SEBI: General Obligations

GENERAL OBLIGATIONS

The 1992 regulations have enunciated the following general obligations and responsibilities for the merchant bankers.

Sole Function Every merchant banker shall abide by the Code of Conduct as specified in Schedule III. They are as follows:

1. Merchant Banker not to associate with any business other than the securities market. 2. No merchant banker, other than a bank or a public financial institution, who has been granted certificate of registration under these regulations, shall after June 30th, 1998 carry on any business other than that in the securities market. However , a merchant banker who prior to the date of notification of the Securities and exchange board of India (Merchant Bankers) Amendment Regulations, 1997, has entered into a contract in respect of a business other that of the securities market may, f he so desires, discharge his obligations under such contract. Similarly, a merchant banker who has been granted certificate of registration to act as primary or satellite dealer by the Reserve Bank of India may carry on such business as may be permitted by Reserve Bank of India.

Maintenance of Books

Every merchant banker shall keep and maintain the following books of accounts, records and documents: 1. A copy of balance sheet as at the end of each accounting period; 2. A copy

of profit and loss account for that period; that period; and 4. A statement of financial position. Every merchant banker shall intimate to the

Board the place where the books of accounts, record and documents are maintained. Every merchant banker shall, after the end of each accounting period furnish to the Board copies of the Balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the Board.

Submission of Half-yearly Results:

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

Preservation of Books of Account, Records:

The merchant banker shall preserve the books of accounts and other records and documents maintained under regulation 14 for a minimum period of five years.

Report on Steps taken on Auditor‟sReport:

Every merchant banker shall within two months from the date of the auditors' report take steps to rectify the deficiencies, made out in the auditor‗s report.

Appointment of Lead Merchant Bankers:

All issues should be managed by at least one merchant banker functioning as the lead merchant banker. In an issue of offer of rights to the existing members with or without the right of renunciation, the amount of the issue of the body corporate does not exceed rupees fifty lakh, the appointment of a lead merchant banker shall not be essential. Every lead merchant banker shall before taking up the assignment relating to an issue enter into an agreement with such body corporate setting out their mutual right, liabilities and obligations relating to such issue an in particular to disclosures, allotment and refund.

Restriction on Appointment of Lead Managers:

The number of lead merchant bankers may not, exceed in case of any issue of the following:

Responsibilities of Lead Managers:

No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are:

Size of Issue                                               Number of Merchant Bankers

Less than Rs. 50 Crores                             Two Above

Rs. 50 Crores but less than Rs.100 Crores Three Above

Rs. 100 Crores but less that Rs.200 Crores         Four Above

Rs.200 Crores but less that Rs.400 Crores Five Above

Rs.400 Crores                                            Five or more

as agreed by SEBI clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription. Where there are more than one lead merchant banker to the issue the responsibilities of each of such lead merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription. No lead merchant banker shall, agree to manage the issue made by anybody corporate, if such body corporate is an associate of the lead merchant banker. A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue.

Underwriting Obligations:

In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum underwriting obligation of five percent of the total underwriting commitment or rupees twenty-five lakh whichever is less. If the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement for having the issue underwritten to that extent by a merchant banker associated with the issue and shall keep the board informed of such arrangement.

Submission of Due Diligence Certificate:

The lead merchant bankers, who is responsible for verification of the contents of a prospectus or the Letter of Offer in respect of an issue and the reasonableness of the views expressed therein, shall submit to the Board at least two weeks prior to the opening of the issue for subscription, a due diligence certificate in Form

Documents to be furnished to the Board:

The lead manager responsible for the issue shall furnish to the Board, the following documents

1. Particulars of the issue;

2. Draft prospectus or where there is an offer to the existing shareholders, the draft letter of offer;

3. Any other literature intended to be circulated to the investors, including the shareholders; and

4. Such other documents relating to prospectus or letter of offer as the case may be.

The documents shall be furnished at least two weeks prior to the date of filing of the draft prospectus or the letter of the offer, as the case may be, with the Registrar of Companies or with the Regional Stock Exchanges or with both. The lead manager shall ensure that the modifications and suggestions, if any, made by the Board on the draft prospectus or the Letter of Offer as the case may be, with respect to information to be given to the investors are incorporated therein.

Payment of fees to the Board:

The draft prospectus or draft letter of offer referred to in regulation 24 shall be submitted along with such fees and in such manner as may be specified in Schedule IV.

Continuance of Association of Lead Manager:

The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to be associated with the issues till the subscriber have received the share or debenture certificates or refund of excess application money. Where a person other than the lead manager is entrusted with the refund or allot of securities in respect of any issue the lead manager shall continue to be responsible for ensuring that such other person discharges the requisite responsibilities in accordance with the provisions of the Companies Act and the listing agreement entered into but the body corporate with the stock Exchange.

Acquisition of shares Prohibited: No merchant banker or any of its directors, partner manager or principal shall either on their respective accounts or through their associates or relative enter into transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.

Information to the Board: Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of anybody corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction.

Disclosures to the Board:  A merchant banker shall disclose to the Board as and when required,

the following information:

1. His responsibilities with regard to the management of the issue; Any change in the information o particulars previously furnished, which have a bearing on the certificate granted to it;

2. The names of the body corporate whose issues he has managed or has been ass0oiciated with;

3.   The particulars relating to breach of the capital adequacy requirement as specified in regulation 7;

4.  Relating to his activities as a manager, underwriter, consultant or adviser to an issue as the case may be.

Appointment of Compliance Officer: 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 the board or the Central Government and for redressed ofievancesinvestors‗. Thecomplianceofficer shallgr immediately and independently report to the Board any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on/in the draft prospectus or the Letter of offer as the case may be, do not recur.

Procedure For Inspection Boards Right to inspect: The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records and documents of the merchant banker for any of the purposes specified in sub-regulation(2).

The purposes referred to in sub-regulation (1) may be as follows:

1. To ensure that the books of account are being maintained in the manner required;

2. To ensure that the provisions of the Act, rules, regulations are being complied with;

3.  To investigate into the complaints received from investors, other merchant bankers or any other person on any matter having a bearing on the activities of the merchant banker; and

4. To investigate suo-moto in the interest of securities business or investors interest in the affairs of the merchant banker.

Notice before Inspection:

Before undertaking an inspection under regulation 29 the Board shall give a reasonable notice to the merchant banker for that purpose. Where the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing directing that the inspection of the affairs of the merchant banker be taken up without such notice. During the course of inspection, the merchant banker against whom an inspection is being carried out shall be bound to discharge his obligations as provided under regulation 31.

Obligations of Merchant Banker on Inspection:

It shall be the duty of every director, proprietor, partner, officer and employee of the merchant banker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to his activities as a merchant banker within such time as the inspecting authority may require. The merchant banker shall allow the inspecting authority to have reasonable access to the premises occupied by such merchant banker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the merchant banker or any such other person and also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant for the purposes of the inspection. The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any principal officer, director, partner, proprietor and employee of the merchant banker. It shall be the duty of every director, proprietor, partner, officer or employee of the merchant banker to give to the inspecting authority all assistance in connection with the inspection which the merchant banker may be reasonably expected to give.

Submission of Report to the Board:

The inspecting authority shall, as soon as possible submit, an inspection report to the

Board.

Suspension of Registration

SEBI Regulations, 2002 published in the official Gazette of India dated 27.09.2002 A penalty for suspension of registration of a merchant banker may be imposed under the following circumstances:

• Where the merchant banker violates the provisions of the Act, rules or regulations; or

• Where the merchant banker fails to furnish any information relating to his activity as merchant banker as required by the Board; or furnishes wrong or false information, or does not submit periodical returns as required by the Board; or does not co-operate in any enquiry conducted by the Board; or

• Where the merchant banker fails to resolve the complaints of the investors or fails to give a satisfactory reply to the Board in this behalf; or

• Where the merchant banker indulges in manipulation or price rigging or cornering activities; or

• Where the merchant banker is guilty of misconduct or improper or unbusiness like or  unprofessional conduct which is not in accordance with the Code of Conduct specified in Schedule III; or

• Where the merchant banker fails to maintain the capital adequacy requirement in accordance with provisions of regulation 7; or

• Where the merchant banker fails to pay the fees; or

• Where the merchant banker violates the conditions of registration; or

• Where the merchant banker does not carry out his obligations as specified in the regulation.

Cancellation or Registration

A penalty of cancellation of registration of a merchant banker may be imposed where;

• The merchant banker indulges in deliberate manipulation or price rigging or cornering activities affecting the securities market and the investor‘s interest;

• The financial position of the merchant banker deteriorates to such an extent that the Board is of the opinion that his continuance as merchant banker is not in the interest of investors;

• The merchant banker is guilty of fraud, or is convicted of a criminal offence;

• In case of repeated defaults of the nature mentioned in regulation 36 provided that the Board  furnishes reasons for cancellation in writing.

Manner of Making Order of Suspension or Cancellation:

No order of penalty of suspension or cancellations the case may be shall be imposed except after holding an enquiry in accordance with procedure specified in regulation.

Manner of Holding Enquiry before Suspension or Cancellation:

For the purpose of holding an enquiry under regulation 38, the board may appoint an enquiry officer. The enquiry officer shall issue to the merchant banker a notice the registered office or the principal place of business of the merchant banker. The merchant banker may, within thirty days from the date of receipt of such notice, furnish to the enquiry officer a reply together with copies of documentary or other evidence relied on by him or sought by the Board from the merchant banker. The enquiry officer shall, give a reasonable opportunity or hearing to the merchant banker to enable him to make submissions in support of his reply made under sub-regulation (3). The merchant banker may either appear in person or through any duly authorized person. No lawyer or advocate shall be permitted to represent the merchant banker at the enquiry. Where a lawyer or an advocate has been appointed by the Board as a presenting officer under sub-regulation (6), it shall be lawful for the merchant banker to present its case through a lawyer or advocate. It is considered necessary that the enquiry officer may ask the Board to appoint a presenting officer to present its case. The enquiry officer shall, after taking into account all relevant facts and submissions made by the merchant banker, submit a report the Board and recommend the penalty to be imposed as also the grounds on the basis of which proposed penalty is justified.

Show case Notice and Order:

On receipt of the report from the enquiry officer, the Board shall consider the same and issue a show-cause notice as to why the penalty as proposed by the enquiry officer should not be imposed. The merchant banker shall within twenty-one days of the date of the receipt of the show-cause send a reply to the Board. The Board after considering the reply to the show-cause notice, if received, shall as soon as possible or not later than thirty days from the receipt of the reply, if any, pass such order as it deems fit. Every order passed under sub-regulation (3) shall be self-contained and give reasons for the conclusions stated therein including justification of the penalty imposed by that order. The Board shall send a copy of the order under sub-regulation (3) to the merchant banker.

Effect of Suspension and Cancellation:

On and from the date of the suspension of their merchant banker he shall cease to carry on any activity as a merchant banker during the period of suspension. On and from the date of cancellation the merchant banker shall with immediate effect cease to carry on any activity as a merchant banker. The order of suspension or cancellation of certificate passed under sub-regulation (3) of regulation 40 shall be published in at least two daily newspapers by the Board.