JAIIB IE and IFS Paper-1 Module-D Unit 7 : Merchant Banking Services

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Jul 29

JAIIB Paper 1 (IE and IFS) Module D Unit 7 : Merchant Banking Services (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 1 (Indian Economy & Indian Financial System) includes an important topic called "Merchant Banking Services". Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 1 (IE and IFS) Module D (FINANCIAL PRODUCTS AND SERVICES ) Unit 7 : Merchant Banking Services , Aspirants must go through this article to better understand the topic, Merchant Banking Services and practice using our Online Mock Test Series to strengthen their knowledge of Merchant Banking Services. Unit 7: Merchant Banking Services

Definition Of Merchant Banking

Merchant Banking primarily involves providing financial advice and services to large corporates and wealthy individuals. Merchant Banks do not provide regular banking services to the general public.
The notification of the Ministry of Finance defines Merchant Banker as – "Any person who is engaged in business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management."

Merchant Banking Vs Commercial Banking

There are key differences in approach, attitude and areas of services between Merchant Banks and Commercial Banks. Some of them are listed below:

Merchant Banks are regulated by SEBI, whereas Commercial Banks are governed by RBI regulations;
Merchant Banks primarily assist in raising equity and equity related finance, whereas Commercial Banks primarily deal with debt and debt related finance;
Merchant Banks are management oriented, whereas Commercial Banks are assets oriented;
Activities of Merchant Banks are project counseling, capital structuring, amalgamations and takeovers, whereas Commercial Banks are mainly financiers;
Merchant Bankers mainly undertake fee-based business, whereas Commercial Banks mainly undertake funding business.

Licensing Requirements

Prospective Merchant Banks have to obtain the following Licenses from SEBI for initiating Merchant Banking activities:

Merchant Banker: Certificate of Registration from SEBI is to be obtained for Category I/II/III/IV Merchant Banker, for rendering Issue Management Services (Public/Rights/Private Placement Issues related to Equity/Debt), Underwriting, Consultancy and Corporate Advisory Services, etc., as Capital Market
Banker to the Issue: Certificate of Registration from SEBI is to be obtained to handle "Bankers to the Issue" assignments with network of exclusive Capital Market Branches and Designated Branches to handle ASBA applications, collecting (Escrow)/refund/paying banker assignments.
Debenture Trustee : In terms of SEBI guidelines, all debenture issues (public rights) of the companies with the maturity period exceeding 18 months are required to have 'Debenture Trustee' and its name must be stated in the Prospectus to the issue. A Merchant Bank cannot, directly, be the Trustee, but the Trust can be a subsidiary of the Merchant Bank.
Portfolio Management: In terms of SEBI guidelines, the Merchant Bank can carry on the activity as Portfolio Manager only if, separate Certificate of Registration under the provisions of the SEBI (Portfolio Manager) Regulations, 1993 is obtained.

Sebi Regulations On Merchant Banking

Certification under SEBI Regulations

Certificate from SEBI is mandatory to commence Merchant Banking activities. Certification of Merchant Bankers is of four types, viz.,

Category I Merchant Bank: can act as Issue managers—

To carry on any activity of the issue management, which will, inter alia, consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscriptions; and
To act as advisor, consultant, manager, underwriter, portfolio manager;

Category II Merchant Bank: Can act only as advisor, consultant, co-manager, underwriter, portfolio manager.

Category III Merchant Bank: can act as underwriter, advisor, consultant to an issue. Category IV Merchant Bank: can merely act as advisor or consultant to an issue.

Capital Adequacy Norms as per SEBI Regulations

As per SEBI Regulations, the applicant for a Merchant Banking License should have net worth of not less than:

5 crores for Category I Merchant Bank Where "net worth" means the sum of paid-up capital and free reserves of the applicant. The certificate of registration granted under sub-regulation (1) shall be valid unless it is suspended or cancelled by the Board.

Key SEBI Guidelines for Merchant Banks

SEBI's authorisation criteria to allow the applicant to act as Merchant Bank include:

Professional qualification in finance, law or business management
Infrastructure like office space, equipment and man power
Capital Adequacy
Past track of record, experience, general reputation and fairness in all transactions.

Activities Of Merchant Banks

Issue Management
Pre-issue Functions
Post-issue Functions
Bankers to the Issue (Collecting Banker)
Mobilising Payment of Dividend Warrants/Interest Warrants/Refund Orders (Paying Banker)
Debenture Trustee
Monitoring Agency

Key Policy Requirements As Per Sebi Regulations

Every merchant bank should maintain copies of balance sheet, profit and loss account, statement of financial position
Half-yearly unaudited result should be submitted to SEBI
Merchant Banks (including their directors and employees) are prohibited from buying/selling securities, based on the unpublished price sensitive information of their clients, during the tenor of the assignment
Merchant Bank should not associate with any business other than that of the securities market. The exception is granted to Banks and Financial Institutions.
Lead Merchant Bank should not associate with a merchant banker, without registration
Merchant Bank should not act as such for an associate.
Every merchant bank shall appoint a Compliance Officer to monitor compliance with prevailing Regulations
SEBI has the right to send inspecting authority to inspect books of accounts, records, etc., of merchant banks
Inspections will be conducted by SEBI to ensure that the provisions of the regulations are properly complied with
An initial authorisation fee, an annual fee and renewal fee shall be collected by SEBI.

Key Codes Of Conduct As Per Sebi Regulations

According to the Regulation 13 of the SEBI (Merchant Bankers) Regulations of 1992, every Merchant Bank should comply with codes of conduct, as per Schedule III of the Regulations. Some of the key Codes of Conduct as per SEBI Regulations are listed below.

A Merchant Bank

Should make all efforts to protect the interest of investors
Should maintain high standards of integrity, dignity and fairness in conduct of business
Should fulfill all obligations in a professional and ethical manner
Should not discriminate among the clients
Should ensure that prospectus, letter of offer, etc., is available to investors at the time of issue
Should render best possible advice to its clients
Should inform its clients of any penal action taken against it, by SEBI
Should inform the board about any legal proceedings initiated against it
Should abide by the rules of ''Securities and Exchange Board of India Regulations, 2003"
Shall develop its own internal code of conduct, for governing its internal operations
Should ensure that any person it employs should have the capacity to be a merchant banker
Would be responsible for the act of its employees and agents