedinaccurate.
9. Thecodeofconductshallspecifyanyreasonabletimeframe,whichinanyeventshallnotbe
morethanseventradingdays,withinwhichtradesthathavebeenpreclearedhavetobe
executedbythedesignatedperson,failingwhichfreshpreclearancewouldbeneededfor
thetradestobeexecuted.
10. Thecodeofconductshallspecifytheperiod,whichinanyeventshallnotbelessthansix
months, within which a designated person who is permitted to trade shall not execute a
contra trade. The compliance officer may be empowered to grant relaxation from strict
application of such restriction for reasons to be recorded in writing provided that such
relaxation does not violate these regulations. Should a contra trade be executed,
inadvertently or otherwise, in violation of such a restriction, the profits from such trade
shall be liable to be disgorged for remittance to the Board for credit to the Investor
ProtectionandEducationFundadministeredbytheBoardundertheAct.
11. Thecodeofconductshallstipulatesuchformatsastheboardofdirectorsdeemsnecessary
for making applications for preclearance, reporting of trades executed, reporting of
decisionsnottotradeaftersecuringpreclearance,recordingofreasonsforsuchdecisions
andforreportinglevelofholdingsinsecuritiesatsuchintervalsasmaybedeterminedas
beingnecessarytomonitorcompliancewiththeseregulations.
12. Without prejudice to the power of the Board under the Act, the code of conduct shall
stipulatethesanctionsanddisciplinaryactions,includingwagefreeze,suspensionetc.,that
may be imposed, by the persons required to formulate a code of conduct under sub
regulation (1) and subregulation (2) of regulation 9, for the contravention of the code of
conduct.
13. The code of conduct shall specify that in case it is observed by the persons required to
formulateacodeofconductundersubregulation(1)andsubregulation(2)ofregulation9,
thattherehasbeenaviolationoftheseregulations,theyshallinformtheBoardpromptly.


2.3.9 SecuritiesandExchangeBoardofIndia(SubstantialAcquisitionofSharesand
Takeovers)Regulations,2011

TheSEBI(SubstantialAcquisitionofSharesandTakeovers)Regulations,2011dealswithissues
suchasinitialandcontinualdisclosuresofshareholdingandcontrol,substantialacquisitionof
sharesorvotingrights,bailouttakeoversandinvestigationandactionbySEBI.

The regulations begin with an explanation of important terms such as acquirer, control,
person acting in concert and promoter. Some of the Regulations are discussed below, to
illustratethenatureandscopeoftheregulations.

According to Regulation 3(1), no acquirer shall acquire shares or voting rights in a target
companywhichtakentogetherwithsharesorvotingrights,ifany,heldbyhimandbypersons

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NISM-Series-IX: Merchant Banking Certification Examination


actinginconcertwithhiminsuchtargetcompany,entitlethemtoexercise25%ormoreofthe
votingrightsinsuchtargetcompanyunlesstheacquirermakesapublicannouncementofan
openofferforacquiringsharesofsuchtargetcompanyinaccordancewiththeseregulations.

Regulation 4 states that irrespective of acquisition or holding of shares or voting rights in a


target company, no acquirer shall acquire, directly or indirectly, control over such target
company unless the acquirer makes a public announcement of an open offer for acquiring
sharesofsuchtargetcompanyinaccordancewiththeseregulations.
FurtherRegulation5statesthatforthepurposesofregulation3andregulation4,acquisitionof
sharesorvotingrightsin,orcontrolover,anycompanyorotherentitythatwouldenableany
person and persons acting in concert with him to exercise or direct the exercise of such
percentage of voting rights in, or control over, a target company, the acquisition of which
would otherwise attract the obligation to make a public announcement of an open offer for
acquiring shares under these regulations, shall be considered as an indirect acquisition of
sharesorvotingrightsin,orcontroloverthetargetcompany.Itfurtherspecifiestheobligations
oftheacquirerinsuchacase.

Regulation5Aspecifiesthatintheeventtheacquirermakesapublicannouncementofanopen
offerforacquiringsharesofatargetcompanyintermsofregulations3,4or5,hemaydelist
thecompanyinaccordancewithprovisionsoftheSEBI(DelistingofEquityShares)Regulations,
2009providedcertainconditionsarefulfilled.

Regulation 6 states the requirements to be met by an acquirer for making a public


announcementofanopenoffer.Itstatesthatanacquirertogetherwiththepersonsactingin
concertholdssharesorvotingrightsinatargetcompanyentitlinghimtoexercise25%ormore,
theacquirerisentitledtomakeapublicannouncementofanopenofferoracquiringshares.An
acquirerandpersonsactinginconcertwithhim,whohavemadeapublicannouncementunder
thisregulationtoacquiresharesofatargetcompanyshallnotbeentitledtoacquireanyshares
of the target company for a period of six months after completion of the open offer except
pursuanttoanothervoluntaryopenoffer.

Regulation7dealswiththeoffersize.Theopenofferforacquiringsharestobemadebythe
acquirerandpersonsactinginconcertwithhimunderregulation3andregulation4shallbefor
atleasttwentysixpercentoftotalsharesofthetargetcompany,asoftenthworkingdayfrom
theclosureofthetenderingperiodsubjecttocertainconditions.

Regulation 8 deals with the offer price. The open offer for acquiring shares under various
regulations (Regulation 3, 4, 5 or 6) shall be made at a price not lower than the price
determinedinaccordancewithsubregulation(2)orsubregulation(3),asthecasemaybe.

Regulation 9 states the modes of payment as cash or by issue, exchange or transfer of listed
sharesintheequitysharecapitaloftheacquirerorofanypersonactinginconcertorbyissue,
exchange or transfer of listed secured debt instruments by issue, exchange or transfer of
convertible debt securities entitling the holder thereof to acquire listed shares in the equity

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NISM-Series-IX: Merchant Banking Certification Examination


sharecapitaloftheacquirerorofanypersonactinginconcertoracombinationofanyofthe
above.

Regulation10laydownthatcertainacquisitionsshallbeexemptfromtheobligationtomake
an open offer under regulation 3 and 4 subject to fulfillment of the conditions stipulated
therefor,
(a)acquisitionpursuanttointersetransferofsharesamongstqualifyingpersons,being,
(i)immediaterelatives;
(ii)personsnamedaspromotersintheshareholdingpatternfiledbythetargetcompany
intermsofthelistingagreementortheseregulationsfornotlessthanthreeyearsprior
totheproposedacquisition;
(iii)acompany,itssubsidiaries,itsholdingcompany,othersubsidiariesofsuchholding
company, persons holding not less than fifty percent of the equity shares of such
company,othercompaniesinwhichsuchpersonsholdnotlessthanfiftypercentofthe
equity shares, and their subsidiaries subject to control over such qualifying persons
beingexclusivelyheldbythesamepersons;
(iv) persons acting in concert for not less than three years prior to the proposed
acquisition,anddisclosedassuchpursuanttofilingsunderthelistingagreement;
(v) shareholders of a target company who have been persons acting in concert for a
periodofnotlessthanthreeyearspriortotheproposedacquisitionandaredisclosedas
such pursuant to filings under the listing agreement, and any company in which the
entire equity share capital is owned by such shareholders in the same proportion as
their holdings in the target company without any differential entitlement to exercise
votingrightsinsuchcompany:
Providedthatforpurposesofavailingoftheexemptionunderthisclause,
(i) If the shares of the target company are frequently traded, the acquisition price per
share shall not be higher by more than twentyfive per cent of the volumeweighted
averagemarketpriceforaperiodofsixtytradingdaysprecedingthedateofissuanceof
noticefortheproposedintersetransferundersubregulation(5),astradedonthestock
exchange where the maximum volume of trading in the shares of the target company
are recorded during such period, and if the shares of the target company are
infrequently traded, the acquisition price shall not be higher by more than twentyfive
percentofthepricedeterminedintermsofclause(e)ofsubregulation(2)ofregulation
8;and
(ii) the transferor and the transferee shall have complied with applicable disclosure
requirementssetoutinChapterV.
(b)acquisitionintheordinarycourseofbusinessby,
(i) an underwriter registered with the Board by way of allotment pursuant to an
underwritingagreementintermsoftheSEBI(ICDR)Regulations,2009;
(ii)astockbrokerregisteredwiththeBoardonbehalfofhisclientinexerciseoflienover
thesharespurchasedonbehalfoftheclientunderthebyelawsofthestockexchange
wheresuchstockbrokerisamember;

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NISM-Series-IX: Merchant Banking Certification Examination


(iii)amerchantbankerregisteredwiththeBoardoranominatedinvestorintheprocess
of market making or subscription to the unsubscribed portion of issue in terms of
ChapterXBoftheSEBI(ICDR)Regulations,2009;
(iv) any person acquiring shares pursuant to a scheme of safety net in terms of
regulation44oftheSEBI(ICDR)Regulations,2009;
(v)amerchantbankerregisteredwiththeBoardactingasastabilisingagentorbythe
promoterorpreissueshareholderintermsofregulation45ofSEBI(ICDR)Regulations,
2009;
(vi)byaregisteredmarketmakerofastockexchangeinrespectofsharesforwhichhe
isthemarketmakerduringthecourseofmarketmaking;
(vii)aScheduledCommercialBank,actingasanescrowagent;and
(viii)invocationofpledgebyScheduledCommercialBanksorPublic
(c)acquisitionsatsubsequentstages,byanacquirerwhohasmadeapublicannouncementof
anopenofferforacquiringsharespursuanttoanagreementofdisinvestment,ascontemplated
insuchagreement:
Providedthat,
(i)boththeacquirerandthesellerarethesameatallthestagesofacquisition;and
(ii)fulldisclosuresofallthesubsequentstagesofacquisition,ifany,havebeenmadein
thepublicannouncementoftheopenofferandintheletterofoffer.
(d)acquisitionpursuanttoascheme,
(i)madeundersection18oftheSickIndustrialCompanies(SpecialProvisions)Act,1985
(1of1986)oranystatutorymodificationorreenactmentthereto;
(ii) of arrangement involving the target company as a transferor company or as a
transfereecompany,orreconstructionofthetargetcompany,includingamalgamation,
merger or demerger, pursuant to an order of a court or a competent authority under
anylaworregulation,Indianorforeign;or
(iii)ofarrangementnotdirectlyinvolvingthetargetcompanyasatransferorcompany
or as a transferee company, or reconstruction not involving the target companys
undertaking, including amalgamation, merger or demerger, pursuant to an order of a
courtoracompetentauthorityunderanylaworregulation,Indianorforeign,subject
to,
(A) the component of cash and cash equivalents in the consideration paid being less
thantwentyfivepercentoftheconsiderationpaidunderthescheme;and
(B) where after implementation of the scheme of arrangement, persons directly or
indirectly holding at least thirtythree per cent of the voting rights in the combined
entity are the same as the persons who held the entire voting rights before the
implementationofthescheme.
(e)acquisitionpursuanttotheprovisionsoftheSecuritisationandReconstructionofFinancial
AssetsandEnforcementofSecurityInterestAct,2002(54of2002);
(f) acquisition pursuant to the provisions of the Securities and Exchange Board of India
(DelistingofEquityShares)Regulations,2009;
(g)acquisitionbywayoftransmission,successionorinheritance;

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NISM-Series-IX: Merchant Banking Certification Examination


(h) acquisition of voting rights or preference shares carrying voting rights arising out of the
operationofsubsection(2)ofsection87oftheCompaniesAct,1956(1of1956).

2.3.10 SEBI(BankerstoIssue)Regulations,1994

The SEBI (Bankers to an Issue) regulations govern / regulate the Bankers to an Issue (BTI)
activitywhichincludes(a)Acceptanceofapplicationandapplicationmonies;(b)Acceptanceof
allotmentorcallmonies;(c)Refundofapplicationmonies;(d)Paymentofdividendorinterest
warrants. The Banker to an Issue is required to be registered with SEBI subject to complying
withtheeligibilityconditions.SEBIregulatesitsactivitiesthroughreportsofitsactivitiesfiled
withSEBIonaperiodicbasis.

Every banker to an issue is required to enter into an agreement with the issuer company for
whichitisactingasbankertoanissue.Theagreementshallspecifythefollowing:

a. The number of centres at which the applications and application monies of an issue of a
issuercompanywillbecollectedfromtheinvestors;
b. The time within which the statement regarding the applications and application monies
receivedfromtheinvestorsinvestinginanissueoftheissuercompanywillbeforwardedto
theregistrartoanissueortheissuercompany,asthecasemaybe;
c. Thatadailystatementwillbesentbythedesignatedcontrollingbranchofthebankersto
theissuetotheregistrartoanissueindicatingthenumberofapplicationsreceivedonthat
date from the investors investing in the issue of the issuer company, and the amount of
applicationmoneyreceived.

2.3.11 SEBI(RegistrarstoanIssueandShareTransferAgents)Regulations,1993

The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations mainly deal with
registration, code of conduct of entities who undertake activities like collecting applications
from investors in respect of an issue and keeping proper record of applications and monies
receivedfrominvestorsorpaidtosellerofthesecurities.TheRegistrarstotheIssuealsoassist
theissuercompanyorpersonorgroupofpersonin(a)determiningthebasisofallotmentof
securities in consultation with stock exchange, (b) finalizing the list of persons entitled to
allotment, (c) processing and dispatching allotment letters, refund orders or certificates and
otherrelateddocumentsinrespectofanissue.

Sharetransferagentmeans
(i) any person, who on behalf of anybody corporate, maintains the records of holders of
securitiesissuedbysuchbodycorporateanddealswithallmattersconnectedwiththetransfer
andredemptionofitssecurities;
(ii) a department or division, by whatever name called, of a body corporate performing the
activitiesreferredinsubclause(i)ifatanytimethetotalnumberoftheholdersofitssecurities
issuedexceedonelakh;

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NISM-Series-IX: Merchant Banking Certification Examination


The Registrar and Transfer Agents (RTA) have a significant role to play in a public issue of
shares.Theyareappointedbytheissuerinconsultationwiththeleadmanagertotheissueand
enterintoanagreementdetailingtheirresponsibilityintheissuework.Thescopeofactivityof
theRTAencompassestheperiodbeforetheissueopens,duringtheperiodofissueandafter
theissuecloses.
PreIssueWork
- Assist in the finalization of bankers to the issue, controlling and collection branches,
biddingcentresandgiveinstructionsontheprocedurestobefollowed.
- Assistintheworkrelatedtodesigningtheapplicationformsandotherissuematerial.
- Facilitateandestablishinformation flowsystembetweenclients,banksandManagers
totheissue
- LiaisonwithRegulatoryAuthoritiessuchasSEBIandStockExchange
IssueWork
- Collect and report information on the daily collections/bids received to the lead
manager/bookrunningleadmanagers.
- Providestatutoryreportsontheprogressoftheissueasrequired.
- Incaseofabookbuiltoffer,makeatableofallvalidapplicationstoidentifythecutoff
price.Oncethecutoffpriceisdetermined,theapplicationsaresegregated.
- Identify valid bids from QIBs and print and dispatch Confirmatory Allocation Notice
(CAN)sothatthebalancemoneycanbecollected.
- Reconcilefundswiththefinalcollectioncertificatereceivedfromthebankers.
PostIssueWork
- Applicationsmayberejected,amongotherreasons,if:
Applicationisincomplete
InformationsuchasPANnumber,bankaccountisnotprovided
Supportingdocumentssuchasthoserequiredforcorporateapplicantsisabsent
Thebidisatcutoffpriceforanapplicantotherthanaretailindividualinvestor
Termsofofferintermsofminimumapplicationisnotmet
Applicationsfromminors
Multipleapplications
- Get the approval of the issuer and the lead manager/book running lead manager for
applicationsrejectedontechnicalgrounds.
- Draw up the underwriters obligations in case the issue is undersubscribed and send
devolvement notices on the instruction of the lead manager/ book running lead
manager.
- Finalise the basis of allotment, if the issue is oversubscribed, in consultation with the
leadmanager/bookrunningleadmanager,issuerandstockexchange.
- Submitthefollowingdocumentstothestockexchange:

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NISM-Series-IX: Merchant Banking Certification Examination



Basisofallotment

Top100applications

Certificateoffinalcollectionfromthebankersandreconciliationstatement

Listofapplicationsrejectedontechnicalgrounds

Minutes of the meeting held with the issuer, lead manager/book running lead
managerandstockexchangeforfinalizingthebasisofallotment
- Maketheallotmentofsharestotheinvestorsontheapprovedbasis.
- Postissuemerchantbankershallmaintainclosecoordinationwiththeregistrarstothe
issueandarrangetodeputeitsofficerstotheofficesofvariousintermediariesatregular
intervals after the closure of the issue to monitor the flow of applications from
collecting bank branches and/or Self Certified Syndicate Banks, processing of the
applications including application form for ASBA and other matters till the basis of
allotmentisfinalised,despatchofsecuritycertificatesandrefundordersarecompleted
andsecuritiesarelisted.
- Ensurethatlegalrequirementssuchaspaymentofstampdutybytheissuer,creationof
registerofmembers,approvalsoftheboardofdirectorsoftheissuingcompanyandthe
stockexchangearecompliedwith.
- PrinttheConfirmatoryAllotmentNote(CAN)forallsuccessfulapplicants.
- Arrange for the printing, signing and dispatch of certificates if allotment is in physical
form in case of a fixed price offer or upload data for Depositories to credit securities
electronically.
- Arrangefortherefundorderstobedispatched.
- Drawupthelistofbrokerstowhomcommissionshavetobepaid.
- Manage the issue work so that the shares are listed on the stock exchange within 12
workingdays4dayfromtheclosureoftheissue.
- Handleallpostissuequeriesfrominvestors.

2.3.12 SEBI(DelistingofEquityShares)Regulations,2009

SEBI(DelistingofEquityShares)Regulations,2009mainlydealwiththeprocessofdelistingof
equitysharesofalistedcompanywhichcanbedoneintwoways,viz.,VoluntaryDelistingand
Compulsory Delisting. Voluntary delisting is a condition when the issuer company no longer
wantstobeonthetradingplatformoftheexchangeandexitsoutoftheExchange.Whereas
the involuntary delisting involves delisting byexchanges onaccount ofany disciplinaryaction
initiatedbyeithertheExchangesorbySEBIonnonfulfillmentofthelistingcriteriasetbythe
exchanges.

The SEBI delisting regulations shall not apply to any delisting made pursuant to a scheme
sanctioned by the Board for Industrial and Financial Reconstruction under the Sick Industrial

4
SEBIRef.No.CIR/CFD/DIL/3/2010DatedApril22,2010.

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NISM-Series-IX: Merchant Banking Certification Examination


Companies (Special Provisions) Act, 1985 or by the National Company Law Tribunal under
section424DoftheCompaniesAct,1956,ifsuchscheme
(a)laysdownanyspecificproceduretocompletethedelisting;or
(b)providesanexitoptiontotheexistingpublicshareholdersataspecifiedrate.

1. Delistingnotpermissibleincertaincircumstancesandconditionsfordelisting

Nocompanyshallapplyforandnostockexchangeshallpermitdelistingofequitysharesof
thecompany:
a) PursuanttoBuyBackofequitysharesor
b) PursuanttoPreferentialAllotmentor
c) Unlessaperiodof3yearshaselapsedsincelistingor
d) Any instrument(s) which are convertible into shares that are sought to be listed are
outstanding

Further it is stated that no promoter or promoter group shall propose delisting of equity
sharesofacompany,ifanyentitybelongingtothepromoterorpromotergrouphassold
equitysharesofthecompanyduringaperiodofsixmonthspriortothedateoftheboard
meeting in which the delisting proposal was approved in terms of subregulation (1B) of
regulation8.

2. VoluntaryDelisting

The company may delist equity shares from one or morestock exchanges where they
are listed and continue their listing on one or more other exchanges subject to
following:

If the equity shares continue to be listed on stock exchange which has nationwide
trading terminals and is proposed to be listed from other stock exchanges, exit
opportunityneednotbegiventopublicshareholders.

Iftheequitysharesareproposedtobedelisted&wouldnotremainlistedonanyof
thestockexchangeshavingnationwidetradingterminals,theissuershallprovidean
exitopportunitytotheexistingshareholders.
Inrespectofdelistingwhereexitopportunityisrequiredtobegiventheofferpriceshall
be determined through a book building process popularly known as Reverse Book
Building(RBB),afterfixingoffloorprice.

Thefinalofferpriceshallbedeterminedatthepriceatwhichthemaximumnumberof
equitysharesistenderedbythepublicshareholders.

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NISM-Series-IX: Merchant Banking Certification Examination


Acquirers/Promoters shall not be bound to accept theequity sharesat the offerprice


determined by the Reverse Book Building process and promoter may decide not to
accepttheofferpricesodetermined.

On successful completion of delisting offer and payment of consideration to valid
applicantsandreturnofequitysharesinrespectofinvalidapplications,StockExchange
on compliance with the other requirements would delist the equity shares of the
companyfromtheexchange.

Theacquirers/promotersshallcontinuetogivepostdelistingexitofferforaperiodof1
yearfromthedateoflistingandEscrowaccountshallcontinuetobemaintainedtillthe
saidperiod.

SpecialprovisionsforSmallCompanies&DelistingbyOperationofLaw

WherecompanyhasapaidupcapitaluptoRs.1croreandequityshareswerenottraded
on the stock exchange in past 1 year such equity shares may be delisted without
adoptingreversebookbuildingmethod.

Where the company has 300 or less public shareholders and paid up value of shares
heldbypublicshareholdersinsuchcompanyisnotmorethanRs.1crorethenalsothe
equitysharescanbedelistedwithoutadoptingreversebookbuildingmethod.

Inabovecasespromotersshallwriteindividuallytoallthepublicshareholdersinforming
them about the intention to get the equity shares delisted indicating the exit price
togetherwithjustificationandseekingtheirconsentfortheproposalofdelisting.
Insuchcasesatleast90%ofpublicshareholdersshallgivepositiveconsentinwritingto
theproposalofdelisting.

In case of winding up proceedings of a company whose equity shares are listed the
rightsifanyoftheshareholdersofsuchcompanyshallbeinaccordancewiththelaws
applicabletothoseproceedings.

The application for listing of equity shares of any company which have been delisted
undervoluntarydelistingandunderspecialprovisionsforsmallcompaniesshallnotbe
madeforaperiodof5yearsfromthedelisting.

We will read in detail about the role of merchant banker in the delisting process in the later
chapters.

2.3.13 SEBI(Intermediaries)Regulations,2008

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NISM-Series-IX: Merchant Banking Certification Examination


EverySEBIregisteredintermediarydealingintheStockmarketsarerequiredtoberegistered
under the SEBI Act, 1992. For this purpose, the SEBI (Intermediaries) Regulations, 2008
prescribestheprocedureforregistrationofintermediaries,generalobligations,inspectionand
disciplinaryproceedingsandinteralia,criteriafordeterminingafitandproperpersonandcode
of conduct. Merchant Bankers are also required to comply with SEBI (Intermediaries)
Regulations,2008inadditiontotheSEBI(MerchantBankers)Regulations.

2.3.14 SEBI(BuyBackofSecurities)Regulations,1998

CompaniesarepermittedtobuybacktheirownsecuritiesfromthemarketunderSections41,
68to70.Incasethecompanyislisted,itisrequiredtoalsocomplywiththeSEBI(Buybackof
Securities) Regulations, 1998. These regulations prescribe, inter alia, the conditions of buy
back, procedure for buyback through tender offer, procedure for buyback from the open
market, general obligations from the Company, obligations of the merchant banker and the
actionthatcanbetakenagainstintermediariesbySEBI.

Section8.2ofthisworkbookdealsindetailabouttheroleofMerchantBankerinBuyBackof
Securities.

2.3.15 SEBI(ShareBasedEmployeeBenefits)Regulations,2014

ListedcompaniesareallowedtoissuesharestotheiremployeesundertheSEBI(ShareBased
Employee Benefits) Regulations, 2014. The Regulations prescribe the schemes and the
companiestowhichtheseRegulationsareapplicable,implementationoftheschemethrough
trusts, eligibility of the employee to participate in ESOS of the company, formation of
compensation committee, Shareholders approval, pricing, lockin period and rights of the
optionholder and disclosures required to be made in the Directors Report subsequent to
ESOP. It also specifies the process of administration and implementation with respect to
Employees Stock Option Scheme (ESOS), Employees Stock Purchase Scheme (ESPS), Stock
AppreciationRightsScheme(SARS),GeneralEmployeeBenefitsScheme(GEBS)andRetirement
Benefit Scheme (RBS). Compliances and Conditions are specified under Regulation 12 which
includes the appointment of registered merchant banker for implementation of schemes
coveredundertheseRegulations

2.3.16 SEBI(IssueandListingofDebtSecurities)Regulations,2008

These regulations shall apply to (a) public issue of debt securities; and (b) listing of debt
securities issued through public issue or on private placement basis on a recognized stock
exchange.Theseregulationsspecifytheissuerequirementsforpublicissues,theprocedurefor
listing of debt securities, conditions for continuous listing and trading of debt securities,
obligations of intermediaries and issuers and procedure for action in case of violation of
regulations.

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NISM-Series-IX: Merchant Banking Certification Examination


Section8.4ofthisworkbookdealsindetailabouttheroleofMerchantBankerinissueoflisting
ofDebtSecurities.

2.3.17 CompetitionAct,2002

The Competition Act, 2002 was passed by the Parliament in the year 2002, to which the
PresidentaccordedassentinJanuary,2003.ItwassubsequentlyamendedbytheCompetition
(Amendment)Act,2007.

InaccordancewiththeprovisionsoftheAmendmentAct,theCompetitionCommissionofIndia
and the Competition Appellate Tribunal have been established. The provisions of the
CompetitionActrelatingtoanticompetitiveagreementsandabuseofdominantpositionwere
notifiedonMay20,2009.
TheCompetitionAct,2002,prohibitsanticompetitiveagreements,abuseofdominantposition
byenterprisesandregulatescombinations(acquisition,acquiringofcontrolandM&A),which
causes or likely to cause an appreciable adverse effect on competition within India. The
Commissionworksto:
Preventpracticeshavingadverseeffectoncompetition
Promoteandsustaincompetitioninthemarket
Protecttheinterestsofconsumers,and
Ensurefreedomoftradecarriedonbyotherparticipantsinmarkets,inIndia.
Section6oftheCompetitionAct,2002,statesthatNopersonorenterpriseshallenterintoa
combination5 which causes or is likely to cause an appreciable adverse effect on competition
withintherelevantmarketinIndiaandsuchacombinationshallbevoid.
Incaseofanofferpursuanttotakeover,MerchantBankermayberequiredtofollowupwith
theCompetitionCommissionofIndia(CCI)soastodisclosethestatusofCCIapprovalforthe
proposedtakeoverbytheacquireranditsstatusintheofferdocumentoftheacquirer.

2.3.18 ForeignExchangeManagementAct,1999

The Foreign Exchange Management Act , 1999 (FEMA) was passed to replace the erstwhile
Foreign Exchange Regulation Act, The main objective behind the Foreign Exchange
ManagementAct(1999)istoconsolidateandamendthelawrelatingtoforeignexchangewith
theobjectiveoffacilitatingexternaltradeandpayments.Itwasalsoformulatedtopromotethe
orderlydevelopmentandmaintenanceofforeignexchangemarketinIndia.

FEMAisapplicabletothewholeofIndia.Theactisalsoapplicabletoallbranches,officesand
agencies outside India owned or controlled by a person who is a resident of India. The FDI
relatednotificationsareissuedbyRBIundertheFEMA,1999.

2.3.19 SEBI(Underwriters)Regulations,1993

Underwriter means a person who engages in the business of underwriting of an issue of


securitiesofabodycorporate.Underwritingmeansanagreementwithorwithoutconditions

5
Combinationdefined,includesmergers&amalgamation,acquisitionofshares,assetsabovethresholdsanddomesticnexus.

53

NISM-Series-IX: Merchant Banking Certification Examination


to subscribe to the securities of a body corporate or procure subscription when the existing
shareholdersofsuchbodycorporateorthepublicdonotsubscribetothesecuritiesofferedto
them.TheseRegulationsspecifytheconditionsandprocedureforregistrationofunderwriters
asalsothegeneralobligationsandresponsibilitiesofunderwriters.

Thusinsimplewordsitcanbesaidthatwhenpublicfailstorespond/subscribetoanissue,
Underwritershavetochipinandgettheissuesubscribed.

2.3.20 TheDepositoriesAct,1996

TheDepositoriesActenablessettingupofmultipledepositoriesinIndia.TheActusheredinan
eraofefficientcapitalmarketinfrastructure,improvedinvestorprotection,reducedrisksand
increasedtransparencyoftransactionsinthesecuritiesmarket.TheActspecifies,interalia,the
rightsandobligationsofdepositories,participants,issuersandbeneficialowners.

Asondate,therearetworegistereddepositoriesinIndiaviz.CentralDepositoryServices(India)
Limited(CDSL)andNationalSecuritiesDepositoryLtd.(NSDL).

2.3.21 SEBI(DepositoriesandParticipants)Regulations,1996

These Regulations deal with the procedural requirements to be complied with by the
Depository or Depository Participant with respect to registration of depository, obtaining of
certificateofcommencementofbusiness,registrationofparticipant,rightsandobligationsof
depositories,participants,issuers,mannerofsurrenderofcertificateofsecurityandcreationof
pledgeorhypothecation.ParticipantasdefinedinTheDepositoriesAct,1996meansaperson
registeredassuchundersubsection(1A)ofsection12oftheSecuritiesandExchangeBoardof
IndiaAct,1992.

A Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs
and the depository is governed by an agreement made between the two under the
DepositoriesAct,1996,SEBI[DepositoriesandParticipants]Regulations,1996andtheByelaws
oftheDepository.

2.3.22 SEBI(CertificationofAssociatedPersonsinSecuritiesMarkets)Regulations,2007

TheSEBI(CAPSM)Regulations,2007,Regulations7and8,delegatesthefollowingpowersand
functionstoNationalInstituteofSecuritiesMarkets:

(a) The functions of NISM in respect of certification for associated persons in the securities
marketshallincludeputtinginplaceandimplementingthecertificationprocess,procedure
andpolicies.

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NISM-Series-IX: Merchant Banking Certification Examination


(b) NISMinconsultationwithSEBImaylaydownstandardswhichmay,(i)specifythatallorany
portion of such standards shall be applicable to all or any category of associated persons
workingorassociatedwithalloranyclassofintermediariesinsecuritiesmarket;(ii)specify
thatnoassociatedpersoninanysuchclassmaybequalifiedtobeemployedorengagedor
continuedtobeemployedorengagedbyanintermediaryunlessheisincompliancewith
such standards of examination, continuing professional education requirements and such
otherqualificationsasNISMinconsultationwiththeSEBImayspecify.
ObligationofObtainingCertification
Regulation3oftheSEBI(CAPSM)Regulations,2007providesthatSEBImaybynotificationin
theofficialgazetterequiresuchcategoriesofassociatedpersonstoobtainrequisitecertificate
forengagementoremploymentwithsuchclassesofintermediariesandfromsuchdateasmay
bespecifiedinthenotificationprovidedthatanassociatedpersonemployedorengagedbyan
intermediarypriortothedatespecifiedbySEBImaycontinuetobeemployedorengagedby
theintermediaryifheobtainsthecertificatewithintwoyearsfromthesaiddate.

Anassociatedpersononbeingemployedorengagedbyanintermediaryonorafterthedate
specifiedbySEBIshallobtainthecertificatewithinoneyearfromthedateofbeingemployedor
engagedbytheintermediary.

Anassociatedperson,whoasonthedatespecifiedbySEBI,holdsacertificateforacategoryas
recognised by SEBI shall not be required to obtain a fresh certificate for the same category
duringthevalidityofsuchcertificate.

MannerofObtainingCertification

Regulation 4 of SEBI (CAPSM) Regulations, 2007 specifies the manner of obtaining the
certificatethefirsttime.Thesearefurtherdetailedbelow:

APrincipal6mayobtainthecertificatebyanyofthefollowingmanners:

(a) Passingtherelevantcertificateexamination,asmaybespecifiedbyNISM.
(b) SuccessfullycompletingarelatedCPEProgram7,asmaybespecifiedbyNISM.
(c) DeliveringatleastfoursessionsinspecificCPEprogram,asmaybespecifiedbyNISM.

A person other than a Principal, who has attained 50 years of age or who has 10 years of
experience,mayobtainthecertificatebyanyofthefollowingmethods:

(a) Passingtherelevantcertificateexamination,asmaybespecifiedbyNISM.

6
A Principal is a person who is actively engaged in the management of the intermediarys securities business including
supervision, solicitation, conduct of business, and includes: a) Sole Proprietors, b) Managing Partners and c) Whole Time
Directors
7TheCPEProgramisasperthenewNISMcommuniquRef.No.NISM/Certification/CPEGeneral/2011/1datedDecember21,

2011.

55

NISM-Series-IX: Merchant Banking Certification Examination


(b) SuccessfullycompletingarelatedCPEProgram,asmaybespecifiedbyNISM.

Allotherpersonsmayobtainthecertificatebythefollowingmethod:

(a)Passingtherelevantcertificateexamination,asmaybespecifiedbyNISM.

ValidityPeriodofCertificate

Thecertificategivenunderregulation3ofSEBI(CAPSM)Regulations,2007isvalidforaperiod
of3yearsfromthedateofthegrantofthecertificateorrevalidationasthecasemaybe.Upon
theexpiryofthevalidityofthecertificatepossessedbytheassociatedperson,thecertificate
shall be revalidated for a period of 3 years provided the associated person successfully
completesaprogrammeofcontinuingprofessionaleducationasspecifiedbyNISM.

Associatedpersonsengagedintheactivities8asmentionedinsubregulation4ofregulation3
oftheSEBI(CAPSM)shallcontinuetobesoengagedonlyuponholdingavalidcertificate.

ContinuingProfessionalEducationRequirements

Uponexpiryofthevalidityofthecertificatepossessedbyanassociatedperson,thecertificate
may get revalidated, provided the associated person successfully completes a programme of
continuing professional education, as may be specified by NISM during 12 months preceding
thedateofexpiryofthecertificate,orbypassingtherelevantNISMCertificationExamination
beforetheexpiryoftheexistingcertificate9.

The certificate will be revalidated for a period of three years from the date of expiry of the
existingcertificate.Differentcategoriesofpersonsmaygettheircertificaterevalidatedthrough
differentmethodsasfollows:

APrincipalmaygethis/hercertificaterevalidatedbyanyofthefollowingways:

(a) Passingtherelevantcertificateexamination,asmaybespecifiedbyNISM.
(b) SuccessfullycompletingarelatedCPEProgram,asmaybespecifiedbyNISM.
(c) DeliveringatleastfoursessionsinspecificCPEprogram,asmaybespecifiedbyNISM.

A person other than a Principal, who has attained 50 years of age or who has 10 years of
experience,maygetthecertificaterevalidatedbyanyofthefollowingmethods:

8
Activitywhereinthe(a)theassociatedpersonaspartofhisworkoroperationdealsorinteractswiththeinvestors,issuersor
clients of intermediaries;(b)the associated person deals with assets or funds of investor orclients; (c)the associated person
handlesredressalofinvestorgrievances;(d)theassociatedpersonisresponsibleforinternalcontrolorriskmanagement;(e)the
associated person is responsible for compliance of any rules or regulations; (f)the associated person is engaged in activities
thathaveabearingonoperationalriskoftheintermediary.
9
SeeNISMcommuniquRef.No.NISM/Certification/CPEGeneral/2011/1datedDecember21,2011.

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NISM-Series-IX: Merchant Banking Certification Examination


(a) Passingtherelevantcertificateexamination,asmaybespecifiedbyNISM.
(b) SuccessfullycompletingarelatedCPEProgram,asmaybespecifiedbyNISM.

Allotherpersonsmaygettheircertificaterevalidatedbyanyofthefollowingmethods:

(a) Passingtherelevantcertificateexamination,asmaybespecifiedbyNISM.
(b) SuccessfullycompletingarelatedCPEProgram,asmaybespecifiedbyNISM.

2.3.23 SEBI(ForeignPortfolioInvestors)Regulations,2014

SEBI issued the SEBI (Foreign Portfolio Investors) Regulations, 2014 on 7th January 2014. A
ForeignPortfolioInvestor(FPI)hasbeendefinedtomeanapersonwhosatisfiestheprescribed
eligibility criteria and has been registered under the FPI Regulations. All existing Foreign
InstitutionalInvestors(FIIs)andQFIsaretobemergedintoonecategorycalledFPI.

EligibilityCriteria

AnapplicantdesirousofFPIregistrationshould,interalia,satisfythefollowingconditions:

ItshouldnotberesidentinIndiaoraNonResidentIndian.

Itshouldbearesidentofacountry:

whose securities market regulator is a signatory to IOSCOs Multilateral MOU or a


signatorytoabilateralMOUwithSEBI;

whosecentralbankisamemberoftheBankforInternationalSettlements;

againstwhomtheFinancialActionTaskForce(FATF)hasnotissuedanywarnings

Itshouldlegallybepermittedtoinvestinsecuritiesoutsidethecountryofitsincorporationor
establishmentorplaceofbusiness.

It should be authorised by its Memorandum of Association and Articles of Association or


equivalentdocument(s)ortheagreementtoinvestonitsownbehalforonbehalfofitsclients.

Itmustmeettheprescribedcriteriaofafitandproperperson.

Among other things, the SEBI (FPI) Regulations specifies the investment restrictions and
conditions for the Foreign Portfolio Investors. It specifies the list of securities in which the
ForeignPortfolioInvestorscaninvestin.Incases,whereaforeigninstitutionalinvestororasub
account,priortocommencementoftheseregulations,holdsequitysharesinacompanywhose
sharesarenotlistedonanyrecognizedstockexchange,andcontinuestoholdsuchsharesafter
initial public offering and listing thereof, such shares shall be subject to lockin for the same
period, if any, as is applicable to shares held by a foreign direct investor placed in similar

57

NISM-Series-IX: Merchant Banking Certification Examination


position,underthepolicyoftheGovernmentofIndiarelatingtoforeigndirectinvestmentfor
thetimebeinginforce.

In respect of investments in the secondary market, the Regulation prescribes additional


conditions.Someoftheimportantconditionsarelistedbelow:

1. AforeignportfolioinvestorshalltransactinthesecuritiesinIndiaonlyonthebasisoftaking
andgivingdeliveryofsecuritiespurchasedorsold.However,thisrestrictionshallnotapply
to (a) any transactions in derivatives on a recognized stock exchange; (b) short selling
transactionsinaccordancewiththeframeworkspecifiedbytheBoard;(c)anytransactionin
securitiespursuanttoanagreemententeredintowiththemerchantbankerintheprocess
ofmarketmakingorsubscribingtounsubscribedportionoftheissueinaccordancewiththe
SEBI(ICDR)Regulations,2009.
2. Notransactiononthestockexchangeshallbecarriedforward.
3. Thetransactionofbusinessinsecuritiesbyaforeignportfolioinvestorshallbeonlythrough
stockbrokersregisteredbySEBI.

CandidatesmayreadtheSEBI(FPI)Regulationsforbetterunderstanding.

2.3.24 SEBI(AlternativeInvestmentFunds)(AFI)Regulations,2012

AlternativeInvestmentFundmeansanyfundestablishedorincorporatedinIndiaintheform
ofatrustoracompanyoralimitedliabilitypartnershiporabodycorporatewhichisaprivately
pooledinvestmentvehiclewhichcollectsfundsfrominvestors,whetherIndianorforeign,for
investingitinaccordancewithadefinedinvestmentpolicyforthebenefitofitsinvestorsand
whichisnotcoveredbySEBIunderanyotherfundmanagementregulationsSEBIhasspecified
the eligibility criteria for an AIF. The Regulations also specify the investment strategy and
conditionsforinvestmentinallcategoriesofAIF.AlternativeInvestmentFundcanraisefunds
throughprivateplacementbyissueofinformationmemorandumorplacementmemorandum.
The Alternative Investment Fund may launch schemes subject to filing of placement
memorandumwiththeBoard.

This Regulation also covers the requirements for Angel Fund. Angel Fund means a sub
category of Venture Capital Fund under Category I Alternative Investment Fund that raises
fundsfromangelinvestorsandinvestsinaccordancewiththeprovisionsofthisChapter.The
provisionsofthisChaptershallapplytoangelfundsandschemeslaunchedbysuchangelfunds.

Alternative Investment Funds shall seek registration under different subcategories as


mentionedintheSEBI(AIF)Regulations.CategoryIAlternativeInvestmentFundwhichinvests
instartuporearlystageventuresorsocialventuresorSMEsorinfrastructureorothersectors
orareaswhichthegovernmentorregulatorsconsiderassociallyoreconomicallydesirableand
shallincludeventurecapitalfunds,SMEFunds,socialventurefunds,infrastructurefundsand
suchotherAlternativeInvestmentFundsasmaybespecified;

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NISM-Series-IX: Merchant Banking Certification Examination


CategoryIIAlternativeInvestmentFundwhichdoesnotfallinCategoryIandIIIandwhichdoes
notundertakeleverageorborrowingotherthantomeetdaytodayoperationalrequirements
andaspermittedintheseregulations;

CategoryIIIAlternativeInvestmentFundwhichemploysdiverseorcomplextradingstrategies
andmayemployleverageincludingthroughinvestmentinlistedorunlistedderivatives.

2.3.25 SEBI(ResearchAnalyst)Regulations,2014

The SEBI (Research Analyst) Regulations 2014, specifies who is a research analyst and the
specific regulations to be followed by them. The regulation defines research analyst as a
personwhoisprimarilyresponsiblefor,

i.preparationorpublicationofthecontentoftheresearchreport;or

ii.providingresearchreport;or

iii.making'buy/sell/hold'recommendation;or

iv.givingpricetarget;or

v.offeringanopinionconcerningpublicoffer,

withrespecttosecuritiesthatarelistedortobelistedinastockexchange,whetherornotany
such person has the job title of 'research analyst' and includes any other entities engaged in
issuanceofresearchreportorresearchanalysis.

PersonsactingasaResearchanalystorresearchentitycannotholdhimselfoutasaresearch
analyst, unless he holds a SEBI Registration certificate. An individual registered as research
analyst under these regulations, individuals employed as research analyst and partners of a
research analyst, if any, engaged in preparation and/or publication of research report or
researchanalysisshallhavethefollowingminimumqualifications,atalltimes:

(i) A professional qualification or postgraduate degree or post graduate diploma in finance,


accountancy, business management, commerce, economics, capital market, financial services
ormarketsprovidedby:

(a) a university which is recognized by University Grants Commission or by any other


commission/council/board/bodyestablishedunderanActofParliamentinIndiaforthe
purpose;or

(b)aninstitute/associationaffiliatedwithsuchuniversity;or

(c) an institute/ association/university established by the central government or state


government;or

(d)autonomousinstitutefallingunderadministrativecontrolofGovernmentofIndia;or

59

NISM-Series-IX: Merchant Banking Certification Examination


(ii) professional qualification or postgraduate degree or post graduate diploma which is


accreditedbyAllIndianCouncilforTechnicalEducation,NationalAssessmentandAccreditation
CouncilorNationalBoardofAccreditationoranyothercouncil/board/bodysetupunderanAct
ofParliamentinIndiaforthepurpose;or

(iii)agraduateinanydisciplinewithanexperienceofatleastfiveyearsinactivitiesrelatingto
financialproductsormarketsorsecuritiesorfundorassetorportfoliomanagement.

TheSEBI(ResearchAnalyst)Regulationspecifiesthelimitationsontrading,theinternalpolicies
and control procedures governing the dealing and trading by any research analyst. The
regulation also specifies the limitations on publication of research report, public appearance
andconductofbusiness,etc.

2.3.26 SEBI(InvestmentAdviser)Regulations,2013

The SEBI (investment Adviser) Regulation, 2013 basically regulates investment Advisers.
InvestmentAdvisermeansanyperson,whoforconsideration,isengagedinthebusinessof
providinginvestmentadvicetoclientsorotherpersonsorgroupofpersonsandincludesany
personwhoholdsouthimselfasaninvestmentadviser,bywhatevernamecalled;

Investment Advice means advice relating to investing in, purchasing, selling or otherwise
dealing in securities or investment products, and advice on investment portfolio containing
securities or investment products, whether written, oral or through any other means of
communicationforthebenefitoftheclientandshallincludefinancialplanning:

Provided that investment advice given through newspaper, magazines, any electronic or
broadcastingortelecommunicationsmedium,whichiswidelyavailabletothepublicshallnot
beconsideredasinvestmentadviceforthepurposeoftheseregulations;

ThisRegulationspecifiesthatanypersonactingasInvestmentAdviserneedstoberegistered
with SEBI, it also lists out the conditions and requirements to be followed by Investment
Advisers.TheregulationspecifiesthegeneralobligationsandresponsibilitiesoftheInvestment
Advisers,disclosureswhichtheyneedtomaketotheirclientsetc.

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NISM-Series-IX: Merchant Banking Certification Examination


ReviewQuestions

1. ThemerchantbankerleadingapublicofferispopularlyknownastheLeadManager.State
whetherTrueorFalse.
(a) True
(b) False
Ans:(a)

2. WhichActdealswithlawsrelatingtolistedaswellasunlistedCompanies?
(a) FEMA
(b) SEBIAct
(c) CompaniesAct
(d) SCRA
Ans:(c)

3. AspertheSEBI(CertificationofAssociatedPersonsinSecuritiesMarkets)Regulations,2007,
acertificateisvalidforaperiodof______fromthedateofgrantofcertificateor
revalidationasthecasemaybe.
(a) 3years
(b) 2years
(c) 5years
(d) 7years
Ans:(a)

4. WhichActaimsatprohibitinganticompetitiveagreements,abuseofdominantpositionby
enterprisesandregulatescombinations(acquisition,acquiringofcontrolandM&A),which
causesorlikelytocauseanappreciableadverseeffectoncompetitionwithinIndia?
(a) SEBIAct,1992
(b) CompetitionCommissionAct,2002
(c) CompaniesAct,2013
(d) FEMA,1999
Ans:(b)

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NISM-Series-IX: Merchant Banking Certification Examination







THISPAGEHASBEENLEFTBLANK
INTENTIONALLY

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NISM-Series-IX: Merchant Banking Certification Examination


ChapterRegistration,CodeofConduct&GeneralObligationsofMerchant
BankersinIndia

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

Differentcategoriesandeligibilitycriteriaforbecomingamerchantbanker

Generalobligationsandcodeofconductformerchantbankers

InvestorgrievanceredressalandSCOREsmechanism

3.1 Introduction
In this chapter, we will give our readers an insight into the various regulatory aspects of the
Merchant Bankers in India. Merchant Bankers are expected to deal in project counseling and
preinvestment analysis, feasibility studies of capital expenditure, capital structure designing,
issue management and underwriting, loan syndication as well as mergers, amalgamation and
takeovers,venturecapitalinvestmentsandbuybacks.

ActivitiesCoveredunderMerchantBanking

As per the SEBI (Merchant Bankers) Regulations, 1992, a body corporate other than a non
banking financial company (NBFC) can undertake activities that are relating to merchant
banker.Someofthespecificactivities10carriedoutbyamerchantbankerarelistedbelow:
a) Managingthepublicissueofsecurities
b) Underwritingthepublicissue
c) Managing/advisingoninternationaldebt/equityofferingslikeGDRs,ADRs,FCCBsetc.
d) Privateplacementofsecurities
e) Primary/satellitedealershipofgovernmentsecurities
f) Corporateadvisoryservicessuchasmergers,takeovers,buybacksetc.
g) Stockbroking
h) Advisoryservicesforprojects
i) Syndicationofdomesticloanofferings
j) Internationalfinancialadvisoryservices

WhocanbeaMerchantBanker?

A merchant banker who has been granted certificate of registration to act as primary or
satellitedealerbyReserveBankofIndiamaycarryonsuchbusinessasmaybepermittedbythe

10
SEBICircularRef.No.:RMBCIRCULARNO.1(9899)June05,1998

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NISM-Series-IX: Merchant Banking Certification Examination


Reserve Bank of India. A merchant banker, who has been granted certificate of registration
undertheseregulations,mayensuremarketmakinginaccordancewithChapterXAoftheSEBI
(IssueofCapitalandDisclosureRequirements)Regulations,2009.

Merchant bankers, irrespective of the activity in which they are involved / dealing, are
governed by the SEBI (Merchant Bankers) Regulations, 1992 issued by SEBI and Amendment
RegulationsissuedthereunderfromtimetotimeandneedtoberegisteredwithSEBIunderthe
aforementioned regulation. The requirements for the grant of certificate of registration to
merchant banker and the regulations applicable to them will be dealt with in detail in the
followingsections.

3.2 RegistrationofMerchantBankers11
3.2.1 DefinitionofMerchantBanker

IntheSEBI(MerchantBankers)Regulations,1992,aMerchantBankerisdefinedasanyperson
whoisengagedinthebusinessofissuemanagementeitherbymakingarrangementsregarding
selling,buyingorsubscribingtosecuritiesoractingasmanager,consultant,adviserorrendering
corporateadvisoryserviceinrelationtosuchissuemanagement.

3.2.2 CategoriesofMerchantBankers

Anapplicationforthegrantofcertificateofinitialregistrationasmerchantbankersneedsto
be submitted to SEBI in Form A as specified in the SEBI (Merchant Bankers) Regulations
(hereinafter referred as SEBI MB Regulation). The regulation states that an application for
registrationmadeunderthisregulationshallbeaccompaniedbyanonrefundableapplication
feeofRs.25,000/andcanbemadeonlyforCategoryIMerchantBanker.

(a)CategoryI,thatis

(i) 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,tieupoffinanciersandfinalallotmentandrefundofthesubscriptions;and

(ii)toactasadviser,consultant,manager,underwriter,portfoliomanager;

StockBrokersand/orMerchantbankersholdingavalidregistrationcertificateunderSEBIAct
are entitled to act as an underwriter without obtaining a separate certificate as per the SEBI
(Underwriters) Regulation and will be governed by these regulations in other respects.
However,anapplicantcancarryontheactivityasportfoliomanageronlyifheobtainsseparate
certificateofregistrationundertheSEBI(PortfolioManager)Regulations,1993.SEBIonbeing
satisfiedthattheapplicantiseligible,shallgrantacertificateofinitialregistration.

11
Forthepurposeofregistration,merchantbankerswhowerenotcarryingonnonsecuritiesmarketactivitiesor
thosewhoareplanningtodiscontinuethesame,shouldsubmitanundertakingtoSEBIthattheywillnotcarryon
anyotheractivitythanthatinsecuritiesmarket.

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NISM-Series-IX: Merchant Banking Certification Examination


3.2.3 EligibilityCriteriaforregisteringasaMerchantBanker

AnapplicantseekingregistrationasMerchantBankershallcomplywiththerequirementssuch
astheCapitalAdequacyRequirements,RegistrationFees,andCriteriaforfitandproperperson
etc.whichwouldbediscussedinthefollowingsections.
3.2.3.1 ConsiderationofApplication

SEBIshallconsidergrantofacertificateofmerchantbankertoanapplicantwhocomplieswith
thefollowingrequirementsasmentionedbelow:

(a) An applicant shall be a body corporate other than a nonbanking financial company as
definedundersection45I(f)oftheRBIAct,1934,providedthatthemerchantbankerwho
hasbeengrantedregistrationbytheRBItoactasPrimaryorSatelliteDealermaycarryon
suchactivitysubjecttotheconditionthatitshallnotacceptorholdpublicdeposit.

(b) The applicant should have the necessary infrastructure like adequate office space,
equipmentsandmanpowertoeffectivelydischargehisactivities.

(c) The applicant should have in his employment minimum of two persons who have the
experiencetoconductthebusinessofmerchantbanker.

(d) A person directly or indirectly connected12 with the applicant has not been granted
registrationbytheSEBI.

(e) The applicant, his partner, director or principal officer are not involved in any litigation
connectedwiththesecuritiesmarketwhichhasanadversebearingonthebusinessofthe
applicant;

(f) The applicant, his director, partner or principal officer have not been at any time been
convicted for any offence involving moral turpitude or has been found guilty of any
economicoffence;

(g) The applicant has the professional qualification from an institution recognized by the
Governmentinfinance,laworbusinessmanagement;

(h) Grantofcertificatetotheapplicantisintheinterestofinvestors;

(i) TheapplicantsatisfiesthecapitaladequacyrequirementsandisFitandproperperson.
3.2.3.2 CapitalAdequacyRequirements

Theregulation7oftheSEBIMBRegulationsspecifythatthecapitaladequacyrequirementsfor
applicantsseekingregistrationasMerchantBankersisthatitshallhaveanetworthofnotless

12
Directly or indirectly connected means any person being an associate, subsidiary or interconnected or group
companyoftheapplicantincaseoftheapplicantbeingabodycorporate

65

NISM-Series-IX: Merchant Banking Certification Examination


thanRs.5crore.Networthheremeansthepaidupcapitalandfreereservesoftheapplicantat
thetimeofmakingapplication.
3.2.3.3 FitandProperPerson

Forpurposeofgrantingregistrationtoanapplicant,SEBItakesintoaccounttheCriteriaforfit
andproperpersonasgivenundertheSEBI(Intermediaries)Regulations2008.Itstates:

For the purpose of determining as to whether an applicant or the intermediary is a fit and
properpersontheBoardmaytakeintoaccountanyconsiderationitdeemsfit,includingbutnot
limited to the following criteria in relation to the applicant or the intermediary, the principal
officerandthekeymanagementpersonsbywhatevernamecalled

a) Integrity,reputationandcharacter;
b) Absenceofconvictionsandrestraintorders;
c) Competenceincludingfinancialsolvencyandnetworth
3.2.3.4 FurnishingofInformation,ClarificationandPersonalRepresentation

Regulation5ofSEBI(MerchantBankers)Regulationsstate:

1) SEBImayrequiretheapplicanttofurnishfurtherinformationorclarificationregarding
mattersrelevanttotheactivityofamerchantbankerforthepurposeofdisposalofthe
application.
2) Theapplicantoritsprincipalofficershall,ifsorequired,appearbeforeSEBIforpersonal
representation.

3.2.4 Registration,RenewalFees&Validity

SEBI, after being satisfied that the applicant is eligible for registration as a merchant banker,
shall grant the certificate of initial registration as mentioned in the SEBI (Merchant Bankers)
Regulation.Onbeingintimatedofthegrantofthiscertificatethemerchantbankerisrequired
to pay the requisite fees as mentioned in the SEBI (Merchant Bankers) Regulations within 15
daysofreceiptofsuchintimationfromSEBI.

EveryMerchantBankerisrequiredtopayaninitialfeeofRs.10lakhasregistrationfees.The
certificateofinitialregistrationgrantedshallbevalidforaperiodoffiveyearsfromthedateof
itsissuetotheapplicant.

3.2.5 Grantofcertificateofpermanentregistration

Themerchantbankerwhohasbeengrantedordeemedtohavebeengrantedacertificateof
initial registration, may, three months before the expiry of the period of certificate of initial
registration,makeanapplicationforgrantofacertificateofpermanentregistrationinFormA.
Anapplicationforgrantofcertificateofpermanentregistrationshallbeaccompaniedbyanon
refundableapplicationfeeofRs.25,000/asspecifiedinScheduleIIoftheseregulations.The

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applicationforgrantofacertificateofpermanentregistrationshallbeaccompaniedbydetails
ofthechangesthathavetakenplaceintheinformationthatwassubmittedtotheSEBIwhile
seeking initial registration or renewal, as the case may be, and a declaration stating that no
changesotherthanthoseasmentionedinsuchdetailshavetakenplace.

OnceSEBIissatisfied,itshallgrantacertificateofpermanentregistrationinFormBandshall
send intimation to the applicant. On the grant of a certificate of permanent registration the
merchant banker shall be liable to pay the fee in accordance with Schedule II of these
regulations.Amerchantbankerwhohasbeengrantedacertificateofpermanentregistration,
tokeepitsregistrationinforce,shallpayafeeoffivelakhrupeeseverythreeyearsfromthe
sixthyearfromthedateofgrantofcertificateofinitialregistration,orfromcompletionofthe
periodofrenewedcertificateofregistration,asthecasemaybe.

Onbeingintimatedofthegrantofthiscertificatethemerchantbankerisrequiredtopaythe
requisite fees as mentioned in the SEBI MB Regulations within 15 days of receipt of such
intimationfromSEBI

The fees specified shall be payable by the merchant banker by a demand draft in favour of
SecuritiesandExchangeBoardofIndiapayableatMumbaiorattherespectiveregionaloffice.

3.2.6 ConditionsofRegistration

Anycertificatewhichhasbeengrantedtothemerchantbankerorrenewalgrantedunderthe
SEBIMBRegulationshallbesubjecttothefollowingconditionsasmentionedbelow.

(a)Wherethemerchantbankerproposeschangeincontrol,itshallobtainpriorapprovalofthe
SEBIforcontinuingtoactassuchafterthechange;

(b)Themerchantbankershallpaythefeesforinitialregistrationorpermanentregistration,as
thecasemaybe,inthemannerasprovidedintheseregulations;

(c)Themerchantbankershalltakeadequatestepsforredressalofgrievancesoftheinvestors
withinonemonthofthedateofthereceiptofthecomplaintandkeepSEBIinformedaboutthe
number,natureandotherparticularsofthecomplaintsreceived;

(d)Itshallmaintaincapitaladequacyrequirementsatalltimesduringtheperiodoftheinitial
registrationorpermanentregistration

(e)ItshallabidebytheregulationsmadeundertheSEBIAct,1992inrespectoftheactivities
carriedonbyitasmerchantbanker.

3.2.7 RegistrationRequirementsofMerchantBankersasUnderwriters

AsperRegulation3oftheSEBI(Underwriters)Regulation,1993,anypersonwillingtoactasan
UnderwriterneedstoholdavalidcertificateofinitialorpermanentregistrationgrantedbySEBI
under the SEBI (Underwriters) Regulation. Stock Brokers and/ or Merchant bankers holding a
valid registration certificate under SEBI Act are entitled to act as an underwriter without

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obtainingaseparatecertificateaspertheSEBI(Underwriters)Regulationandwillbegoverned
bytheseregulationsinotherrespects.


3.3 CodeofConductforMerchantBankers

TheRegulation13providesthateachmerchantbankerregisteredwithSEBIshouldfollowthe
prescribed code of conduct as given under the Schedule III of the SEBI (Merchant Bankers),
Regulation. The code of conduct emphasises the importance of integrity, honesty and ethical
behaviourexpectedfrommerchantbankers.Italsolaysouttheneedforpropersupervisionof
the employees and agents of a merchant bank, since they are in contact with investors and
clients very frequently. Since the business of a merchant banker is totally client and investor
driven, merchant bankers are expected to keep in mind the interests of the investors at all
timesandredressanygrievancesimmediatelyaswellaskeepSEBIinformedofthesame.

ThecodeofconductasprescribedbySEBIisasfollows:

1.Amerchantbankershallmakealleffortstoprotecttheinterestsofinvestors.

2. A merchant banker shall maintain high standards of integrity, dignity and fairness in the
conductofitsbusiness.

3.Amerchantbankershallfulfillitsobligationsinaprompt,ethical,andprofessionalmanner.

4.Amerchantbankershallatalltimesexerciseduediligence,ensurepropercareandexercise
independentprofessionaljudgment.

5.Amerchantbankershallendeavourtoensurethat

(a)Inquiriesfrominvestorsareadequatelydealtwith;

(b)Grievancesofinvestorsareredressedinatimelyandappropriatemanner;

(c) Where a complaint is not remedied promptly, the investor is advised of any further steps
whichmaybeavailabletotheinvestorundertheregulatorysystem.

6. A merchant banker shall ensure that adequate disclosures are made to the investors in a
timely manner in accordance with the applicable regulations and guidelines so as to enable
themtomakeabalancedandinformeddecision.

7.Amerchantbankershallendeavourtoensurethattheinvestorsareprovidedwithtrueand
adequate information without making any misleading or exaggerated claims or any
misrepresentation and are made aware of the attendant risks before taking any investment
decision.

8.Amerchantbankershallendeavourtoensurethatcopiesoftheprospectus,offerdocument,
letterofofferoranyotherrelatedliteratureismadeavailabletotheinvestorsatthetimeof
issueortheoffer.

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9.Amerchantbankershallnotdiscriminateamongstitsclients,saveandexceptonethicaland
commercialconsiderations.

10. A merchant banker shall not make any statement, either oral or written, which would
misrepresenttheservicesthatthemerchantbankeriscapableofperformingforanyclientor
hasrenderedtoanyclient.

11. A merchant banker shall avoid conflict of interest and make adequate disclosure of its
interest.

12. A merchant banker shall put in place a mechanism to resolve any conflict of interest
situationthatmayariseintheconductofitsbusinessorwhereanyconflictofinterestarises,
shalltakereasonablestepstoresolvethesameinanequitablemanner.

13.Amerchantbankershallmakeappropriatedisclosuretotheclientofitspossiblesourceor
potentialareasofconflictofdutiesandinterestwhileactingasmerchantbankerwhichwould
impairitsabilitytorenderfair,objectiveandunbiasedservices.

14.Amerchantbankershallalwaysendeavourtorenderthebestpossibleadvicetotheclients
havingregardtotheirneeds.

15. A merchant banker shall not divulge to anybody either orally or in writing, directly or
indirectly, any confidential information about its clients which has come to its knowledge,
withouttakingpriorpermissionofitsclients,exceptwheresuchdisclosuresarerequiredtobe
madeincompliancewithanylawforthetimebeinginforce.

16. A merchant banker shall ensure that any change in registration status/any penal action
takenbytheSEBIoranymaterialchangeinthemerchantbankersfinancialstatus,whichmay
adversely affect the interests of clients/investors is promptly informed to the clients and any
businessremainingoutstandingistransferredtoanotherregisteredintermediaryinaccordance
withanyinstructionsoftheaffectedclients.

17.Amerchantbankershallnotindulgeinanyunfaircompetition,suchasweaningawaythe
clientsonassuranceofhigherpremiumoradvantageousofferpriceorwhichislikelytoharm
theinterestsofothermerchantbankersorinvestorsorislikelytoplacesuchothermerchant
bankersinadisadvantageouspositionwhilecompetingfororexecutinganyassignment.

18.Amerchantbankershallmaintainarmslengthrelationshipbetweenitsmerchantbanking
activityandanyotheractivity.

19. A merchant banker shall have internal control procedures and financial and operational
capabilities which can be reasonably expected to protect its operations, its clients, investors
andotherregisteredentitiesfromfinanciallossarisingfromtheft,fraud,andotherdishonest
acts,professionalmisconductoromissions.

20.Amerchantbankershallnotmakeuntruestatementorsuppressanymaterialfactinany
documents,reportsorinformationfurnishedtotheSEBI.

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NISM-Series-IX: Merchant Banking Certification Examination


21.Amerchantbankershallmaintainanappropriatelevelofknowledgeandcompetenceand
abide by the provisions of the Act, regulations made there under, circulars and guidelines,
which may be applicable and relevant to the activities carried on by it. The merchant banker
shallalsocomplywiththeawardoftheOmbudsmanpassedundertheSecuritiesandExchange
BoardofIndia(Ombudsman)Regulations,2003.

22. A merchant banker shall ensure that SEBI is promptly informed about any action, legal
proceedings,etc.,initiatedagainstitinrespectofmaterialbreachornoncompliancebyit,of
anylaw,rules,regulations,anddirectionsofSEBIorofanyotherregulatorybody.

23.(a)Amerchantbankeroranyofitsemployeesshallnotrender,directlyorindirectly,any
investment advice about any security in any publicly accessible media, whether realtime or
nonrealtime,unlessadisclosureofhisinterestincludingalongorshortposition,inthesaid
securityhasbeenmade,whilerenderingsuchadvice.

(b)Intheeventofanemployeeofthemerchantbankerrenderingsuchadvice,themerchant
bankershallensurethatsuchemployeeshallalsodisclosetheinterests,ifany,ofhimself,his
dependent family members and the employer merchant banker, including their long or short
positioninthesaidsecurity,whilerenderingsuchadvice.

24. A merchant banker shall demarcate the responsibilities of the various intermediaries
appointedbyitclearlysoastoavoidanyconflictorconfusionintheirjobdescription.

25.Amerchantbankershallprovideadequatefreedomandpowerstoitscomplianceofficerfor
theeffectivedischargeofthecomplianceofficersduties.

26.Amerchantbankershalldevelopitsowninternalcodeofconductforgoverningitsinternal
operationsandlayingdownitsstandardsofappropriateconductforitsemployeesandofficers
in carrying out their duties. Such a code may extend to the maintenance of professional
excellence and standards, integrity, confidentiality, objectivity, avoidance or resolution of
conflictofinterests,disclosureofshareholdingsandinterests,etc.

27.Amerchantbankershallensurethatgoodcorporatepoliciesandcorporategovernanceare
inplace.

28.Amerchantbankershallensurethatanypersonitemploysorappointstoconductbusiness
is fit and proper and otherwise qualified to act in the capacity so employed or appointed
(includinghavingrelevantprofessionaltrainingorexperience).

29.Amerchantbankershallensurethatithasadequateresourcestosupervisediligentlyand
doessupervisediligentlypersonsemployedorappointedbyitintheconductofitsbusiness,in
respectofdealingsinsecuritiesmarket.

30. A merchant banker shall be responsible for the Acts or omissions of its employees and
agentsinrespectoftheconductofitsbusiness.

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NISM-Series-IX: Merchant Banking Certification Examination


31.Amerchantbankershallensurethattheseniormanagement,particularlydecisionmakers
haveaccesstoallrelevantinformationaboutthebusinessonatimelybasis.

32.Amerchantbankershallnotbeapartytoorinstrumentfor

(a)creationoffalsemarket;

(b)priceriggingormanipulation;or

(c) passing of unpublished price sensitive information in respect of securities which are listed
andproposedtobelistedinanystockexchangetoanypersonorintermediaryinthesecurities
market.

3.4 GeneralobligationsandResponsibilities
In this section we discuss the general responsibilities of a merchant banker as prescribed by
SEBI in the SEBI MB Regulations, which includes following the Code of Conduct, maintaining
properbooksofaccounts,submittinghalfyearlyresultsandotherrelevantinformationtoSEBI
as well as specific responsibilities with regard to lead managers of an issue. The relevant
sectionsfromtheSEBIRegulationsarementionedintheparentheses.

3.4.1 CodeofConduct

Inordertomaintainthehighestlevelofhonesty,integrity,ethics,professionaljudgmentand
keepingtheinterestsoftheinvestorinmind,SEBIrequiresthatmerchantbankersfollowthe
Code of Conduct as specified in the SEBI Regulations, (already been discussed in the section
3.3).

3.4.2 Maintainbooksofaccounts,recordsetc

The solvency and financial stability of merchant bankers is of prime importance to the
merchantbankingbusiness.Keepingthisinmind,SEBIhasprescribedthefollowingrulesunder
regulation14oftheSEBIMBRegulations:

(1)Everymerchantbankershallkeepandmaintainthefollowingbooksofaccount,recordsand
documentsnamely:

(a)acopyofbalancesheetasattheendoftheeachaccountingperiod;

(b)acopyofprofitandlossaccountforthatperiod;

(c)acopyoftheauditorsreportontheaccountsforthatperiod;

(d)astatementoffinancialposition.

(e)Recordsanddocumentspertainingtoduediligenceexercisedinpreissueandpost
issue activities of issue management and in case of takeover, buyback and delisting of
securities.

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NISM-Series-IX: Merchant Banking Certification Examination


(2)EverymerchantbankershallintimatetoSEBItheplacewherethebooksofaccount,records
anddocumentsaremaintained.

(3)Everymerchantbankershall,aftertheendofeachaccountingperiodfurnishtoSEBIcopies
ofthebalancesheet,profitandlossaccountandsuchotherdocumentsforanyotherpreceding
fiveaccountingyearswhenrequiredbySEBI.

Theabovedocumentsneedtobemaintainedforaminimumperiodof5accountingyears.

3.4.3 Submissionofhalfyearlyresults

In order to properly monitor the capital adequacy and the financial health of the merchant
banker, regulation 15 has mandated merchant bankers to submit the unaudited half yearly
financial results when required by SEBI. In this context, it is important to note the
requirements of Regulation 17 which states that every merchant banker shall within two
monthsfromthedateoftheauditorsreporttakestepstorectifythedeficienciesmadeoutin
theauditorsreport.

3.4.4 Responsibilitiesofleadmanagers

Leadmanagersofanissueareprimarilyresponsibleforthepricing,financinganddistributionof
the securities. They have a greater responsibility towards investors, SEBI and the issuer
company.SEBIunderregulation20hasmandatedthat:

(1) No lead manager shall agree to manage or be associated with any issue unless his
responsibilitiesrelatingtoissuemainly,thoseofdisclosures,allotmentandrefundareclearly
defined,allocatedanddeterminedandastatementspecifyingsuchresponsibilitiesisfurnished
toSEBIatleastonemonthbeforetheopeningoftheissueforsubscription:

Provided that, where there are more than one lead merchant banker to the issue the
responsibilities of each of such lead merchant bankers shall clearly be demarcated and a
statementspecifyingsuchresponsibilitiesshallbefurnishedtoSEBIatleastonemonthbefore
theopeningoftheissueforsubscription.

Thisistoensurethattheleadmanagersarewellawareoftheirrightsanddutiesinthecourse
ofissuanceofasecurity.

3.4.5 LeadMerchantBankernottoassociatewithanyMerchantBankerwhichisnot
holdingSEBIregistration

In order to ensure the highest standards of integrity and service to investors and clients,
Regulation21oftheSEBIMBRegulationhasprescribedthatmerchantbankersshallnotbelead
managersinanyissueifamerchantbankerwhoisnotholdingacertificateofregistrationfrom
SEBIisassociatedtotheissue.

Additionally regulation 21A of the SEBI MB Regulation requires that a merchant banker shall
notbeleadmanagerorassociatedwithanyactivityundertakenunderanyregulationsmadeby

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NISM-Series-IX: Merchant Banking Certification Examination


SEBI,ifheisapromoteroradirectororanassociateoftheissuerofsecuritiesorofanyperson
making an offer to sell or purchase securities in terms of any regulations made by SEBI.
However,amerchantbankerwhoisanassociateofsuchissuerorpersonmaybeappointed,if
heisinvolvedonlyinthemarketingoftheissueoroffer.Thetermassociateoftheissueror
thepersonwhoisissuingthesecuritieshereisinterpretedas:

(i)eitherofthemcontrols,directlyorindirectlythroughitssubsidiaryorholdingcompany,
notlessthanfifteenpercentofthevotingrightsintheother;or

(ii) Either of them, directly or indirectly, by itself or in combination with other persons,
exercisescontrolovertheother;or

(iii)Thereisacommondirector,excludingnomineedirector,amongsttheissuer,itssubsidiary
orholdingcompanyandthemerchantbanker.

Thisaimsatpreventinganyissuesrelatingtoconflictofinterest.

3.4.6 UnderwritingObligations

As per provisions of the regulation 22 of the SEBI MB Regulation, for every issue, the lead
manager will accept a minimum underwriting obligation of 5% of the total underwriting
commitment13orRs.25lakh,whicheverislesser.

Provided that, if the lead manager is unable to accept this obligation, he shall make
arrangementfortheissuetobeunderwrittenbyamerchantbankerassociatedwiththeissue
andshallkeepSEBIinformedaboutthis.

Further,inanyissuemadeinaccordancewithChapterXBoftheSEBI(ICDR)Regulations,2009,
(IssueofspecifiedsecuritiesbySmallandMediumEnterprises),themerchantbankershallitself
orjointlywithothermerchantbankersassociatedwiththeissueunderwriteatleast15%ofthe
issuesizeontheirownaccount.

3.4.7 Acquisitionofsharesprohibited

Inordertopreventmerchantbankersfromprofitingfromsensitiveinformationtheymayhave
abouttheirclientsorotherwise,SEBIhasprohibitedacquisitionofsharesonthebasisofsuch
information.Regulation26oftheSEBIMBRegulationstatesthatNomerchantbankerorany
ofitsdirectors,partnerormanagerorprincipalofficershalleitherontheirrespectiveaccounts
or through their associates or relatives, enter into any transaction in securities of bodies
corporateonthebasisofunpublishedpricesensitiveinformationobtainedbythemduringthe
courseofanyprofessionalassignmenteitherfromtheclientsorotherwise.

3.4.8 InformationtoSEBI

13
Is the amount of an underwriter's statutory underwriting commitment which the lead manager allows the underwriter to
keepfortheunderwriter'sownsaleseffort.(http://www.capitalmarketsadvisors.com/glossary.html)

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NISM-Series-IX: Merchant Banking Certification Examination


Every merchant banker shall submit to SEBI complete particulars of any transaction for
acquisitionofsecuritiesofanybodycorporatewhoseissueisbeingmanagedbythatmerchant
bankerwithinfifteendaysfromthedateofenteringintosuchtransaction.However,complete
particularsofanytransactionforacquisitionofsecuritiesmadeinpursuanceofunderwritingor
market making obligations in accordance with Chapter XA of the SEBI (Issue of Capital and
DisclosureRequirements)Regulations,2009shallbesubmittedtoSEBIonquarterlybasis.

3.4.9 DisclosurestotheSEBI

In order to maintain highest levels of transparency, merchant bankers are required to make
disclosuresregardingissuemanagementandcapitaladequacy.Regulation28statesasunder:

A merchant banker shall disclose to SEBI, as and when required, the following information,
namely:

(i)Hisresponsibilitieswithregardtothemanagementoftheissue;

(ii)Anychangeintheinformationorparticularspreviouslyfurnished,whichhaveabearingon
thecertificategrantedtoit;

(iii) The names of the body corporate whose issues he has managed or has been associated
with;

(iv)Theparticularsrelatingtothebreachofthecapitaladequacyrequirementasspecifiedin
regulation7;

(v)Relatingtohisactivitiesasamanager,underwriter,consultantoradvisertoanissue,asthe
casemaybe.

Itfurtherstatesthatthemerchantbankershallsubmitaperiodicreportinsuchmannerasmay
bespecifiedbySEBIfromtimetotime.

3.4.10 AppointmentofComplianceOfficer

InordertodealwithinvestorgrievancesandanycomplianceissueswiththeCodeofConduct,a
merchantbankerisrequiredtoappointaComplianceOfficertoensurethepropercompliance
toalltherulesandregulationsapplicabletothemerchantbankerasperRegulation28Aofthe
SEBIMBRegulation.

(1) Every merchant banker shall appoint a compliance officer who shall be responsible for
monitoring the compliance of the Act, rules and regulations, notifications, guidelines,
instructions, etc., issued by SEBI or the Central Government and for redressal of investors
grievances.

(2) The compliance officer shall immediately and independently report to SEBI any non
complianceobservedbyhimandensurethattheobservationsmadeordeficienciespointedout
bySEBIon/inthedraftprospectusorthelettersofofferasthecasemaybe,donotrecur.

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NISM-Series-IX: Merchant Banking Certification Examination


3.5 RedressalofInvestorGrievancesandSCORES

SEBI has vide its Circular No. CIR/OIAE/2/2011 dated June 3, 2011 provided for a system for
processing of investor complaints against listed companies called SEBI Complaints Redress
System (SCORES). This is a centralised web based complaints redress system. The salient
featuresofthissystemare:
Centraliseddatabaseofallcomplaints
Onlinemovementofcomplaintstotheconcernedlistedcompanies
Online upload of Action Taken Reports (ATRs) by the concerned intermediaries /
companiesand
Onlineviewingbyinvestorsofactionstakenonthecomplaintanditscurrentstatus

ComplaintsarisingoutofissuesthatarecoveredunderSEBIAct,SecuritiesContractRegulation
Act, Depositories Act and Rules and Regulation made there under and provisions that are
coveredundersection26ofCompaniesActarecomplaintsdealtwithbySEBI.

Forredressalofinvestorgrievances,eachMerchantBankerisgivenauseridandpasswordfor
gainingaccesstotheSCORESwebsite.Themerchantbankerisexpectedtologintothewebsite
onadailybasistocheckforanynewcomplaintsuploadedbySEBIandtoinitiatestepstoget
theseresolvedattheearliest.Asstatedabove,themerchantbankerisalsoexpectedtosubmit
anActionTakenReport(ATR)inrespectofeachsuchcomplaint.

CertainmattersarenotconsideredascomplaintsinSCOREs.Thesearegivenhereunder:
Complaintsthatareincompleteornotspecific
Allegationswithoutsupportingdocuments
Offeringsuggestionsorseekingguidance/explanation
Seekingexplanationfornontradingofsharesorilliquidityofshares
Notsatisfiedwithtradingpriceofthesharesofthecompanies
Nonlistingofsharesofprivateoffer
Disputesarisingoutofprivateagreementwithcompanies/intermediaries

Apartfromthis,therearecertaincomplaintsnotdealtwithbySEBI:
Complaintsagainstunlisted/delisted/woundup/liquidated/sickcompanies
Complaintsthataresubjudice(relatingtocaseswhichareunderconsiderationbycourt
oflaw,quasijudicialproceedingsetc.)
Complaintsfallingunderthepurviewofotherregulatorybodiesviz.RBI,IRDA,PFRDA,
CCI,FMC,etc.,orunderthepurviewofotherministriesviz.,MCA,etc.

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NISM-Series-IX: Merchant Banking Certification Examination


ReviewQuestions

1. AMerchantBankerapplicantshouldhavehowmanypeopleinhisemploymentwhoshould
beexperiencedtoconductthebusinessofMerchantBanker?
(a) 5
(b) 2
(c) 7
(d) 10
Ans:(b)


2. Thefeespayablebythemerchantbankerongrantofcertificateofregistrationshouldbeby
ademanddraftinfavourofAssociationofInvestmentBankersofIndia(AIBI)payableat
Mumbai.StatewhetherTrueorFalse.
(a) True
(b) False
Ans:(b)

3. Every merchant banker shall submit to SEBI complete particulars of any transaction for
acquisition of securities of any Body Corporate whose issue is being managed by that
merchantbankerwithin______fromthedateofenteringintosuchtransaction.
1. 30days
2. 15days
3. 21days
4. 45days
Ans:(b)

4. SCORESsystemofSEBIdoesnotdealwithanycomplaintswhichfallunderthepurviewof
theotherregulatorybodiesi.e.IRDA,PFRDAetc.StatewhetherTrueorFalse.
(a) True
(b) False
Ans:(a)

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NISM-Series-IX: Merchant Banking Certification Examination


Chapter4:IssueManagementImportantTerms

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

Varioustermswhicharerelatedtoofferinge.g.IPO,GreenShoeOption,
IPP,QIPetc

In the following chapters we will discuss the Issue management process, underwriting
provisions with regards to the Merchant bankers role in it. However before going into the
process details, we look at the important frequently used terms in the Issue Management
processandtheprimarymarket.Thesetermsarediscussedinthischapter.

4.1 UnderstandthevarioustermsrelatedtoOffering

(1) InitialPublicOffer

InitialPublicOffer(IPO)meansanofferofspecifiedsecuritiesbyanunlistedissuertothepublic
forsubscriptionandincludesanofferforsaleofspecifiedsecuritiestothepublicbyanyexisting
holdersofsuchsecuritiesinanunlistedissuer.Whenanunlistedcompanymakeseitherafresh
issueofsecuritiesoranofferforsaleofitsexistingsecuritiesorboth;forthefirsttimetothe
public;itistermedasanIPO.Thispavesthewayforlistingandtradingoftheissuerssecurities.

(2) FurtherPublicOffer

A further public offering (FPO) means an offer of specified securities by a listed issuer to the
publicforsubscriptionandincludesandofferforsaleofspecifiedsecuritiestothepublicbyany
existingholdersofsuchsecuritiesinalistedissuer.Itiswhenanalreadylistedcompanymakes
eitherafreshissueofsecuritiestothepublici.e.otherthantoitsexistingshareholdersoran
offerforsaletothepublicorboththroughanofferdocumentitiscalledafurtherpublicoffer.
FPOcanbemadethroughabookbuildingprocessorafixedpriceissue.

FPO may be made through the Fast Track Issue (FTI) process, provided certain conditions as
prescribed under the SEBI ICDR Regulations are complied with. Such issues are also granted
exemptions from requirements such as filing the draft offer document with SEBI, issuance of
observationsbySEBIetc.

(3) NetOffertoPublic

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NISM-Series-IX: Merchant Banking Certification Examination


Netoffertopublicmeansanofferofspecifiedsecuritiestothepublicbutdoesnotinclude
reservationsmadeforcertaininvestorcategories.ItisimportanttonotethattheNetOfferto
the Public should be in compliance with Rule 19(2)(b) of SCRR (Refer section 2.3.7 of this
workbook).

(4) RightsIssue

Rightsissuemeansanofferofspecifiedsecuritiesbyalistedissuertotheshareholdersofthe
issuerasontherecorddatefixedforthesaidpurpose.
RightsissuemaybemadethroughtheFasttrackissueprocessalsoprovidedcertainconditions
asprescribedundertheSEBIICDRRegulationsarecompliedwith.Suchissuesarealsogranted
exemptions from requirements such as filing the draft offer document with SEBI, issuance of
observationsbySEBIetc.

(5) Institutional Placement Programme means Offer of shares to QIBs for the purpose of
achievingminimumpublicshareholdingrequirementsasrequiredunderRule19(2)(b)ofSCRR,
termsofChapterVIIIAofSEBIICDRRegulations.Theoffercanbebywayofissueofsharesby
thelistedcompanyorbywayofsaleofsharesbyshareholdersofthecompany.

(6) QualifiedInstitutionsPlacement

When a listed issuer issues equity shares or securities convertible in to equity shares to
Qualified Institutional Buyers only in terms of provisions of Chapter VIII of SEBI (ICDR)
Regulations, 2009 SEBI ICDR, it is called a QIP. As per SEBI ICDR, Qualified institutional buyer
means:
SEBIregisteredmutualfund,venturecapitalfundandforeignventurecapitalinvestor;
Foreigninstitutionalinvestorandsubaccount(otherthanasubaccountwhichisaforeign
corporateorforeignindividual),registeredwithSEBI;
APublicfinancialinstitutionasdefinedinsection2(72)oftheCompaniesAct,2013;
Scheduledcommercialbank;
MultilateralandbilateralDevelopmentFinancialInstitution;
StateIndustrialdevelopmentCorporation;
InsurancecompanyregisteredwiththeIRDA;
ProvidentFundwithminimumcorpusofRs.25crore;
PensionFundwithminimumcorpusofRs.25crore;
NationalInvestmentFundsetupbytheGovernmentofIndia;
InsuranceFundssetupandmanagedbyarmy,navyorairforceoftheUnionofIndia;
InsuranceFundssetupbytheDepartmentofPosts

(7) PreferentialIssue

Preferentialissuemeansanissueofspecifiedsecuritiesbyalistedissuertoanyselectpersonor
group of persons on a private placement basis and does not include an offer of specified

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NISM-Series-IX: Merchant Banking Certification Examination


securities made through a public issue, rights issue, bonus issue, employee stock option
scheme, employee stock purchase scheme or qualified institutions placement or an issue of
sweat equity shares or depository receipts issued in a country outside India or foreign
securities.

(8) OfferforsalethroughStockExchangeMechanism
In order to facilitate promoters to dilute/offload their holding in listed companies in a
transparentmannerwithwiderparticipation,SEBIhasallowedtheofferforsaleofsharesby
promotersofsuchcompaniesthroughaseparatewindowprovidedbythestockexchange(s).
The details about the mechanism are given in SEBI Circular Reference No.
CIR/MRD/DP/18/2012 dated July 18, 2012. The OFS through Stock exchange Mechanism has
beendetailedinSection6.2ofthisworkbook.

(9) OfferDocument

Offerdocumentisadocumentwhichcontainsalltherelevantinformationaboutthecompany,
promoters,projects,financialdetails,objectsofraisingthemoney,termsoftheissueetc.andis
usedforinvitingsubscriptiontotheissuebeingmadebytheissuer.OfferDocumentiscalled
ProspectusincaseofapublicissueorofferforsaleandLetterofOfferincaseofarights
issue. Terms used for offer documents vary depending upon the stage or type of the issue
wherethedocumentisused.AspertheSEBIICDRRegulations,offerdocumentmeansared
herringprospectus,prospectusorshelfprospectusandinformationmemorandumintermsof
section31oftheCompaniesAct,2013incaseofapublicissueandletterofofferincaseofa
rightsissue.

Draftofferdocument:isanofferdocumentfiledwithSEBIforspecifyingchanges,ifany,init,
beforeitisfiledwiththeRegistrarofcompanies(ROCs)incaseofapublicissueandbeforeitis
filedwiththeStockExchangesincaseofaRightsIssue.Draftofferdocumentismadeavailable
in public domain including SEBI website, for enabling public to give comments, if any, on the
draftofferdocument.

Red herring prospectus is an offer document used in case of a book built public issue. It
containsalltherelevantdetailsexceptthatofpriceornumberofsharesbeingoffered.Itisfiled
withRoCbeforetheissueopens.

(10) BookBuildingProcess

AspertheSEBIICDRRegulations,bookbuildingmeansaprocessundertakentoelicitdemand
and to assess the price for determination of the quantum or value of specified securities or
IndianDepositoryReceipts,asthecasemaybe,inaccordancewiththeseregulations

In the book built method, the process aids price and demand discovery. It is a mechanism
where,duringtheperiodforwhichthebookfortheofferiskeptopen,bidsarecollectedfrom
investorsatvariouspricesatwhichtheyarewillingtosubscribetoacertainnumberofshares,

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NISM-Series-IX: Merchant Banking Certification Examination


whichiswithinthepricebandspecifiedbytheissuer.Pricebandindicatesthefloorpricewhich
istheminimumpriceatwhichthebidcanbemadeandthecapwhichistheupperlimitofthe
priceatwhichthebidcanbemade.Thecapcannotbemorethan20%ofthefloorprice.The
processisdirectedtowardsboththeinstitutionalaswellastheretailinvestors.Theissueprice
isdeterminedafterthebidclosurebasedonthedemandgeneratedintheprocess.

(11) FixedPriceIssue

Infixedpriceissue,theProspectusthatisfiledwithRoCcontainstheissuepricepershareand
thedemandfortheissueisknownonlywhiletheissueiskeptopenforsubscription.

(12) DifferentialPricing

Whenonecategoryofinvestorsisofferedsharesatapricedifferentfromtheothercategoryit
iscalleddifferentialpricing.Anissuercompanycanallotthesharestoretailindividualinvestors
and certain other categories of investors at a prescribed discount to the price at which the
sharesareofferedtoothercategoriesofpublic.

(13) FastTrackIssue

SEBIintroducedFastTrackIssue(FTI)inordertoenablewell establishedandcompliantlisted
companiessatisfyingcertainspecificentrynorms/conditionstoaccessIndianPrimaryMarketin
atimeeffectivemanner.SuchcompaniescanproceedwithFPOs/RightIssuesbyfilingacopy
of Red Herring Prospectus / Prospectus with the ROC or the Letter of Offer with designated
StockExchange,SEBIandStockExchanges.SuchcompaniesarenotrequiredtofileDraftOffer
DocumentforSEBIcommentsandtoStockExchanges.

Theequitysharesofthecompanyhavebeenlistedonanystockexchangehavingnationwide
trading terminals for a period of at least three years immediately preceding the reference
date14.
The average market capitalisation of public shareholding of the company is atleast Rs.
3,000croreforaperiodofoneyearuptotheendofthequarterprecedingthemonthin
whichtheproposedissueisapprovedbytheBoardofDirectors/shareholdersoftheissuer
dividedbythenumberoftradingdays;
Theannualizedtradingturnoverofthesharesofthecompanyduringsixcalendarmonths
immediately preceding the month of the reference date has beenat least two percent of
theweightedaveragenumberofshareslistedduringthesaidsixmonthsperiod;
Thecompanyhasredressedatleast95%ofthetotalshareholder/investorgrievancesor
complaintsreceivedtilltheendofthequarterimmediatelyprecedingthemonthofthedate
offilingofofferdocumentwithRegistrarofCompanies/StockExchanges;

14
Referencedatemeans:(a)incaseofapublicissuebyalistedissuer,thedateofregisteringtheredherringprospectus(in
caseofabookbuiltissue)orprospectus(incaseofafixedpriceissue)withtheRegistrarofCompanies;and(b)incaseofa
rightsissuebyalistedissuer,thedateoffilingtheletterofofferwiththedesignatedstockexchange.

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NISM-Series-IX: Merchant Banking Certification Examination


Thecompanyhascompliedwiththelistingagreementforaperiodofatleastthreeyears
immediatelyprecedingthereferencedate;
The impact of auditors qualifications, if any, on the audited accounts of the company in
respectofthefinancialyearsforwhichsuchaccountsaredisclosedintheofferdocument
doesnotexceed5%ofthenetprofit/lossaftertaxofthecompanyfortherespectiveyears.
No prosecution proceedings initiated or show cause notices issued by SEBI or pending
againstthecompanyoritspromotersorwholetimedirectorsasonthereferencedate;and
The entire shareholding of the promoter group is held in dematerialised form as on the
referencedate.

(14) GreenShoeOption

SEBIICDRRegulationshasdefinedgreenshoeoptionasanoptionofallottingequitysharesin
excess of the equity shares offered in the public issue as a postlisting price stabilizing
mechanism.GreenShoeOptionisapricestabilizingmechanisminwhichsharesareissuedin
excessoftheissuesize,byamaximumof15%.Fromaninvestorsperspective,anissuewith
green shoeoption provides more probability of getting shares and alsothat post listing price
may show relatively more stability. The specified securities bought from the market and
credited in the special account with the depository participant shall be returned to the
promotersorpreissueshareholdersimmediately,inanycasenotlaterthantwoworkingdays
aftertheendofthestabilizationperiod.Henceeffectively,theissuerborrowssecuritiesfrom
thepromotersorpreissueshareholdersandreturnsittothemafterthestabilisationperiod.

(15) SafetyNet

Safetynetarrangementmeansanarrangementprovidedbytheissuerunderwhichaperson
offerstopurchasespecifiedsecuritiesfromtheoriginalresidentretailindividualallotteesatthe
issue price. An issuer may provide for a safetynet arrangement for the specified securities
offered in any public issue in consultation with the merchant banker after ascertaining the
financial capacity of the person offering the safetynet arrangement, subject to disclosures
specifiedinthisregard.

(16) ApplicationSupportedBlockedAmount

ApplicationSupportedbyBlockedAmount(ASBA)isanapplicationcontaininganauthorization
toblocktheapplicationmoneyinthebankaccount,forsubscribingtoanissue.Thebankwill
block the application money in the bank account specified in the ASBA on the basis of the
authorisation.IfaninvestorisapplyingthroughASBA,hisapplicationmoneyshallbedebited
from the bank account only if his/her application is selected for allotment after the basis of
allotmentisfinalized,ortheissueiswithdrawn/failed.

UnderASBAfacility,investorscanapplyinanypublic/rightsissuesbyusingtheirbankaccount.
Investor submits the ASBA form (available at the designated branches of the banks acting as
SCSB)afterfillingthedetailslikenameoftheapplicant,PANnumber,demataccountnumber,

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NISM-Series-IX: Merchant Banking Certification Examination


bid quantity, bid price and other relevant details, to their banking branch by giving an
instructiontoblocktheamountintheiraccount.Inturn,thebankwilluploadthedetailsofthe
applicationinthebiddingplatform.Investorsshallensurethatthedetailsthatarefilledinthe
ASBAformarecorrectotherwisetheformisliabletoberejected.

(17) HardandSoftUnderwriting

Hardunderwritingiswhenanunderwriteragreestobuyhiscommitmentatitsearlieststage.
The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the
sharesarenotsubscribedbyinvestors,theissueisdevolvedonunderwritersandtheyhaveto
bringintheamountbysubscribingtotheshares.Theunderwriterbearsariskwhichismuch
higherthansoftunderwriting.

Incaseofsoftunderwriting,theunderwriteragreestobuyhiscommitmentatalaterstageonly
whenthepriceofsharesisknown,pursuanttobookbuilding.InsoftunderwritingUnderwriters
bearstheriskofonlywithdrawalofapplicationandthattooforashortperiodoftimei.e.till
theallotmentiffinalised.

(18) OpenandClosedBook

Inanopenbookbuildingsystemthemerchantbankeralongwiththeissuerensuresthatthe
demand for the securities and the bids are displayed online on the website of the Stock
Exchanges.Here,theinvestorcanbeguidedbythemovementsofthebidsduringtheperiodin
whichthebidiskeptopen.IndianBookbuildingprocessprovidesforanopenbooksystem.

Intheclosedbookbuildingsystem,thebookisnotmade publicandthebidderswillhaveto
takeacallonthepriceatwhichtheyintendtomakeabidwithouthavinganyinformationon
thebidssubmittedbyotherbidders.

(19) BasisofAllocation

After the closure of the issue, for example a book built public issue, the bids received are
aggregatedunderdifferentcategoriesi.e.,firmallotment,QualifiedInstitutionalBuyers(QIBs),
Non InstitutionalBuyers(NIBs),Retail,etc.Theallotmentofspecifiedsecuritiestoeachretail
individualinvestorshallnotbelessthantheminimumbidlot,subjecttoavailabilityofsharesin
retailindividualinvestorcategory,andtheremainingavailableshares,ifany,shallbeallotted
onaproportionatebasis.

(20) CategoriesofInvestor

Investorsarebroadlyclassifiedunderfollowingcategories:

Retail individual Investor (RIIs): means an investor who applies or bids for securities for a
valueofnotmorethanRs.2lakh.

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NISM-Series-IX: Merchant Banking Certification Examination


Qualified Institutional Buyers (QIBs): means (a) a public financial institution as defined in
section2(72)oftheCompaniesAct,2013;b)ascheduledcommercialbank;c)amutualfund
registered with SEBI; d) a foreign institutional investor and sub account registered with
SEBI, other than a subaccount which is a foreign corporate or foreign individual; e) a
multilateral and bilateral development financial institution; f) a venture capital fund
registered with SEBI; g) a foreign venture capital investor registered with SEBI; h) a state
industrialdevelopmentcorporation;i)aninsurancecompanyregisteredwiththeInsurance
RegulatoryandDevelopmentAuthority(IRDA);j)aprovidentfundwithminimumcorpusof
Rs. 25 crores; k) a pension fund with minimum corpus of Rs. 25 crores); l) National
InvestmentFund;m)insurancefundssetupandmanagedbyarmy,navyorairforceofthe
UnionofIndia;n)insurancefundssetupandmanagedbytheDepartmentofPosts,India.

Non Institutional Investors (NIIs): Investors who do not fall within the definition of the
abovetwocategoriesarecategorizedasNon InstitutionalInvestors.

Anchor Investor: Anchor investor means a qualified institutional buyer making an
applicationforavalueofRs.10croreormoreinapublicissue,onedaybeforeopeningof
thatpublicissue.SharesareallocatedtoAnchorInvestorsondiscretionarybasis(andnot
onproportionatebasis)andonthedayofbiddingitself. Thereshallbealockinof30days
onthesharesallottedtotheAnchorInvestorfromthedateofallotmentinthepublicissue.
Neither the merchant bankers nor any person related to the promoter/promoter
group/merchant bankers in the concerned public issue can apply under Anchor Investor
category.TheparametersforselectionofAnchorInvestorshallbeclearlyidentifiedbythe
merchant banker and shall be available as part of records of the merchant banker for
inspectionbytheBoard.Ifthepricefixedasaresultofbookbuildingishigherthantheprice
at which the allocation is made to Anchor Investor, the Anchor Investor shall bring in the
additionalamount.However,ifthepricefixedasaresultofbookbuildingislowerthanthe
price at which the allocation is made to Anchor Investor, the excess amount shall not be
refundedtotheAnchorInvestorandtheAnchorInvestorshalltakeallotmentatthepriceat
whichallocationwasmadetoit.

(21) DesignatedStockExchange

Thestockexchangewheresecuritiesoftheissuerareproposedtobelistedandischosenby
theissuerisadesignatedstockexchange.Incasewhereoneormoreofsuchstockexchanges
havenationwidetradingterminals,theissuershallchooseoneofthemasthedesignatedstock
exchange.

(22) Employee

Employeemeansapermanentandfulltimeemployee,workinginIndiaorabroad,oftheissuer
oroftheholdingcompanyorsubsidiarycompanyorofthatmaterialassociate(s)oftheissuer
whose financial statements are consolidated with the issuers financial statements as per

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NISM-Series-IX: Merchant Banking Certification Examination


AccountingStandard21,oradirectoroftheissuer,whetherwholetimeorparttimeanddoes
not include promoters and an immediate relative of the promoter (i.e., any spouse of that
person,oranyparent,brother,sisterorchildofthatpersonorofthespouse);

(23) SpecifiedSecurities
Specifiedsecuritiesmeansequitysharesandconvertiblesecurities.ThetermSecuritieshave
beendefinedintheSCRA,1956(Refersection2.3.6ofthisworkbook)

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NISM-Series-IX: Merchant Banking Certification Examination


ReviewQuestions

1. WhoisaQualifiedInstitutionalBuyer?
(a) SEBIregisteredmutualfund,venturecapitalfund
(b) SEBIregisteredFIIandsubaccount
(c) Scheduledcommercialbank
(d) Alloftheabove
Ans:(d)

2. Which of the following ways are used by the Promoters to dilute/offload their holding in
listedcompanies?
(a) Offerforsaleofshares
(b) QualifiedInstitutionalPlacementProgramme
(c) PreferentialIssue
(d) Noneoftheabove
Ans:(a)

3. UnderASBAfacility,investorscanapplyin__________byusingtheirbankaccount.
(a) PublicIssues
(b) RightsIssues
(c) PreferentialIssues
(d) Both(a)and(b)
Ans:(d)

4. FurtherPublicOffer(FPO)canbemadeonlythroughbookbuildingissuesthroughthestock
exchangeroute.StatewhetherTrueorFalse?
(a) True
(b) False
Ans:(b)

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NISM-Series-IX: Merchant Banking Certification Examination


Chapter5:IssueManagementProcessandUnderwriting

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

Issuemanagementprocesswhichincludesfilingofofferdocument,
documentsrequiredtobefiledbeforetheissueetc.
Pricingofissue

Underwritingobligations
Minimumsubscription,allotmentandrefund

In India, the Merchant Bankers registered with SEBI have been provided with statutory
exclusivityinmanagingthepublicofferssuchasIPOs,rightsandsecondaryissues.Intheoverall
processofissuemanagement,themerchantbankerplaysavarietyofimportantrolessuchas,
anexpertadvisortothemanagementoftheissuercompany,whoperformsduediligenceon
thecompany,asaneventmanagerandcoordinatortoensuretimelycompletionoftheissue,as
awatchdogforthestatutorycomplianceandasapersoninfiduciarycapacityforprotectionof
theinterestsoftheinvestors.Atthetimeofanissue,italsoactsasaninterfacebetweenthe
issuer company and the SEBI. The role of merchant banker in different capacity will be
emphasized as the processes involved in issue management are discussed further in this
chapter. Merchant bankers are also expected to guard against conflict of interest at every
stage.

This chapter deals with the regulations governing the process of Issue management (public
issues,rightsissues,furtherpublicoffersetc.)andunderwritingofissuesasperprovisionsgiven
in the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2009 hereinafter
referredtoasSEBIICDRRegulations.

5.1 IssueManagement
TheprovisionoftheSEBIICDRRegulationsstreamlinestheframeworkforpublicissues.Italong
withpublicissuesalsodealswith(a)Rightsissues,whentheaggregatevalueofthespecified
securitiesissuedisRs.50lakhsormore;(b)PreferentialIssue;(c)Anissueofbonussharesbya
listed issuer; (d) A Qualified Institutions Placement (QIP) by a listed issuer; (e) Institutional
Placement;(f)AnissueofIndianDepositoryReceipts(IDRs);(g)RightIssueofIndianDepository
Receipts;(h)IssueofSpecifiedSecuritiesbySmallAndMediumEnterprises;(i)ListingandIssue
ofSmallMediumEnterprisesonInstitutionalTradingPlatformwithoutInitialPublicOffer.

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NISM-Series-IX: Merchant Banking Certification Examination


Theregulationsalsosetsoutthecommonconditionswhichanissuerneedstofulfillforpublic
issuesandrightsissues,whichisdiscussedintheregulation4oftheSEBIICDR.Thecommon
conditionsstatethat:

(1)Anyissuerofferingspecifiedsecuritiesthroughapublicissueorrightsissueshallsatisfythe
conditionsasmentionedinthedifferentprovisionsofSEBIICDRRegulationsatthetimeoffiling
draft offer document with SEBI (unless stated otherwise in the said regulations in the said
regulations)andatthetimeofregisteringorfilingthefinalofferdocumentwiththeRegistrarof
Companies(RoC)ordesignatedstockexchange,asthecasemaybe.

(2)Noissuershallmakeapublicissueorrightsissueofspecifiedsecurities:

(a)iftheissuer,anyofitspromoters,promotergroupordirectorsorpersonsincontrol
oftheissueraredebarredfromaccessingthecapitalmarketbytheBoard;

(b)ifanyofthepromoters,directorsorpersonsincontroloftheissuerwasoralsoisa
promoter, director or person in control of any other company which is debarred from
accessingthecapitalmarketunderanyorderordirectionsmadebytheBoard;

(c)iftheissuerofconvertibledebtinstrumentsisinthelistofwilfuldefaulterspublished
bytheReserveBankofIndia(RBI)oritisindefaultofpaymentofinterestorrepayment
ofprincipalamountinrespectofdebtinstrumentsissuedbyittothepublic,ifany,fora
periodofmorethansixmonths;

(d) unless it has made an application to one or more recognized stock exchanges for
listingofspecifiedsecuritiesonsuchstockexchangesandhaschosenoneofthemasthe
designatedstockexchange:

Provided that in case of an IPO, the issuer shall make an application for listing of the
specifiedsecuritiesinatleastonerecognizedstockexchangehavingnationwidetrading
terminals;

(e)unlessithasenteredintoanagreementwithadepositoryfordematerializationof
specifiedsecuritiesalreadyissuedorproposedtobeissued;

(f) unless all existing partly paidup equity shares of the issuer have either been fully
paiduporforfeited;

(g)unlessfirmarrangementsoffinancethroughverifiablemeanstowardsseventyfive
percentofthestatedmeansoffinance,excludingtheamounttoberaisedthroughthe
proposed public issue or rights issue or through existing identifiable internal accruals,
havebeenmade.

(3)Warrantsmaybeissuedalongwithpublicissueorrightsissueofspecifiedsecuritiessubject
tothefollowing:

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NISM-Series-IX: Merchant Banking Certification Examination


(a) the tenure of such warrants shall not exceed twelve months from their date of
allotmentinthepublic/rightsissue;

(b)notmorethanonewarrantshallbeattachedtoonespecifiedsecurity.

(4)Theamountforgeneralcorporatepurposes,asmentionedinobjectsoftheissueinthedraft
offerdocumentfiledwiththeBoard,shallnotexceedtwentyfivepercentoftheamountraised
bytheissuerbyissuanceofspecifiedsecurities.

Theprovisionsasmentionedaboveessentiallyaimsatinvestorprotection.

Inthesubsequentsection,wewillbedealingwiththeappointmentofmerchantbankersand
otherintermediariesbytheissuercompanyandtheirobligationsrelatingtotheissuesuchas
filingofofferdocument,maintainingproperduediligenceetc.

5.1.1 AppointmentofMerchantBankersandotherIntermediaries/Agencies

Since the process of issue management is of critical importance to the issuer company, the
selection of the merchant banker and the other related intermediaries is also of great
significance.TheRegulation5oftheSEBIICDRRegulationsdiscussestheprocessofappointing
merchantbankersandotherintermediariesfortheissuewhichisasdiscussedbelow:

1. Theissuercompanyshallappointoneormoremerchantbankers,atleastoneofwhich
shall be a lead merchant banker. The other intermediaries involved in the process of
carrying out the obligations relation to an issue should also be appointed in
consultation with the lead merchant banker. The lead merchant banker shall
independently assess the capability of the other intermediaries to carry out their
obligation. Thereafter, he should advise the issuer company on their (other
intermediaries)appointment.

2. Alltheotherintermediarieswhichareappointedinconsultationwiththeleadmerchant
bankerbytheissuercompanyshouldberegisteredwiththeSEBI.

3. In cases where an issue is managed by more than one merchant banker, the rights,
obligations, responsibilities relating interalia to disclosures, allotment, refund and
underwritingobligationsifany,foreachmerchantbankershallbepredetermined.The
samealsoneedstobedisclosedintheofferdocumentasperformatprescribedinthe
SEBIICDRRegulations.

Providedthatwhereanyofthemerchantbankersisanassociateoftheissuer,itshall
declareitselfasamarketingleadmanageranditsroleshallbelimitedtomarketingof
theissue.

4. Theissuercompanyhastoenterintoanagreementwiththeleadmerchantbankeras
per the prescribed format given under the SEBI ICDR Regulations and with the other
intermediaries as required under the respective regulations applicable to the
intermediaryconcerned.Providedthatsuchagreementsmayincludesuchotherclauses

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NISM-Series-IX: Merchant Banking Certification Examination


astheissuerandtheintermediarymaydeemfitwithoutdiminishingorlimitinginany
waytheliabilitiesandobligationsofthemerchantbankers,otherintermediariesandthe
issuerundertheAct,theCompaniesAct,2013,theSecuritiesContracts(Regulation)Act,
1956,theDepositoriesAct,1996andtherulesandregulationsmadethereunderorany
statutorymodificationorstatutoryenactmentthereof.FurtherincaseofASBAprocess,
the issuer shall take cognizance of the deemed agreement of the issuer with the Self
CertifiedSyndicateBanks(SCSBs).

5. In case an issuer makes an issue through the book building process, he shall appoint
syndicate members. In case of any other issue, the issuer company shall appoint
bankerstoissueatallmandatorycollectioncentresasspecifiedintheRegulation.

6. The issuer company shall also appoint a registrar which has connectivity with all the
depositories.HoweveriftheissueritselfisaregistrartoanissueregisteredwithSEBI,
thenanotherregistrartoanissueshallbeappointedasregistrartotheissue.Further,
the lead merchant banker shall not act as registrar to the issue in which it is also
handlingthepostissueresponsibilities.Theregistrarsscopeofworkincludesreceiving
applications from prospective investors/bankers/brokers, managing the data on
applicationreceivedandhelpingtheissuercompanyandthemerchantbankeridentify
successful applicants. They also coordinate with the issuer company the bankersand
the syndicate members regarding collections. They coordinate in securing allocation
approvalandreceivinglistingpermissionfromstockexchanges.

7. The issuer company in consultation with the lead merchant banker shall also appoint
thelegalcounsel,whoshallensurethelegalduediligences,helpindraftingoftheoffer
document, advice on the syndicate agreement, underwriting agreement and ensure
overallcomplianceswithregulatoryauthorities.

8. The issuer company in consultation with the merchant banker also appoints the
accountants and the auditors who help in reviewing and auditing financials and
preparing financial statement as per SEBI (ICDR) Regulations for inclusion in the Offer
Document. They also prepare the reports as per Companies Act and assess the tax
benefits.

9. The issuer company in consultation with the merchant bankers appoint the printers
whoareengagedinbulkprintingoftheofferdocumentandapplicationforms.Theyare
also responsible for ensuring timely dispatch and distribution of stationery to all
centers.

10. Theadvertisingagency(s)areappointedbytheissuercompanyinconsultationwiththe
merchant bankers, who advise the issuer company and the merchant banker on
formulationandexecutionofthemediaandPRstrategy.TheyalsoassisttheCompany
andInvestmentBanksforstatutoryadvertisements,arrangeforroadshowsetc. They
ensure adequate coverage of the IPO. Further details about the advertisement and

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NISM-Series-IX: Merchant Banking Certification Examination


publicitymaterialsasprovidedinSEBIICDRregulationismentionedsection6.1ofthis
workbook.

5.1.2 FilingofOfferDocument

TheprocessofissueofsecuritiesisverycloselyregulatedbySEBItopreventanywrongdoing
on part of the issuer company. In order to issue securities, an issuer has to file a draft offer
documentwithSEBIthroughtheappointedleadmerchantbankerandpaytherequisitefees.
The Regulation 6 of the SEBI ICDR Regulations deals with the filing of offer documents with
SEBI.TheprovisionsoftheRegulationareasfollows:

1. Theissuercompanymakingapublicissueorarightsissue,wheretheaggregatevalueof
thespecifiedsecuritiesofferedisRupeesfiftylakhormore,shalldosoonlywhenthe
draftofferdocumentalongwithfees(asprescribedintheRegulations)havebeenfiled
throughtheleadmerchantbankerwithSEBI.Theissuerhastofiletheofferdocument
at least thirty days prior to registering the prospectus, redherring prospectus or shelf
prospectuswiththeRoCorfilingtheletterofofferwiththedesignatedstockexchange
asmaybethecase.

2. SEBImaymakeitsobservationsorspecifychangesifany,onthedraftofferdocument
withinthirtydaysfromthelaterofthefollowingdate:

a. dateofreceiptofthedraftofferdocumentasmentionedabove;or

b. dateofreceiptofsatisfactoryreplyfromtheleadmerchantbankers,whereSEBI
hassoughtanyclarificationoradditionalinformationfromthem;or

c. date of receipt of clarification or information from any regulator or agency,


where SEBI has sought any clarification or information from such regulator or
agency;or

i. date of receipt of a copy of inprinciple approval letter issued by the


recognizedstockexchanges.

3. IfSEBIspecifieschangesorissuesobservationsonthedraftofferdocument,theissuer
andleadmerchantbankershallcarryoutsuchchangesinthedraftofferdocumentand
comply with the observations issued by SEBI before registering the prospectus, red
herring prospectus or shelf prospectus, as the case may be, with the RoC or filing the
letterofofferwiththedesignatedstockexchange.

4. Theissuercompanyshall,simultaneouslywhileregisteringtheprospectus,redherring
prospectus or shelf prospectus with the RoC or filing the letter of offer with the
designatedstockexchangeorbeforetheopeningoftheissue,fileacopythereofwith
SEBIthroughtheleadmerchantbanker.

5. The lead merchant banker when filing the offer document with SEBI should also file a
copyofthedocumentwiththerecognizedstockexchangewherethesaidsecuritiesare

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NISM-Series-IX: Merchant Banking Certification Examination


proposedtobelisted.TheofferdocumentshallalsobefurnishedtoSEBIinasoftcopy
aspertheformatprescribedintheSEBIICDRRegulations.
5.1.2.1 FeestobepaidalongwiththeOfferDocument

TheSEBIICDRRegulationsprescribesthefeestobepaidbytheissuertoSEBIwithrespectto
everydraftofferdocumentorincaseoffasttrackissue,everyofferdocumentandincaseof
updationofanydraftofferdocument.Thefeestructureisasgivenbelow:

a) Incaseofapublicissue

IssueSize,includingintendedretentionof Feestobepaid
oversubscription
LessthanorequaltoRs.10crore AflatchargeofRs.1,00,000
MorethanRs.10crorebutlessthanor 1%oftheissuesize
equaltoRs.5000crore
MorethanRs.5000crore Rs,5,00,00,000(FiveCroreRupees)Plus
0.025percentoftheportionoftheIssueSize
inexcessofRs.5,000crore


b) Incaseofarightsissue

IssueSize,includingintendedretentionof Feestobepaid
oversubscription
LessthanorequaltoRs.10crore AflatchargeofRs.50,000
MorethanRs.10crore 0.05%oftheIssueSize

Wheretheissuesizeisnotdeterminedatthetimeofsubmissionofthedraftofferdocumentor
the offer document (in case of fast track issue), the issuer shall pay fees mentioned above,
based on the estimated issue size. In case the issue size is not correctly known or estimated
then the excess fees must be paid within 7 working days of filing the prospectus with the
RegistrarofCompanies.AnyexcessfeespaidarerefundedbySEBItotheissuer.

Incases,whereupdationsaremadeinanyofthesectionsoftheofferdocument,thereshallbe
afeeofRs.10,000forupdationsorchangespersection,subjecttototalfeenotexceeding1/4th
of the filing fees paid at the time of filing the draft document with the SEBI or Rs. 50,000
whicheverishigher.

5.1.3 Documentstobesubmittedbeforetheopeningoftheissue

Inordertomaintainmaximumpossibletransparencyintheissueprocessandtosafeguardthe
interests of the investors, SEBI requires the lead merchant banker to submit documents
regardingtheissueprocessandtheissuersfinancialhealth.

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NISM-Series-IX: Merchant Banking Certification Examination


Regulation 8 of the SEBI ICDR Regulations provides the details of the documents which are
required to be submitted to SEBI before the opening of the issue. The lead merchant banker
shallsubmitthefollowingtoSEBIalongwiththedraftofferdocument:

1. acertificate,confirmingthatanagreementhasbeenenteredintobetweentheissuerand
theleadmerchantbankersaspertheformatspecifiedinScheduleIIofSEBIICDR;

2. DuediligencecertificateaspertheformatprescribedintheSEBIICDRRegulation;

3. Duediligencecertificatefromthedebenturetrusteeincaseofanissueofconvertibledebt
instrumentsaspertheprescribedformatprovidedintheRegulations.

4. Certificate confirming compliance of the conditions which are specified in PART C of


ScheduleVIIIoftheRegulations.

CertainDisclosuresaretobemade.DisclosuresforIPOisgivenunderPartAofScheduleVIIIof
SEBI(ICDR)Regulations;forFastTrackIssueisgivenunderPartBofScheduleVIIIofSEBI(ICDR)
Regulations; for Further Public Offer is given under Part C of Schedule VIII of SEBI (ICDR)
Regulations.

Anissuercompanymakingafurtherpublicofferofspecifiedsecuritiesmaygetexemptionfrom
makingsomedisclosures,ifthefollowingaremetwith:

a. The issuer has been filing periodic statements in regards to financial results and
shareholdingpatternwiththedesignatedstockexchangeandalsowiththeROC(in
caseofapublicissue),forthelast3yearsandsuchstatementsshallbeavailableon
thewebsiteofthedesignatedstockexchangeoronacommonefilingplatform.

b. The issuer has in place an investor grievance handling mechanism, which includes
meetingoftheShareholders/InvestorsGrievanceCommitteeatfrequentintervals,
appropriatedelegationofpowerbytheBoardofDirectorsoftheissuerwithregard
to share transfer and clearly laid out systems and procedures for timely and
satisfactoryredressalofinvestorgrievances.

c. Theleadmerchantbankershouldhavecertifiedcompliancewiththeconditionsas
specifiedinpoints(a)and(b)above.

d. TheissuercompanyalsoneedstoprovideSEBItheundertakingaboutadherenceto
compliancealongwiththedraftofferdocument,whichshallalsobeincorporatedin
theofferdocument.

e. The issuer has made the offer document of its immediately preceding public or
rightsissuepublicinthemannerspecifiedinsubregulation(1)ofregulation9and
subregulation (1) of regulation 61 and has also kept this document for public
inspectioninthemannerspecifiedinsubpara(c)ofpara4ofsubitem(D)ofItem
(VIII)ofPartAofthisScheduleVIII.

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OnceSEBIhasmadeitsobservationsonthedraftofferdocumentorevenaftertheexpiryofthe
stipulatedperiod,ifSEBIhasnotissuedanyobservation,theleadmerchantbankerisrequired
tosubmitthefollowingdocumentstoSEBI:

Statement certifying that all changes, suggestions and observations made by SEBI have
beenincorporatedintheofferdocument;

Due diligence certificate at the time of registering the prospectus with the Registrar of
Companies;

Copyoftheresolutionpassedbytheboardofdirectorsoftheissuerforallottingspecified
securitiestopromoterstowardsamountreceivedagainstpromoterscontribution,before
openingoftheissue;

Certificate from a Chartered Accountant, before opening of the issue, certifying that
promoters contribution has been received in accordance with these regulations,
accompanyingtherewiththenamesandaddressesofthepromoterswhohavecontributed
to the promoters contribution and the amount paid by each of them towards such
contribution;

Due diligence certificate as per the prescribed format immediately before the opening of
theissue,certifyingthatnecessarycorrectiveaction,ifany,hasbeentaken;

Due diligence certificate as per format provided in the Regulation after the issue has
openedbutbeforeitclosesforsubscription.

The issuer while filing draft offer document with the recognized stock exchange where the
specified securities are proposed to be listed, submit the Permanent Account Number (PAN),
bankaccountnumberandpassportnumberofitspromoterstosuchstockexchange.

5.1.4 InprincipleapprovaloftheStockExchanges

The issuer has to obtain inprinciple approval of the stock exchanges before proceeding with
theissue.

1) Inthecaseofaninitialpublicoffer,theissuerhastogetaninprincipleapprovalfromall
therecognisedstockexchangesonwhichtheyintendtolistthespecifiedsecurities;
2) Inthecaseofafurtherpublicofferorarightsissuetheissuershallobtaininprinciple
approvalfrom:
a) Allrecognisedstockexchangeswherethespecifiedsecuritiesarelisted;
b) Fromallexchangesonwhichthesecuritiesareproposedtobelisted,incaseswhere
the specified securities are not listed on any recognized stock exchanges having
nationwideterminals;
c) All recognised stock exchanges having nationwide terminals, in case the securities
are tradedon recognised stockexchanges, with nationwide terminals as well asthose
whicharenothavingnationwideterminals.

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5.1.5 Draftofferdocumenttobemadepublic

The draft offer document submitted to SEBI has to be made public, for comments if any, by
hostingitonthewebsiteofSEBI,therecognizedStockExchangesonwhichtheissueistobe
listedandthewebsiteofthemerchantbankersassociatedwiththeissueforatleast21days
fromthedateofthefiling.

Theleadmerchantbankersshall,afterexpiryofthestipulatedperiod,filewithSEBIastatement
givinginformationofthecommentsreceivedbythemortheissueronthedraftofferdocument
during that period and the consequential changes, if any, to be made in the draft offer
document.

The issuer either on the date of filing the draft offer document with SEBI or on the next day
needs to make a public announcement in one English national daily newspaper with wide
circulation,oneHindinationaldailynewspaperwithwidecirculationandoneregionallanguage
newspaper with wide circulation at the place where the registered office of the issuer is
situated,disclosingtothepublicthefactoffilingofdraftofferdocumentwithSEBIandinviting
the public to give their comments to SEBI in respect of disclosures made in the draft offer
document.

5.1.6 Openingofanissue

Along with the SEBI ICDR Regulations, Section 26 and Section 31 of the Companies Act, 2013
andRule3,4,5,6,oftheCompanies(ProspectusandAllotmentofSecurities)Rules,2014hasan
importantroletoplayintheissueprocesswhicharestatedasunder:

SubjecttopropercomplianceswiththeActandtheRegulations,apublicissueorarightsissue
maybeopened:

(a)WithintwelvemonthsfromthedateofissuanceoftheobservationsbySEBIor(b)Within
threemonthsofexpiryoftheperiodasgivenintheRegulations,incaseSEBIhasnotissuedits
observations

(2)Incaseofshelfprospectus,thefirstissuemaybeopenedwithinthreemonthsofissuanceof
observationsbySEBI.

(3)Theissuershall,beforeregisteringtheredherringprospectus(incaseofabookbuiltissue)
orprospectus(incaseofafixedpriceissue)withtheRoCorfilingtheletterofofferwiththe
designated stock exchange, as the case may be, file with SEBI through the lead merchant
bankers,anupdatedofferdocumenthighlightingallthechangesmadeintheofferdocument.

(4)However,notwithstandinganythingcontainedinthisregulation,iftherearechangesinthe
offerdocumentinrelationtothemattersasperspecificationgivenintheSEBIICDRRegulations
the updated offer document or new draft offer document, as the case may be, shall be filed
withalongwithappropriatefeeswithSEBI.

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(5)Anissueshallbeopenedafteratleastthreeworkingdaysfromthedateofregisteringthe
redherringprospectuswiththeRegistrarofCompanies.

31.(1)Anyclassorclassesofcompanies,asSEBImayprovidebyregulationsinthisbehalf,may
file a shelf prospectus with the Registrar at the stage of the first offer of securities included
thereinwhichshallindicateaperiodnotexceedingoneyearastheperiodof validityofsuch
prospectuswhichshallcommencefromthedateofopeningofthefirstofferofsecuritiesunder
thatprospectus,andinrespectofasecondorsubsequentofferofsuchsecuritiesissuedduring
theperiodofvalidityofthatprospectus,nofurtherprospectusisrequired.

(2)Acompanyfilingashelfprospectusshallberequiredtofileaninformationmemorandum
containingallmaterialfactsrelatingtonewchargescreated,changesinthefinancialpositionof
the company as have occurred between the first offer of securities or the previous offer of
securitiesandthesucceedingofferofsecuritiesandsuchotherchangesasmaybeprescribed,
withtheRegistrarwithintheprescribedtime,priortotheissueofasecondorsubsequentoffer
ofsecuritiesundertheshelfprospectus:

Providedthatwhereacompanyoranyotherpersonhasreceivedapplicationsfortheallotment
of securities along with advance payments of subscription before the making of any such
change,thecompanyorotherpersonshallintimatethechangestosuchapplicantsandifthey
expressadesiretowithdrawtheirapplication,thecompanyorotherpersonshallrefundallthe
moniesreceivedassubscriptionwithinfifteendaysthereof.

(3)Whereaninformationmemorandumisfiled,everytimeanofferofsecuritiesismadeunder
subsection(2),suchmemorandumtogetherwiththeshelfprospectusshallbedeemedtobea
prospectus.

Explanation For the purposes of this section, the expression "shelf prospectus" means a
prospectusinrespectofwhichthesecuritiesorclassofsecuritiesincludedthereinareissued
for subscription in one or more issues over a certain period without the issue of a further
prospectus.

5.1.7 DispatchofIssueMaterialandDistribution

The lead merchant bankers are responsible for the dispatch of the issue material to all the
parties concerned. This involves the dispatch of the offer document and other materials like
formsforASBA(ApplicationSupportedbyBlockedAmount)tothedesignatedstockexchanges,
syndicate members, underwriters, bankers to the issue, investors associations and Self
CertifiedSyndicateBanksinadvance.

5.2 PricingofIssue

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Anissuercompanymaydeterminethepriceofthespecifiedsecuritieswhichareofferedtothe
publiceither`throughbookbuildingprocess15orinconsultationwiththeleadmerchantbanker
fortheissue.IncaseofConvertibleDebtSecuritiestheissuermaydeterminethecouponrate
and the conversion price of the convertible debt instruments in consultation with the lead
merchant banker or through the book building process. The manner of book building is as
definedinthescheduleXIoftheSEBI(ICDR)Regulations.

Differential Pricing:Anissuermayofferspecifiedsecuritiesatdifferentprices,subjecttothe
following:

(a) Retail individual investors or retail individual shareholders or employees entitled for
reservationasunderSEBIICDRregulations,makinganapplicationforspecifiedsecuritiesof
valuenotmorethanRs.2lakh,maybeofferedspecifiedsecuritiesatapricelowerthanthe
price at which net offer is made to other categories of applicants, provided that such
differenceshallnotbemorethan10%ofthepriceatwhichspecifiedsecuritiesareoffered
toothercategoriesofapplicants;
(b) Incaseofabookbuiltissue,thepriceofthespecifiedsecuritiestoananchorinvestorshall
notbelowerthanthepriceofferedtootherapplicants;
(c) Incaseofacompositeissue,thepriceofthespecifiedsecuritiesofferedinthepublicissue
may be different from the price offered in rights issue and justification for such price
differenceshallbegivenintheofferdocument;
(d) In case the issuer opt for the alternate method of book building, the issuer may offer
specifiedsecuritiestoitsemployeesatapricelowerthanthefloorprice,providedthatthe
differencebetweenthefloorpriceandthepriceatwhichspecifiedsecuritiesareofferedto
employeesshallnotbemorethan10%ofthefloorprice.

PriceandPriceBand:

(a) Theissuermaymentionthepriceorthepricebandinthedraftprospectus(incaseoffixed
priceissue)andfloorpriceorpricebandintheredherringprospectus(incaseofbookbuilt
issue) and determine the price at a later date before registering the prospectus with the
RoC, provided, the prospectus registered with the RoC will have one price or the specific
couponrate,asperthecase.
(b) Theissuershallannouncethefloorpriceorpricebandatleastfiveworkingdaysbeforethe
openingofthebidincaseofIPOandatleastoneworkingdaypriortotheopeningofthe
bidinfurtherpublicofferingsinallthosenewspapersinwhichthepreissueadvertisement
wasreleased.
(c) Theannouncementofthepricebandorthefloorpriceshallcontainrelevantfinancialratios
computed for both upper and lower end of the price band and also a statement drawing
attentionoftheinvestorstothesectiontitledbasisofissuepriceintheprospectus.

15
Bookbuildingprocessmeansaprocessundertakentoelicitdemandandtoassessthepricefordeterminationofthequantum
or value of specified securities or Indian Depository Receipts (IDRs) as the case may be, in accordance with the SEBI ICDR
Regulations.

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(d) Theannouncementandtherelevantfinancialratiosreferredaboveshallbedisclosedonthe
websitesofthosestockexchangeswherethesecuritiesareproposedtobelistedandshall
alsobeprefilledintheapplicationformsavailableonthewebsitesofthestockexchanges.
(e) Thecaponthepricebandshouldbelessthanorequalto120%ofthefloorprice.
(f) The floor price or the final price shall not be less than the face value of the specified
securities.

5.3 Underwriting
AspertheSEBIICDRRegulations,wheretheissuermakingapublicissue(otherthanthrough
the book building process) or rights issue, desires to have the issue underwritten, it shall
appointtheunderwritersinaccordancewithSEBI(underwriters)Regulations,1993.

Incases,wheretheissuermakesapublicissuethroughthebookbuildingprocess,suchissues
shall be underwritten by, book runners or syndicate members. Further, where QIPs
participationtotheextentofatleast75%oftheissuesizeismustasaneligibilityconditionfor
an issue, this part of the issue cannot be underwritten. It means that if QIBs are not able to
subscribetoatleast75%,itwillnotdevolveonUnderwritersandtheissuewillfail.Anyunder
subscriptionintheQIBcategoryshallnotbeavailableforsubscriptiontoanyothercategory.

The issuer shall enter into underwriting agreement with the book runner, who in turn shall
enterintounderwritingagreementwithsyndicatemembers,indicatingthereinthenumberof
specified securities which they shall subscribe to at the predetermined price in the event of
undersubscriptionintheissue.

Ifsyndicatemembersfailtofulfiltheirunderwritingobligations,theleadbookrunnershallfulfil
theunderwritingobligations.Thebookrunnersandsyndicatemembersshallnotsubscribeto
theissueinanymannerexceptforfulfillingtheirunderwritingobligations.

In case of every underwritten issue, the lead merchant banker or the lead book runner shall
undertake minimum underwriting obligations as specified in the SEBI (Merchant Bankers)
Regulations,1992.

In cases where 100% of the offer through offer document is underwritten, the underwriting
obligationsshallbefortheentire100%oftheofferthroughofferdocumentandshallnotbe
restricteduptotheminimumsubscriptionlevels.

5.4 MinimumSubscription
The minimum subscription to be received in an issue shall not be less than 90% of the offer
through offer document, provided that in the case of an initial public offer, the minimum
subscription to be received shall be subject to allotment of minimum number of specified

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NISM-Series-IX: Merchant Banking Certification Examination


securities, as prescribed in Securities Contract(Regulations) Rules, 1957. In the event of non


receipt of minimum subscription, all application money received shall be refunded to the
applicantsforthwith,butnotlaterthan:
(a) 15daysoftheclosureoftheissue,incaseofanonunderwrittenissue;
(b) 70 days of the closure of the issue, in the case of an underwritten issue; where
minimum subscription including devolvement obligations paid by the underwriters is
notreceivedwith60daysoftheclosureoftheissue.
The offer document shall contain adequate disclosures regarding minimum subscription as
specifiedinScheduleVIIIoftheSEBIICDRRegulations.
These aforementioned conditions except the requirement relating to allotment of minimum
numberofspecifiedsecurities,howevershallnotapplytoofferforsaleofspecifiedsecurities.

5.5 Allotment,RefundandPaymentofInterest
Theissuerandthemerchantbankerhavetoensurethatspecifiedsecuritiesareallottedand/or
applicationmoneyarerefundedwithin15daysfromthedateofclosureoftheissue.Wherethe
specified securities are not allotted and/or application money are not refunded within the
periodmentionedabove,theissuershallundertaketopayinterestatsuchrateandwithinsuch
timeasdisclosedintheofferdocument.

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ReviewQuestions

1. Whichofthefollowingactivitiesdoesthemerchantbankerhavetoperformintheprocess
ofIssueManagement?
(a) Handlesthestatutorycompliancerequirements
(b) EventManager
(c) Handlestheinvestorsinterestinfiduciarycapacity
(d) Alloftheabove
Ans:(d)

2. ApromoterofXYZcompanywantstoraiseresourcesthroughpublicissue.Hewasbarred
from accessing the capital market last year by SEBI on account of insider trading. Is he
eligibletocomeoutwithpublicissue?
(a) Yes,hecanraisemoneythroughpublicissue
(b) Nohecannotraisemoneythroughpublicissue
Ans:(b)

3. Thereisrestrictiononthenumberofwarrantsbeingattachedtopublicissueorrightsissue.
Howmanywarrantscanbeattachedtoaspecifiedsecurity?
(a) 7
(b) 5
(c) 3
(d) 1
Ans:(d)

4. Who appoints the accountants and the auditors who help in reviewing and auditing
financialsandpreparingfinancialstatementasperSEBI(ICDR)Regulationsforinclusionin
theOfferDocument?
(a) IssuerCompany
(b) MerchantBanker
(c) AssociationofInvestmentBankersofIndia
(d) MinistryofCorporateAffairs
Ans:(b)

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THISPAGEHASBEENLEFTBLANK
INTENTIONALLY

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Chapter6:IssueManagementGeneralObligationsofMerchantBankersand
DueDiligence

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

Generalobligationsofmerchantbankersrelatingtoissuemanagement
process

Offerforsalethroughstockexchangemechanism
Preferentialissue,QIPprocess,IPPprocess,Rightsissue

Duediligencetobefollowedbythemerchantbanker

6.1 GeneralObligationsofMerchantBankerswithregardstoIssueManagement
The SEBI ICDR Regulations prescribes general obligations of Issuers and other intermediaries
who are related with the process of issue management. However, we will here only discuss
thoseobligationswhicharepertainingtoMerchantBankers

1. Prohibitionofpaymentofincentives:Nopersonconnectedwiththeissueshallofferany
incentive,whetherdirectorindirect,inanymanner,whetherincashorkindorservicesor
otherwise to any person for making an application for allotment of specified securities.
However,thisdoesnotapplytofeesorcommissionforservicesrenderedinrelationtothe
issue

2. Public Communications / Research reports: Any intermediary concerned with the issue
shall not issue any public communication including advertisement, research report and
publicity material which contains projections, estimates, conjectures etc or any matter
extraneoustothecontentsoftheofferdocument.

Anyadvertisementorresearchreportissuedbyanissuer,anyintermediaryconcernedwith
theissueortheirassociatesshallcomplywiththefollowing:

(a) It shall be truthful, fair and shall not be manipulative or deceptive or distorted and it
shallnotcontainanystatement,promiseorforecastwhichisuntrueormisleading.

(b) Reproduction of information given in the offer document should be done in such a
manner that all information and relevant facts are disclosed in clear, concise and
understandable language and not restricted to select extracts relating to that
information.

(c) Slogans and brand names for the issue should not be used except the normal
commercial name of the issuer or commercial brand names of its products already in
use.

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(d) In cases where the financial data is used, the data should be for last three years and
shallalsoincludetheparticularsrelatingtosales,grossprofit,netprofit,sharecapital,
reserves,earningpershare,dividendsandthebookvalues.

(e) Advertisementsshallnotuseextensivetechnical,legalterminologyorcomplexlanguage
and excessive details which may distract the investors. Also the issue advertisements
shallnotcontainstatementswhichpromiseorguaranteerapidincreaseinprofits.

(f) Advertisements of issues shall not display models, celebrities, fictional characters,
landmarks or caricatures or the likes. It shall not contain slogans, expletives or non
factualandunsubstantiatedtitles.

(g) Theissueadvertisementsshallnotappearintheformofcrawlersontelevision.Therisk
factorspertainingtotheissuesincaseofadvertisementsofissuesontelevisionscreens
should not be scrolled but viewers should be advised to refer to the red herring
prospectusorotherofferdocumentfordetails.

(h) The advertisement regarding any issue on billboards should not contain information
otherthanwhatisspecifiedintheSEBIICDRRegulations.

No advertisement shall be issued giving any impression that the issue has been fully
subscribed or oversubscribed during the period the issue is open for subscription. An
announcementregardingtheclosureofissueshouldbemadeonlyaftertheleadmerchant
banker is satisfied that atleast 90% of the offer through the offer document have been
subscribed and a certificate regarding that have been obtained from the registrar to the
issue.However,suchannouncementshouldnotbemadebeforetheissueclosuredate.

The merchant bankers shall submit a compliance certificate in the format as specified in
SEBI(ICDR)Regulations,fortheperiodbetweenthedateoffilingthedraftofferdocument
withSEBIandthedateofclosureoftheissue,inrespectofnewsreportsappearinginanyof
thefollowingmedia:

(a)newspapers;

(b)majorbusinessmagazines;

(c) print and electronic media controlled by a media group where the media group has a
privatetreaty/shareholdersagreementwiththeissuerorpromotersoftheissuer.

3. PubliclyAvailableDocument:Theleadmerchantbankeralongwiththeissuershallensure
thatthecontentsofofferdocumentshostedonthewebsitesasrequiredintheRegulation
issameasthatoftheprintedcopiesfiledwiththeRoC,SEBIandthestockexchanges.As
and when required by any investor, the lead merchant banker and the recognised stock
exchange should furnish a copy of the draft offer document and final offer document.
However, a reasonable sum of money can be charged by the merchant banker or the
recognisedstockexchangeforthesame.

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4. Redressal of Investor Grievances: The postissue lead merchant bankers should look into
the postissue activities such as allotment, refund, dispatch and giving instructions to the
syndicate members, SelfCertified Syndicate Banks and other intermediaries. The lead
merchant banker is required to also look into and monitor the redressal of the investor
grievancesifany.

5. PostissueReports:Theleadmerchantbankerisrequiredtosubmitthepostissuereports
toSEBIasspecifiedintheRegulations.Theinitialpostissuereportshallbesubmittedwithin
3daysofclosureoftheissueinspecifiedformatsandthefinalpostissuereportswithin15
daysofthedateoffinalizationofbasisofallotmentorwithin15daysofrefundofmoneyin
caseoffailureofissue.Theleadmerchantbankerhastosubmitaduediligencecertificate
asperformatspecifiedintheRegulationsalongwiththepostissuereport.

6. Postissue Advertisements: The merchant banker related to the postissue activities shall
ensurethatadvertisementsgivingdetailsrelatingto oversubscription,basisofallotment,
number, value and percentage of all applications, number, value and percentage of
successfulallotteesforallapplications,dateofcompletionofdispatchofrefundordersor
instructions to SelfCertified Syndicate Banks by the Registrar, date of dispatch of
certificatesanddateoffilingoflistingapplications,etcisreleasedwithintendaysfromthe
dateofcompletionofthevariousactivitiesinatleastoneEnglishnationaldailynewspaper
and one Hindi national daily newspaper with wide circulation and one regional language
daily newspaper with wide circulation at a place where the issuer company has its
registeredoffice.

Itistheresponsibilityofthepostissuemerchantbankertoensurethattheissuercompany,
advisors, brokers or any other entity connected with the issue does not publish any
advertisementswhichstatethatissuehasbeenoversubscribed.Theadvertisementshould
also not indicate the investors response to the issue, during the period when the public
issueisopenforsubscriptionbythepublic.

7. CoordinationwithotherIntermediaries:Thepostissuemerchantbankerhastomaintain
closecoordinationwiththeregistrarstotheissueandarrangetodeputeitsofficerstothe
offices of various intermediaries at regular intervals after the closure of the issue. This
would enable the postissue merchant bankerto monitor (a) the flowof application from
collecting bank branches and/or SCSBs; (b) processing of the applications including the
applicationformforASBA;(c)otherrelatedmatterstillthebasisofallotmentisfinalized;(d)
dispatchofsecuritycertificatesandrefundordersarecompletedandsecuritiesarelisted.

Incases,wherethereisadevolvementonunderwriters,themerchantbankerhastoensure
that the notice for devolvement containing the obligation of the underwriters is issued
withinaperiodoftendaysfromthedateofclosureoftheissue.Itisalsotheresponsibility
ofthepostissuemerchantbankertoconfirmtothebankerstoissuethatallformalitiesin
connectionwiththeissuehavebeencompletedandthatthebankerisfreetoreleasethe
moneytotheissuerorreleasethemoneyforrefundincaseoffailureoftheissue.

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8. Miscellaneousresponsibilities:Themerchantbankerhastoensurethatalltheinformation
containedintheofferdocumentandtheparticularsaspertheauditedfinancialstatements
in the offer document are not more than 6 months old from the issue opening date. The
postissuemerchantbankerhasto:

Ensure that the dispatch of refund orders, allotment letters and share certificates are
donebywayofregisteredpostorcertificateofposting,whicheverisapplicable.

Ensurepaymentofinteresttotheapplicantsfordelayeddispatchofallotmentletters,
refundorders,etcasperthedisclosuresmadeintheofferdocument.

Incaseofabsenceofdefiniteinformationaboutsubscriptionfigures,theissueshallbe
keptopenfortherequirednumberofdaystoavoidanydispute,atalaterdate,bythe
underwritersinrespectoftheirliability.

9. Promoters Contribution & shares ineligible for promoters contribution: SEBI (ICDR)
Regulations, 2009 specified the promoters contribution in the public issue, which are as
follows;

(a) In case of an initial public offer, not less than 20% of the postissue capital; Provided
thatincasethepostissueshareholdingofthepromotersislessthantwentypercent.,
alternativeinvestmentfundsmaycontributeforthepurposeofmeetingtheshortfallin
minimumcontributionasspecifiedforpromoters,subjecttoamaximumoftenpercent
ofthepostissuecapital.]
(b) Incaseofafurtherpublicoffer,eithertotheextentof20%oftheproposedissuesizeor
totheextentof20%ofthepostissuecapital;
(c) Incaseofacompositeissue,eithertotheextentof20%oftheproposedissuesizeorto
theextentof20%ofthepostissuecapitalexcludingtherightsissuecomponent.
Incaseofapublicissueorcompositeissueofconvertiblesecurities,minimumpromoters
contributionshallbeasfollow:
Thepromotersshallcontribute20%asstipulatedinthe(a),(b)and(c)above,asthe
(i) The promoters shall contribute 20% as stipulated in the (a), (b) and (c) above, as the
casemaybeeitherbywayofequitysharesorbywayofsubscriptiontotheconvertible
securities,providedthatifthepriceoftheequitysharesallottedpursuanttoconversion
is not predetermined and not disclosed in the offer document, the promoter shall
contributeonlybywayofsubscriptiontotheconvertiblesecuritiesbeingissuedinthe
publicissueandshallundertakeinwritingtosubscribetotheequitysharespursuantto
conversionofsuchsecurities;
(ii) Incaseofanyissueofconvertiblesecuritieswhichareconvertibleorexchangeableon
different dates and if the promoters contribution is by way of equity shares, such
contributionshallnotbeatapricelowerthantheweightedaveragepriceoftheequity
sharecapitalarisingoutofconversionofsuchsecurities.
(iii) Subject to the points (i) and (ii) above, in case of an initial public offer of convertible
debtinstrumentswithoutapriorpublicissueofequityshares,thepromotersshallbring
inacontributionofatleast20%oftheprojectcostintheformofequityshares,subject
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tocontributingatleast20%oftheissuesizefromtheirownfundsintheformofequity
shares.

Provided that if the project is to be implemented in stages, the promoters contribution


shallbewithrespecttototalequityparticipationtilltherespectivestagevisvisthedebt
raisedorproposedtoberaisedthroughthepublicissue.


Incaseofafurtherpublicofferorcompositeissue,thecontributionofpromotersinFPOor
in composite issue in excess of the mandated minimum contribution, will be treated as a
preferentialallotmenttothepromotersandshallbepricedaspertheprovisionsapplicable
forpreferentialallotmentorissuepricewhicheverishigher.
Thepromotersshallsatisfytherequirementsofthisregulationatleastonedaypriortothe
dateofopeningoftheissueandtheamountofpromoterscontributionshallbekeptinan
escrowaccountwithascheduledcommercialbankandshallbereleasedtotheissueralong
withthereleaseoftheissueproceeds.

Providedthatwherethepromoterscontributionhasalreadybeenbroughtinandutilised,the
issuershallgivethecashflowstatementdisclosingtheuseofsuchfundsintheofferdocument;

Provided that where the minimum promoters contribution is more than one hundred crore
rupees, the promoters shall bring in at least one hundred crore rupees before the date of
openingoftheissueandtheremainingamountmaybebroughtonproratabasisbeforethe
callsaremadetopublic.

SEBI (ICDR) Regulations also specifies the securities which are ineligible for minimum
promoterscontribution.Suchspecifiedsecuritiesaregivenbelow:
(a) Specifiedsecuritiesacquiredduringthepreceedingthreeyears,iftheyare:
i. Acquired for consideration other than cash and revaluation of assets or
capitalizationofintangibleassetsisinvolvedinsuchtransaction;or
ii. Resultingfromabonusissuebyutilizationofrevaluationreservesorunrealised
profits of the issuer or from bonus issue against equity shares which are
ineligibleforminimumpromoterscontribution;
(b) Specifiedsecuritiesacquiredbypromotersandalternativeinvestmentfundduringthe
precedingoneyearatapricelowerthanthepriceatwhichspecifiedsecuritiesarebeing
offeredtopublicintheinitialpublicoffer:providedthatnothingcontainedinthisclause
shallapply:
i. If promoters/alternative investment funds pay to the issuer, the difference
between the price at which specified securities are offered in the initial public
offerandthepriceatwhichthespecifiedsecuritieshadbeenacquired;
ii. If such specified securities are acquired in terms of the scheme under sections
391394oftheCompaniesAct,1956asapprovedbyaHighCourt,bypromoters
inlieuofbusinessandinvestedcapitalthathadbeeninexistenceforaperiodof
morethanoneyearpriortosuchapproval;

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iii. ToanIPObyaGovernmentcompany,statutoryauthorityorcorporationorany
specialpurposevehiclesetupbyanyofthem,whichisengagedininfrastructure
sector;
(c) Specified securities allotted to promoters and alternative investment fund during the
precedingoneyearatapricelessthantheissueprice,againstfundsbroughtinbythem
duringthatperiod,incaseofanissuerformedbyconversionofoneormorepartnership
firms, where the partners of the erstwhile partnership firms are the promoters of the
issuer and there is no change in the management: Provided that specified securities
allottedtopromotersagainstcapitalexistinginsuchfirmsforaperiodofmorethanone
yearonacontinuousbasis,shallbeeligible;
(d) Specifiedsecuritiespledgedwithanycreditor.

10. Restriction on Transferability (Lockin) of Promoters Contribution: In a public issue, the
specifiedsecuritiesheldbypromotersshallbelockedinfortheperiodasgivenbelow:
(a) Minimum promoters contribution including contribution made by alternative
investment funds shall be lockedin for a period of three years from the date of
commencement of commercial production or date of allotment in the public issue,
whicheverislater;
(b) Promotersholdinginexcessofminimumpromoterscontributionshallbelockedinfor
a period of one year, Provided that excess of promoters contribution as provided in
shallnotbesubjecttolockin.

11. EligibilityoftheCompanyforissue

Theeligibilityconditionstobefulfilledbyanissuerformakinganinitialpublicofferisspecified
inRegulation26oftheSEBI(ICDR)Regulations,2009ICDR.Asperregulation26(1)oftheSEBI
ICDRRegulations,anissuermaymakeaninitialpublicoffer,if:

(a)theissuercompanyhasnettangibleassetsofatleastRs.3croreineachofthepreceding
three full years (of twelve months each), of which not more than 50% are held in monetary
assets.Furtherifmorethanfiftypercentofthenettangibleassetsareheldinmonetaryassets,
the issuer should have made firm commitments to utilise such excess monetary assets in its
business or project. This limit of 50% on monetary assets shall not be applicable in case the
publicofferismadeentirelythroughanofferforsale.

(b)ithasaminimumaveragepretaxoperatingprofitofrupeesfifteencrore,calculatedona
restatedandconsolidatedbasis,duringthethreemostprofitableyearsoutoftheimmediately
precedingfiveyears..
(c) the issuer company has a net worth of at least Rs. 1 crore in each of the preceding 3 full
years(of12monthseach);

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(d)theaggregateoftheproposedissueandallpreviousissuesmadeinthesamefinancialyear
intermsofissuesizedoesnotexceed5timesitspreissuenetworthaspertheauditedbalance
sheetoftheprecedingfinancialyear;

(e) if it has changed its name within the last one year, at least 50% of the revenue for the
precedingonefullyearhasbeenearnedbyitfromtheactivityindicatedbythenewname.

Regulation26(2)specifiesthatanissuerwhoisnotsatisfyinganyoftheconditionsstipulatedin
regulation26(1)maymakeaninitialpublicofferiftheissueismadethroughthebookbuilding
process and the issuer undertakes to allot, at least seventy five percent of the net offer to
public,toqualifiedinstitutionalbuyersandtorefundfullsubscriptionmoneyifitfailstomake
thesaidminimumallotmenttoqualifiedinstitutionalbuyers.

Regulation26,subregulation3and4statesthatanissuermaymakeanIPOofconvertibledebt
instrumentswithoutmakingapriorpublicissueofitsequitysharesandlistingthereofandthat
an issuer shall not make an allotment pursuant to a public issue if the number of respective
allotteesislessthantheprescribednumber

As per the ICDR regulation 26 (5) No issuer shall make an initial public offer if there are any
outstandingconvertiblesecuritiesoranyotherrightwhichwouldentitleanypersonwithany
optiontoreceiveequityshares.Furthertheprovisionsofthissubregulationshallnotapplyto:
(a)apublicissuemadeduringthecurrencyofconvertibledebtinstrumentswhichwereissued
through an earlier initial public offer, if the conversion price of such convertible debt
instrumentswasdeterminedanddisclosedintheprospectusoftheearlierissueofconvertible
debtinstruments;

(b) outstanding options granted to employees pursuant to an employee stock option scheme
framedinaccordancewiththerelevantGuidanceNoteorAccountingStandards,ifany,issued
bytheInstituteofCharteredAccountantsofIndiainthisregard.

(c) fully paidup outstanding convertible securities which are required to be converted on or
before the date of filing of the red herring prospectus (in case of bookbuilt issues) or the
prospectus(incaseoffixedpriceissues),asthecasemaybe.

Regulation 26 (6) specifies that subject to provisions of the Companies Act, and these
regulations,equitysharesmaybeofferedforsaletopublicifsuchequityshareshavebeenheld
bythesellersforaperiodofatleastoneyearpriortothefilingofdraftofferdocumentwith
SEBI in accordance with subregulation (1) of regulation 6. Further, in case equity shares
received on conversion or exchange of fully paidup compulsorily convertible securities
includingdepositoryreceiptsarebeingofferedforsale,theholdingperiodofsuchconvertible
securitiesaswellasthatofresultantequitysharestogethershallbeconsideredforthepurpose
of calculation of one year period referred in this subregulation. This is further that the
requirementofholdingequitysharesforaperiodofoneyearshallnotapply:

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(a) in case of an offer for sale of specified securities of a government company or statutory
authority or corporation or any special purpose vehicle set up and controlled by any one or
moreofthem,whichisengagedininfrastructuresector;

(b)ifthespecifiedsecuritiesofferedforsalewereacquiredpursuanttoanyschemeapproved
by a High Court under sections 391394 of the Companies Act, 1956, in lieu of business and
investedcapitalwhichhadbeeninexistenceforaperiodofmorethanoneyearpriortosuch
approval.

(c)ifthespecifiedsecuritiesofferedforsalewereissuedunderabonusissueonsecuritiesheld
foraperiodofatleastoneyearpriortothefilingofdraftofferdocumentwiththeBoardand
furthersubjecttothefollowing,

(i)suchspecifiedsecuritiesbeingissuedoutoffreereservesandsharepremiumexistinginthe
booksofaccountasattheendofthefinancialyearprecedingthefinancialyearinwhichthe
draftofferdocumentisfiledwiththeBoard;and

(ii)suchspecifiedsecuritiesnotbeingissuedbyutilizationofrevaluationreservesorunrealized
profitsoftheissuer.

An issuer making an initial public offer may obtain grading for such offer from one or more
creditratingagenciesregisteredwiththeBoard.SEBIvideGeneralOrderdatedOctober9,2012
has notified the SEBI (Framework for Rejection of Draft Offer Documents) Order 2012. It has
laiddowntheprovisionsonwhichthedraftofferdocumentswouldbescrutinized.

12. CorporateGovernanceandCompositionoftheBoardofDirectors

There are specific laws in both Companies Act, 1956/Companies Act, 2013 and Regulations
issuedbySEBIwithrespecttoBoardandCommitteemeetingsandtheresolutionstobepassed
therein. The Compliance Officer is required to ensure that the laws for conduct of these
meetingsandtheinformationtobeprovidedtotheBoardforthispurposearecompliedwith.
The norms of Corporate Governance specified in Clause 49 of the Listing Agreement with
respect to composition of the Board, to have optimum combination of executive and non
executivedirectorswithnotlessthan50percentoftheboardofdirectorscomprisingofnon
executive directors, nonexecutive directors compensation and disclosures, code of conduct
for the board of directors, disclosures related to related party transactions, appointment of
independentdirectorsontheboard,formationofcommitteesviz.,auditcommittee,investor
grievancesredressalcommittee,remunerationcommittee,nominationcommitteeetc.needto
becompliedwith.

13. ReservationinIPOs

Theissuerispermittedtomakereservationstocertaincategoriesofpersons.Thisisexcluding
thepromoterscontributionandthenetoffertothepublic.AsperSEBIICDRregulation;

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(1) In case of an issue made through the book building process, the issuer may make
reservation on competitive basis out of the issue size excluding promoters contribution and
netoffertopublicinfavourofthefollowingcategoriesofpersons:

(a) employees;andincaseofanewissuer,personswhoareinthepermanentandfulltime
employment of the promoting companies excluding the promoters and an immediate
relativeofthepromoterofsuchcompanies;
(b) shareholders(otherthanpromoters)of(i)listedpromotingcompanies,incaseofanew
issuer;and (ii) listed group companies, in case of an existing issuer. Further, if the
promotingcompaniesaredesignatedfinancialinstitutionsorstateandcentralfinancial
institutions,theshareholdersofsuchpromotingcompaniesshallnotbeeligibleforthe
reservationoncompetitivebasis;
(c) personswho,asonthedateoffilingthedraftofferdocumentwithSEBI,areassociated
with the issuer as depositors, bondholders or subscribers to services of the issuer
makinganinitialpublicoffer.Further,theissuershallnotmakethereservationtothe
issuemanagementteam,syndicatemembers,theirpromoters,directorsandemployees
andforthegrouporassociatecompaniesoftheissuemanagementteamandsyndicate
membersandtheirpromoters,directorsandemployees;

(2)Incaseofanissuemadeotherthanthroughthebookbuildingprocess,theissuermaymake
reservation on competitive basis out of the issue size excluding promoters contribution and
netoffertopublicinfavourofthefollowingcategoriesofpersons:

(a) employees;andincaseofanewissuer,personswhoareinthepermanentandfulltime
employment of the promoting companies excluding the promoters and an immediate
relativeofthepromoterofsuchcompanies;
(b) shareholders(otherthanpromoters)of(i)listedpromotingcompanies,inthecaseofa
newissuer;and(ii)listedgroupcompanies,inthecaseofanexistingissuer.Further,if
the promoting companies are designated financial institutions or state and central
financialinstitutions,theshareholdersofsuchpromotingcompaniesshallnotbeeligible
forthereservationoncompetitivebasis

(3) In case of a further public offer (not being a composite issue), the issuer may make
reservation on competitive basis out of the issue size excluding promoters contribution and
netoffertopublicinfavourofretailindividualshareholdersoftheissuer.

(4)Thereservationoncompetitivebasisshallbesubjecttofollowingconditions:

(a) the aggregate of reservations for employees shall not exceed 5% of the post issue
capitalofthe issuer;
(b) reservationforshareholdersshallnotexceed10%oftheissuesize;
(c) reservationforpersonswhoasonthedateoffilingthedraftofferdocumentwithSEBI,
have businessassociationasdepositors,bondholdersandsubscriberstoserviceswith
theissuermakinganinitialpublicoffershallnotexceed5%oftheissuesize;

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(d) no further application for subscription in the net offer to public category shall be
entertainedfromanyperson(exceptanemployeeandretailindividualshareholder)in
favourofwhomreservationoncompetitivebasisismade;
(e) anyunsubscribedportioninanyreservedcategorymaybeaddedtoanyotherreserved
category and the unsubscribed portion, if any, after such interse adjustments among
thereservedcategoriesshallbeaddedtothenetoffertothepubliccategory;
(f) in case of undersubscription in the net offer to the public category, spillover to the
extentofundersubscriptionshallbepermittedfromthereservedcategorytothenet
publicoffercategory;
(g) valueofallotmenttoanyemployeeinpursuanceofreservationmadeunderpoints(1)
or(2),asthecasemaybe,shallnotexceedRs.2lakh.

(5)Inthecaseofreservedcategories,asingleapplicantinthereservedcategorymaymakean
applicationforanumberofspecifiedsecuritieswhichexceedsthereservation.

Explanation: (I) The term "reservation on competitive basis means reservation wherein
specifiedsecuritiesareallottedinproportionofthenumberofspecifiedsecuritiesappliedforin
respectofaparticularreservedcategorytothenumberofspecifiedsecuritiesreservedforthat
category;

(II) The term new issuer means an issuer which has not completed twelve months of
commercialoperationanditsauditedoperativeresultsarenotavailable.


14. IdentificationofPromotersandPromotersGroup

AspertheSEBIICDRRegulation,promotersandpromotersgroupincludes:

(i)thepersonorpersonswhoareincontroloftheissuer;

(ii) the person or persons who are instrumental in the formulation of a plan or programme
pursuanttowhichspecifiedsecuritiesareofferedtopublic;

(iii)thepersonorpersonsnamedintheofferdocumentaspromoters,providedthatadirector
orofficeroftheissueroraperson,ifactingassuchmerelyinhisprofessionalcapacity,shallnot
be deemed as a promoter. Further, a financial institution, scheduled bank, foreign portfolio
investorotherthanCategoryIIIforeignportfolioinvestorandMFshallnotbedeemedtobea
promotermerelybyvirtueofthefactthat10%ormoreoftheequitysharecapitaloftheissuer
is held by such person. Provided further that such financial institution, scheduled bank and
foreignportfolioinvestorotherthanCategoryIIIforeignportfolioinvestorshallbetreatedas
promoter for the subsidiaries or companies promoted by them or for the mutual fund
sponsoredbythem;

PromoterGroupalsoincludes;

(i)thepromoter;

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(ii) an immediate relative of the promoter (i.e., any spouse of that person, or any parent,
brother,sisterorchildofthepersonorofthespouse);and

(iii) in case promoter is a body corporate (A) a subsidiary or holding company of such body
corporate;(B)anybodycorporateinwhichthepromoterholds10%ormoreoftheequityshare
capital or which holds 10% or more of the equity share capital of the promoter; (C) body
corporate in which a group of individuals or companies or combinations thereof which hold
20%ormoreoftheequitysharecapitalinthatbodycorporatealsoholds20%ormoreofthe
equitysharecapitaloftheissuer;and

(iv)incasethepromoterisanindividual(A)anybodycorporateinwhich10%ormoreofthe
equitysharecapitalisheldbythepromoteroranimmediaterelativeofthepromoterorafirm
orHinduUndividedFamily(HUF)inwhichthepromoteroranyoneormoreofhisimmediate
relative is a member; (B) any body corporate in which a body corporate as provided in (A)
above holds 10% or more, of the equity share capital; (C) any HUF or firm in which the
aggregateshareholdingofthepromoterandhisimmediaterelativesisequaltoormorethan
10%ofthetotal;and

(v)allpersonswhoseshareholdingisaggregatedforthepurposeofdisclosingintheprospectus
under the heading "shareholding of the promoter group". Further, a financial institution,
scheduledbank,foreignportfolioinvestorotherthanCategoryIIIforeignportfolioinvestorand
MFshallnotbedeemedtobepromotergroupmerelybyvirtueofthefactthat10%ormoreof
theequitysharecapitaloftheissuerisheldbysuchperson.

Provided further that such financial institution, scheduled bank and foreign portfolio investor
other than Category III foreign portfolio investor shall be treated as promoter group for the
subsidiariesorcompaniespromotedbythemorforthemutualfundsponsoredbythem;

15. DisclosuresrelatingtoGroupCompanies

Theleadmerchantbankershallreviewandretainthecertificatesconfirmingtheconstitutionof
the promoter group and the group companies; shareholding, board of directors of the
corporate promoters and the group companies, litigation, disassociation by the promoters in
thelast3yearsandvariousotherconfirmationsrequiredundertheICDRRegulations,basedon
which disclosures are made in the Offer Document in relation to promoters, promoter group
andgroupcompanies.
The NonCompete agreement, if applicable and the family settlement agreement, if any, also
needtobereviewedbytheleadmerchantbankeranddocumentedforfuturereference.
Further, the Memorandum of Association (MoA) and Article of Association (AoA) of the
corporate promoters and group companies should be reviewed by the Merchant Banker.
Additionally,theannualreportsofthegroupcompaniesforthelast3years,agreementsand
regulatoryfilingswherepromotershavebeenidentifiedassuchbytheissuerinthepastshall
alsobereviewedbytheMerchantBanker.

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16. DisclosuresrelatingtoLitigations

ThelegalcounselassiststheLeadMerchantBankerstoassessthediligenceprocessandreview
litigationrelateddocuments,ifany.Theissuercompanyisrequiredtoimmediatelyinformthe
Lead Managers about any new development on any disclosed litigation matter or any new
litigation.ThefollowingdocumentsshallbereviewedandretainedbytheLeadManagers:
MIS/Summarisedtableoflegalcasesinvolvingtheissuertobeprovidedbytheissuer.
Certifications provided by the promoters, Directors, Issuer, Group Companies,
SubsidiariesandJointVenturesinrespectofthelitigations.
Lastordersetcoflitigationagainsttheissuer,subsidiarieswhichcouldhaveamaterially
adverseeffectonthepositionoftheissuer.
Further,theleadmanagersalsoneedtoreviewandcheckthefollowingdocuments:
Case papers of all the litigations relating to the issuer and subsidiaries which are
requiredtobedisclosedundertheICDRRegulationsandprovidedbytheissuer.
In respect of a large number of similar cases which are combined for disclosure
purpose,casepapersforsomelitigationarereviewedonasamplebasis.


17. RestrictiononTransferability(LockIn)ofPromotersContribution,etc.

Dateofcommencementoflockinandinscriptionofnontransferability
Specified securities held by promoters and persons other than promoters shall not be
transferable(hereinafterreferredtoaslockin)fromthedateofallotmentofthespecified
securitiesintheproposedpublicissuefortheperiodstipulatedherebelow.

The certificate of specified securities which are subject to lockin shall contain the
inscription nontransferable and the lockin period and in case such specified securities
aredematerialised,theissuershallensurethatlockinisrecordedbythedepository.

Where the specified securities which are subject to lockin are partly paidup and the
amount calledup on such specified securities is less than the amount calledup on the
specifiedsecuritiesissuedtothepublic,thelockinshallendonlyontheexpiryofthree
years after such specified securities have become paripassu with the specified securities
issuedtothepublic.

Lockinofspecifiedsecuritiesheldbypromoters

In a public issue, the specified securities held by promoters shall be lockedin for the period
stipulatedhereunder:

Minimum promoters contribution including contribution made by alternative investment


funds, shall be lockedin for a period of three years from the date of commencement of
commercialproductionordateofallotmentinthepublicissue,whicheverislater;

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Promotersholdinginexcessofminimumpromoterscontributionshallbelockedinfora
period of one year; Provided that excess promoters contribution as provided above shall
notbesubjecttolockin.

Explanation: For the purposes of above clause, the expression "date of commencement of
commercialproduction"meansthelastdateofthemonthinwhichcommercialproductionina
manufacturingcompanyisexpectedtocommenceasstatedintheofferdocument.

Lockinofspecifiedsecuritiesheldbypersonsotherthanpromoters

In case of an initial public offer, the entire preissue capital held by persons other than
promotersshallbelockedinforaperiodofoneyear:

Providedthatnothingcontainedaboveshallapplyto:

(a) equity shares allotted to employees under an employee stock option or employee stock
purchase scheme of the issuer prior to the initial public offer, if the issuer has made full
disclosureswithrespecttosuchoptionsorschemeinaccordancewithPartAofScheduleVIIIof
SEBI(ICDR)Regulations;

(b)equitysharesheldbyaventurecapitalfundoralternativeinvestmentfundofcategoryIora
foreignventurecapitalinvestor:

Providedthatsuchequitysharesshallbelockedinforaperiodofatleastoneyearfromthe
dateofpurchasebytheventurecapitalfundoralternativeinvestmentfundorforeignventure
capitalinvestor.

Explanation:Forthepurposeofclause(b),incasesuchequityshareshaveresultedpursuantto
conversion of fully paidup compulsorily convertible securities, the holding period of such
convertiblesecuritiesaswellasthatofresultantequitysharestogethershallbeconsideredfor
thepurposeofcalculationofoneyearperiodandconvertiblesecuritiesshallbedeemedtobe
fully paid up, if the entire consideration payable thereon has been paid and no further
considerationispayableatthetimeoftheirconversion.

Lockinofspecifiedsecuritieslenttostabilisingagentundergreenshoeoption

Thelockinshallnotapplywithrespecttothespecifiedsecuritieslenttostabilisingagentfor
thepurposeofgreenshoeoption,duringtheperiodstartingfromthedateoflendingofsuch
specifiedsecuritiesandendingonthedateonwhichtheyarereturnedtothelender.
Providedthatthespecifiedsecuritiesshallbelockedinfortheremainingperiodfromthedate
onwhichtheyarereturnedtothelender.

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Pledgeoflockedinspecifiedsecurities

Specified securities held by promoters and lockedin may be pledged with any scheduled
commercial bank or public financial institution as collateral security for loan granted by such
bankorinstitution,subjecttothefollowing:

(a)Ifthespecifiedsecuritiesarelockedinintermsofclause(a)ofregulation36ofSEBI(ICDR)
Regulations,theloanhasbeengrantedbysuchbankorinstitutionforthepurposeoffinancing
oneormoreoftheobjectsoftheissueandpledgeofspecifiedsecuritiesisoneofthetermsof
sanctionoftheloan;
(b)ifthespecifiedsecuritiesarelockedinintermsofclause(b)ofregulation36ofSEBI(ICDR)
Regulationsandthepledgeofspecifiedsecuritiesisoneofthetermsofsanctionoftheloan.

Transferabilityoflockedinspecifiedsecurities.
SubjecttotheprovisionsofSecuritiesandExchangeBoardofIndia(SubstantialAcquisitionof
sharesandTakeovers)Regulations,2011,thespecifiedsecuritiesheldbypromotersandlocked
inasperregulation36ofSEBI(ICDR)Regulationsmaybetransferredtoanotherpromoteror
anypersonofthepromotergrouporanewpromoterorapersonincontroloftheissuerand
thespecifiedsecuritiesheldbypersonsotherthanpromotersandlockedinasperregulation
37 of SEBI (ICDR) Regulations may be transferred to any other person holding the specified
securitieswhicharelockedinalongwiththesecuritiesproposedtobetransferred:

Providedthatlockinonsuchspecifiedsecuritiesshallcontinuefortheremainingperiodwith
thetransfereeandsuchtransfereeshallnotbeeligibletotransferthemtillthelockinperiod
stipulatedintheseregulationshasexpired.

18. GeneralInformationDocument(GID)

SEBI vide its circular CIR/CFD/DIL/12/2013 dated October 23, 2013 has issued General
InformationDocument.ItstatesthatLeadManagersshallensurethat:
1. theGIDshouldexplicitlyincorporatethedateoflastupdation;
2. thenumberofGIDsprintedbyeveryissuercompanyshallnotbelessthanfivepercentof
thetotalAbridgedProspectus/ApplicationFormsprintedor50,000innumber,whichever
islower;
3. Copy of GID is provided to an investor as and when requested, in form and manner so
requestedbytheinvestor;
4. TheupdatedGIDismadeavailabletoinvestors;andtheupdatedGIDismadeavailableon
thewebsitesofthe:
a.StockExchange(s)wherethesharespursuanttoanissueareproposedtobelisted;and
b. The respective Lead Manager(s) to the issue, where DRHP / RHP / Draft Prospectus /
Prospectusismadeavailable.

6.2 OfferForSalethroughStockExchangeMechanism
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TheSecuritiesandExchangeBoardofIndia(SEBI)byacircularnoCIR/MRD/DP/04/2013dated
25th January 2013 and CIR/MRD/DP/ 18 /2012 dated 18 July 2012, has permitted the Stock
Exchanges to provide a separate window, i.e. apart from the existing trading system for the
normal market segment, to facilitate Promoters of listed companies to dilute/offload their
holdinginlistedcompaniesinatransparentmannerwithwiderparticipation.Further,SEBIvide
itscirculardatedCIR/MRD/DP/24/2014hasexpandedtheframeworkofOfferforSale(OFS)of
sharesthroughstockexchangemechanismasfollows:

Eligibility

(a) Exchanges: The facility of offer for sale of shares shall be available on BSE Ltd (BSE) and
NationalStockExchange(NSE).

(b)Sellers

i.Allpromoter(s)/promotergroupentitiesofsuchcompaniesthatareeligiblefortradingand
are required to increase public shareholding to meet the minimum public shareholding
requirements in terms Rule 19(2)(b) and 19A of Securities Contracts (Regulation) Rules, 1957
(SCRR),readwithclause40A(ii)(c)ofListingAgreement.

ii. Any nonpromoter shareholder of eligible companies holding at least 10% of share capital
mayalsooffersharesthroughtheOFSmechanism.

iii.IncaseanonpromotershareholderofferssharesthroughtheOFSmechanism,promoters/
promoter group entities of such companies may participate in the OFS to purchase shares
subject to compliance with applicable provisions of SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 and SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations,2011.

iv.Allpromoters/promotergroupentitiesof top200companiesbymarketcapitalisation inany


ofthelastfourcompletedquarters,marketcapitalisationbeingcalculatedasaveragemarket
capitalisationinaquarter.For(i)and(ii)above,thepromoter/promotergroupentitiesshould
nothavepurchasedand/orsoldthesharesofthecompanyinthe12weeksperiodpriortothe
offerandtheyshouldundertakenottopurchaseand/orsellsharesofthecompanyinthe12
weeks period after the offer. However, within the cooling off period of +12 weeks, the
promoter(s)/promoter group entities can offer their shares only through OFS/ Institutional
PlacementProgramme(IPP)withagapof2weeksbetweensuccessiveoffers.Theaboveshall
also be applicable on promoter(s) /promoter group entities who have already offered their
sharesthroughOFS/IPP.

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(c)Buyers

i. Allinvestorsregisteredwiththebrokersoftheaforementionedstockexchangesother
thanthepromoter(s)/promotergroupentities.
ii. In case a nonpromoter shareholder offers shares through the OFS mechanism,
promoters/ promoter group entities of such companies may participate in the OFS to
purchase shares subject to compliance with applicable provisions of SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 and SEBI (Substantial
AcquisitionofSharesandTakeovers)Regulations,2011.

2.Definitions

a)"SingleClearingPrice"isthepriceatwhichthesharesareallocatedtothesuccessfulbidders
inaproportionatebasismethodology.

b)"MultipleClearingPrices"arethepricesatwhichthesharesareallocatedtothesuccessful
biddersinapriceprioritymethodology.

c)IndicativePriceisthevolumeweightedaveragepriceofallthevalidbids.

d) "Floor Price" is the minimum price at which the seller intends to sell the shares.

3.SizeofOfferforsaleofshares

ThesizeoftheoffershallbeaminimumofRs.25crores.However,sizeofoffercanbelessthan
Rs. 25 crores so as to achieve minimum public shareholding in a single tranche.

4.Advertisementandofferexpenses

a)Advertisementsabouttheofferforsaleofsharesthroughstockexchange(s)l,ifany,shallbe
madeaftertheannouncement/noticeoftheofferforsaleofsharestothestockexchangesin
accordance with para 5 (b) below and its contents shall be restricted to the contents of the
noticeasgiventothestockexchangeunderPara5(b).

b)Allexpensesrelatingtoofferforsaleofsharesthroughstockexchange(s)shallbeborneby
theseller(s).

5.OperationalRequirements16

16
SEBICircularRef.No.CIR/MRD/DP/18/2012datedJuly18,2012.

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(a) Appointment of Broker: The Seller(s) will appoint broker(s) for this purpose. The Seller's
broker(s)mayalsoundertaketransactionsonbehalfofeligiblebuyers.

(b) Contents of the announcement/ Notice of the Offer for sale of shares:
Seller(s)shallannouncetheintentionofsaleofsharespriorlatestby5pmonT2days(where
T2dayshallbereckonedfromBankingdayinsteadofTradingday)17,alongwiththefollowing
information:

i. Name of the Seller(s) i.e. Promoters/Promoter group entities/ NonPromoter


shareholderandthenameofthecompanywhosesharesareproposedtobesold.
ii. Name of the Exchange(s) where the orders shall be placed. In case orders are to be
placed on both BSE and NSE, one of them shall be declared as the Designated Stock
Exchange("DSE").
iii. Dateandtimeoftheopeningandclosingoftheoffer.
iv. Allocationmethodologyi.e.eitheronapricepriority(multipleclearingprices)basisor
onaproportionatebasisatasingleclearingprice.
v. Numberofsharesbeingofferedforsale.
vi. Themaximumnumberofsharesthatthesellermaychoosetoselloverandabovethe
offermadeatpoint(v)above.Thenameofthebroker(s)onbehalfoftheseller(s).
vii. Thedateandtimeofthedeclarationoffloorprice,iftheseller(s)choosestoannounce
it to the market. Alternatively, a declaration to the effect that the floor price will be
submitted to the DSE in a sealed envelope that shall be disclosed post closure of the
offer.
viii. Conditions,ifany,forwithdrawalorcancellationoftheoffer.

(c)Floorprice

i. Incasethesellerchoosestodisclosethefloorprice,theseller(s)shalldeclareitafterthe
closeoftradinghoursandbeforethecloseofbusinesshoursoftheexchangesonT1
day else the seller(s) shall give the floor price in a sealed envelope to DSE before the
openingoftheoffer.(Tdaybeingthedayoftheofferforsale).
ii. Thefloorpriceifnotdeclaredtothemarket,shallnotbedisclosedtoanybody,including
the selling broker(s). Sealed envelope shall be opened by the DSE after the closure of
theofferforsaleandthefloorpricesuitablydisseminatedtothemarket.

(d)Timelines

i. The duration of the offer for sale shall be as per the trading hours of the secondary
marketandshallnotexceedonetradingday.

17
SEBIRef.No.Cir/MRD/DP/12/2015DatedJune26,2015.

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ii. Ordersshallbeplacedduringtradinghours.

(e)OrderPlacement

i. AseparatewindowforthepurposeofsaleofsharesthroughOFSshallbecreated.
ii. ThefollowingordersshallbevalidintheOFSwindow:

1. Every bid/order for an Institutional Investor should be backed by 100% (Upfront) Cash
Marginofthebidamountor0%Margin(NoMargin).

2. Every bid/order for a Retail Investor (RI) and Non Institutional Investor (NII) should be
backedby100%(Full)CashMargin.

a. Minimum 10% of the offer size shall be reserved for Retail Investors. For this purpose,
RetailInvestorshallmeananindividualinvestorwhoplacesbidsforsharesoftotalvalueof
not more than Rs. 2 lakhs aggregated across the exchanges. If the cumulative bid value
across exchanges exceeds Rs.2 lakhs in the retail category, such bids shall be rejected.

b.IndividualretailinvestorsshallhavetheoptiontobidintheRetailCategory(RI)andthe
generalcategoryi.e.NonInstitutionalInvestor(NII).However,ifthecumulativebidvalueof
such investors exceeds Rs.2 lakhs, the bids in the retail category shall become ineligible.

3. Every order/ bid placed for 100% (Upfront) Cash Margin shall be validated against the
cashdepositinOFSsegment.

iii.Cumulativebidquantityshallbemadeavailableonlinetothemarketthroughoutthetrading
session at specific intervals in respect of orders with 100% upfront margin and separately in
respect of orders placed without any upfront margin. Indicative price shall be disclosed to
market throughout the trading session. The indicative price shall be calculated based on all
validbids/orders.

iv. If the security has a price band in the normal segment, the same shall not apply for the
ordersplacedintheofferforsale.Stockspecificticksizeaspertheextantpracticeinnormal
tradingsessionshallbemadeapplicableforthiswindow.

v.Incaseofsharesunderofferforsale,thetradinginthenormalmarketshallalsocontinue.
However,incaseofmarketclosureduetotheincidenceofbreachof'Marketwideindexbased
circuitfilter',theofferforsaleshallalsobehalted.

vi.Onlylimitorders/bidsshallbepermitted.

vii.Multipleordersfromasinglebuyershallbepermitted.

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viii.Incasefloorpriceisdisclosed,orders/bidsbelowfloorpriceshallnotbeaccepted.

6.RiskManagement

i. Clearing Corporation shall collect 100% margin in cash from noninstitutional investors. In
case of institutional investors who place orders/bids with 100% of margin upfront, custodian
confirmation shall be within trading hours. In case of institutional investors who place orders
withoutupfrontmargin,custodianconfirmationshallbeaspertheexistingrulesforsecondary
markettransactions.Thefundscollectedshallneitherbeutilizedagainstanyotherobligationof
thetradingmembernorcomingledwithothersegments.

ii.Incaseoforder/bidmodificationorcancellation,suchfundsshallbereleased/collectedona
realtimebasisbyclearingcorporation.

iii. The seller(s) shall deposit the entire quantity of shares offered for sale including the
additional shares disclosed at Para 5(b)(vi) as payin with the clearing corporation/clearing
houseofDSEpriortothecommencementoftheoffer.Noothermarginshallbechargedonthe
seller(s).

7.Allocation

I. Minimum of 25% of the shares offered shall be reserved for mutual funds and insurance
companies, subject to allocation methodology. Any unsubscribed portion thereof shall be
availabletotheotherbidders.

II. TheordersshallbecumulatedbytheDSEimmediatelyoncloseoftheoffer.Basedonthe
methodologyforallocationtobefollowedasdisclosedinthenotice,theDSEshalldrawupthe
allocation.i.e.eitheronapricepriority(multipleprices)basisoronaproportionatebasisata
singleclearingprice.

III.Noallocationwillbemadeincaseoforder/bidisbelowfloorprice.

IV.Nosinglebidderotherthanmutualfundsandinsurancecompaniesshallbeallocatedmore
than25%ofthesizeofofferforsale.

V.TheallocationdetailsshallbesharedbytheDSEwiththeotherexchangeaftertheallocation
iscrystallized.

VI. Minimum 10% of the offer size shall be reserved for retail investors.

8.(i)Settlement

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a. The allocation and the obligations resulting thereof shall be intimated to the brokers on T
day.
b.Settlementshalltakeplaceontradefortradebasis.Fornoninstitutionalorders/bidsandfor
institutional orders with 100% margin, settlement shall take place on T+1 day. In case of
orders/bids of institutional investors with no margin, settlement shall be as per the existing
rulesforsecondarymarket.

c.Fundscollectedfromthebidderswhohavenotbeenallocatedsharesshallbereleasedafter
thedownloadoftheobligation.

d.OnT+1day,totheextentofobligationdetermined,theclearingCorporation/Clearinghouse
ofDSEshalltransfersuchnumberofsharestotheclearingcorporation/clearinghouseofthe
otherstockexchange,withoutconsiderationofmoney.Excessshares,ifany,shallbereturned
to seller broker(s).The direct credit of shares shall be given to the demat account of the
successful bidder provided such manner of credit is indicated by the broker/bidder.

(ii)Handlingofdefaultinpayin

a.Incaseofdefaultinpayinbyanyinvestor,10%oftheordervalueshallbechargedaspenalty
fromtheinvestorandcollectedfromthebroker.ThisamountshallbecreditedtotheInvestor
ProtectionFundofthestockexchange.

b.ThepriceatwhichallotmentshavebeenmadebasedontheallocationonTdayshallnotbe
revisedasaresultofanydefaultinpayin.

c.Issuershallhavetheoptiontocancelinfullorconcludetheoffer.

d.Allotmentdetailsaftersettlementshallalsobedisseminatedbytheexchange.

e.AllocationdetailsaftersettlementshallbeconsolidatedbytheDSEandexcessshares,ifany,
shall be returned by the respective Clearing Corporation/ Clearing house to the seller(s)
broker(s).

f. Settlement Guarantee Fund shall not be available for OFS through stock exchange
mechanism.

9.IssuanceofContractNotes.

Thebrokersshallberequiredtoissuecontractsnotetoitsclientsbasedontheallotmentprice
andquantityintermsofconditionsspecifiedbytheexchange.

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10.Withdrawalofoffer

Theofferforsalemaybewithdrawnpriortoitsproposedopening.Insuchacasetherewillbea
coolingoffperiodof10tradingdaysfromthedateofwithdrawalbeforeanofferismadeonce
again. The stock exchange(s) shall suitably disseminate details of such withdrawal.

11.Cancellationofoffer

Cancellationofoffershallnotbepermittedduringthebiddingperiod.Iftheseller(s)failstoget
sufficient demand at or above the floor price, he may choose to either conclude the offer or
cancelitinfull.Thesellermayalsochoosetoconcludetheofferorcancelitinfull,incaseof
defaultsinsettlementobligation.

6.3 PreferentialIssue
The lead manager shall ensure that listed issuer makes a preferential issue of specified
securities,ifonlythefollowingconditionsaremetwith:
(a) Aspecialresolutionhasbeenpassedbyitsshareholders;
(b) Alltheequityshares,ifany,heldbytheproposedallotteesintheissuerareindemat
form;
(c) Theissuerisincompliancewiththeconditionsforcontinuouslistingofequitysharesas
mentioned in the listing agreement with the recognised stock exchange where the
equitysharesoftheissuerarelisted;
(d) TheissuerhasobtainedthePANoftheproposedallottees;
(e) The issuer shall not make preferential issue of specified securities to any person who
has sold any equity shares of the issuer during the six months preceding the relevant
date.
Provided that in respect of the preferential issue of equity shares and compulsorily
convertible debt instruments, whether fully or partly, the Board may grant relaxation
from the requirements of this subregulation, if the Board has granted relaxation in
terms of regulation 29A of the Securities and Exchange Board of India (Substantial
AcquisitionofSharesandTakeovers)Regulations,1997tosuchpreferentialallotment.

[Explanation.Whereanypersonbelongingtopromoter(s)orthepromotergrouphas
soldhisequitysharesintheissuerduringthesixmonthsprecedingtherelevantdate,
the promoter(s) and promoter group shall be ineligible for allotment of specified
securitiesonpreferentialbasis.

Where any person belonging to promoter(s) or the promoter group has previously
subscribedtowarrantsofanissuerbutfailedtoexercisethewarrants,thepromoter(s)
andpromotergroupshallbeineligibleforissueofspecifiedsecuritiesofsuchissueron
preferentialbasisforaperiodofoneyearfrom:

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(a)thedateofexpiryofthetenureofthewarrantsduetononexerciseoftheoptionto
convert;or

(b)thedateofcancellationofthewarrants,asthecasemaybe.

Theissuershall,inadditiontothedisclosuresrequiredundersection102oftheCompaniesAct,
2013 or any other applicable law, disclose the following in the explanatory statement to the
noticeforthegeneralmeetingproposedforpassingresolution:
Theobjectsofthepreferentialissue;
Theproposalofthepromoters,directorsorkeymanagementpersonneloftheissuerto
subscribetotheoffer;
Theshareholdingpatternoftheissuerbeforeandafterthepreferentialissue;
Thetimewithinwhichthepreferentialissueshallbecompleted;
Theidentityofthenaturalpersonswhoaretheultimatebeneficialownersoftheshares
proposed to be allotted and/or who ultimately control the proposed allottees, the
percentage of post preferential issue capital that may be held by them and change in
control,ifany,intheissuerconsequenttothepreferentialissue;Providedthatifthere
is any listed company, mutual fund, bank or insurance company in the chain of
ownershipoftheproposedallottee,nofurtherdisclosurewillbenecessary.
Anundertakingthattheissuershallrecomputethepriceofthespecifiedsecuritiesin
termsoftheprovisionoftheseregulationswhereitisrequiredtodoso;
Anundertakingthatiftheamountpayableonaccountoftherecomputationofpriceis
not paid within the time stipulated in these regulations, the specified securities shall
continuetobelockedintillthetimesuchamountispaidbytheallottees.

(2) The issuer shall place a copy of the certificate of its statutory auditor before the general
meeting of the shareholders, considering the proposed preferential issue, certifying that the
issueisbeingmadeinaccordancewiththerequirementsoftheseregulations.

(3) Where specified securities are issued on a preferential basis to promoters, their relatives,
associatesandrelatedentitiesforconsiderationotherthancash,thevaluationoftheassetsin
considerationforwhichtheequitysharesareissuedshallbedonebyanindependentqualified
valuer,whichshallbesubmittedtotherecognisedstockexchangeswheretheequitysharesof
theissuerarelisted:
Providedthatiftherecognisedstockexchangeisnotsatisfiedwiththeappropriatenessofthe
valuation,itmaygetthevaluationdonebyanyothervaluerandforthispurposeitmayobtain
anyinformation,asdeemednecessary,fromtheissuer.

(4) The special resolution shall specify the relevant date on the basis of which price of the
equity shares to be allotted on conversion or exchange of convertible securities shall be
calculated.

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Explanation:Forthepurposeofsubregulation(3),thetermvaluerhasthesamemeaningas
is assigned to it under clause (r) of subregulation (1) of regulation 2 of the Securities and
ExchangeBoardofIndia(IssueofSweatEquity)Regulations,2002.

Pricing

(1) If the equity shares of the issuer have been listed on a recognised stock exchange for a
period of 26 weeks or more as on the relevant date, the equity shares shall be allotted at a
pricenotlessthanhigherofthefollowing:
(a)Theaverageofthe weeklyhighandlowoftheclosingpricesoftherelevantequityshares
quotedontherecognisedstockexchangeduringthe26weeksprecedingtherelevantdate;or

(b) The average of the weekly high and low of the closing prices of the related equity shares
quotedonarecognisedstockexchangeduringthe2weeksprecedingtherelevantdate.
(2) If the equity shares of the issuer have been listed on a recognised stock exchange for a
period of less than 26 weeks as on the relevant date, the equity shares shall be allotted at a
pricenotlessthanthehigherofthefollowing:
(a) the price at which equity shares were issued by the issuer in its initial public offer or the
valuepersharearrivedatinaschemeofarrangementasperprovisionsoftheCompaniesAct,
pursuanttowhichtheequitysharesoftheissuerwerelisted,asthecasemaybe;or

(b) The average of the weekly high and low of the closing prices of the related equity shares
quotedontherecognisedstockexchangeduringtheperiodshareshavebeenlistedpreceding
therelevantdate;or

(c) the average of the weekly high and low of the closing prices of the related equity shares
quotedonarecognisedstockexchangeduringthetwoweeksprecedingtherelevantdate.

(3)Wherethepriceoftheequitysharesisdeterminedintermsofsubregulation(2),suchprice
shallberecomputedbytheissueroncompletionoftwentysixweeksfromthedateoflistingon
arecognisedstockexchangewithreferencetotheaverageoftheweeklyhighandlowofthe
closing prices of the related equity shares quoted on the recognised stock exchange during
thesetwentysixweeksandifsuchrecomputedpriceishigherthanthepricepaidonallotment,
thedifferenceshallbepaidbytheallotteestotheissuer

(4) Any preferential issue of specified securities, to QIBs not exceeding 5 in number, shall be
madeatapricenotlessthantheaverageoftheweeklyhighandlowoftheclosingpricesofthe
relatedequitysharesquotedonarecognisedstockexchangeduringtwoweeksprecedingthe
relevantdate.

As per the SEBI ICDR Regulation, allotment pursuant to the special resolution shall be
completed within a period of 15 days from the date of passing such resolution. However, in
caseswhereapplicationforexemptionfromSEBIundertheSEBI(SAST)Regulation,2011orany

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approval from any other regulatory authority for allotment is pending, the period of 15 days
shall be counted from the date of order on such application or the date of approval or
permission,asthecasemaybe.However,therequirementofallotmentwithin15daysshall
not apply to allotment of specified securities on preferential basis pursuant to a scheme of
corporate debt restructuring as per the corporate debt restructuring framework specified by
theRBI.
Further,iftheallotmentofspecifiedsecuritiesisnotcompletedwithin15daysfromthedateof
specialresolution,afreshspecialresolutionshallbepassed.Therelevantdatefordetermining
the price of specified securities will be taken with reference to the date of latter special
resolution.

Notwithstanding anything contained above, where a preferential allotment is made that


attracts an obligation to make an open offer for shares of the issuer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011,
and there is no offer made under subregulation (1) of regulation 20 of the Securities and
ExchangeBoardofIndia(SubstantialAcquisitionofSharesandTakeovers)Regulation,2011,the
periodoffifteendaysshallbecountedfromtheexpiryoftheperiodspecifiedinsubregulation
(1)ofregulation20ordateofreceiptofallstatutoryapprovalsrequiredforthecompletionof
an open offer under the Securities and Exchange Board of India (Substantial Acquisition of
SharesandTakeovers)Regulation,2011:

Providedthatifanofferismadeundersubregulation(1)ofregulation20oftheSecuritiesand
ExchangeBoardofIndia(SubstantialAcquisitionofSharesandTakeovers)Regulation,2011,the
period of fifteen days shall be counted from the expiry of the offer period as defined in the
Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulation,2011:

Provided further that the above provisions shall not apply to an offer made under sub
regulation (1) of regulation 20 of the Securities and Exchange Board of India (Substantial
AcquisitionofSharesandTakeovers)Regulation,2011,pursuanttoapreferentialallotment.

Allotmentshallonlybemadeindematerialisedform.

Explanation.The requirement of allotment in dematerialised form shallalso be applicable for


the equity shares to be allotted pursuant to exercise of option attached to warrant or
conversionofconvertiblesecurities.

6.4 QualifiedInstitutionalPlacement
The lead manager shall ensure that a listed issuer making Qualified Institutional Placement
(QIP)shallsatisfythefollowingcondition:
a) AspecialresolutionapprovingtheQIPhasbeenpassesbyitsshareholders;

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b) The equity shares of the same class, which are proposed to be allotted through QIP or
pursuant to conversion or exchange of eligible securities offered through QIP, have been
listed on arecognised stock exchange having nationwide trading terminal for a period of
atleastoneyearpriortothedateofissuanceofnoticetoitsshareholdersforconveningthe
meetingtopassthespecialresolution;
c) It is in compliance with the requirement of minimum public shareholding specified in the
listingagreementwiththestockexchange;
d) In the special resolution, it shall be, among other relevant matters, specifies that the
allotmentisproposedtobemadethroughQIP,andtherelevantdateshallalsobespecified.

The merchant banker, while seeking inprinciple approval for listing of the eligible securities
issuedunderQIP,furnishtoeachstockexchangeonwhichthesameclassofequitysharesof
the issuer are listed, a due diligence certificate stating that the eligible securities are being
issuedunderQIPandthattheissuercomplieswiththeprovisionsoftheSEBIICDRRegulations.
The issuer company shall also furnish a copy of the placement document, a certificate
confirming compliance with the provisions related to Qualified Institutional Placement while
submittingapplicationforseekinginprincipleapprovalfromthestockexchanges.

PricingandRestrictionsonAllotment
TheQIPshallbemadeatapricenotlessthattheaverageoftheweeklyhighandlowofthe
closingpricesoftheequitysharesofthesameclassquotedonthestockexchangeduringthe
two weeks preceding the relevant date. Provided that the issuer may offer a discount of not
more than five per cent. on the price so calculated for the qualified institutions placement,
subject to approval of shareholders as specified in clause (a) of regulation 82 of these
regulations.
Theissuershallnotallotpartlypaidupeligiblesecurities.Further,incaseofallotmentofnon
convertibledebtinstrumentsalongwithwarrants,theallotteesmaypaythefullconsideration
or part thereof payable with respect to warrants, at the time of allotment of such warrants.
Providedfurtherthatonallotmentofequitysharesonexerciseofoptionsattachedtowarrants,
suchequitysharesshallbefullypaidup. ThepricessodeterminedforQIPshallbesubjectto
appropriateadjustmentsiftheissuer:
a) Makes an issue of equity shares by way of capitalisation of profits or reserves, other
thanbywayofdividendonshares;
b) Makesarightsissueofequityshares;
c) Consolidatesitsoutstandingequitysharesintoasmallernumberofshares;
d) Dividesitsoutstandingequitysharesincludingbywayofstocksplit;
e) Reclassifiesanyofitsequitysharesintoothersecuritiesoftheissuer;
f) Is involved in such other similar events or circumstances, which in the opinion of the
concernedstockexchange,requiresadjustments.
AllotmentsundertheQIPshallbemadesubjecttothefollowingconditions:
a) Minimum 10% of eligible securities shall be allotted to mutual funds. Further, if the
mutual funds do not subscribe to said minimum percentage or any part thereof, such
minimumportionorpartthereofmaybeallottedtootherQIBs;

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b) Noallotmentshallbemade,eitherdirectlyorindirectly,toanyQIBwhoisapromoter
or any person relatedto promoters of the issuer. Further,the QIB who does not hold
anysharesintheissuerandwhohasacquiredthesaidrightsinthecapacityofalender
shallnotbedeemedtobeapersonrelatedtopromoters.
InaQIPofnonconvertibledebtinstrumentslongwithwarrants,aninvestorcansubscribeto
thecombinedofferingofnonconvertibledebtinstrumentswithwarrantsortotheindividual
securities,i.e.,eithernonconvertibledebtinstrumentsorwarrants.

Minimumnumberofallottees
As per the SEBI ICDR regulations, the minimum number if allottees for each placement of
eligiblesecuritiesmadeunderQIPshallnotbelessthan:
(a) two,wherethesizeislessthanorequaltoRs.250crore;
(b) five,wheretheissuesizeisgreaterthanRs.250crore,subjecttotheconditionthatno
singleallotteeshallbeallottedmorethan50%oftheissue.
Restrictionsonamountraised
The aggregate of the proposed QIP and all previous QIPs made by the issuer in the same
financialyearshallnotexceed5timesthenetworthoftheissueraspertheauditedbalance
sheetofthepreviousfinancialyear.

6.5 Rightsissue
Issuershallnotmakearightsissueofequityshares,unlessithasmadereservationofequity
sharesofthesameclassinfavouroftheholdersofoutstandingconvertibledebtinstrumentsif
anyinproportiontotheconvertiblepartthereof.

Theequitysharessoreservedfortheholdersoffullyorpartiallycompulsorilyconvertibledebt
instrumentsshallbeissuedatthetimeofconversionofsuchconvertibledebtinstrumentson
thesametermsatwhichtheequitysharesofferedintherightsissuewereissued.
Theabridgedletterofoffer,alongwithapplicationform,shallbedispatchedthroughregistered
postorspeedposttoallexistingshareholdersatleastthreedaysbeforethedateofopeningof
theissue.Further,theletterofoffershallbegivenbytheissuerorleadmerchantbankertoany
existing shareholder who has made a request in this regard. The shareholders may make an
applicationintheapplicationformorwhohavenotreceivedtheapplicationform,onaplain
paperalongwiththerequisiteapplicationmoney.Wheretheshareholdermakesanapplication
onboththeapplicationformandtheplainpaper,theapplicationisliabletoberejected.

The issue price is decided before determining the record date which shall be determined in
consultationwiththedesignatedstockexchange.Arightsissueshallbeopenforsubscription
foraminimumperiodof15daysandamaximumperiodof30days.

A listed company making a rights issue shall announce a Record Date for the purpose of
determiningtheshareholderseligibletogetrightsoffer.Issuershallnotwithdrawarightsissue
after announcement of Record Date. In case issuer withdraws after announcing the Record

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NISM-Series-IX: Merchant Banking Certification Examination


Date it shall not make application of listing of any of its securities for a period of 12 months
fromtheRecordDateannounced.

Theissuershallgiveonlyonepaymentoptionoutofthefollowingtoalltheinvestors
(a)partpaymentonapplicationwithbalancemoneytobepaidincalls;or
(b)fullpaymentonapplication:
Providedthatwheretheissuerhasgiventhepartpaymentoptiontoinvestors,suchissuershall
obtainthenecessaryregulatoryapprovalstofacilitatethesame.

PreIssueAdvertisementforRightsIssue
Theissuerhastoissueanadvertisementforrightsissuedisclosingthefollowing:
a. Thedateofcompletionofdespatchofabridgedletterofofferandtheapplicationform;
b. Thecentresotherthanregisteredofficeoftheissuerwheretheshareholdersorthepersons
entitled to receive the rights entitlements may obtain duplicate copies of the application
forms in case they do not receive the application form within a reasonable time after
openingoftherightsissue;
c. Astatementthatiftheshareholdersentitledtoreceivetherightsentitlementshaveneither
received the original application forms nor they are in a position to obtain the duplicate
forms,theymaymakeanapplicationinwritingonaplainpapertosubscribetotherights
issue;
d. Aformattoenabletheshareholdersentitledtoapplyagainsttheirrightsentitlements,to
make the application on a plain paper specifying therein necessary particulars such as
name,address,ratioofrightsissue,issueprice,numberofequitysharesheld,ledgerfolio
numbers,depositoryparticipantID,clientID,numberofequitysharesentitledandapplied
for,additionalsharesifanyetc.andparticularsofcheque,etc.Tobedrawninfavourofthe
issuersaccount;
e. Astatementthattheapplicationscanbedirectlysentbytheshareholdersentitledtoapply
againstrightsentitlementsthroughregisteredposttogetherwiththeapplicationmoneysto
theissuersdesignatedofficialattheaddressgivenintheadvertisement;
f. Astatementtotheeffectthatiftheshareholdermakesanapplicationonplainpaperand
alsoonapplicationformbothhisapplicationsshallbeliabletoberejectedattheoptionof
theissuer.
Theadvertisementshallbemadeinatleast1English,1Hindinationaldailynewspaperwith
widecirculation,and1regionallanguagedailynewspaperwithwidecirculationattheplace
where registered office of the issuer is situated, at least three days before the date of
openingoftheissue.

Utilisationoffundsraisedthroughrightsissue

As per the SEBI (ICDR), the issuer shall utilise the funds collected in rights issues after the
finalisationofthebasisofallotment.

Mannerofdisclosuresintheofferdocument

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NISM-Series-IX: Merchant Banking Certification Examination


Theofferdocumentshallcontainallmaterialdisclosureswhicharetrueandadequatesoasto
enable investors make informed investment decisions. The redherring, shelf prospectus and
prospectusshallnecessarilycontainthe;
(a) DisclosuresasspecifiedinSection26oftheCompaniesAct,2013readwithrules3,4,5,6of
theCompanies(ProspectusandAllotmentofSecurities)Rules2014;
(b) DisclosuresspecifiedinPartAofScheduleVIIIoftheSEBIICDRRegulations,subjecttothe
provisionsofPartsBandCthereof;

The letter of offer shall contain disclosures as specified in Part E of Schedule VIII of the SEBI
(ICDR)Regulations.
Theissuermakingarightsissuemaymakereduceddisclosureasspecifiedinclause5ofpart
EofScheduleVIIIofSEBI(ICDR)RegulationsintheLetterofOfferifitsatisfiesthecondition
mentionedthereini.e.;
Issuerhasbeenfilingperiodicreturns,statement&informationincompliancewithlisting
agreementforthelast3yearsprecedingthedateoffilingofdraftLetterofOfferwithSEBI.
Such reports, statements and information are available on website of recognized stock
exchanges having nationwide trading terminal or on a common Efiling platform specified
bySEBI.
Issuer has investor grievances handling mechanism including meeting of shareholders or
investorsgrievancescommitteeatfrequentintervals,appropriatedelegationofpowersby
the Board of Directors regarding share transfer and clearly laid down systems and
proceduresfortimelyandsatisfactoryredressalofinvestorgrievance.

ExemptionfromOpenOfferincaseofacquisitionthroughRightsIssue

Theacquisitionofsharesbyanyshareholderuptohisentitlementpursuanttorightsissueis
exemptfromtheobligationtomakeanopenofferunderTakeoverRegulation.

Acquisitionofsharesbyanyshareholderinarightissuebeyondhisentitlementpursuantto
right issue is exempt from obligation to make an offer in terms of Takeover Regulation
subjecttofulfillingtheconditionsmentionedtherein.Suchconditionsbroadlyinclude;

Shareholderhasnotrenouncedanyofhisentitlementinrightsissue.
ThepriceatwhichtherightsissueismadeisnothigherthantheExrightpriceofthe
sharesoftheissuercompanyarrivedasperthespecifications.
Thepostrightsissueshareholdingofpromotershallnotbebeyond75%.

6.6 InstitutionalPlacementProgramme
An Institutional Placement Programme (IPP) may be made only after a special resolution
approvingtheinstitutionalplacementprogrammehasbeenpassedbytheshareholdersofthe

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NISM-Series-IX: Merchant Banking Certification Examination


issuerintermsofprovisionsoftheCompaniesAct,2013.Nopartlypaidupsecuritiesshallbe
offered.Theissuershallobtainaninprincipleapprovalfromthestockexchanges.

OfferDocument

An IPP Programme shall be managed by SEBI registered Merchant Bankers exercising due
diligence. The IPP shall be made on the basis of the offer document which shall contain all
materialinformation.Theissuershall,simultaneouslywhileregisteringtheofferdocumentwith
theRegistrarofCompanies,fileacopywithSEBIandwiththestockexchangesthroughthelead
merchantbanker.
Theofferdocumentshallalsobeplacedonthewebsiteoftheconcernedstockexchangeandof
theissuerclearlystatingthatitisinconnectionwithIPPthattheofferisbeingmadeonlytothe
QIBs. It is the merchant banker who submits to SEBI the due diligence certificate as per the
specified format, stating that the eligible securities are being issued under IPP and that the
issuercomplieswithrequirementsasgivenintheSEBI(ICDR)Regulations.

Pricingandallocation/allotment
Thefloorpriceorthepricebandneedstobeannouncedbytheeligibleselleratleastoneday
prior to the opening of the IPP. The eligible seller shall have the option to make allocation
/allotmentasperanyofthefollowingmethods:(a)Proportionatebasis,(b)priceprioritybasis,
(c)criteriaasmentionedintheofferdocument.Themethodofallotment/allocationneedsto
bedisclosedintheofferdocument.Theallocation/allotmentisoverseenbythestockexchange
beforefinalallotment.

Restrictions

1. Thepromoterorpromotergroupshallnotmakeinstitutionalplacementprogrammeifthe
promoter or any person who is part of the promoter group has purchased or sold the
eligiblesecuritiesduringthetwelveweeksperiodpriortothedateoftheprogrammeand
theyshallnotpurchaseorselltheeligiblesecuritiesduringthetwelveweeksperiodafter
thedateoftheprogramme:
2. Provided that such promoter or promoter group may, within the period provided in sub
regulation (1), offer eligible securities held by them through institutional placement
programme or offer for sale through stock exchange mechanism specified by the Board,
subjecttotheconditionthatthereshallbeagapofminimumtwoweeksbetweenthetwo
successiveoffer(s)and/orprogramme(s).
3. Allocation/allotmentundertheIPPshallbemadesubjecttothefollowingconditions:
(a) Minimumof25%ofeligiblesecuritiesshallbeallottedtoMFsandinsurancecompanies.
Further, if the MFs and insurance companies do not subscribe to said minimum
percentageoranypartthereof,suchminimumportionorpartthereofmaybeallotted
tootherQIBs;
(b) Noallocation/allotmentshallbemadeeitherdirectlyorindirectly,toanyQIBwhoisa
promoteroranypersonrelatedtopromotersoftheissuer.Further,aQIBwhodoesnot

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holdanysharesintheissuerandwhohasacquiredtherightsinthecapacityofalender
shallnotbedeemedtobeapersonrelatedtopromoters.
4. TheissuerwillacceptbidsonlythroughASBAfacility.
5. ThebidsmadebyapplicantsinIPPshallnotbewithdrawnorreviseddownwards.

Minimumnumberofallottees

TheminimumnumberofallotteesforeachofferofeligiblesecuritiesmadeunderIPPshallnot
belessthan10,providedthatnosingleallotteeshallbeallottedmorethan25%oftheoffer
size.TheQIBsbelongingtothesamegrouporwhoareundersamecontrolshallbedeemedto
besingleallottee.

Restrictionsonsizeoftheoffer

The aggregate of all tranches of IPP made by the eligible seller shall not result in increase in
public shareholding by more than 10% or such less percent as is required to reach minimum
publicshareholding.Wheretheissuehasbeenoversubscribed,anallotmentofnotmorethan
10%oftheoffersizeshallbemadebytheeligibleseller.

Periodofsubscriptionanddisplayofdemand

Theissueshallbekeptopenforaminimumofonedayormaximumoftwodays.Theaggregate
demandscheduleshallbedisplayedbystockexchangeswithoutdisclosingtheprice.

Theeligiblesellershallhavetherighttowithdrawtheofferincaseitisnotfullysubscribed.

Transferabilityofeligiblesecurities

The eligible securities allotted under IPP shall not be sold by the allottee for a period of one
yearfromthedateofallocation/allotment,exceptonarecognisedstockexchange.

6.7 IndianDepositoryReceipts
Eligibility
AnissuingcompanymakinganissueofIDRshallalsosatisfythefollowing:
(a) Theissuingcompanyislistedinitshomecountry;
(b) Theissuingcompanyisnotprohibitedtoissuesecuritiesbyanyregulatorybody;
(c) Theissuingcompanyhasatrackrecordofcompliancewithsecuritiesmarketregulations
initshomecountry.

ConditionsforissueofIDR
AnissueofIDRshallbesubjecttothefollowingconditions:
(a) IssuesizeshallnotbelessthanRs.50crore;

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(b) Proceduretobefollowedbyeachclassofapplicantforapplyingshallbementionedin
theprospectus;
(c) MinimumapplicationamountshallbeRs.20,000;
(d) Atleast50%oftheIDRissuedshallbeallottedtoQIBsonproportionatebasis;
(e) Thebalance50%maybeallocatedamongcategoriesofnonQIBsandretailindividual
investorsincludingemployeesatthediscretionoftheissuer.Themannerofallocation
shallbedisclosedintheprospectus.Allotmenttoinvestorswithinacategoryshallbeon
proportionatebasis;

Providedthatatleastthirtypercent.oftheIDRsbeingofferedinthepublicissueshallbe
availableforallocationtoretailindividualinvestorsandincaseofundersubscriptionin
retailindividualinvestorcategory,spillovertoothercategoriestotheextentofunder
subscriptionmaybepermitted.

(f) Atanygiventime,thereshallbeonlyonedenominationofIDRoftheissuingcompany.

MinimumSubscription
1. ForNonUnderwrittenIssues:
1. Iftheissuingcompanydoesnotreceivetheminimumsubscriptionof90%oftheoffer
throughofferdocumentonthedateofclosureoftheissue,orifthesubscriptionlevel
fallsbelow90%aftertheclosureofissueonaccountsofchequeshavingbeingreturned
unpaid or withdrawal of applications, the issuing company shall forthwith refund the
entiresubscriptionamountreceived.
2. If the issuing company fails to refund the entire subscription amount within 15 days
fromthedateoftheclosureoftheissue,itisliabletopaytheamountwithinterestto
thesubscribersattherateof15%perannumfortheperiodofdelay.

2. ForUnderwrittenIssues:Iftheissuingcompanydoesnotreceivetheminimumsubscription
of90%oftheofferthroughofferdocumentincludingdevolvementofunderwriterswithin
60 days from the dateof closure of the issue,the issuing company shall forthwith refund
theentiresubscriptionamountreceivedwithinteresttothesubscribersattherateof15%
perannumfortheperiodofdelaybeyond60days.

Fungibility

The Indian Depository Receipts shall be fungible into underlying equity shares of the issuing
companyinthemannerspecifiedbytheBoardandReserveBankofIndia,fromtimetotime.

Filing of Draft Prospectus, Due diligence Certificate, Payment of Fees and Issue of
advertisementsforIDR

1. TheissuingcompanymakinganissueofIDRshallenterintoanagreementwithamerchant
bankeronthelinesofformatasspecifiedintheSEBI(ICDR)Regulations.

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2. Wheretheissueismanagedbymorethanonemerchantbanker,therights,obligationsand
responsibilities, relating to disclosures, allotment, refund and underwriting obligations, if
any,ofeachmerchantbankershallbepredeterminedanddisclosedintheprospectusas
perspecifiedformatgivenintheSEBI(ICDR)Regulations.
3. The issuing company shall file a draft prospectus with SEBI through the merchant banker
alongwiththerequisitefee.(FeestructureisgiveninCompanies(IssueofIndianDepository
Receipts)Rules,2004.
4. Theleadmerchantbankersisrequiredtodothefollowing:
a. SubmitduediligencecertificatetoSEBIalongwiththedraftprospectus;
b. Certify that all amendments, suggestions or observations made by SEBI have been
incorporatedintheprospectus;
c. Submitafreshduediligencecertificateatthetimeoffilingtheprospectuswiththe
RegistraroftheCompanies;
d. Furnishacertificateimmediatelybeforetheopeningoftheissue,certifyingthatno
correctiveactionisrequiredonitspart;
e. Furnishacertificateaftertheissuehasopenedbutbeforeitclosesforsubscription.


PostIssueReports
ThemerchantbankerhastosubmitthepostissuereportstoSEBIasfollows:
Initialpostissuereportshallbefiledwithin3daysofclosureoftheissue;
Finalpostissuereportshallbefiledwithin15daysofthedateoffinalisationofbasisof
allotmentorwithin15daysofrefundofmoneyincaseoffailureofissue.

UndersubscribedIssue
In case of undersubscribed issue of IDR, the merchant banker shall furnish information in
respectofunderwriterswhohavefailedtomeettheirunderwritingdevolvementtoSEBIasper
provisionsspecifiedintheSEBI(ICDR)Regulations.

Finalisationofbasisofallotment

Inconsultationwiththepostissueleadmerchantbankersandtheregistrarstotheissue,the
executivedirectorormanagingdirectorofthestockexchange,wheretheIDRsareproposedto
belistedshallensurethatthebasisofallotmentisfinalisedinafairandpropermannerasper
SEBI(ICDR)Regulation.

6.8 DueDiligence
Theobjectiveofduediligenceistocollectinformationabouttheissuercompanythathelpsthe
leadmanagerassessthedisclosuresintheofferdocumentinconnectionwiththeirobligations
under applicable regulations. This helps investors make balanced and informed decision. The
CodeofConductasgivenintheSEBIMerchantBankingRegulationsrequiresamerchantbanker
to,amongstotherthingsexerciseduediligence,ensurepropercareandexerciseindependent
professionaljudgement.

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In terms of the ICDR Regulations the lead managers are required to submit due diligence
certificate(s)toSEBIatvariousstagesofatransactionandtheformatsforsuchcertificateshave
beenprovidedintheICDRRegulations.

RoleofExternalpartiesintheduediligenceprocess

During the due diligence process, the Lead Manager and the issuer are assisted by external
partiessuchaslegalcounsels,statutoryauditorsandspecialisedindustryexperts,ifrequired.
ThelegalcounselmayassisttheLeadManagerincarryingoutlegaldocumentaryduediligence,
assisting the issuer in the preparation of the Offer Documents in compliance with ICDR
Regulations, the Companies Act, 2013 and other applicable laws and advising the lead
managersonlegalmattersrelatingtotheoffering.Inadditionthelegalcounselsmayalsoissue
legal and disclosure opinions in relation to the issue to the Lead Managers. The statutory
auditorsoftheissuercompanyalsoprovidetheirreportsonthefinancialinformationincluded
in the Offer Documents and other relevant certifications pertaining to the issue including
comfort letters for financial information included in the Offer Documents including for
periodssubsequenttothedateofthelastauditedfinancialstatements.

Keyduediligencedocuments

Theleadmanagershouldmaintainthefollowingdocumentsbeingpartoftheirduediligence:

1. ContractsaspertheOfferDocumentshallinclude:
a. LettersofappointmentissuedtotheLeadManager
b. IssueAgreementbetweentheissuerandtheLeadManager
c. MOUbetweentheissuerandtheRegistrartotheIssue
d. EscrowAgreement
e. SyndicateAgreement
f. UnderwritingAgreement
g. TripartiteAgreementbetweenNSDL/CDSL,Registrartotheissueandissuer
h. Monitoringagencyagreement,ifapplicable

2. Indicativelistofotherdocuments:
a. MemorandumandArticlesofAssociation
b. Certificateofincorporationandchangeofnameoftheissuer
c. CertifiedtruecopiesoftheBoardresolutionandshareholdersresolutionofthe
issuerauthorisingtheissue
d. Auditors reports for the relevant financial period specified in the ICDR
Regulations
e. Annualreports,fortherelevantfinancialperiodspecifiedintheICDRRegulations
f. AuditorsTaxbenefitreport
g. Appraisalreportsorvaluationreportsbyindependentexperts
h. InitiallistingapprovalsoftheStockExchanges
i. CommunicationexchangedwithSEBIandotherregulatoryauthorities,including
duediligencecertificatesissuedbytheLeadManagers

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j. Legalopinionsprovidedbythelegalcounsels,ifany
k. CorporatepresentationsmadebytheissuercompanytotheLeadManagers,if
any
l. KYC documentation of promoters and key management personnel in line with
theinternalguidelinesoftheconcernedLeadManager(s).
m. Agreementwithadvertisingagencies
n. Consents from Auditors, Directors, IPO Grading Agency, Bankers to the
Company,BankerstotheIssue,ComplianceOfficer,LeadManagers,TaxExpert,
OtherExperts,LegalAdvisors,Registrarstotheissue,RefundBankers,Syndicate
Members
o. IPOgradingreport
p. Material agreement not in the ordinary course of business that are listed as
materialcontractsintheOfferDocument

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ReviewQuestions

1. WhichAct/RegulationprescribesthegeneralobligationstobefollowedbyIssuersandother
intermediarieswhoarerelatedwiththeprocessofissuemanagement?
(a) TheSecuritiesContract(Regulations)Act,1956
(b) TheCompaniesAct2013
(c) SEBI(IssueofCapitalandDisclosureRequirements)Regulations,2009
(d) SEBI(SubstantialAcquisitionofSharesandTakeovers)Regulation,2011
Ans:(c)

2. No advertisement shall be issued giving any impression that the issue has been fully
subscribed or oversubscribed during the period the issue is open for subscription. State
whetherTrueorFalse.
(a) True
(b) False
Ans:(a)

3. Who is required to look into and monitor the redressal of the investor grievances, if any
whichhasarisenduringissuemanagementprocess?
(a) RegistrartoanIssue
(b) Leadmerchantbanker
(c) DebentureTrustee
(d) Depository
Ans:(b)

4. As per SEBI (ICDR) Regulation, the aggregate reservation on competitive basis for
employeesshallnotexceed___percentofthepostissuecapitaloftheissuer.
(a) 5
(b) 10
(c) 15
(d) 20
Ans:(a)

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Chapter7:OtherMerchantBankingActivities18Mergers,Acquisitions&
Takeovers

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowaboutthe:

RoleofmerchantbankerinMergers,Acquisitions&Takeovers
KeyfeatureoftheSEBI(SubstantialAcquisitionofShares&Takeovers)
Regulations

Merchantbankersarealsoinvolvedinmanyotheractivities,suchasprovidingadvisoryservices
regardingmergersandacquisitionsdivestments,takeoversetc.tocorporatehouseswhichmay
involve a change in ownership of a company or business. In the following sections we will
discuss the role of merchant banker in M&A activities, Takeovers, buyback of equity shares,
delistingofshares,IssueandlistingofDebtSecuritiesandIssueofESOPs.

7.1 Mergers,Acquisitions&Takeovers
Mergerisabroadertermanditdenotesacombinationoftwoormorecompaniestoforma
single entity, in which either one or both lose their identity and a new company is formed.
When both companies lose their identity, a new company is formed and existing companies
stocks are surrenderedand shares of new company are issued in their place. Merger is not
necessarilyamongsttwoequalorcomparablestaturecompanies.

An acquisition is the purchase of one business or company by another company or other


business entity. Consolidation occurs when two companies combine together to form a new
enterprise altogether, and neither of the previous companies survives
independently. Acquisitionusuallyreferstoapurchaseofasmallerfirmbyalargerone.

ThetermsMergerandAcquisitionareusedsynonymously,however,theyareslightlydifferent
intheirmeanings. Whenonecompanytakesoveranotherandclearlyestablishesitselfasthe
new owner, the purchase is called an acquisition. From a legal point of view, the target
companyceasestoexist,thebuyer"swallows"thebusinessandthebuyer'sstockcontinuesto
betraded.

Inthepuresenseoftheterm,amergerhappenswhentwofirmsagreetogoforwardasasingle
newcompanyratherthanremainseparatelyownedandoperated.Thiskindofactionismore
preciselyreferredtoasa"mergerofequals".Thefirmsareoftenofaboutthesamesize.Both
companies'stocksaresurrenderedandnewcompanystockisissuedinitsplace.Forexample,

18
SectionsofthischapterhavebeentakenfromWikipedia.

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in the 1999 merger of GlaxoWellcome and SmithKline Beecham, both firms ceased to exist
whentheymerged,andanewcompany, GlaxoSmithKline,wascreated.

Takeover is the acquisition of substantial shares or voting rights for the purpose of seeking
management control of the company. If management of a prospective selling company is
unwillingtonegotiateatransactionwithaprospectivebuyer,thebuyermaymakeadirectbid
to the sellers shareholders and purchase sellers shares from the market to acquire a
controlling stake in the sellers company. The target company may be maintained as a
subsidiaryordivisionordissolvedorbemerged.

Takeover can be by merger of a solvent acquirer with a sick company for availing the tax
benefits,orelseitcanbeacquisitionofsharesthroughdirectnegotiationswithonewhoowns
controlling interest or through open offer or market purchase of requisite voting rights to
changethemanagementofthecompany.

7.1.1 DifferencebetweenMergers,AcquisitionsandTakeovers

A merger is a mutual decision of two companies to combine and become one entity. The
combinedbusiness,throughstructuralandoperationaladvantagessecuredbythemerger,can
cutcostsandincreaseprofits,boostingshareholdervaluesforbothgroupsofshareholders.A
takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller
companybyamuchlargerone.Thiscombinationof"unequals"canproducethesamebenefits
as a merger, but it does not necessarily have to be a mutual decision. A larger company can
initiateahostiletakeoverofasmallerfirm,whichessentiallyamountstobuyingthecompanyin
the face of resistance from the smaller company's management. Unlike in a merger, in an
acquisition, the acquiring firm usually offers a cash price per share to the target firm's
shareholdersortheacquiringfirm'sshare'stotheshareholdersofthetargetfirmaccordingtoa
specified conversion ratio. Either way, the purchasing company essentially finances the
purchase of the target company, buying it outright for its shareholders. An example of an
acquisitionwouldbehowtheWaltDisneyCorporationboughtPixarAnimationStudiosin2006.
Inthiscase,thetakeoverwasfriendly,asPixar'sshareholdersallapprovedthedecisiontobe
acquired.

Thereisnotangibledifferencebetweenanacquisitionandatakeover;bothwordscanbeused
interchangeablytheonlydifferenceisthateachwordcarriesaslightlydifferentconnotation.
Typically,takeoverisusedtoreferenceahostiletakeoverwherethecompanybeingacquiredis
resisting.Incontrast,acquisitionisfrequentlyusedtodescribemorefriendlyacquisitions.

7.2 RoleofMerchantBankerinMergersandAcquisitionandTakeovers
Inalltypesofcorporaterestructuring,themerchantbankerperformsthepivotalrole,actingas
acatalystfortheentiredeal.However,intransactionsinvolvingmergersandacquisitions,the
task becomes onerous. In a merger, functions relating to (i) preparation and circulation of
information memoranda, (ii) deal structuring & negotiations, (iii) valuation and due diligence

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are taken care of by the merchant banker. Mergers involve statutory compliances and
application to the Court/Tribunal. It also involves liasoning with accountants, lawyers or
companysecretaries.

MergersandAcquisitionsinIndiaareregulatedbythefollowinglegislationsandregulators:

1.TheCompaniesAct,1956

2.TheSEBI(SubstantialAcquisitionofSharesandTakeovers)Regulations,2011

3.TheMonopoliesandRestrictiveTradePracticesAct,1969

4.TheForeignExchangeManagementAct,1999

5.TheReserveBankofIndiaandtheRBIAct,1934.

6.TheIncomeTaxAct,1961

7.TheCompetitionAct2002

Mergers, amalgamations, demergers, acquisitions of business units or divisions, are all


governed by The Companies Act 1956. Any acquisitions of shares or control in listed Indian
companies are governed by the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations 2011 (hereafter referred to as the takeover code). The Companies Act and The
TakeoverCodeworkinverydifferentwaysandimposeverydifferentsetsofregulationsonthe
merger and/or acquisition process within India. In this section, however, we discuss in detail
the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, and the
complianceswhicharerequiredtobeadheredtobythemerchantbankerswithrespecttoany
otherlegislation.

In acquisitions and takeovers involving open offers, the merchant bankers role involves
managing the public offer and ensuring compliance with the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011). The role of a Merchant Banker in takeovers and
substantialacquisitionofsharesisdescribedintheSEBI(SubstantialAcquisitionofSharesand
Takeovers)Regulations,2011.

7.3 SEBI(SubstantialAcquisitionofSharesandTakeovers)Regulations,2011
The SEBI (Substantial Acquisition of shares and takeovers) Regulations, 2011 (hereinafter
referred as SEBI SAST Regulation) ensure greater transparency, fairness, and equitable
treatmenttoallinvestors,timelinessandaccuracyofdisclosureofinformation,preventionof
frivolousoffersandenforcementagainstviolations.ThemajorthrustoftheseRegulationsisto
ensure that when substantial number of shares changes hands, that is, one group sells a
controllingblockofsharestoanother;theminorityshareholdersalsogettheopportunitytosell
their shares at the fair price. In absence of this Code, an existing group, say A, could sell the

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controllingstaketoanothergroup,sayB,andthecommonshareholderswouldsimplycontinue
toholdtheshareswithoutgettingtherighttoparticipateinthesalethathappened.

TheRegulationsenvisageacquisitionsfor:

(a) ChangeinControlofManagement
(b) ConsolidationofHoldings
(c) SubstantialAcquisitionofsharesorvotingrights

7.3.1 Substantialacquisitionofsharesorvotingrights

AspertheSEBISASTRegulation,anacquirershallnotacquiresharesorvotingrightsinatarget
companywhichentitlethemtoexercise25%ormoreofthevotingrightsinthetargetcompany
unless they have made a public announcement of an open offer for acquiring shares of such
targetcompany.

Noacquirerwhotogetherwithpersonsactinginconcertwithhim,hasacquiredandholdsin
accordance with the SEBI SAST, shares or voting rights in a target company entitling them to
exercise25%ormoreofthevotingrightsinthetargetcompany,butlessthanthemaximum
permissiblenonpublicshareholding,shallacquirewithinanyfinancialyearadditionalsharesor
voting rights in such target company entitling them to exercise more than 5% of the voting
rights after making a public announcement of open offer for acquiring shares of such target
company.

Further,suchacquirershallnotbeentitledtoacquireorenterintoanyagreementtoacquire
shares or voting rights exceeding such number of shares as would take the aggregate
shareholding pursuant to the acquisition above the maximum permissible nonpublic
shareholding.

Unlessthepublicannouncementofanopenofferforacquiringsharesofthetargetcompanyis
made,noacquirershallacquiredirectlyorindirectlycontroloversuchtargetcompany.

7.3.2 VoluntaryOffer

(a) Anacquirer,whotogetherwithpersonsactinginconcertwithhim,holdssharesorvoting
rights in a target company entitling them to exercise 25% or more but less than the
maximumpermissiblenonpublicshareholding,shallbeentitledtovoluntarilymakeapublic
announcementofanopenofferforacquiringsharesinaccordancewithSEBISAST,provided
the shareholding after completion of the open offer does not exceed the maximum
permissible nonpublic shareholding. Further, where the acquirer or any person acting in
concert with him has acquired shares of the target company in the preceding 52 weeks
withoutattractingtheobligationtomakeapublicannouncementofanopenoffer,heshall
not be eligible to voluntarily make a public announcement of an open offer for acquiring
sharesunderSAST.Insuchofferperiods,theacquirershallnotbeentitledtoacquireany
sharesotherwisethanwhichisundertheopenoffer.

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(b) Anacquirerandpersonsactinginconcertwithhim,whohavemadeapublicannouncement
underthisregulationtoacquiresharesofatargetcompany,shallnotbeentitledtoacquire
anysharesofthetargetcompanyforaperiodofsixmonthsaftercompletionoftheopen
offer except pursuant to another voluntary open offer. Further, such restriction shall not
prohibit the acquirer from making a competing offer upon any other person making an
openofferforacquiringsharesofthetargetcompany.

7.3.3 OfferSize

Theopenofferforacquiringsharestobemadebytheacquirerandpersonsactinginconcert
withhimshallbeforatleast26%oftotalsharesofthetargetcompany,ason10thworkingday
fromtheclosureofthetenderingperiod.Further,thetotalsharesofthetargetcompanyasof
the 10th working day from the closure of the tendering period shall take into account all
potentialincreasesinthenumberofoutstandingsharesduringtheofferperiodcontemplated
as of the date of the public announcement. Further the offer size shall be proportionately
increased in case of an increase in total number of shares, after the public announcement
whichisnotcontemplatedonthedateofthepublicannouncement.

Theopenoffershallbeforacquisitionofatleastsuchnumberofsharesaswouldentitlethe
holder thereof to exercise an additional 10% of the total shares of the target company, and
shallnotexceedsuchnumberofsharesaswouldresultinthepostacquisitionholdingofthe
acquirer and persons acting in concert with him exceeding the maximum permissible non
public shareholding applicable to such target company. Further, in case of a competing offer
being made, the acquirer who has voluntarily made a public announcement of an open offer
shallbeentitledtoincreasethenumberofsharesforwhichtheopenofferhasbeenmadeto
such number of shares as he deems fit. Such increase in offer size has to be made within a
period of 15 working days from the public announcement of a competing offer, failing which
theacquirershallnotbeentitledtoincreasetheoffersize.

In the event of shares accepted in the open offer were such that the shareholding of the
acquirertakentogetherwithpersonsactinginconcertwithhimpursuanttocompletionofthe
open offer results in their shareholding exceeding the maximum permissible nonpublic
shareholding,theacquirershallberequiredtobringdownthenonpublicshareholdingtothe
levelspecifiedandwithinthetimepermittedunderSC(R)R,1957.

The acquirer whose shareholding exceeds themaximum permissible nonpublic shareholding,


pursuant to an open offer under these regulations shall not be eligible to make a voluntary
delistingofferundertheSEBI(DelistingofEquityShares)Regulations,2009unlessaperiodof
12monthshaselapsedfromthedateofthecompletionoftheofferperiod.

7.3.4 OfferPrice

I. In case of direct acquisition of shares or voting rights in, or control over the target
company,andindirectacquisitionofsharesofvotingrightsin,orcontroloverthetarget
companywheretheparametersasmentionedinthesubregulation(2)ofregulation5
ofSASTaremet,theofferpriceshallbehighestof

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NISM-Series-IX: Merchant Banking Certification Examination


(a) Thehighestnegotiatedpricepershareofthetargetcompanyforanyacquisitionunder
the agreement attracting the obligation to make a public announcement of an open
offer;
(b) The volumeweighted average price paid or payable for acquisitions, whether by the
acquirer or by any person acting in concert with him, during the fifty two weeks
immediatelyprecedingthedateofthepublicannouncement;
(c) Thehighestpricepaidorpayableforanyacquisition,whetherbytheacquirerorbyany
personactinginconcertwithhim,duringthe26weeksimmediatelyprecedingthedate
ofthepublicannouncement;
(d) The volume weighted average market price of such shares for a period of 60 trading
days immediately preceding the date of the public announcement as traded on the
stock exchange where the maximum volume of trading in the shares of the target
companyarerecordedduringsuchperiod,providedsuchsharesarefrequentlytraded;
(e) Wherethesharesarenotfrequentlytraded,thepricedeterminedbytheacquirerand
themanagertotheopenoffertakingintoaccountvaluationparametersincluding,book
value, comparable trading multiples, and such other parameters as are customary for
valuationofsharesofsuchcompanies;
II. Incaseofanindirectacquisitionofsharesorvotingrightsin,orcontroloverthetarget
company,wheretheparameterasmentionedinsubregulation(2)ofregulation5are
notmet,theofferpriceshallbethehighestof
(a) Thehighestnegotiatedpricepershare,ifany,ofthetargetcompanyforanyacquisition
under the agreement attracting the obligation to make a public announcement of an
openoffer;
(b) Thevolumeweightedaveragepricepaidorpayableforanyacquisition,whetherbythe
acquirerorbyanypersonactinginconcertwithhim,duringthe52weeksimmediately
preceding the earlier of, the date on which the primary acquisition is contracted, and
the date on which the intention or the decision to make the primary acquisition is
announcedinthepublicdomain;
(c) Thehighestpricepaidorpayableforanyacquisition,whetherbytheacquirerorbyany
person acting in concert with him, during 26 weeks immediately preceding the earlier
of,thedateonwhichtheprimaryacquisitioniscontracted,andthedateonwhichthe
intention or the decision to make the primary acquisition is announced in the public
domain;
(d) Thehighestpricepaidorpayableforanyacquisition,whetherbytheacquirerorbyany
personactinginconcertwithhim,betweentheearlierof,thedateonwhichtheprimary
acquisitioniscontracted,andthedateonwhichtheintentionorthedecisiontomake
the primary acquisition is announced in the public domain, as traded on the stock
exchangewherethemaximumvolumeoftradinginthesharesofthetargetcompany
arerecordedduringsuchperiod,providedsuchsharesaretradedfrequently;
III. Insuchcases,wheretheofferpriceisincapableofbeingdeterminedasperprovisions
mentionedabove,theofferpriceshallbethefairpriceofsharesofthetargetcompany.
It shall be determined by the acquirer and the manager to the open offer taking into

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account valuation parameters as are customary for valuation of shares of such


companies.
IV. Inthecaseofanindirectacquisitionandopenofferswhere,
(1) The proportionate net asset value of the target company as a percentage of the
consolidatednetassetvalueoftheentityorbusinessbeingacquired;
(2) The proportionate sales turnover of the target company as a percentage of the
consolidatedsalesturnoveroftheentityorbusinessbeingacquired;or
(3) The proportionate market capitalisation of the target company as a percentage of
theenterprisevaluefortheentityorbusinessbeingacquired;
Is in excess of 15%, on the basis of the most recent audited annual financial
statements,theacquirershallberequiredtocomputeanddiscloseintheletterof
offer, the per share of the target company taken into account for the acquisition,
alongwithadetaileddescriptionofmethodologyadoptedforsuchcomputation.
V. Where the acquirer or any person acting in concert with him has any outstanding
convertible instruments convertible into shares of the target company at a specific
price,thepriceatwhichsuchinstrumentsaretobeconvertedintoshares,shallalsobe
consideredasaparameterasmentionedinpointsIandIIabove.
VI. Thepricepaidforsharesofthetargetcompany(forthepurposeofpointsmentionedin
pointsIandIIabove)shallincludeanypricepaidoragreedtobepaidforthesharesor
votingrightsin,orcontroloverthetargetcompany,inanyformwhatsoever,whether
statedintheagreementforacquisitionofsharesorinanyincidental,contemporaneous
orcollateralagreement,whethertermedascontrolpremiumorasnoncompetefeesor
otherwise.
VII. In cases, where the acquirer has acquired or agreed to acquire whether by himself or
through or with persons acting in concert with him any shares or voting rights in the
targetcompanyduringtheofferperiod,whetherbysubscriptionorpurchase,ataprice
higher than the offer price, the offer price shall revised to the highest price paid or
payable for any such acquisition. Further, no such acquisition shall be made after the
third working day prior to the commencement of the tendering period and until the
expiryofthetenderingperiod.
VIII. Thepriceparametersshallbeadjustedbytheacquirerinconsultationwiththemanager
to the offer, for corporate actions such as issuances pursuant to rights issue, bonus
issue,stockconsolidations,stocksplits,paymentofdividend,demergersandreduction
of capital, where the record date for effecting such corporate actions falls prior to 3
working days before the commencement of the tendering period. Further, no
adjustmentshallbemadefordividenddeclaredwitharecorddatefallingduringsuch
periodexceptwherethedividendpershareismorethan50%higherthantheaverage
of the dividend per share paid during the 3 financial years preceding the date of the
publicannouncement.
IX. Insuchcases,wheretheacquirerorpersonsactinginconcertwithhimacquiresshares
of the target company during the period of 26 weeks after the tendering period at a
price higher than the offer price under the SEBI SAST regulations, the acquirer and
personsactinginconcertshallpaythedifferencebetweenthehighestacquisitionprice

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and the offer price, to all the shareholders whose shares were accepted in the open
offer,within60daysfromthedateofsuchacquisition.Further,thisprovisionshallnot
be applicable to acquisitions under another open offer under these regulations or
pursuant to the SEBI (Delisting of Equity Shares) Regulations, 2009, or open market
purchases,bywayofbulkdeals,blockdealsorinanyotherform.
X. Insuchcases,wheretheopenofferissubjecttoaminimumlevelofacceptances,the
acquirer may, indicate a lower price subject to other provisions of the SEBI SAST for
acquiring all the acceptances. The lower price shall not be less than the price as
determined under the SAST despite the acceptance falling short of the indicated
minimum level of acceptance (in the event the open offer does not receive the
minimumacceptance).
XI. Incaseofanyindirectacquisition(otherthanthoseacquisitionswhichhasalreadybeen
discussedintheabovementioned),theofferpriceshallstandenhancedbyanamount
equaltoasumdeterminedattherateof10%perannumfortheperiodbetweenthe
earlierofthedateonwhichtheprimaryacquisition,orthedateonwhichtheintention
orthedecisiontomaketheprimaryacquisitionisannouncedinthepublicdomainand
thedateofthedetailedpublicstatement,providedsuchperiodismorethan5working
days.
XII. Theofferpriceforpartlypaidupsharesshallbecomputedasthedifferencebetween
the offer price and the amount due towards callinarrears including calls remaining
unpaidwithinterest,ifany.
XIII. Theofferpriceforequitysharescarryingdifferentialvotingrightsshallbedetermined
bytheacquirerandthemanagertotheopenoffer.Thefulldisclosureofjustificationfor
thepriceasdeterminedshallbegiveninadetailedpublicstatementandtheletterof
offer.
XIV. In cases, where the price parameters as mentioned in the SAST regulation is not
available or denominated in Indian Rupees, the conversion of such amount into the
IndianRupeesshallbeeffectedattheExchangerateasprevailingonthedatepreceding
thedateofpublicannouncementandtheacquirershallsetoutthesourcedetailsofthe
exchange rate in public announcement, detailed public statement and the letter of
offer.

7.3.5 PaymentMode

I. Theofferpricemaybepaidin
a) cash;
b) byissue,exchangeortransferoflistedsharesintheequitysharecapitaloftheacquirer
orofanypersonactinginconcert;
c) byissue,exchangeortransferoflistedsecureddebtinstrumentsissuedbytheacquirer
oranypersonactinginconcertwitharatingnotinferiortoinvestmentgradeasratedby
aSEBIregisteredcreditratingagency;
d) byissue,exchangeortransferofconvertibledebtsecuritiesentitlingtheholderthereof
toacquirelistedshareintheequitysharecapitaloftheacquirerorofanypersonacting
inconcert;or

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e) acombinationofpaymentmodeasmentionedinpoints(a),(b),(c)and(d).
Further, where any shares have been acquired or agreed to be acquired by the acquirer and
persons acting in concert with him, during the 52 weeks immediately preceding the date of
publicannouncementandconstitutemorethan10%ofthevotingrightsinthetargetcompany
hasbeenpaidforincash,theopenoffershallentailanoptiontotheshareholderstorequire
payment of the offer price in cash. A shareholder who has not exercised an option in his
acceptance shall be deemed to have opted for receiving the offer price in cash. In case of
revision in offer price the mode of payment of consideration may be altered subject to the
conditionthatthecomponentoftheofferpricetobepaidincashpriortosuchrevisionisnot
reduced.

7.3.6 Exemptions

TheSEBISASTprovidescaseswhichareexemptfromtheobligationtomakeanopenofferas
discussed above. We will discuss some of them in this section but for the complete list of
exemptionspleaserefertoregulation10and11oftheSEBI(SubstantialAcquisitionofShares
and Takeovers) Regulation, 2011.There are general exemptions and some are granted by the
SEBIbutsubjecttothefulfilmentofconditionsgivenbelow.

GeneralExemptions

(a) Acquisitionpursuanttointersetransferofsharesamongstqualifyingpersonswhocanbe
(1) Immediaterelatives;
(2) Personsnamedaspromotersintheshareholdingpatternfiledbythetargetcompanyin
termsofthelistingagreementortheSASTregulationsfornotlessthan3yearspriorto
theproposedacquisition;
(3) A company, its subsidiaries, its holding company, other subsidiaries of such holding
company, persons holding not less than 50% of the equity shares of such company,
othercompaniesinwhichsuchpersonsholdnotlessthan50%oftheequityshares,and
theirsubsidiariessubjecttocontroloversuchqualifyingpersonsbeingexclusivelyheld
bythesamepersons;
(4) Personsactinginconcertfornotlessthan3yearspriortotheproposedacquisition,and
disclosedassuchpursuanttofilingsunderthelistingagreement;
(5) Shareholdersofatargetcompanywhohavebeenpersonsactinginconcertforaperiod
ofnotlessthanthreeyearspriortotheproposedacquisition.
(b) Acquisitionintheordinarycourseofbusinessby,
(1) A SEBI registered underwriter by way of allotment pursuant to an underwriting
agreementintermsofSEBIICDRRegulations;
(2) ASEBIregisteredstockbrokeronbehalfofhisclientinexerciseoflienovertheshares
purchasedonbehalfoftheclientunderthebyelawsofthestockexchangewherethe
stockbrokerisamember;
(3) A SEBI registered merchant banker or a nominated investor in the process of market
making or subscription to the unsubscribed portion of issue in terms provisions as
specifiedintheSEBIICDRRegulations,2009;

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(4) Anypersonacquiringsharespursuanttoaschemeofsafetynetintermsofprovisionsas
givenintheSEBIICDRRegulations,2009;
(5) A SEBI registered merchant banker acting as a stabilising agent or by the promoter or
preissueshareholderintermsofSEBIICDRRegulations,2009;
(6) Aregisteredmarketmakerofanexchange;
(7) Ascheduledcommercialbank,actingasanescrowagent;and
(8) InvocationofpledgebySCBsorpublicfinancialinstitutionsasapledge.
(c) Acquisitionsatsubsequentstages,byanacquirerwhohasmadeapublicannouncementof
an open offer for acquiring shares pursuant to an agreement of disinvestment, as
contemplatedinsuchagreement,providedthat;
(1) Boththeacquirerandthesellerarethesameatallthestagesofacquisition,and
(2) Fulldisclosuresofallthesubsequentstagesofacquisition,ifany,havebeenmadeinthe
publicannouncementoftheopenofferandintheletterofoffer.
(d) Acquisitionpursuanttoascheme,
(1) Madeundersection18oftheSickIndustrialCompanies(SpecialProvision)Act,1985or
anystatutorymodificationorreenactmentthereto;
(2) Of arrangement involving the target company as a transferor company or as a
transferee company, or reconstruction of the target company, including amalgamation,
mergerordemerger,pursuanttoanorderofacourtoracompetentauthorityunderany
laworregulation,Indiaorforeign;or
(3) Ofarrangementnotdirectlyinvolvingthetargetcompanyasatransferorcompanyoras
a transferee company, or reconstruction not involving the target companys undertaking,
includingamalgamation,mergerordemerger,pursuanttoanorderofacourtorcompetent
authorityunderanylaworregulation,Indiaorforeign,subjectto,
The component of cash and cash equivalents in the consideration paid being less
than25%oftheconsiderationpaidunderthescheme,and
Where after implementation of the scheme of arrangement, persons directly or
indirectly holding atleast 33% of the voting rights in the combined entity are the
sameasthepersonswhoheldtheentirevotingrightsbeforetheimplementationof
thescheme.
(e) AcquisitionpursuanttotheprovisionsoftheSecuritisationandReconstructionofFinancial
AssetsandEnforcementofSecurityInterestAct,2002.
(f) AcquisitionpursuanttotheprovisionsoftheSEBI(DelistingofEquityShares)Regulations,
2009.
(g) Acquisitionbywayoftransmission,successionorinheritance
(h) Acquisition of voting rights or preference shares carrying voting rights arising out of the
operationofsubsection(2)ofsection47oftheCompaniesAct,2013

ExemptionsbytheSEBI
(a) SEBImaygrantexemptionfromtheobligationtomakeanopenofferforacquiringshares
undertheSEBISASTregulationssubjecttoconditionsimposedbySEBIandafterrecordingit
inwriting.

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(b) SEBI may after recording the reasons, grant relaxation from strict compliance with any
procedural requirement as mentioned in the SEBI SAST, subject to conditions imposed by
SEBIandintheinterestsofinvestorsinsecuritiesandsecuritiesmarket.
(c) Forseekingexemption,theacquirershallfileanapplicationwithSEBI,supportedbyaduly
sworn affidavit, giving details of the proposed acquisition and the grounds on which the
exemptionhasbeensought.Theacquirerorthetargetcompany,asthecasemaybe,shall
along with the application pay a nonrefundable fee of Rs. 50,000, by way of bankers
chequeordemanddraftpayableinMumbaiinfavourofSEBI.
(d) SEBIafterhearingtheapplicantandconsideringallrelevantfactsandcircumstances,passa
reasonedordereithergrantingorrejectingtheexemptionorrelaxationsought.Theorder
shallbeplacedontheSEBIWebsite.

7.3.7 ProcessofOpenOffer

AppointmentofMerchantBanker

SEBISASTprescribesthatbeforemakinganypublicannouncementofoffer,theacquirershall
appoint a SEBI registered merchant banker who shall not be an associate of the acquirer. A
publicannouncementisanannouncementmadeinthenewspapersbytheacquirerprimarily
disclosinghisintentiontoacquiresharesofthetargetcompanyfromexistingshareholdersby
meansofanopenoffer.Thepublicannouncementoftheopenofferforacquiringsharesshall
bemadebytheacquirerthroughthemerchantbankerstotheoffer.

Apart from the above mentioned activity, the Merchant Banker services are required in the
capacityofthemanageroftheofferorinanindependentcapacityinthefollowing:

(i) RegardingModeofPaymentwhensecuritiesoftheacquirercompanyareofferedinlieu
ofcashpayment,thevalueofsuchsecuritiesshallbedeterminedinthespecifiedmanner,
asdulycertifiedbyanindependentmerchantbanker(otherthanthemanagertotheoffer)
oranindependentcharteredaccountanthavingaminimumexperienceoftenyears.
(ii) RegardingProvision ofescrow,theentireamountofescrowamountdepositedwiththe
bankincashshallbereleasedtotheacquireruponwithdrawalofofferonlyifthemanager
to the open offer certifies the same. Further the balance of the escrow account after
transfer of cash to the special escrow account shall be released to the acquirer, on the
expiry of 30 days from the completion of payment of consideration to shareholders who
havetenderedtheirsharesinacceptanceoftheopenoffer,ascertifiedbythemanagerto
theopenoffer.
(iii) Theentireamountofescrowamountdepositedwiththebankincashshallbereleasedto
theacquirerupontheexpiryof30daysfromthecompletionofpaymentofconsiderationto
shareholders who have tendered their shares in acceptance of the open offer, upon
certification by the manager to the open offer, where the open offer is for exchange of
sharesorothersecuredinstruments.

GeneralobligationsoftheMerchantbanker

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SEBISASTalsolaysdownthegeneralobligationsoftheMerchantBankerwhichisdiscussedin
thesectionbelow.Themanagertotheopenoffershall

1. Ensure prior to public announcement being made that (a) the acquirer is able to
implement the open offer; and (b) firm arrangements for funds through verifiable
means have been made by the acquirer to meet the payment obligations under the
openoffer.
2. Ensure that the contents of the public announcement, the detailed public statement
andtheletterofofferandthepostofferadvertisementaretrue,fairandadequateinall
material aspects, not misleading in any material particular, are based on reliable
sources, state the source wherever necessary, and are in compliance with the
requirementsundertheSEBISAST.
3. FurnishtoSEBIaduediligencecertificatealongwiththedraftletterofofferfiledwith
SEBI.
4. Ensure that market intermediaries engaged for the purposes of the open offer are
registeredwithBoard.
5. Exercise diligence, care and professional judgment to ensure compliance with these
regulations.
6. Not deal on his own account in the shares of the target company during the offer
period.
7. FileareportwithSEBIwithin15workingdaysfromtheexpiryofthetenderingperiod,in
such form as may be specified, confirming status of completion of various open offer
requirements.

Upon appointment of the merchant banker, the public announcement of the open offer is
made.Themerchantbankerisrequiredunderregulationstoperformsuchdutiesasmentioned
intheparaabove.TherearesomeotherspecificrequirementsundertheSEBISASTbasedon
theobligationsstatedabovewhichwediscussinthefollowingsections:

Timing

The public announcement shall be made in accordance with the restrictions regarding the
content and the publication, on the date of agreeing to acquire shares or voting rights in, or
controloverthetargetcompany.Suchpublicannouncement

(a) in the case of market purchases, shall be made prior to placement of the purchase order
with the stock broker to acquire the shares. It would take the entitlement to voting rights
beyondthestipulatedthresholds;

(b) pursuant to an acquirer acquiring shares or voting rights in, or control over the target
company upon converting convertible securities without a fixed date of conversion or upon
conversion of depository receipts for the underlying shares of the target company shall be
made on the same day as the date of exercise of the option to convert such securities into
sharesofthetargetcompany;

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(c) pursuant to an acquirer acquiring shares or voting rights in, or control over the target
company upon conversion of convertible securities with a fixed date of conversion shall be
madeonthesecondworkingdayprecedingthescheduleddateofconversionofsuchsecurities
intosharesofthetargetcompany;

(d) pursuant to a disinvestment shall be made on the same day as the date of executing the
agreementforacquisitionofsharesorvotingrightsinorcontroloverthetargetcompany;

(e) in the case of indirect acquisition of shares or voting rights in, or control over the target
companywherenoneoftheparametersasreferredtoinregulation5ofSASTaremet,maybe
made at any time within 4 working days from the earlier of, the date on which the primary
acquisition is contracted, and the date on which the intention or the decision to make the
primaryacquisitionisannouncedinthepublicdomain;

(f) in the case of indirect acquisition of shares or voting rights in, or control over the target
company where any of the parameters referred to in regulation 5 of SAST are met shall be
madeontheearlierof,thedateonwhichtheprimaryacquisitioniscontracted,andthedateon
whichtheintentionorthedecisiontomaketheprimaryacquisitionisannouncedinthepublic
domain;

(g) pursuant to an acquirer acquiring shares or voting rights in, or control over the target
company, under preferential issue, shall be made on the date on which special resolution is
passedforallotmentofsharesaspertheCompaniesAct,2013;

(h)thepublicannouncementpursuanttoanincreaseinvotingrightsconsequentialtoabuy
backnotqualifyingforexemptionunderSAST,shallbemadenotlaterthanthe90thdayfrom
thedateofsuchincreaseinthevotingrightsbeyondtherelevantthresholdstipulatedinSAST;

(i)thepublicannouncementpursuanttoanyacquisitionofsharesorvotingrightsinorcontrol
overthetargetcompanywherethespecificdateonwhichtitletosuchshares,votingrightsor
controlisacquiredisbeyondthecontroloftheacquirer,shallbemadenotlaterthan2working
daysfromthedateofreceiptofintimationofhavingacquiredsuchtitle.

Thepublicannouncementmadeundervoluntaryofferprocessshallbemadeonthesameday
as the date on which the acquirer takes the decision to voluntarily make a public
announcementofanopenofferforacquiringsharesofthetargetcompany.

After the manager to the offer makes the public announcement, a detailed public statement
shallbepublishedbytheacquirerthroughthemanagertotheopenofferinaccordancewith
the provisions as mentioned in the SEBI SAST, not later than 5 working days of the public
announcement

Publication

Thepublicannouncementshallbesenttoallthestockexchangesonwhichthesharesofthe
targetcompanyarelisted.Thestockexchangesshallforthwithdisseminatesuchinformationto
thepublic.AcopyofthepublicannouncementshallbesenttoSEBIandtothetargetcompany

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NISM-Series-IX: Merchant Banking Certification Examination


at its registered office within 1 working day of the date of the public announcement. The
detailed public statement pursuant to the public announcement needs to be published in all
editions of any 1 English national daily with wide circulation, any 1 Hindi national daily with
widecirculation,andany1regionallanguagedailywithwidecirculationattheplacewherethe
registeredofficeofthetargetcompanyissituatedand1regionallanguagedailyattheplaceof
thestockexchangewherethemaximumvolumeoftradinginthesharesofthetargetcompany
are recorded during the sixty trading days preceding the date of the public announcement.
Simultaneouslywithpublicationofsuchdetailedpublicstatementinthenewspapers,acopyof
thesameshallbesentto

i. SEBIthroughthemanagertotheopenoffer,
ii. Stock exchanges on which the shares of the target company are listed, and the stock
exchangesshallforthwithdisseminatesuchinformationtothepublic,
iii. TargetCompanyatitsregisteredofficeandthetargetcompanyshallforthwithcirculate
ittothemembersofitsboard.

ContentsofthePublicAnnouncement

The public announcement shall contain such information as may be specified, including the
following,
o nameandidentityoftheacquirerandpersonsactinginconcertwithhim;
o nameandidentityofthesellers,ifany;
o natureoftheproposedacquisitionsuchaspurchaseofsharesorallotmentofshares,or
anyothermeansofacquisitionofsharesorvotingrightsin,orcontroloverthetarget
company;
o theconsiderationfortheproposedacquisitionthatattractedtheobligationtomakean
openofferforacquiringshares,andthepricepershare,ifany;
o theofferprice,andmodeofpaymentofconsideration;and
o offersizeandconditionsastominimumlevelofacceptances,ifany.
The detailed public statement pursuant to the public announcement shall contain such
informationasmaybespecifiedinordertoenableshareholderstomakeaninformeddecision
withreferencetotheopenoffer.
The public announcement of the open offer, the detailed public statement, and any other
statement, advertisement, circular, brochure, publicity material or letter of offer issued in
relation to the acquisition of shares under these regulations shall not omit any relevant
information,orcontainanymisleadinginformation.

FilingofLetterofOfferwithSEBI

Aletterofofferisadocumentaddressedtotheshareholdersofthetargetcompanycontaining
disclosures of the acquirer/ persons acting in concert, target company, their financials,
justification of the offer price, number of shares to be acquired from the public, purpose of
acquisition, future plans of acquirer, if any, regarding the target company, change in control
over the target company, if any, the procedure to be followed by acquirer in accepting the

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NISM-Series-IX: Merchant Banking Certification Examination


sharestenderedbytheshareholdersandtheperiodwithinwhichalltheformalitiespertaining
totheofferwouldbecompleted.

Within5workingdaysfromthedateofthedetailedpublicstatementmadetheacquirershall,
throughthemanagertotheopenoffer,filewithSEBI,adraftoftheletterofoffercontaining
informationasmaybespecifiedalongwithanonrefundablefee,bywayofabankerscheque
ordemanddraftpayableinMumbaiinfavourofSEBI.Thenonrefundablefeesareprescribed
intheSASTRegulations

Sl. Consideration Payable under the Open Fee(Rs.)


No. Offer
a. UptoRs.10crore Rs.1,25,000
b. >Rs.10crorebutRs.1000crore Rs. 1,25,000 plus 0.025% of the
portionoftheoffersizeinexcessof
Rs.Tencrore(Rs.10,00,00,000)
c. >Rs.1000crorebutRs.5000crore Rs. 1,25,00,000 plus 0.03125 per
centoftheportionoftheoffersize
inexcessofRs.Onethousandcrore
(Rs.1000,00,00,00)
d. >Rs.5000crore Rs.2,50,00,000plus0.01percentof
the portion of the offer size in
excess of Rs. Five thousand crore
(Rs. 5000,00,00,00) subject to a
minimum of Rs. Three crore (Rs.
3,00,00,000)

Theconsiderationpayableundertheopenoffershallbecalculatedattheofferpriceassuming
fullacceptanceoftheopenoffer.Intheeventtheopenofferissubjecttodifferentialpricing,
the open offer shall be computed at the highest offer price irrespective of the manner of
payment of the consideration. In the event of consideration payable under the open offer
beingenhancedowingtoarevisiontotheofferpriceoroffersizethefeespayableshallstand
revisedaccordinglyandshallbepaidwithin5workingdaysfromthedateofsuchrevision.

Themanagertotheopenofferisrequiredtoprovidesoftcopiesofthepublicannouncement,
the detailed public statement and the draft letter of offer in accordance with such
specificationsasmaybespecifiedandtheSEBIshalluploadthesameonitswebsite.

It should be understood that while Acquirer is primarily responsible for the correctness,
adequacyanddisclosureofallrelevantinformationinthisLetterofOffer,theMerchantBanker
is expected to exercise due diligence to ensure that the Acquirer duly discharges its
responsibilityadequately.

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The Merchant Banker will incorporate in the letter of offer the comments made by SEBI and
then send the letter of offer along with the blank acceptance form, to all the shareholders
whosenamesappearintheregisterofthecompanyontheSpecifiedDate.

ProvisionofEscrow

1. The acquirer should create an escrow account towards security for performance of his
obligationsundertheSASTregulations,atleasttwoworkingdayspriortothedateofthe
detailedpublicstatementoftheopenofferforacquiringshares.Theacquirershalldeposit
inescrowaccountsuchaggregateamountasperthefollowingscale:

Sl.No. Consideration payable under the Open EscrowAmount
Offer
a. OnthefirstRs.500crore Amountequalto25%oftheconsideration
b. Onthebalanceconsideration Additional amount equal to 10% of the
balanceconsideration

Where an open offer is made conditional upon minimum level of acceptance, 100% of the
considerationpayableinrespectofminimumlevelofacceptanceor50%oftheconsideration
payable under the open offer, whichever is higher, shall be deposited in cash in the escrow
account.
2. Theconsiderationpayableundertheopenoffershallbecomputedasperprovisionsgiven
intheSASTandincaseofupwardrevisionoftheofferpriceoroftheoffersize,thevalueof
the escrow amount shall be computed on the revised consideration calculated at such
revised offer price, and the additional amount shall be brought into the escrow account
priortoeffectingsuchrevision.
3. Theescrowaccountmaybeintheformof
a. cashdepositedwithanyscheduledcommercialbank;
b. bank guarantee issued in favour of the manager to the open offer by any scheduled
commercialbank;or
c. deposit of frequently traded and freely transferable equity shares or other freely
transferablesecuritieswithappropriatemargin.
Furthersecuritiessoughttobeprovidedtowardsescrowaccountshallberequiredtoconform
totherequirementsassetoutintheSASTRegulations.
4. Intheeventoftheescrowaccountbeingcreatedbywayofabankguaranteeorbydepositof
securities,theacquirershallalsoensurethatatleast1%ofthetotalconsiderationpayableis
depositedincashwithascheduledcommercialbankasapartoftheescrowaccount.
5. For such part of the escrow account as is in the form of a cash deposit with a scheduled
commercialbank,theacquirershallwhileopeningtheaccount,empowerthemanagertothe
openoffertoinstructthebanktoissueabankerschequeordemanddraftortomakepayment
of the amounts lying to the credit of the escrow account, in accordance with requirements
undertheSASTregulations.
6. Forsuchpartoftheescrowaccountasisintheformofabankguarantee,suchbankguarantee
shallbeinfavourofthemanagertotheopenofferandshallbekeptvalidthroughouttheoffer

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periodandforanadditionalperiodofthirtydaysaftercompletionofpaymentofconsideration
toshareholderswhohavetenderedtheirsharesinacceptanceoftheopenoffer.
7. Forsuchpartoftheescrowaccountasisintheformofsecurities,theacquirershallempower
themanagertotheopenoffertorealisethevalueofsuchescrowaccountbysaleorotherwise,
andintheeventthereisanyshortfallintheamountrequiredtobemaintainedintheescrow
account,themanagertotheopenoffershallbeliabletomakegoodsuchshortfall.
8. Themanagertotheopenoffershallnotreleasetheescrowaccountuntiltheexpiryofthirty
days from the completion of payment of consideration to shareholders who have tendered
theirsharesinacceptanceoftheopenoffer,saveandexceptfortransferoffundstothespecial
escrowaccountasrequiredunderSASTregulation.
9. IntheeventofnonfulfillmentofobligationsundertheSASTbytheacquirerSEBImaydirectthe
manager to the open offer to forfeit the escrow account or any amounts lying in the special
escrowaccount,eitherinfullorinpart.
10. The escrow account deposited with the bank in cash shall be released only in the following
manner:
a. Entire amount will be released to the acquirer upon withdrawal of offer as per the
provisionsoftheregulationsandshouldbecertifiedbythemanagertotheopenoffer,
provided,thatintheeventthewithdrawalispursuanttotheprovisionsasstatedinthe
SASTregulations(withdrawalofopenoffer),themanagertotheopenoffershallrelease
theescrowaccountreceiptofconfirmationofsuchreleasefromSEBI.
b. For transfer of an amount not exceeding 90% of the escrow account, to the special
escrowaccount.
c. Totheacquirer,thebalanceoftheescrowaccountaftertransferofcashtothespecial
escrow account, on the expiry of 30 days from the completion of payment of
consideration to shareholders who have tendered their shares in acceptance of the
openoffer,ascertifiedbythemanagertotheopenoffer.
d. Theentireamounttotheacquirerupontheexpiryof30daysfromthecompletionof
payment of consideration to shareholders who have tendered their shares in
acceptance of the open offer, upon certification by the manager to the open offer,
wheretheopenofferisforexchangeofsharesorothersecuredinstruments.
e. Theentireamountshallbereleasedtothemanageroftheopenoffer,(intheeventof
forfeiturefornonfulfilmentofanyoftheobligationsundertheSAST),fordistribution
afterdeductionofexpenses,ifany,ofregisteredmarketintermediariesassociatedwith
theopenoffer.

OtherProceduresRequirementsforOpenOfferProcess

1. SimultaneouslywiththefilingofthedraftletterofofferwithSEBI,theacquirershallsenda
copyofthedraftletterofoffertothetargetcompanyatitsregisteredofficeaddressandto
allstockexchangeswherethesharesofthetargetcompanyarelisted.

2. The letter of offer shall be dispatched to the shareholders whose names appear on the
registerofmembersofthetargetcompanyasoftheidentifieddate,notlaterthanseven

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workingdaysfromthereceiptofcommentsfromSEBIorwherenocommentsareoffered
by SEBI, within 7 working days from the expiry of the period as stipulated in the SAST
Regulations19.IncaseswherelocallawsorregulationsofanyjurisdictionoutsideIndiamay
expose the acquirer or the target company to material risk of civil, regulatory or criminal
liabilitiesintheeventtheletterofofferinitsfinalformweretobesentwithoutmaterial
amendmentsormodificationsintosuchjurisdiction,andtheshareholdersresidentinsuch
jurisdiction hold shares entitling them to less than 5% of the voting rights of the target
company,theacquirermayrefrainfromdispatchoftheletterofofferintosuchjurisdiction.
Providedfurtherthateverypersonholdingshares,regardlessofwhetherheheldshareson
theidentifieddateorhasnotreceivedtheletterofoffer,shallbeentitledtotendersuch
sharesinacceptanceoftheopenoffer.

3. Simultaneouslywiththedispatchoftheletterofoffer,theacquirershallsendtheletterof
offer to the custodian of shares underlying depository receipts, if any, of the target
company.

4. Irrespectiveofwhetheracompetingofferhasbeenmade,anacquirermaymakeupward
revisionstotheofferprice,andsubjecttotheotherprovisionsoftheseregulations,tothe
number of shares sought to be acquired under the open offer, at any time prior to the
commencementofthelastthreeworkingdaysbeforethecommencementofthetendering
period.

5. Intheeventofanyrevisionoftheopenoffer,whetherbywayofanupwardrevisioninoffer
price,oroftheoffersize,theacquirershall,
(a) make corresponding increases to the amount kept in escrow account prior to such
revision;
(b) makeanannouncementinrespectofsuchrevisionsinallthenewspapersinwhichthe
detailedpublicstatementpursuanttothepublicannouncementwasmade;and
(c) simultaneously with the issue of such an announcement, inform SEBI, all the stock
exchanges on which the shares of the target company are listed, and the target
companyatitsregisteredoffice.
6. Theacquirershalldiscloseduringtheofferperiodeveryacquisitionmadebytheacquireror
personsactinginconcertwithhimofanysharesofthetargetcompanyinsuchformasmay
bespecified,toeachofthestockexchangesonwhichthesharesofthetargetcompanyare
listedandtothetargetcompanyatitsregisteredofficewithin24hoursofsuchacquisition,
andthestockexchangesshallforthwithdisseminatesuchinformationtothepublic.Further,
theacquirerandpersonsactinginconcertwithhimshallnotacquireorsellanysharesof
thetargetcompanyduringtheperiodbetween3workingdayspriortothecommencement
ofthetenderingperiodanduntiltheexpiryofthetenderingperiod.

7. Theacquirershallissueanadvertisement1workingdaybeforethecommencementofthe
tendering period, announcing the schedule of activities for the open offer, the status of

19
SASTsubregulation(4)ofregulation16

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statutoryandotherapprovals,ifany,whetherfortheacquisitionattractingtheobligation
tomakeanopenofferundertheseregulationsorfortheopenoffer,unfulfilledconditions,
if any, and their status, the procedure for tendering acceptances and such other material
detailasmaybespecified.Theadvertisementshallbe(a)publishedinallthenewspapersin
whichthedetailedpublicstatementpursuanttothepublicannouncementwasmade;and
(b)simultaneouslysenttoSBEI,allthestockexchangesonwhichthesharesofthetarget
companyarelisted,andthetargetcompanyatitsregisteredoffice.

8. Thetenderingperiodshallstartwithin12workingdaysfromdateofreceiptofcomments
from SEBI and shall remain open for 10 working days. Shareholders who have tendered
shares in acceptance of the open offer shall not be entitled to withdraw such acceptance
duringthetenderingperiod.

9. The acquirer shall, within 10 working days from the last date of the tendering period,
completeallrequirementsundertheseregulationsandotherapplicablelawrelatingtothe
openofferincludingpaymentofconsiderationtotheshareholderswhohaveacceptedthe
openoffer.

10. Theacquirershallberesponsibletopursueallstatutoryapprovalsrequiredbytheacquirer
inordertocompletetheopenofferwithoutanydefault,neglectordelay.Incaseswhere
the acquirer is unable to make the payment to the shareholders who have accepted the
open offer within the stipulated period owing to nonreceipt of statutory approvals
requiredbytheacquirer,SEBImay,grantextensionoftimeformakingpayments,subjectto
theacquireragreeingtopayinteresttotheshareholdersforthedelayatrateasspecified.
However,SEBIshallhavetobesatisfiedthatsuchnonreceiptwasnotattributabletoany
wilfuldefault,failureorneglectonthepartoftheacquirer.
(a) The acquirer shall issue a post offer advertisement within five working days after the
offer period (in the format specified), giving details including aggregate number of shares
tendered,accepted,dateofpaymentofconsideration.
(b) Such advertisement shall be (i) published in all the newspapers in which the detailed
publicstatementpursuanttothepublicannouncementwasmade;and(ii)simultaneously
senttoSEBIallthestockexchangesonwhichthesharesofthetargetcompanyarelisted,
andthetargetcompanyatitsregisteredoffice.

ProcedurefollowedinConditionaloffer

An acquirer can make an open offer conditional as to the minimum level of acceptance,
provided that the open offer is made after the agreement. The agreement shall have a
conditionthatintheeventthedesiredlevelofacceptanceoftheopenofferisnotreceived,the
acquirer shall not acquire any shares under the open offer and the agreement attracting the
obligationtomaketheopenoffershallstandrescinded.

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Whereanopenofferismadeconditionaluponminimumlevelofacceptances,theacquirerand
personsactinginconcertwithhimshallnotacquire,duringtheofferperiod,anysharesinthe
target company except under the open offer and any underlying agreement for the sale of
sharesofthetargetcompanypursuanttowhichtheopenofferismade.

ProcedurefollowedinCompetingOffers

(a) Whenapublicannouncementofanopenofferforacquiringsharesofatargetcompany
ismade,anyperson,otherthantheacquirerwhohasmadesuchpublicannouncement,
isentitledtomakeapublicannouncementofanopenofferwithin15workingdaysof
thedateofthedetailedpublicstatementmadebytheacquirerwhohasmadethefirst
publicannouncement.
(b) The open offer made shall be for such number of shares which, when taken together
withsharesheldbytheacquireralongwithpersonsactinginconcertwithhim,shallbe
at least equal to the holding of the acquirer who has made the first public
announcement,includingthenumberofsharesproposedtobeacquiredbyhimunder
the offer and any underlying agreement for the sale of shares of the target company
pursuanttowhichtheopenofferismade.
(c) NotwithstandinganythingcontainedintheSASTregulations,anopenoffermadewithin
the period (15 working days) shall not be regarded as a voluntary open offer and the
provisions of these regulations shall apply accordingly. Every open offer as mentioned
above(paraa)andtheopenofferfirstmadeshallberegardedascompetingoffersfor
purposesofSAST.
(d) Nobody is entitled to make a public announcement of an open offer for acquiring
shares,orenterintoanytransactionthatwouldattracttheobligationtomakeapublic
announcementofanopenofferforacquiringsharesundertheseregulations,afterthe
period of fifteen working days and until the expiry of the offer period for such open
offer. A person is not entitled to make a public announcement of an open offer for
acquiringshares,orenterintoanytransactionthatwouldattracttheobligationtomake
a public announcement of an open offer under the SAST until the expiry of the offer
periodwhere
a. theopenofferisforacquisitionofsharespursuanttodisinvestment;or
b. theopenofferispursuanttoarelaxationfromstrictcomplianceasgrantedby
SEBI(discussedinearliersection).
(e) The schedule of activities and the tendering period for all competing offers shall be
carriedoutwithidenticaltimelines.Thelastdatefortenderingsharesinacceptanceof
the every competing offer shall stand revised to the last date for tendering shares in
acceptanceofthecompetingofferlastmade.
(f) Aftermakingthepublicannouncementofacompetingoffer,anacquirerwhohadmade
apreceding competing offer shall be entitled to revise the terms of his open offer
provided the revised terms are more favourable to the shareholders of the target
company.Further,theacquirersmakingthecompetingoffersshallbeentitledtomake

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upward revisions of the offer price at any time up to 3 working days prior to the
commencementofthetenderingperiod.

Paymentofconsideration

TheacquirershallopenaspecialescrowaccountwithaSEBIregisteredbankertoanissueand
deposittheamountofconsideration(incash).Thecashsodepositedmakesupfortheentire
sumdueandpayabletotheshareholdersasconsiderationpayableundertheopenoffer.Italso
empowers the manager to the offer to operate the special escrow account on behalf of the
acquirer for the purposes as stated in the SAST. The acquirer shall complete payment of
considerationwhetherintheformofcash,orasthecasemaybe,byissue,exchangeortransfer
of securities, to all shareholders who have tendered shares in acceptance of the open offer,
withintenworkingdaysoftheexpiryofthetenderingperiod.

Anyunclaimedbalances,lyingtothecreditofthespecialescrowaccountattheendofseven
years from the date of deposit thereof, shall be transferred to the Investor Protection and
Education Fund established under the Securities and Exchange Board of India (Investor
ProtectionandEducationFund)Regulations,2009.

CompletionofAcquisition

1) Theacquirerasperregulationsshallnotcompletetheacquisitionofsharesorvotingrights
in, or control over, the target company, whether by way of subscription to shares or a
purchase of shares attracting the obligation to make an open offer for acquiring shares,
untiltheexpiryofthe offer period. Further, in case of an offer made20 pursuant to a
preferentialallotment,theofferhastobecompletedwithintheperiodasprovidedunder
subregulation(1)ofregulation 74 of SEBI (Issue of Capital and Disclosure) Regulations,
200921.
2) Notwithstanding anything which is discussed in the above (para 1) and subject to the
acquirer assuming full acceptance of the open offer the parties to such agreement may
aftertheexpiryof21workingdaysfromthedateofdetailedpublicstatement,actuponthe
agreementandtheacquirermaycompletetheacquisitionofsharesorvotingrightsin,or
controloverthetargetcompanyascontemplated.
3) Theacquirershallcompletetheacquisitionscontractedunderanyagreementattractingthe
obligation to make an open offer not later than 26 weeks from the expiry of the offer
period.Incaseofanyextraordinaryandsuperveningcircumstancesrenderingitimpossible
tocompletesuchacquisitionwithinthestipulatedperiod,SEBImaygrantanextensionof
time by such period as it may deem fit in the interests of investors in securities and the
securitiesmarket.Thereasonsforgrantingextensionmaybealsopublished.

TheSASTregulationshavelaiddownthegeneralobligationsoftheMerchantBanker.Forany
failuretocarryouttheseobligationsaswellasforfailure/noncomplianceofotherprovisionsof

20Asperprovisionsundersubregulation(1)ofregulation20ofSEBISAST.
21Allotmentpursuanttothespecialresolutionshallbecompletedwithinaperiodof15daysfromthedateofpassingsuch
resolution.

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theRegulations,penaltieshavealsobeenlaiddownwhichshallbeapplicabletoanydefaulting
intermediary.

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ReviewQuestions

1. MerchantBankerisinvolvedinwhichofthefollowingactivities?
(a) Mergers
(b) Takeovers
(c) Acquisitions
(d) Alloftheabove
Ans:(d)

2. Mergerisnecessarilyamongsttwoequalorcomparablestaturecompanies.Statewhether
TrueorFalse.
(a) True
(b) False
Ans:(b)

3. Takeover is the acquisition of substantial _________ for the purpose of seeking


managementcontrolofthecompany.
1. Rights
2. Debentures
3. SharesorVotingRights
4. Noneoftheabove
Ans:(c)

4. The SEBI (Substantial Acquisition of shares and takeovers) Regulations, 2011 ensures
greatertransparency,fairness,andequitabletreatmenttoallinvestors.StatewhetherTrue
orFalse.
(a) True
(b) False
Ans:(a)

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THISPAGEHASBEENLEFTBLANK
INTENTIONALLY

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Chapter8:OtherMerchantBankingActivitiesDisinvestment,Buybackof
EquityShares

LEARNINGOBJECTIVES:

Afterstudyingthischapter,youshouldknowabouttheroleofMerchantBankerin:
Disinvestmenttransactions
Buybackofsharesanddelistingofshares

Issueandlistingofdebtissues
Sharebasedemployeebenefits

8.1 Disinvestment
Disinvestment means the direct or indirect sale by the Central Government or any State
Governmentorbyagovernmentcompany,asthecasemaybe,ofsharesorvotingrightsin,or
control over, a target company, which is a public sector undertaking. Transactions related to
Governmententitiescanbeeitheradisinvestmenttransactionoranadvisorytransaction.
Disinvestmenttransactionsaregenerallyoftwotypes:

(1) inthenatureofanofferforsalebythesellingshareholder(inthiscasetheGovernment
ofIndia)throughtheprospectus,attimesthiscouldbeacombinationofafreshissue
andanofferforsaleor
(2) inthenatureofOfferforSalethroughtheStockExchangeMechanism.

8.1.1 RoleofMerchantBankerinDisinvestmentTransactions

The role of a Merchant Banker in Disinvestment transactions is similar to the transactions of


anyIPO/FPO/OFS(SE)intheprivatesector.

AdvisorytransactionsforaGovernmententitycouldbeforabonusissueorabuybackorany
otheradvisorytransaction.Insuchcasesalso,theroleofaMerchantBankerissimilartothe
transactionsofadvisorynatureforanyentityintheprivatesector.IfaMerchantBankerhas
been mandated to provide advisory services to any Government entity then DPE guidelines
havetobekeptinmind,forexample,ifabonusissueisbeingrecommendedthentheimpactit
willhaveontheirratingduetotheexpandedequitybaseandalikelihoodoflowerEPS.

However, there are certain guidelines issued by the Department of Public Enterprises (DPE)
whichareavailableathttp://dpe.nic.in/important_links/dpe_guidelines.

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Forexamplepurpose,someofthemarelistedbelow:

TheDPEhasprescribedcertainperformancemeasuresforthereviewofperformanceof
Navratna and Miniratna enterprises as per DPE OM No. DPE/3(2)/2001Fin. dated
15.03.02.ThePSUswhichareMiniratnaI,ScheduleAandhaveobtainedexcellentor
verygoodMOUratinginthreeofthelastfiveyearsareeligible.CompositeScoreof
performancetobe60orabove.

InordertoreviewtheperformanceofthePSU,acompositescorebasedonitsperformancefor
the last three years would be calculated. For calculation of composite score, 6 performance
indicators have been identified based on their general applicability to the PSUs. The
performance indicators have been chosen so as to capture the performance of PSUs
irrespective of their belonging to manufacturing sector or services sector. The 6 identified
performanceindicatorsare:

Table8.1:SixidentifiedperformanceindicatorsasperDPEguidelines

Parameter Weightage

1 NetProfittoNetWorth 25
2 ManpowerCosttototalCostofProductionorCostofServices 15
3 PBDITtoCapitalemployed 15
4 PBITtoTurnover 15
5 EarningsPerShare 10
6 InterSectoralPerformance 20
TOTAL 100

Table8.2:ScoringscaleatdifferentlevelsofEPS

EarningsPerShare(FVRs.10) Scores
>=30 10
>=20&<30 8
>=10&<20 6
>=5&<10 4
>=0&<5 2
>= 5&<0 0
>= 10&< 5 2

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8.2 RoleofMerchantBankerinBuybackofEquityShares
SEBI(BuybackofSecurities)Regulationsisapplicabletobuybackofsharesorotherspecified
securities of a company listed on a stock exchange. However, a company listed on a stock
exchangeshallnotbuybackitssharesorotherspecifiedsecuritiessoastodelistitssharesor
otherspecifiedsecuritiesfromthestockexchange.
A company shall buyback its shares or other specified securities using any of the following
methods:

(a)fromtheexistingsecurityholdersonaproportionatebasisthroughthetenderoffer;

(b)fromtheopenmarketthrough

(i)bookbuildingprocess,or

(ii)stockexchange;

(c)fromoddlotholders.

Acompanyshallnotbuybackitssharesorotherspecifiedsecuritiesfromanypersonthrough
negotiateddeals,whetheronorofthestockexchangeorthroughspottransactionsorthrough
anyprivatearrangement.

Anypersonoraninsidershallnotdealinsecuritiesofthecompanyonthebasisofunpublished
informationrelatingtobuybackofsharesorotherspecifiedsecuritiesofthecompany.

The procedure for buyback of securities has been prescribed in the SEBI (BuyBack of
Securities)Regulations,1998.AspertheRegulations,appointmentofmerchantbankeristhe
firststepbeforestartingtheprocessofpublicannouncementforbuyback.

8.2.1 ObligationsofMerchantBankerinBuybackofEquityShares

The obligations specified for a merchant banker under the Regulation have been specified in
theSEBI(BuybackofEquityShares)Regulations,1998.Themerchantbankershallensurethat

a. thecompanyisabletoimplementtheoffer;
b. theprovisionrelatingtoescrowaccountasreferredintheregulationhasbeenmade;
c. firmarrangementsformoniesforpaymenttofulfiltheobligationsundertheofferarein
place;
d. thepublicannouncementofbuybackismadeintermsoftheregulations;
e. theletterofofferhasbeenfiledintermsoftheregulations;
f. the merchant banker shall furnish to SEBI a due diligence certificate which shall
accompanythedraftletterofoffer;
g. themerchantbankershallensurethatthecontentsofthepublicannouncementofoffer
as well as the letter of offer are true, fair and adequate and quoting the source
wherevernecessary;

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h. themerchantbankershallensurecompliancewiththeCompaniesAct22,andanyother
lawsorrulesasmaybeapplicableinthisregard;
i. uponfulfilmentofallobligationsbythecompanyundertheregulations,themerchant
banker shall inform the bank with whom the escrow or special amount has been
depositedtoreleasethebalanceamounttothecompany;
j. the merchant banker shall send a final report to SEBI in the form specified within 15
daysfromthedateofclosureofthebuybackoffer.

ContentsofthePublicAnnouncement
Thepublicannouncementshallcontainthefollowinginformation:

1. Details of the offer including the total number and percentage of the total paidup
capitalandfreereservesproposedtobeboughtbackandprice.
2. The proposed time table from opening of the offer till the extinguishment of the
certificates.
3. Thespecifieddateandtheauthorityfortheofferofbuyback.
4. A full and complete disclosure of all material facts including the contents of the
explanatorystatement.Thestatementshouldbeannexedtothenoticeforthegeneral
meetingatwhichthespecialresolutionapprovingthebuybackhadbeenpassed.
5. Thereasonforbuybackandtheprocess/methodologytobeadoptedforbuyback.
6. Themaximumamounttobeinvestedunderthebuyback.Theminimumandmaximum
number of securities that the company proposes to buyback, sources of funds from
whichthebuybackwouldbemadeandthecostoffinancingthebuyback.
7. Auditedfinancialinformationforthelast3years.Theleadmanagerhastoensurethat
theparticularsinthefinancialinformationshouldnotbemorethan6monthsoldfrom
thedateofpublicannouncementtogetherwiththefinancialratios.
8. Detailsoftheescrowaccountandtheamountdepositedtherein.
9. Listingdetailsanddatafromthestockmarketviz.,high,lowandaveragemarketprices
ofthesecuritieswhichareproposedtobeboughtbackinthelast3years,monthlyhigh
low prices in the last 6 months preceding the date of the public announcement, the
market price immediately after the date of resolution of the Board of Directors
approvingthebuybacketc.
10. Thepresentcapitalstructureandtheshareholdingpattern.
11. The capital structure including details of outstanding convertible instruments, if any,
postbuyback.
12. Managementdiscussionandanalysisonthelikelyimpactofbuybackonthecompanys
earnings,publicholdings,holdingsofNRIs/FIIsetc,promotersholdingsandanychange
inmanagementstructure.
13. Detailsofstatutoryapprovalswhichhavebeenobtained.
14. DetailsofCollectionandbiddingcentres.
15. Complianceofficerdetailsandinvestorservicecentres.

22
Compliancewithsection6870.

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16. ThepublicannouncementshallbedatedandsignedonbehalfoftheBoardofDirectors
ofthecompanybythesecretaryormanager,ifany,andbyminimumtwodirectorsof
thecompanyoneofwhomshallbethemanagingdirectorincaseswherethereisonly
onedirector.

DisclosuresintheLetterofOffer

TheissuercompanyisrequiredtofilewithSEBIthedraftletterofoffercontainingdisclosures,
within 7 working days of the public announcement. The issuer company shall work with the
merchantbankerforsuchfilingandthemerchantbankershallensurethatalldisclosuresare
provided as per SEBI requirement. The letter of offer shall contain disclosures most of which
finds mention in the public statement. The disclosures which form part of the letter of offer
onlyhavebeenstatedbelow:

1. Adeclarationsignedbyatleasttwodirectorsofthecompany,oneofwhomshallbethe
managingdirectorincaseswherethereisonlyonedirector,thattherearenodefaults
subsistinginrepaymentofdeposits,redemptionofdebenturesorpreferencesharesor
repaymentofatermloanstoanyfinancialinstitutionsorbanks.
2. Adeclarationsignedbyatleasttwodirectorsofthecompany,oneofwhomshallbethe
managing director incases where there is only one director, stating that the Board of
Directorshasmadeafullenquiryintotheaffairsandprospectsofthecompanyandthat
theyhaveformedtheopinion:
a. Regardingtheprospectsfortheyearimmediatelyfollowingthedateoftheletter
ofofferandalsoregardingthefinancialresourceswhichwillbeavailabletothe
company, the company will be able to meet its financial liabilities and not be
declaredinsolventwithinaperiodofoneyearfromthatdate.
b. Whileforminganopinionfortheabovepurpose,thedirectorsneedtotakeinto
account the liabilities as if the company were being wound up under the
provisions of the Companies Act, 1956 (including prospective and contingent
liabilities).
3. Thedeclarationmustinadditionhaveannexedtoitareportaddressedtothedirectors
bythecompanysauditorsstatingthat
(i)thedirectorshaveinquiredintothecompanysstateofaffairs,and
(ii)theamountofpermissiblecapitalpaymentforthesecuritiesinquestionisintheir
viewproperlydetermined;and
thatthedirectorsarenotawareofanythingtoindicatethattheopinionexpressedby
thedirectorsinthedeclarationastoanyofthemattersmentionedinthedeclarationis
unreasonableinallthecircumstances.

8.3 RoleofMerchantBankerinDelistingofShares
SEBI (Delisting of Equity Shares) Regulations, 2009 apply to delisting of equity shares of a
company from all or any of the recognised stock exchanges where such shares are listed.
Nothingintheregulationsshallapplytoanydelistingmadepursuanttoaschemesanctioned

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NISM-Series-IX: Merchant Banking Certification Examination


by the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial
Companies (Special Provisions) Act, 1985 or by the National Company Law Tribunal under
section424DoftheCompaniesAct,1956,ifsuchscheme

(a)laysdownanyspecificproceduretocompletethedelisting;or

(b)providesanexitoptiontotheexistingpublicshareholdersataspecifiedrate.

Aspertheseregulations,beforemakingthepublicannouncement,thepromotershallappointa
merchant banker registered with SEBI. It shall be the responsibility of the promoter and the
merchantbankertoensurecompliancewiththeprovisionsasstatedbySEBIinitsregulations.
Alsobeforethepublicannouncement,thepromotershallopenanescrowaccountanddeposit
thereinthetotalestimatedamountofconsiderationcalculatedonthebasisofthefloorprice
and the number of equity shares outstanding with public shareholders. The escrow account
shallconsistofeithercashdepositedwithascheduledcommercialbank,orabankguaranteein
favourofthemerchantbanker,oracombinationofboth.Wheretheescrowaccountconsists
ofdepositwithascheduledcommercialbank,thepromotershall,whileopeningtheaccount,
empowerthemerchantbankertoinstructthebanktoissuebankerschequesordemanddrafts
fortheamountlyingtothecreditoftheescrowaccount,forthepurposesmentionedinthese
regulations, and the amount in such deposit, if any, remaining after full payment of
considerationforequitysharestenderedintheoffer.

The promoter is required to despatch the letter of offer to the public shareholders of equity
shares, not later than 45 working days from the date of the public announcement, so as to
reachthematleast5workingdaysbeforetheopeningofthebiddingperiod.Theletterofoffer
shallcontainallthedisclosuresmadeinthepublicannouncementandsuchotherdisclosuresas
may be necessary for the shareholders to take an informed decision. The bidding form also
needstobesentalongwiththeletterofoffer.

Apromoterorapersonactinginconcertwithanyofthepromotersshallnotmakeabidinthe
offer and the merchant banker shall take necessary steps to ensure compliance with this
provision.Offerpricewithrespecttodelistingisrequiredtobedeterminedbythepromoter
andthemerchantbankertakingintoaccountcertainfactorsasspecified.Withineightworking
days of closure of the offer, the promoter and the merchant banker shall make a public
announcement in the same newspapers in which the public announcement was made
regarding:
(i)thesuccessoftheoffer,alongwiththefinalpriceacceptedbytheacquirer;or

(ii)thefailureoftheoffer;or

(iv) rejectionofthefinalpricediscoveredbythepromoters.

8.4 RoleofMerchantBankersinIssueandListingofDebtSecurities
Theissueofdebtsecuritiesisregulatedby:

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NISM-Series-IX: Merchant Banking Certification Examination


(1) SEBI(IssueandListingofDebtSecurities)Regulations,2008(asamended)
(2) VariouscircularsissuedbySEBIinthisregard
(3) CompaniesAct,2013andRulesframedthereunder
(4) ListingAgreementforDebtSecuritieswithStockExchanges
(5) RBIRulesandRegulationsand
(6) SCRAandSCRR.
TheSEBI(IssueandListingofDebtSecurities)Regulations,2008appliesto

(a)publicissueofdebtsecurities;and

(b) listing of debt securities issued through public issue or on private placement basis on a
recognizedstockexchange.

The following are the important points to be kept in mind in case of issuance of debt
securities:

(1) ShelfProspectuscanbeissuedonlybyacertaincategoryofissuers.
(2) TheminimumsubscriptionasstipulatedbySEBIis75%oftheissuesize.
(3) Security has to be created within a specified time limit for debt securities which are
secured.
(4) Debentureredemptionreserveneedstobecreated.
(5) In case of public issue of debt securities, the base issue size should be a minimum of
Rs.100Crores.
(6) Issuersareallowedtoretainoversubscriptionmoneyuptoamaximumof100%ofthe
base issue size. In case of issuers filing a shelf prospectus, they can retain
oversubscriptionuptotheratedsizeasspecifiedintheirshelfprospectus.
(7) The debt securities have to be secured instruments if their tenure exceeds the
prescribedlimitorelsetheywillbedeemedtobepublicdepositsandtheacceptanceof
publicdepositruleswillneedtobecompliedwith.
(8) In case of private placement of debt securities, there is a limit on the number of
potentialinvestorswhocanbeapproached,intheeventthislimitisbreached,itshallbe
deemedtobeapublicissueandallrequirementsofapublicissueshallapply.
AspertheIssueandListingofDebtSecuritiesRegulations,theissuershallappointone
or more SEBI registered merchant bankers, at least one of whom shall be a lead
merchantbanker.Theissuerandtheleadmerchantbankerhastoensurethattheoffer
document contains all material disclosures which will help the subscribers of the debt
securitiestakeinformedinvestmentdecision.Itshouldincludethefollowing:
a) DisclosuresspecifiedinSection26oftheCompaniesAct,2013;
b) Disclosures as mentioned in these regulations, viz., memorandum and articles of
associationsandacopyofthetrustdeed,copyofthelatestauditedbalancesheet
and annual report, statement containing particulars of dates of, and parties to all

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NISM-Series-IX: Merchant Banking Certification Examination


materialcontractsandagreements,nameandaddressoftheregisteredofficeofthe
issuerandthedirectorsoftheissueretc.Thedetailsdisclosurelistisprovidedinthe
scheduleIoftheSEBI(Issueandlistingofdebtsecurities)Regulations,2008;
c) AdditionaldisclosuresasmaybespecifiedbySEBI;
(9) Incaseofpublicissueofdebtsecurities,onlineapplicationsarepermitted,ASBAfacility
can be availed by investors and the post issue timelines applicable for public issue of
equityshallbeapplicable.
The Lead Merchant Banker shall ensure that all comments received on the draft offer
documentaresuitablyaddressedpriortothefilingoftheofferdocumentwiththeRegistrar
ofCompanies.

A copy of draft and final offer document shall also be forwarded to SEBI for its records,
simultaneously with filing of these documents with designated stock exchange. The lead
merchant banker shall, prior to filing of the offer document with the Registrar of
Companies, furnish to SEBI a due diligence certificate as per specifications of this
regulations.

Where any person makes a request for a physical copy of the offer document, the same
shall be provided to him by the issuer or lead merchant banker. The issuer and lead
merchantbankershallensurethat:

(a) every application form issued by the issuer is accompanied by a copy of the abridged
prospectus;

(b)theabridgedprospectusshallnotcontainmatterswhichareextraneoustothecontents
oftheprospectus;

(c)adequatespaceshallbeprovidedintheapplicationformtoenabletheinvestorstofillin
variousdetailslikename,address,etc.

Theissuermaydeterminethepriceofdebtsecuritiesinconsultation withtheleadmerchant
banker and the issue may be at fixed price or the price may be determined through book
buildingprocessinaccordancewiththeprocedureasmaybespecifiedbySEBI.

Thefollowingaretheimportantdocumentsrelatingtodebtissues:

PublicIssue

(1) DraftProspectus/DraftShelfProspectus
(2) Prospectus/ShelfProspectus
(3) TrancheProspectus
(4) IssueAgreement
(5) EscrowAgreement
(6) DebentureTrusteeAgreement
(7) AgreementwiththeRegistrarstotheIssue

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NISM-Series-IX: Merchant Banking Certification Examination


(8) ApplicationForm
(9) DebentureCertificate(incaseofallotmentinphysicalmode)
(10) RefundWarrants/stationery
(11) DebentureTrustDeed

PrivatePlacement

(1) Information Memorandum (as per Form PAS2 prescribed under the Prospectus &
AllotmentofSecuritiesRules,2014)
(2) Offer Letter (as per Form PAS4 prescribed under the Prospectus & Allotment of
SecuritiesRules,2014);
(3) RecordofPrivatePlacementOffers(asperFormPAS5prescribedundertheProspectus
&AllotmentofSecuritiesRules,2014).
Thefollowingarethemajorstepsrequiredincaseofapublicissueofdebtsecurities:

(1) ApprovaloftheshareholdersandtheBoardofDirectorsoftheissuercompany
(2) Appointment of the SEBI Registered intermediaries such as Merchant Banker(s),
Registrars,DebentureTrustee,BankerstotheIssueandBrokerstotheIssue
(3) The Draft Prospectus or the Draft Shelf Prospectus, as applicable, has to be prepared
whichshouldcontainthedisclosuresasrequiredbytheSEBIDebtRegulationsandthe
CompaniesActandhastobefiledwiththeStockExchanges.Thisdocumentisavailable
tothepublicforcommentsforaperiodofsevendays.
(4) After the end of the seven day period, the Prospectus or the Shelf Prospectus is
preparedafterincorporatingcommentsreceivedfromthepublic,ifany,adoptedbythe
BoardofDirectorsoftheissuercompanyandfiledwiththeStockExchangesandSEBI.
(5) Thereaftertheissueopensandremainsopenfortheperiodasmentionedintheoffer
document.
(6) After closure of the offer, the Registrar processes the applications and identifies the
casesoftechnicalrejections,preparesabasisofallotmentandsubmitsthesametothe
designatedstockexchange.
(7) Upon receipt of the approval of the designated stock exchange, the companys Board
allotsthedebtsecurities.
(8) Thereafter,theregistrarcompletestheprocessofcreditingthedebtsecuritiesindemat
mode,despatchofphysicalcertificates(tothosewhohaveoptedforallotmentinsucha
mode), despatch of refund orders / credit of refund to the bank accounts of
unsuccessfulallotteesanddespatchofintimationofallotment/refund.
Once these activities are completed, the final listing approval and trading permissions are
obtainedfromthestockexchanges.

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NISM-Series-IX: Merchant Banking Certification Examination




8.4.1 ObligationsofMerchantBankerIssueandListingofDebtSecurities

Apartfromalltheaboverequirements,theobligationsofthemerchantbankerarespecifically
statedintheregulation.

i. Theissuershalldiscloseallthematerialfactsintheofferdocumentsissuedordistributedto
thepublicandshallensurethatallthedisclosuresmadeintheofferdocumentaretrue,fair
and adequate and there is no misleading or untrue statements or misstatement in the
offerdocument.

ii. The Merchant Banker shall verify and confirm that the disclosures made in the offer
documents are true, fair and adequate and ensure that the issuer is in compliance with
theseregulationsaswellasalltransactionspecificdisclosuresasrequiredintheCompanies
Act,2013.

iii. Theissuershalltreattheapplicantsinapublicissueofdebtsecuritiesinafairandequitable
manneraspertheproceduresasmaybespecifiedbySEBI.

iv. The intermediaries shall be responsible for the due diligence in respect of assignments
undertakenbytheminrespectofissue,offeranddistributionofsecuritiestothepublic.

v. Nopersonshallemployanydevice,schemeorartificetodefraudinconnectionwithissue
orsubscriptionordistributionofdebtsecuritieswhicharelistedorproposedtobelistedon
arecognizedstockexchange.

Theissuerandthemerchantbankershallensurethatthesecuritycreatedtosecurethedebt
securitiesisadequatetoensure100%assetcoverforthedebtsecurities.

8.5 RoleofMerchantBankerinShareBasedEmployeeBenefits
Share Based Employee Benefits apply to any company whose shares are listed on any
recognisedstockexchangeinIndia.TheCompanyshallappointaregisteredMerchantBanker
for the implementation of Share Based Employee Benefits as per the regulations for the
implementationofschemescoveredbytheseregulationstillthestageofobtaininginprincipal
approvalfromthestockexchangesinaccordancewithclause(b)ofregulation10ofSEBI(share
basedemployeebenefits)regulation.


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ReviewQuestions

1. WhichSEBIRegulationappliestodelistingofequitysharesofacompanyfromalloranyof
therecognisedstockexchangeswheresuchsharesarelisted?
(a) SEBI(BuyBackofSecurities)Regulations,1998
(b) SEBI(IssueandListingofDebtSecurities)Regulations,2008
(c) SEBI(IssueofCapitalandDisclosureRequirements)Regulations,2009
(d) SEBI(DelistingofEquityShares)Regulations,2009
Ans:(d)

2. Theescrowaccountopenedforthepurposeoffulfillingdelistingrequirementsshallconsist
ofeithercashdepositedwithascheduledcommercialbank,orabankguaranteeinfavour
ofthemerchantbanker,oracombinationofboth.StatewhetherTrueorFalse?
(a) True
(b) False
Ans:(a)

3. The issuer and the merchant banker shall ensure that the security created to secure the
debtsecuritiesisadequatetoensure____assetcoverforthedebtsecurities.
(a) 50percent
(b) 75percent
(c) 80percent
(d) 100percent
Ans:(d)

4. Department of Economic Affairs handles all matters related to the disinvestment of


GovernmentofIndiashareholdinginCentralPublicSectorEnterprises.StatewhetherTrue
orFalse.
(a) True
(b) False

Ans:(b)


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NISM-Series-IX: Merchant Banking Certification Examination


Appendix1:InitialPublicOfferProcess


*SubjecttoSEBIapprovals.

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