Key Insights into SEBI (Merchant Bankers) (Amendment) Regulations, 2024
Introduction:
The Securities and Exchange Board of India, established in the year 1992, is the primary regulatory agency for India’s securities market. Its broad objectives include ensuring the interests of investors, protecting fair market practices, and promoting order in the capital market. Under its regulatory ambit falls the domain of regulating all stock exchanges, mutual funds, portfolio managers, as well as other market intermediaries, creating transparency and accountability for the stakeholders in the financial landscape. It is vested with the authority to formulate regulations, issue guidelines, and enforce compliance to prevent fraudulent practices and ensure market integrity.
Merchant bankers play a critical role in financial markets as they serve as intermediaries between the issuers of securities and investors. They help companies issue securities to the public and assist in mergers and acquisitions. They also guide in compliance with regulatory requirements. They are essential for the smooth performance of transactions in line with regulatory requirements.
The 2024 amendment to SEBI regulations key updates includes revised definitions for clarity, stricter compliance requirements for disclosures and reporting, and increased accountability for lead managers in securities issues. Additionally, the amendments establish updated eligibility criteria for individuals involved in merchant banking, ensuring higher professional standards. Enhanced regulatory oversight is also emphasized, with provisions for audits and inspections to ensure adherence to the regulations. These changes reflect SEBI’s commitment to investor protection and maintaining market integrity.
Table of Contents
History of Merchant Banking & SEBI regulation:
The origin of merchant banking in India traces back to the early 1960s, when the Indian economy demanded more sophisticated advisory services from the financial services sector. Formal merchant banking activities initiated with the establishment of the IFCI in 1948. Initially, its activities were limited to developmental and financial institutions. This landscape evolved with the introduction of the Industrial Credit and Investment Corporation of India (ICICI) in 1955 and the Industrial Development Bank of India (IDBI) in 1964, which expanded the scope of these services.
The 1970s saw a spurt of momentum with the entry of commercial and foreign banks into the scene, setting up specific merchant banking divisions. The establishment of the Securities and Exchange Board of India (SEBI) in 1988 marked a critical juncture, as this body imposed stringent guidelines for merchant bankers to ensure transparency and protect investors. The liberalization of the Indian economy during the early 1990s further hastened the development of merchant banking, opening the doors to a galaxy of private-sector players.
Key Amendments:
Revised Eligibility Criteria
The SEBI amendments to Regulation 6 intend to simplify the merchant banker certificate acquisition process. The amendment simplifies the language through the removal of redundant phrases, clarifies the relevance of considered activities, and gives flexibility in the process of evaluating. It strengthens professional standards by imposing more stringent qualifications on employees and eliminating unnecessary clauses. These amendments are brought to make the regulatory framework governing merchant bankers in India more effective and efficient.
Enhanced Operational Guidelines
Regulation 9A(1)(c) has been amended so that the liability of a merchant banker concerning redressal of grievances has been increased. This regulation requires all necessary steps by merchant bankers for redressing grievances on the part of clients. It further eliminates the obligation to notify the Board regarding the number, nature, and other particulars of complaints received.
Regulation 9A(1)(f) was also amended to obligate merchant bankers to inform the Board about the alteration of information submitted during the registration process within seven working days after the change; thereby ensuring the Board has updated information about registered merchant bankers.
Market Making Responsibilities
Regulation 13A was amended to clarify the market-making obligations of merchant bankers. The second proviso was changed to clearly require merchant bankers to ensure that market-making is undertaken under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. This amendment aims to strengthen the market making obligations of merchant bankers with better market liquidity.
Defined Roles of Lead Managers
Regulation 20 requires lead managers to have defined responsibilities, especially regarding disclosures, allotment, and refunds. These responsibilities are required to be allocated and determined, and a detailed statement outlining them is to be disclosed in both the draft offer document and the final offer document. This would be very important where the lead managers are more than one, because accountability will be guaranteed and transparency enhanced.
Unfair Dealings
Regulation 21A makes the conflict-of-interest provisions more stringent. It also restricts the leadership of the issue by merchant bankers, who are promoters or associates of the issuer. Furthermore, it clarifies when a common directorship between the issuer and the merchant banker would be permitted and not lead to conflict of interest or unfair dealing.
Underwriting Timeline
Regulation 22B prescribes the timeline in which merchant bankers have to complete their underwriting. It refers to subscribing to the securities before the closure of the basis of allotment. This ensures that the merchant bankers are committed to the issue and that their underwriting commitments were fulfilled on time.
Enhance Transparency
Regulation 27 amends reporting requirements for merchant bankers related to acquisition of securities of a body corporate whose issue they handle. Such acquisitions are required to be reported promptly, except acquisitions made under underwriting or market making obligations which may be reported quarterly. This amendment shall enhance transparency and oversight of the activities of merchant bankers.
Conclusion:
Today, merchant banks are playing an essential role in the financial map of India. They are offering a comprehensive range of services to address the sophisticated needs of modern businesses. They provide capital raising, mergers and acquisitions, and strategic advisory services that help the development and efficiency of financial markets. The shift from a limited institutional service to this dynamic sector depicts the adaptability and importance of merchant banking for supporting economic growth in India.
The recent amendments to the SEBI regulations have far-reaching consequences for several stakeholders. Merchant bankers will be required to adapt their new operation and compliance requirements, more specifically internal controls and risk management systems, in the process. Investors can expect an improvement in transparency, accountability, and strong grievance redressal mechanisms. The financial market, at large, will benefit by increased trust, reduced asymmetry in information, and a levelled playing field. These amendments bring the Indian legislation at par with the world best practices to position Indian capital market as a sound and investor-friendly place.
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