SEBI Merchant Bankers Regulations: Code of Conduct, General Obligations, and Grievance Redressal (Chapter III – Part 2)
Following the registration and eligibility phases covered in Part 1, registered merchant bankers in India must comply with strict operational boundaries, ethical guidelines, and reporting obligations. Under the regulatory oversight of the Securities and Exchange Board of India (SEBI), these standards ensure market integrity, protect investor interests, and maintain high professional standards.
This study guide covers Part 2 of Chapter III, detailing the Code of Conduct, general obligations, regulatory restrictions on business, lead manager responsibilities, and the SEBI Complaints Redress System (SCORES) framework.
1. Code of Conduct for Merchant Bankers
Under Regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992, every registered merchant banker must strictly adhere to the Code of Conduct specified in Schedule III. Since the merchant banking business is entirely driven by corporate clients and investors, maintaining public confidence is crucial.
Core Pillars of the Code of Conduct
| Principle | Key Requirements |
|---|---|
| Integrity & Ethics | Maintain high standards of honesty, integrity, ethics, and professional judgment in all activities. |
| Proper Supervision | Properly supervise employees and agents, especially those who have frequent contact with investors. |
| Investor Protection | Keep investor interests paramount and ensure that investor grievances are addressed promptly. |
Key Ethical Responsibilities
- High Integrity and Honesty: Merchant bankers must maintain the highest standards of integrity, professional conduct, ethical behavior, and independent professional judgment in all dealings.
- Supervision of Employees: Intermediaries must ensure proper and diligent supervision of their employees and operational agents, as they frequently interact with clients and the public.
- Investor-Centric Operations: The interests of the investors must be kept paramount at all times. Merchant bankers are required to resolve investor grievances immediately and keep SEBI continuously informed of the status.
2. General Obligations and Permissible Scope of Business
SEBI imposes clear limits on the types of business activities a registered merchant banker can perform to avoid conflicts of interest and maintain financial focus.
The Exclusivity Rule
- Securities Market Exclusivity: No registered merchant banker—other than a Bank or a Public Financial Institution—is allowed to carry on any business other than activities within the securities market. This prevents registered intermediaries from mixing high-risk commercial operations with fiduciary market obligations.
Financial Monitoring & Account Maintenance
The financial solvency and stability of a merchant banker are vital to market operations. To monitor their ongoing financial health, SEBI mandates:
- Maintenance of Books of Accounts: Under Regulation 14, merchant bankers must systematically maintain records, books of accounts, and physical or digital documents to prove their ongoing financial stability.
- Submission of Half-Yearly Results: Under Regulation 15, merchant bankers are required to submit their unaudited half-yearly financial results to SEBI whenever directed, allowing the regulator to continuously track their capital adequacy and financial solvency.
3. Lead Manager Responsibilities & Operational Restrictions
Lead managers are the central coordinators of public issues and carry a heavy burden of responsibility toward issuers, investors, and regulatory bodies.
Crucial Lead Manager Mandates
- Lead Functions: They are primarily responsible for the pricing, financing, and final distribution of the securities being offered.
- Unregistered Intermediary Ban (Regulation 21): To preserve market standards, a registered merchant banker shall not act as a lead manager in any issue if any unregistered merchant banker (one who does not hold a valid SEBI registration certificate) is associated with the issue.
- Mandatory Compliance Officer: Every merchant banker must appoint a dedicated Compliance Officer. This officer is responsible for:
- Addressing and monitoring investor grievances.
- Ensuring internal compliance with SEBI rules, regulations, and the statutory Code of Conduct.
Underwriting Commitments
In primary public offerings, underwriting acts as a safety net to ensure that the issuer receives the required funds.
| Requirement | Limit |
|---|---|
| Lead Underwriting Commitment | Lesser of 5% of the total underwriting commitment OR ₹25 Lakh |
| Applicable Amount | The lower of the two limits is considered |
- Regulation 22 Obligation: For every issue managed, the lead manager is legally obligated to accept a minimum underwriting obligation of 5% of the total underwriting commitment, or Rs. 25 lakh, whichever is lesser.
4. Insider Restrictions and Reporting Requirements
Because merchant bankers are privy to highly sensitive, non-public operational and financial data of their corporate clients, SEBI enforces strict anti-profiteering measures.
Prohibition on Share Acquisitions
- Inside Information Ban: Merchant bankers are strictly prohibited from acquiring the shares of any client company on the basis of sensitive, unpublished price-sensitive information (UPSI).
- Transaction Reporting to SEBI: To maintain absolute transparency, if a merchant banker acquires shares of any body corporate whose issue is currently being managed by that merchant banker, complete particulars of the transaction must be submitted to SEBI within fifteen days of entering into the transaction.
5. Redressal of Investor Grievances and the SCORES System
SEBI handles complaints arising from violations of the SEBI Act, the Securities Contracts (Regulation) Act (SCRA), the Depositories Act, and specific provisions of the Companies Act, 2013.
The SCORES Infrastructure
For streamlined resolution, SEBI uses an online centralized portal called SCORES (SEBI Complaints Redress System).
| Step | Action and Compliance Timeline |
|---|---|
| 1. Access Credentials | Every registered merchant banker is provided with a unique User ID and Password by SEBI to access the SCORES portal. |
| 2. Daily Monitoring | The merchant banker is legally expected to log in to the SCORES website on a daily basis to check for newly uploaded investor complaints. |
| 3. Immediate Resolution | The intermediary must immediately initiate steps to resolve any pending investor grievances at the earliest. |
| 4. Action Taken Report (ATR) | For every complaint processed, the merchant banker must submit a formal Action Taken Report (ATR) on the platform, detailing the resolution. |
6. Statutory Penalties for Intermediary Defaults
Under the SEBI Act, 1992, SEBI is empowered to initiate adjudication proceedings and levy heavy monetary penalties against intermediaries who fail to comply with their regulatory duties.
- Section 15A (Reporting Defaults): Prescribes penalties for failing to submit documents, reports, returns, or information to SEBI, or failing to maintain books of accounts or statutory records.
- Section 15B (Agreement Defaults): Prescribes penalties for failing to enter into formal tri-partite or bi-partite agreements with clients.
- Section 15C (Grievance Redressal Defaults): Prescribes penalties for failing to redress investor grievances after being directed by SEBI in writing to do so within a specified timeframe.
- Section 15G (Insider Trading): Prescribes strict penalties for entities indulging in insider trading or leaking price-sensitive data.
- Section 15H (Disclosure Defaults): Applies penalties for failing to disclose substantial acquisitions of shares or takeover details.
- Section 15HA (Unfair Trade Practices): Applies penalties for indulging in fraudulent or unfair trade practices in the securities market.
- Section 15HB (General Default clause): A catch-all section prescribing penalties for any entity that fails to comply with any provision of the SEBI Act, rules, or directions where no specific penalty is defined elsewhere.
Key Terms & Concepts
- SCORES: An online electronic platform by SEBI that facilitates the centralized filing, tracking, and resolution of investor grievances by registered intermediaries.
- Action Taken Report (ATR): A mandatory report filed on SCORES by the intermediary detailing the steps taken to resolve an investor's complaint.
- Compliance Officer: A mandatory corporate officer appointed by the intermediary to ensure that all SEBI regulations, internal structures, and codes of conduct are strictly adhered to.
- Underwriting Commitment: A legal obligation under which an intermediary agrees to buy a specified portion of unsold securities if the public subscription fails to reach the target.
- Section 15C: The specific punitive section of the SEBI Act dealing with failure to redress investor grievances.
Key Takeaways
- Exclusivity Limits: Registered merchant bankers (excluding Banks/PFIs) cannot engage in any business outside of the securities market.
- Daily SCORES Checks: Merchant bankers must log in to the SCORES platform daily, resolve complaints, and file Action Taken Reports (ATRs).
- Strict Inside Information Controls: Intermediaries are banned from trading on sensitive client data and must report any client share acquisitions to SEBI within 15 days.
- Underwriting Obligations: Lead managers must assume a minimum underwriting obligation of 5% of the commitment or Rs. 25 lakh (whichever is lower) for every managed issue.
- Severe Non-Compliance Penalties: Statutory provisions (Sections 15A to 15HB) ensure heavy penalties for failure to maintain records, enter client agreements, or resolve investor complaints.