Lead Manager – Capital Issues

The importance of merchant bankers as sponsors of capital issues is reflected in their major services/functions such as composition of the capital structure (type of securities to be issued), drafting of prospectus and application forms, compliance with procedural formalities, appointment of registrars to deal with the share application and transfers, listing of securities arrangements of underwriting/sub-writing, 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 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 compulsorily 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 manger. 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 Requirements: 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 requirement for each category is: Rs 5 crore (Category I), Rs 0.5 crore (Category II), Rs 0.2 ( Category III), and for category IV nil. To monitor the capital adequacy, the SEBI may require half yearly unaudited financial results of a merchant banker.

Apart from minimum capital requirements, 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 interests of the investors.

Fee: A merchant banker has to pay a fee, as detailed below, at time of original registration as well as renewal.

Registration Fee: (1) Category I merchant baker: Rs 2.5 lakh annually for the first two years and Rs 1 lakh for third year, (2) Category II merchant banker: Rs 1.50 lakh annually for the first two years and Rs 50,000 for the third year; (3) category III merchant banker ; Rs 1 lakh annually of the first two years and Rs 25,000 for the third year and (4) Category IV merchant Banker: Rs 5,000 annually for the two years and Rs 1,000 for the third year.

Renewal fee: Original registration of merchant bankers is for three years and it can be renewed for further periods of three years each. The schedule of renewal fees is detailed below:

Category First two years Third years

I Rs 100,000 Rs 20,000
II 75,000 10,000
III 50,000 5,000
IV 5,000 2,000

If a merchant banker fails to pay the annual fees, his registration may be suspended by the SEBI.

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