A merchant banker who fails to comply with any conditions subject to which certificate for registration has been granted by the SEBI, and/or contravenes any of the provisions of the SEBI Act, rules or regulation, is liable to any of the two penalties (1) suspension of registration or (2) cancellation of registration.
Suspension of Registration: A penalty of suspension of registration of a merchant banker may be imposed where the merchant banker:
i) Violates the provisions of the SEBI Act, rules or regulations
ii) (a) fails to furnish any information relating to his activity as merchant banker as required by the SEBI; (b) furnishes wrong or false information; (c) does not submit periodical returns by the SEBI; and (d) dos not cooperate in any enquiry conducted by the SEBI;
iii) Fails to resolve the complaints of the investors or fails to give a satisfactory reply to the SEBI in this behalf:
iv) Indulges in manipulating or price rigging or cornering activities.
v) Is guilty of misconduct or improper or un-business like or unprofessional conduct which is not in accordance with the code of conduct under the regulations;
vi) Fails to maintain the capital adequacy requirement in accordance with the provisions of the regulation;
vii) Fails to pay the fees;
viii) Violates the conditions of registration; and
ix) Does not carry out his obligations as specified in the regulations.
Cancellation of Registration: A penalty of cancellation of registration of a merchant banker may be imposed where
i) The merchant banker indulges in deliberate manipulation or price rigging or cornering activities affecting the securities market and the investors’ interest;
ii) The financial position of the merchant banker deteriorates to such and extent that the SEBI is of the opinion that his continuance as merchant banker is not in the interest of investors;
iii) The merchant banker is guilty of fraud, or is convicted of a criminal offence;
iv) In case of repeated defaults of the nature leading to suspension of registration provided that the SEBI furnishes reasons for cancellations in writing.
On and from the date of suspension and cancellation of registration of the merchant banker, he ceases to carry on any activity as a merchant banker. The order of suspension of cancellation of certificate is published in at least two daily news paper by the SEBI.
Default of Merchant Bankers and Penalty Points:
The SEBI imposes penalties for non compliance of conditions for registration and contravention of the regulations on the basis of which registration is suspended/ cancelled. The defaults are categorized into (1) general, (2) minor (3) major and (4) serious.
General Defaults: For the purpose of penalty points, the following activities are classified under general defaults and attract one penal point:
a) Non-receipt of draft prospectus/letter of offer from the lead manager by the SEBI, before filing with registrar of companies /stock exchanges.
b) Non receipt of inter se allocation of responsibilities of lead mangers in an issue by the SEBI prior to the opening of the issue.
c) Non receipt of due diligence certificate in prescribed manner by the SEBI, before opening of the issue.
d) Failure to ensure submission of certificate of minimum 90 percent subscription to the issue.
e) Failure to ensure expediting of dispatch of refund orders, shares/debentures certificates, filing of listing application by the issuer.
Minor Defaults: The following activities are categorized under minor defaults and attract two penalty points:
a) Advertisement, circular, brochure, press release and other issue related materials not being in conformity with contents of the prospectus.
b) Exaggerated information or information extraneous to the prospectus is given by the issuer or associated merchant banker in any press conference, investor conference, brokers, conference or other such conference/meet prior to the issue for marketing of the issue arranged/ participated by the merchant banker.
c) Failure to substantiate matters contained in highlights to the issue in the prospectus.
d) Violation of regulations relating to advertisement on capital issues.
e) Failure to exercise due diligence in verifying contents of prospectus/letter of offer.
f) Failure to provide adequate and fair disclosure to investors and objectives information about risk factors in the prospectus and other issue literature.
g) Delay in refund / allotment of securities
h) Non-handling of investor grievances promptly.
Major Defaults: The following activities are categorized under major defaults and attract three penalty points:
a) Mandatory underwriting not taken up by the lead managers
b) Excess number of lead managers than is permissible.
c) Association of unauthorized merchant bankers in an issue.
Serious Defaults: The following activities are categorized under serious defaults and attract four points:
a) Unethical practice by merchant banker and/or violation of code of conduct
b) Non-cooperation with the SEBI in furnishing desired information, documents, evidence as may be called for.