Part 5: SEBI Registration Requirements & Key Provisions of the Companies Act, 2013

This part outlines the statutory registration process, capital rules, and eligibility standards that govern merchant bankers under the Securities and Exchange Board of India (SEBI). It also reviews the overlap between securities regulation and corporate law via the Companies Act, 2013.

1. SEBI Registration Framework for Merchant Bankers

Under the SEBI (Merchant Bankers) Regulations, 1992, any entity desiring to operate as a merchant banker must obtain a valid certificate of registration from SEBI.

A. Entity Eligibility and NBFC Restriction

• Corporate Form Required: Only a body corporate is permitted to register and carry out activities relating to merchant banking.
• NBFC Exclusion: A Non-Banking Financial Company (NBFC) is explicitly prohibited from undertaking merchant banking activities.
• Permitted Activities: Registered corporate entities can manage public issues, underwrite offerings, advise on international debt/equity instruments (e.g., GDRs, ADRs, FCCBs), structure private placements, offer corporate advisory services (such as mergers, takeovers, and buybacks), handle project advisory services, and manage domestic loan syndication.

B. Category Specification & Issue Management

While applications can be submitted for registration, SEBI mandates that:

• Any application for issue management must be made exclusively for Category I Merchant Banker status.
• Category I Role: Under this category, the merchant banker is authorised to carry out any activity of issue management. This includes preparing the prospectus, structuring financial frameworks, coordinating with financiers, and finalizing the allotment and refund of subscriptions. They are also authorised to act as an adviser, consultant, manager, underwriter, or portfolio manager.

2. Capital Adequacy & Fee Structure

Financial stability and capital commitments are heavily scrutinized by the regulator during the application and maintenance phase.

Capital Adequacy Requirement

• Net Worth Base: According to Regulation 7 of the SEBI MB Regulations, an applicant must maintain a minimum net worth of not less than Rs. 5 crore.
• Fit and Proper Criteria: Beyond financial capital, the applicant must satisfy the "Criteria for fit and proper person" outlined in the SEBI (Intermediaries) Regulations, 2008.
• Clarification Powers: SEBI reserves the right to ask the applicant for further information or clarification, and may require the principal officer of the applicant to appear in person for representation.

Registration Fees and Validity

• Application Fee: A non-refundable fee of Rs. 50,000 must accompany the initial application.
• Registration Fee: Upon receiving registration clearance, the merchant banker must pay an initial registration fee of Rs. 20 lakh.
• Maintenance Fee: To keep the registration in force, the merchant banker is required to pay a recurring fee of Rs. 9 lakh every three years starting from the sixth year of registration.

3. Key Provisions of the Companies Act, 2013

Merchant bankers must coordinate their capital market operations with corporate law. The Ministry of Corporate Affairs (MCA), through the Registrar of Companies (RoC), administers the Companies Act, 2013. However, the law provides for a unique regulatory overlap where SEBI administers specific corporate regulations.

A. SEBI’s Administrative Power (Section 24)

• Section 24 of the Companies Act, 2013, delegates specific powers to SEBI to administer provisions related to the issue and transfer of securities, as well as non-payment of dividends, specifically for listed public companies or companies intending to go public.

B. Chapter III: Prospectus & Allotment of Securities

This chapter forms the core operating space for issue management and is divided into two distinct parts:

• Part I (Public Offer): Details the procedural laws for offering securities to the public.
• Part II (Private Placement): Governs the non-public offering of securities to selected institutional or private investors.
• Section 23: Provides the enabling framework, stating that both public and private companies may issue securities.

C. The Deemed Prospectus & Publication Rules

• Deemed Prospectus (Section 25): Identifies specific corporate allotment documents that are legally deemed to be a prospectus, ensuring they are subject to standard disclosure liabilities.
• Prospectus Disclosures (Section 26): Requires every prospectus to be dated. This date is treated as the official date of publication. The section also details the exact disclosures, financial statements, and reports that must be integrated into the offer document before registration.
• Abridged Prospectus (Section 33): Defines an abridged prospectus as a summary memorandum containing salient features of a prospectus as specified by SEBI. Section 33 mandates that no share application form can be distributed to an investor unless it is accompanied by this abridged prospectus, except under specific exempted circumstances.
• Statutory Penalties: Defaulters or those who fail to comply with prospectus regulations face severe civil and criminal penalties under Sections 36 to 38 of the Act.

4. Key Takeaways and Exam-Relevant Terms

• Rs. 5 Crore: The mandatory minimum capital adequacy (net worth) requirement for a SEBI-registered merchant banker.
• Category I Merchant Banker: The only registration category permitted to act as the lead manager in public issue management.
• Section 24 (Companies Act): The statutory bridge that empowers SEBI to administer corporate rules for public and listing-bound entities.
• Section 33 (Abridged Prospectus): The statutory mandate requiring a summary prospectus to accompany every corporate security application form.
• Intermediaries Regulations, 2008: The regulatory standard used to assess the "fit and proper" credentials of applicants.