Obligations and responsibilities of Merchant Banks

Code of conduct: Every merchant banker has to abide by the code of conduct as specified below:

A merchant banker in the conduct of his business has to observe high standards of integrity and fairness in all his dealings with his clients and other merchant bankers.

He ought to render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He has to, wherever necessary, disclose to the clients, possible sources of conflict of duties and interest, while providing services.

He cannot make any statement or become privy to any act, practice unfair competition, which is likely to be harmful to the interest of other merchant bankers or is likely to place such other merchant bankers in a disadvantageous position in relation to him, while competing for or executing any assignments.

He should not make any exaggerated statement, whether oral or written, to the client either about his qualification or his capability to render certain services or his achievements in regard to services rendered to other clients.

A merchant banker has always to endeavor to (1) render the best possible advice to the clients having regard to the clients’ needs and the requirements and his own professional skill; and (2) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner.

He should not (1) divulge to other clients, press or any other party any confidential information about his client which has come to his knowledge; and (2) deal in securities of any client company without making disclosure to the SEBI as required under the regulations and also the board of directors of the client company.

He should endeavor to ensure that (1) the investors are provided with true and adequate information without making any misguided or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them: (2) copies of prospectus, memorandum and related literature are made available to the investors; (3) adequate steps are taken for the fair allotment of share application and transfers, listing of securities arrangement of underwriting/sub-underwriting, placing of issues, selection of brokers, bankers to the issue, publicity and advertising agents, printers, etc. In view of the overwhelming importance of merchant bankers in the process of capital issues, it is now mandatory that all public issues should be managed by merchant banker(s) functioning as the lead manager(s). In the case of right issues not exceeding Rs 50 lakh, such appointments may not be necessary. The salient features of the SEBI framework of their operations are summarized in this article.


Compulsory Registration: Merchant bankers are compulsory registered with the SEBI to carry out their activities. They fall in four categories. Category I merchant bankers carry on any activity relating to issue management, i.e. preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment of securities and refund of the subscription. They can also act as advisor, consultant, manager, underwriter or portfolio manager. Category II merchant bankers can act as advisor, consultant co-manager, underwriter, portfolio manager. Category III merchant bankers can act as an underwriter, advisor and consultant to an issue. Thus, only Category I merchant bankers can act as lead managers to an issue.

Capital Adequacy Requirement: A merchant banker is granted recognition by the SEBI in different categories on the basis of capital adequacy norms in terms of its net worth comprising of paid-up capital and free reserves. The minimum net worth requirements for each category is: Rs 5 crore (Category I), Rs 0.5 crore (Category II), Rs 0.2 crore (Category III) and for Category IV nil.

Apart from minimum capital requirement, the merchant bankers are expected to have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge their activities. They should employ at least two persons with experience to conduct merchant banking business; they should not be involved in any litigation connected with the securities market, have professional qualification in finance, law or business management and, finally their registration is in the interest of the investors.