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Merchant Banker License – An Overview

In the financial industry, merchant bankers play a critical and strategic role in helping companies raise capital and steer past financial complexities. The authorisation for a merchant banker license is issued by authorities like the Securities and Exchange Board of India (SEBI) in India. The financial services offered by a licensed merchant banker include underwriting new issues of securities, advisory services for mergers and acquisitions, portfolio management, and corporate restructuring.

Merchant bankers must comply with certain regulations to be eligible for obtaining the merchant banker license in India. The applicants must have the required infrastructure and skilled staff, amongst other necessities. The applicant is required to submit a detailed application along with the documentation and prescribed fees.

SEBI – The Regulatory Authority for Merchant Bankers

Securities and Exchange Board of India, known as SEBI, is the governing body that runs commercial banking in India.  However, any individual or business entity looking to apply for a merchant banker license must also approach SEBI since it regulates and governs the working of the commercial banking system in the country. 

SEBI is the alternate body apart from the Reserve Bank of India that governs the banking system. Besides, in accordance with the Foreign Exchange Administration Rules of 2015, financial institutions also fall under the purview of commercial banks and must adhere to regulatory compliance.

It is pertinent to note that all Indian Merchant Banks are directly supervised by SEBI. The changes in the financial ecosystem of the Indian economy with the inclusion of GST have been challenging. The impact of the micro and macro-sectors (crucial for GDP growth and employment) hauled the merchant banking activities in India.

Who is a Merchant Banker?

According to Section 2, clause (cb) of the Securities and Exchange Board of India Regulations, 1992, a merchant banker is defined as “anyone engaged in the field of managing issues, either creating arrangements for the purchase, sale, or subscription to securities, or acting as a consultant, manager, or by providing corporate advisory services related to issue management.” To conduct merchant banking activities, securing merchant banker registration is crucial.

Categories of Merchant Bankers in India

Merchant Bankers are divided into four categories depending on the nature of their work and capital requirements. They are divided into:

Category I Merchant Bankers

  1. Merchant Bankers act as managers, advisors, consultants, underwriters and portfolio administrators.
  2. They handle issue management tasks such as prospectus creation, developing financial structure, and acquiring financiers.
  3. They make final allocations with the minimum net worth requirement of INR 5 Crores.  

Category II Merchant Bankers

  1. These Merchant Bankers act as advisors, consultants, underwriters, and/or co-managers.
  2. Sometimes, they also work as portfolio managers.
  3. They work with a minimum net worth requirement of INR 50 Lakhs.

Category III Merchant Bankers

  1. These merchant bankers serve as advisors, underwriters and consultants.
  2. They, however, can’t manage issues independently.
  3. They can’t serve as co-managers independently.
  4. They can’t perform the tasks allocated under portfolio management.
  5. They work with a minimum net worth requirement of INR 20 Lakhs.

Category IV Merchant Bankers

  1. These merchant bankers can only act as advisors or consultants.
  2. However, they can work without any minimum net worth requirement.

Benefits of Merchant Banker License in India

A merchant banker license empowers an individual and an entity to operate as a merchant banker, which in turn comes with its own set of benefits, including:

  1. Capital Markets Accessibility- Merchant bankers can help companies raise capital through underwriting and managing public issues. They also ensure that companies have smooth access to capital markets.
  2. Advisory Services – Merchant bankers with authorised licenses offer expert advice on mergers, acquisitions, and corporate restructuring, helping companies make strategic decisions.
  3. Portfolio Management – Licensed merchant bankers provide professional portfolio management services that help companies boost returns on their investments.
  4. Regulatory Compliance- Merchant bankers help their clients meet all regulatory compliance requirements, which in turn minimizes legal risks and avoids penalties.
  5. Boosts Credibility- Merchant bankers with an authorised license from SEBI boost their credibility, which invites not only more clients but also business opportunities.
  6. Market Insights – Merchant bankers have easy access to important data and market insights. This data helps clients make informed investment-related decisions.
  7. Diversified Services – They can offer a wide range of financial services, including underwriting, advisory, and portfolio management, providing comprehensive financial solutions.
  8. Revenue Generation – Licensed merchant bankers are entitled to charge fees for their services that open another revenue generation channel, creating an alternate revenue stream.
  9. Wide Network– Licensed merchant bankers work with various clients across different industry lines, from corporations to high-net-worth individuals. Their wide client interaction helps them expand their client portfolio as well as their professional network.
  10. Economic Contribution – The facilitation of capital formation and through financial advisory services, merchant bankers play a vital role in the overall economic growth.

 

What are the Basic Requirements for Merchant Bankers?

It is important for a licensed merchant banker to adhere to regulatory compliance, including satisfying SEBI requirements. These include the following:

  1. In accordance with RBI Section 45I (c), commercial banking institutions should restrict their activities and must not be involved in any other financial transaction.
  1. The minimum capital adequacy requirement of a merchant banker is at least 5 crores.
  1. Merchant banking companies are prohibited from holding deposits from public banks.
  1. In line with the RBI Act, there must be a clear distinction between a banking company and a non-banking financial company. While a banking company is a legal entity, it is different from a non-banking financial company.
  1. Merchant Banking companies are prohibited from engaging in any activities that are not related to the markets for securities.
  1. All Merchant Banking companies are required to have a minimum of two employees. These employees are required to have previously served in a similar industry or have relevant business experience.
  1. It is mandatory for merchant bankers to maintain a clean legal image. Such companies should not carry the burden of any economic offences in their portfolio, nor should they have been found guilty of any economic offence.

Documents Required for Merchant Banker License

Applicants applying for merchant banker license in India must submit the following documents to be eligible to receive the registration:

  •  Memorandum of Association
  • Article of Association
  • Unique Identification Number (UIN) of the applicant
  • Educational Information of the Directors/Promoters/Shareholders
  • Signed declaration by at least two directors
  • Financial statements of the applicants
  • Detailed report from principal bankers
  • Details on important and key people
  • Details on internal organisational structure
  •  Details on infrastructure facilities
  • Financial account details
  • Details of other registered intermediaries
  • Any other details (if any)

Process for Obtaining Merchant Banker License

The process to apply for a merchant banker license includes the following steps:

  • Filing an application for grant of the certificate via Form A
  • Submission of required documents
  • Payment of application fees
  • Consideration of application
  • Verification of submitted documents
  • Application review by SEBI
  • Approval/Notification by SEBI on the status of the application
  • Post approval compliance
  • Issuance of certificate by SEBI

Services Provided by Licensed Merchant Bankers

Merchant bankers play a key role in the financial ecosystem. Licensed merchant bankers offer a variety of services, including:

  • Issue management
  • Project Counselling
  • Equity offerings
  • Debt management
  • Underwriting of public issues
  • Portfolio management
  • Restructuring strategies
  • Offshore finance
  • Non-resident investment
  • Loan syndication
  • Corporate aids
  • Pre-investment studies
  • Capital financing and investments
  • Lease sponsoring

Prominent Merchant Bankers in India

Let us take a look at some of the prominent Merchant Bankers operating in Public and Private Sectors across India:

S. No

Public Sector

Private Sector

1.

SBI Capital Markets ltd

Bajaj Capital

2.

Karur Vysya bank Ltd

ICICI Securities

3.

IFCI Financial Services

Tata Capital Markets

4.

State Bank of Bikaner and Jaipur

Reliance Securities

5.

Punjab National bank

Kotak Mahindra Capital Company

6.

Bank of Maharashtra

Axis Bank

7.

 

Yes Bank

 

Registration Fees for Merchant Banker License in India

In accordance with the latest guidelines, the fee structure for obtaining a Merchant Banker license is divided into three parts and is given below:

  1. Application Fees

Amount - INR 50,000

The application fee is a non-refundable fee, which is to be paid at the time of submitting the application for the Merchant Banker license.

  1. Registration Fee

Amount - INR 20 Lakhs

The registration fee is to be paid at the time of the approval of the application when the license is granted to the applicant. The timeline to clear this fee payment is 15 days from the time of receiving the intimation from SEBI. The validity of a merchant banker's license is five years.

  1. Renewal Fee

Amount – INR 9 Lakh

Renewal fees comprise the fees to be paid at the time of the renewal of the merchant banker’s license. The validity of the renewed merchant banker license is three years, after which it must be renewed.

Timeline to Obtain Merchant Banker License in India

The process of obtaining a merchant banker license in India is lengthy. It takes anywhere between 3 to 6 months (from the date of filing the application to the Securities and Exchange Board of India) to receive the (SEBI) license. This timeline, however, varies depending on various factors, including the submission of the application, the time taken to review the application by SEBI officials, and any other variable factors such as demanding additional information, clarifications, or documents.

The verification process is lengthy because it takes time to scrutinize and validate the information and details submitted by the applicants.

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Frequently Asked Questions

According to Section 2, clause (cb) of the Securities and Exchange Board of India Regulations, 1992, a merchant banker is defined as “anyone engaged in the field of managing issues, either creating arrangements for the purchase, sale, or subscription to securities, or acting as a consultant, manager, or by providing corporate advisory services related to issue management.”

In the financial industry, merchant bankers play a critical and strategic role in helping companies raise capital and steer past financial complexities. The authorisation for a merchant banker license is issued by authorities like the Securities and Exchange Board of India (SEBI) in India.

The financial services offered by a licensed merchant banker include underwriting new issues of securities, advisory services for mergers and acquisitions, portfolio management, and corporate restructuring.

Securities and Exchange Board of India, known as SEBI, is the governing body that conducts commercial banking in India. However, any individual or a business entity looking to apply for merchant bankers license must also approach SEBI since it regulates and governing the working of commercial banking system in the country. SEBI is the alternate body apart from the Reserve Bank of India that governs the banking system.

The applicants must pay - INR 50, 000 as application fees, INR 20 Lakh as registration fees and INR 9 Lakh as renewal fees.

The capital requirements for Merchant Bankers:

  • Category 1 – Net worth requirement of INR 5 Crores
  • Category 2 – Net worth requirement of INR 50 Lakhs
  • Category 3 – Net worth requirement of INR 20 Lakhs
  • Category 4 – No net worth requirement is needed

Merchant Bankers have two certificates - A certificate of registration for a Temporary Period and a Permanent Registration Certificate.

Merchant bankers are private entities, not public.

The largest merchant banker in India is Kotak Mahindra Capital.

Yes, foreign entities are eligible to apply for merchant banker license in India.

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