NISM Series IX (Merchant Banking) cheat sheet

Primary market: securities are issued for the first time by an issuer to raise capital; secondary market: already-issued securities trade among investors on exchanges or OTC.

SEBI is the statutory regulator of securities markets, constituted under the SEBI Act, 1992; it has powers of investigation, adjudication and regulation of intermediaries.

RBI regulates money market, government securities and foreign exchange; IRDAI regulates insurance; PFRDA regulates pensions - each domain has a separate regulator.

Depositories (NSDL, CDSL) hold securities in dematerialised form; depositories are registered with SEBI and act through Depository Participants.

Stock exchanges are recognised market infrastructure; BSE and NSE are the principal equity exchanges, and SEBI approves their rules, bye-laws and membership norms.

Clearing corporations novate trades and guarantee settlement; settlement follows a T+1 cycle for equities, with funds and securities moving on the settlement date.

Capital market instruments include equity shares, preference shares, debentures, bonds, warrants, units of mutual funds and securitised debt instruments.

Market participants include merchant bankers, underwriters, brokers, registrar and transfer agents, bankers to an issue, debenture trustees, credit rating agencies and portfolio managers.

Merchant banker definition under SEBI (Merchant Bankers) Regulations, 1992: a person who is engaged in the business of issue management, or acts as manager, consultant or adviser to an issue.

Four categories of merchant banker registration exist under the 1992 Regulations, based on net worth and permitted activities; Category I may act as lead manager to an issue.

Core activities: issue management (lead manager), underwriting, corporate advisory, project appraisal, loan syndication, capital restructuring, takeover advisory and private placement.

Merchant banker is distinct from a commercial bank: merchant banking is fee-based advisory and capital-raising work, not deposit-taking or lending as a bank.

Lead manager responsibilities include due diligence, drafting the offer document, filing with SEBI and exchanges, marketing the issue and post-issue compliance.

Underwriting: the underwriter agrees to subscribe to unsubscribed portion up to a stated amount; devolvement occurs when the underwriter must honour that commitment.

Merchant bankers also act as debenture trustees, managers to buyback offers, and advisors in open offers under the Takeover Code, subject to eligibility limits.

SEBI (Merchant Bankers) Regulations, 1992 govern registration, capital adequacy, conduct and code of conduct for merchant bankers.

Category I minimum net worth is Rs 5 crore; Category II, III and IV require lower net worth, and no merchant banker may carry on business without a certificate of registration from SEBI.

Registration is granted for an initial period of five years and renewable; application is made to SEBI in the prescribed form with the prescribed fee.

Code of conduct obligations include acting in the interest of the issuer and investors, maintaining confidentiality, avoiding conflict of interest and not making misleading statements.

Merchant bankers must maintain books of accounts, records and documents for a prescribed period (at least five years) and submit periodic reports to SEBI.

SEBI may suspend or cancel registration for failure to comply, and may take action for violations of the SEBI Act and the Regulations.

Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR), the lead manager must conduct due diligence and certify the offer document.

Appointment of lead managers is subject to limits on the number of lead managers per issue, based on the size of the issue, as prescribed under ICDR.

Public issue types: initial public offer (IPO), further public offer (FPO), rights issue, bonus issue, preferential allotment, qualified institutions placement (QIP) and offer for sale (OFS).

ICDR 2018 governs public issues; eligibility includes minimum operating profit, net tangible assets and a minimum public offer size, with alternative routes for certain issuers.

Book building: price band is discovered through bids; the issuer and lead manager fix the price band, and allotment follows the prescribed basis of allotment.

Red herring prospectus (RHP) omits price and price band; a prospectus filed with the Registrar of Companies is the final offer document.

Minimum promoter contribution and lock-in requirements apply to public issues; promoter contribution is locked in for a prescribed period, with a minimum of 20% of post-issue capital under ICDR.

Application money, refunds and allotment timelines are prescribed; failure to allot or refund within the prescribed time attracts interest liability for the issuer.

Anchor investors may be allotted shares in a book-built public issue, subject to a lock-in period and limits on the portion of the issue.

Green shoe option (over-allotment) permits stabilisation of post-listing price, subject to a cap on the overallotment and a stabilisation period.

Takeover Code (SEBI (SAST) Regulations, 2011): crossing the 25% voting rights threshold or acquiring control triggers a mandatory open offer for at least 26% of the target's shares.

Buyback of securities is governed by the SEBI (Buy-back of Securities) Regulations, 2018; routes include tender offer, open market purchase and book building.

Delisting is governed by the SEBI (Delisting of Equity Shares) Regulations, 2021, with a reverse book building process for price discovery.

Debenture trustees are appointed for debt issues; they hold security on behalf of debenture holders and monitor compliance with the trust deed.

Credit rating agencies registered with SEBI rate debt instruments; a rating is not a recommendation to buy, sell or hold a security.

Ethical duties: avoid front-running, maintain Chinese walls between advisory and trading desks, disclose conflicts, and protect client confidentiality.

Insider trading is prohibited under SEBI (Prohibition of Insider Trading) Regulations, 2015; trading on unpublished price-sensitive information is barred.

Merchant bankers must follow know-your-customer norms and anti-money laundering requirements, and report suspicious transactions to FIU-IND.

Primary market raises new capital for issuers; secondary market provides liquidity to existing holders through exchange trading.

SEBI is the statutory securities regulator under the SEBI Act, 1992, with powers to investigate and penalise market violations.

Depositories such as NSDL and CDSL hold securities in electronic form; investors access them through depository participants.

Settlement of equity trades follows a T+1 cycle, with clearing corporations guaranteeing settlement.

Money market and government securities are regulated by RBI, not SEBI.

Capital market instruments include equity shares, preference shares, debentures, bonds, warrants and securitised debt.

Intermediaries registered with SEBI include merchant bankers, brokers, registrars, bankers to an issue, debenture trustees and credit rating agencies.

Merchant banker under SEBI (Merchant Bankers) Regulations, 1992 includes a person engaged in issue management or acting as manager, consultant or adviser to an issue.

Category I merchant bankers may act as lead managers to issues; lower categories have restricted activity and lower net worth requirements.

Merchant banking is fee-based advisory and capital-raising work, distinct from commercial banking's deposit-taking and lending functions.

Lead manager duties: due diligence, offer document drafting, filing with SEBI and exchanges, marketing and post-issue compliance.

Underwriting commits the underwriter to subscribe to the unsubscribed portion, leading to devolvement if the issue is under-subscribed.

Services include project appraisal, loan syndication, capital restructuring, takeover advisory and private placement.

Merchant bankers may act as debenture trustees, managers to buyback offers and advisers in open offers under the Takeover Code.

SEBI (Merchant Bankers) Regulations, 1992 govern registration, capital adequacy, conduct and the code of conduct.

Category I minimum net worth is Rs 5 crore; no merchant banker may conduct business without a SEBI certificate of registration.

Registration is granted for an initial period of five years and is renewable on application.

Code of conduct requires acting in the interest of issuers and investors, confidentiality, avoidance of conflicts and no misleading statements.

Books, accounts and records must be maintained for at least five years and periodic reports submitted to SEBI.

SEBI may suspend or cancel registration for non-compliance and take action under the SEBI Act.

Under ICDR 2018, the lead manager must conduct due diligence and certify the offer document.

The number of lead managers per issue is capped based on issue size under ICDR.

Public issue routes include IPO, FPO, rights issue, bonus issue, preferential allotment, QIP and offer for sale.

ICDR 2018 prescribes eligibility criteria such as minimum operating profit, net tangible assets and minimum public offer size.

Book building discovers price through bids within a price band set by the issuer and lead manager.

The red herring prospectus omits price and price band; the final prospectus is filed with the Registrar of Companies.

Minimum promoter contribution is locked in for a prescribed period, with a minimum of 20% of post-issue capital under ICDR.

Failure to allot or refund within prescribed timelines attracts interest liability for the issuer.

Anchor investors may be allotted shares in book-built issues subject to lock-in and allotment limits.

The green shoe option permits over-allotment and price stabilisation within prescribed caps and periods.

SEBI (SAST) Regulations, 2011: crossing 25% voting rights or acquiring control triggers a mandatory open offer for at least 26% of the target's shares.

Buyback is governed by the SEBI (Buy-back of Securities) Regulations, 2018, through tender offer, open market or book building routes.

Delisting follows the SEBI (Delisting of Equity Shares) Regulations, 2021, using reverse book building for price discovery.

Debenture trustees hold security for debenture holders and monitor compliance with the trust deed.

Credit ratings are opinions on credit risk, not recommendations to buy, sell or hold.

Ethical duties include avoiding front-running, maintaining Chinese walls, disclosing conflicts and protecting client confidentiality.

SEBI (Prohibition of Insider Trading) Regulations, 2015 bar trading on unpublished price-sensitive information.

Merchant bankers must follow KYC and anti-money laundering norms and report suspicious transactions to FIU-IND.