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Unit 3: Primary Market and Secondary Market

(Merchant Bankers) Regulation Act, 1992, “a merchant banker is a person who is engaged in the Notes
business of issue management either by making arrangements regarding selling, buying or
subscribing to securities or acting as manager, consultant, advisor or rendering corporate advisory
service in relation to such ‘issue management’.”
The SEBI has classified ‘merchant bankers’ into four categories:

Category I Merchant Bankers: These merchant bankers can act as issue manager, advisor,
consultant, underwriter and portfolio manager.

Category II Merchant Bankers: These merchant bankers can act as advisor, consultant,
underwriter and portfolio manager. They cannot act as issue manager on their own but
can act as co-manager.

Category III Merchant Bankers: These bankers can act as advisor, consultant and
underwriter only. They can neither undertake issue management business on their own
nor act as co-manager.
Category IV Merchant Bankers: These bankers can merely act as consultant or advisor to
an issue of capital.

As per the SEBI guidelines introduced on September 5, 1997, all the merchant bankers below the
Category I would stand abolished. The guidelines obligated the merchant bankers functioning
below the Category I to upgrade themselves to Category I. Accordingly, the merchant bankers,
presently engaged in underwriting, portfolio management, besides issue management, would
have to get separate registration as portfolio managers, while underwriting business could be
carried on without additional registration.

Tasks and Responsibilities of Merchant Bankers

The SEBI has laid down the following guidelines regarding duties and obligations of the merchant
bankers:
Merchant bankers shall have to be compulsorily registered with the SEBI. The following
conditions have to be fulfilled for registration by the SEBI:

Merchant bankers must have a minimum net worth of ` 5 crore. Those acting only as
portfolio managers must have a net worth of ` 50 lakh. Those acting only as
underwriters must have a net worth of ` 20 lakh.
Merchant bankers should have adequate and necessary infrastructure for effective
performance of their activities.

Merchant bankers should have expertise in the areas of finance, law and management
and are not involved in any litigation relating to the securities market.

Every merchant banker shall pay a sum of ` 5 lakh as registration fees within 15 days
of receipt of intimation from the SEBI.
The merchant banker shall enter into agreement with the issuing company, spelling out
their mutual rights, obligations and liabilities pertaining to the issue. A copy of the
agreement is to be submitted to the SEBI at least one month before opening of the issue for
subscription.
The merchant banker will have to undertake a minimum underwriting obligation of 5%
of total underwriting commitment or ` 25 lakh; whichever is less, on his own or through
its associate.

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