Introduction to Merchant Banking
This domain tests identity and scope: who is legally a merchant banker, which category they hold, the capital behind it, and what work falls inside the definition. Expect definition and eligibility questions rather than calculations.
Definition
Under the SEBI (Merchant Bankers) Regulations, 1992, a merchant banker is a person engaged in the business of issue management - arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser, or rendering corporate advisory services in relation to issue management.
Registration categories
- Category I: minimum net worth ₹5 crore; may be appointed lead manager to a public issue.
- Category II: minimum net worth ₹50 lakh; may act as co-manager, underwriter or adviser but cannot be lead manager.
- Registration runs for five years under the SEBI (Intermediaries) Regulations, 2008 and is renewable; the applicant must be fit and proper with adequate infrastructure.
Core functions
Issue management (drafting, due diligence, marketing, allotment, post-issue compliance), underwriting, mergers and acquisitions, project and capital-structure advisory, loan syndication, valuation, ESOP and delisting/buyback advisory, escrow work.
Worked example
A firm with ₹75 lakh net worth is offered the lead manager role in a ₹200 crore IPO. It cannot accept: lead manager appointment requires Category I registration and ₹5 crore net worth. The options are to register as Category II and act as co-manager, or to partner with a Category I merchant banker who signs as lead manager while the smaller firm handles defined work.
Traps
- Reading “merchant banker” as a bank - deposit-taking and lending are not the licensed activity.
- Equating merchant banking with underwriting or portfolio management.
- Assuming registration is permanent.
- Forgetting that the registration category, not the firm's experience, determines the role it may play.