Merchant Banking

Contents
• SEBI guidelines for merchant bankers
• Issue Management-Equity Issue (Adani Power Limited)
• Pre and Post Issue Activities
Definition
According to SEBI Merchant Bankers Regulations 1992, Merchant
Banker means any person who is engaged in the business of
issue management either by making arrangements regarding
selling, buying or subscribing to securities or acting as manager,
consultant, adviser or rendering corporate advisory service in
relation to such issue management.
Registration of Merchant Bankers
An application by a person for grant of a certificate shall be made to
the Board for any one of the following categories of the merchant
banker namely:

Category I
1. To carry on any activity of the issue management, which will,
inter alia, consist of preparation of prospectus and other
information relating to the issue, determining financial structure,
tie up of financiers and final allotment and refund of the
subscriptions; and
2. To act as adviser, consultant, manager, underwriter, portfolio
manager
• Category II, that is to act as adviser, consultant, co-manager,
underwriter, portfolio manager

• Category III, that is to act as underwriter, adviser, consultant to

an issue

• Category IV, that is to act only as adviser or consultant to an issue.

**An applicant can carry on the activity as portfolio manager only if he

obtains separate certificate of registration under the provisions of
the Securities and Exchange Board of India (Portfolio Manager)
Regulations, 1993
Consideration of Application
The Board shall take into account for considering the grant of a
certificate, all matters which are relevant to the activities relating to
merchant banker and in particular the applicant complies with the
following requirements, namely :-

• The applicant shall be a body corporate other than a non-banking

financial company as defined under clause (f) of section 45-I of the
Reserve Bank of India Act, 1934.
• Provided that the merchant banker who has been granted
registration by the Reserve Bank of India to act as a primary or
satellite dealer may carry on such activity subject to the condition
that it shall not accept or hold public deposit.

• The applicant has the necessary infrastructure like adequate office

space, equipments, and manpower to effectively discharge his
activities

• The applicant has in his employment minimum of two persons who

have the experience to conduct the business of merchant banker.
• A person directly or indirectly connected with the applicant has not
been granted registration by the Board.

• The applicant fulfils the capital adequacy requirement

• The applicant, his partner, director or principal officer is not

involved in any litigation connected with the securities market
which has an adverse bearing on the business of the applicant
• The applicant, his director, partner or principal officer has not at
any time been convicted for any offence involving moral turpitude
or has been found guilty of any economic offence.

• The applicant has the professional qualification from an institution

recognised by the Government in finance, law or business
management;
Registration
• The Board, on being satisfied that the applicant is eligible, shall
grant a certificate.
• On the grant of a certificate the applicant shall be liable to pay the
fees in accordance with Schedule II

Renewal of certificate

• Three months before the expiry of the period of certificate, the

merchant banker may, if he so desires, make an application for
renewal shall be valid for a period of three years from the date of its
issue to the applicant.
Code of Conduct
• A merchant banker shall at all times exercise due diligence, ensure
proper care and exercise independent professional judgment to
protect interest of investors.

• A merchant banker shall ensure that adequate disclosures are made

to the investors in a timely manner in accordance with the
applicable regulations and guidelines so as to enable them to make a
balanced and informed decision.

• A merchant banker shall endeavour to ensure that the investors are

provided with true and adequate information without making any
misleading or exaggerated claims or any misrepresentation and are
made aware of the attendant risks before taking any investment
decision.
• A merchant banker shall endeavour to ensure that copies of the
prospectus, offer document, letter of offer or any other related
literature is made available to the investors at the time of issue or
the offer.

• A merchant banker shall not discriminate amongst its clients, save

and except on ethical and commercial considerations.

• A merchant banker shall not make any statement, either oral or

written, which would misrepresent the services that the merchant
banker is capable of performing for any client or has rendered to any
client.
• A merchant banker shall put in place a mechanism to resolve any
conflict of interest situation that may arise in the conduct of its
business or where any conflict of interest arises, shall take reasonable
steps to resolve the same in an equitable manner.

• A merchant banker shall ensure that any change in registration

status/any penal action taken by the Board or any material change in
the merchant banker’s financial status, which may adversely affect the
interests of clients/investors is promptly informed to the clients and
any business remaining outstanding is transferred to another
registered intermediary in accordance with any instructions of the
affected clients.

• A merchant banker shall ensure that the senior management,

particularly decision makers have access to all relevant information
about the business on a timely basis.
• A merchant banker shall ensure that any change in registration
status/any penal action taken by the Board or any material change
in the merchant banker’s financial status, which may adversely
affect the interests of clients/investors is promptly informed to the
clients and any business remaining outstanding is transferred to
another registered intermediary in accordance with any instructions
of the affected clients.

• A merchant banker shall have internal control procedures and

financial and operational capabilities which can be reasonably
expected to protect its operations, its clients, investors and other
registered entities from financial loss arising from theft, fraud, and
other dishonest acts, professional misconduct or omissions.

• A merchant banker shall provide adequate freedom and powers to

its compliance officer for the effective discharge of the compliance
officer’s duties
• A merchant banker shall ensure that the Board is promptly
informed about any action, legal proceedings, etc., initiated against
it in respect of material breach or non-compliance by it, of any law,
rules, regulations, directions of the Board or of any other regulatory
body.

• A merchant banker or any of its employees shall not render,

directly or indirectly, any investment advice about any security in
any publicly accessible media, whether real-time or non-real-time,
unless a disclosure of his interest including a long or short position,
in the said security has been made, while rendering such advice.

• A merchant banker shall ensure that any person it employs or

appoints to conduct business is fit and proper and otherwise
qualified to act in the capacity so employed or appointed (including
having relevant professional training or experience).
• A merchant banker shall be responsible for the Acts or omissions of
its employees and agents in respect of the conduct of its business.

• A merchant banker shall not divulge to anybody either orally or in

writing, directly or indirectly, any confidential information about its
clients which has come to its knowledge, without taking prior
permission of its clients, except where such disclosures are required
to be made in compliance with any law for the time being in force.

• A merchant banker shall not be a party to or instrument for-

a) Creation of false market
b) Price rigging or manipulation
Issue Management-Equity Issue

ADANI POWER LIMITED

Adani Power Limited
• The company was incorporated as Adani Power Limited on August
22,1996 as a Public Limited Company.
• The company became a Private limited company on June3,2002 and the
name was changed to Adani Power Private Limited.
• The company was again converted to Public limited company on April
12,2007 and a fresh certificate of incorporation was issued by Registrar of
Companies for the name which was again changed to Adani Power
Limited through a special resolution at the extra ordinary general meeting
on March 28,2007
Promoters
• Mr. Gautam S. Adani
• Mr. Rajesh S. Adani
• Adani Enterprises Limited which is a US $ 5 billion company based in Ahmedabad
with interests in -
 Global trading
 Development and operation of Ports
 Establishment of SEZ
 Oil refining
 Logistics
 Gas distribution
 Power Generation
 Power Transmission and Power Trading etc.
IPO Offer
• Public Issue of 301,652,031 Equity shares
• Face Value Rs.10 each
• Price band Rs.90 to Rs.100 per Equity Share
• Bid Quantity – Minimum 65 Equity Shares and in Multiples of Equity Shares
Thereafter.

• Employee Reservation Portion - 8,000,000 Equity Shares of Rs.10 each for eligible
employees.

• Net Issue = Total Issue – Employee Reservation

=301,652,031-8,000,000

=293,652,031 Equity Shares

Contd.
• The Issue will constitute 13.84% of the post issue Paid Up capital*.

• The Net Issue will constitute 13.47% of the post issue Paid Up capital*.

*The portion of authorized stock that the company has issued and received payment for.
Conditions
• In case of revision in Price Band the bidding period will be extended for 3

additional working days after revision of Price Band subject to the issue

period not exceeding 10 working days and this shall be widely

disseminated by notification to
 NSE

 BSE

 Issuing Press release

 Indicating the change on website of Global Co-coordinator and Book

Running lead Managers' (GCBRLM) and

 At the terminals of other members of the syndicate.

Contd.
 In terms of rule19(2)(b)of the Securities Contracts Regulation Acts
1957(SCRR)
• This being An issue of less than 25% of the Post Issue capital, the issue is
being made through the 100% Book Building Process wherein at least 60% of
the Net Issue shall be allocated on a proportionate basis to QIB Bidders.
• 5% of the QIB Portion shall be available for allocation on a proportionate basis
to Mutual Funds only and the remainder of the QIB Portion shall be available
for allocation on a proportionate basis to all QIB Bidders, including Mutual
Funds, subject to valid Bids being received at or above the Issue Price.
• The QIB portion includes Anchor Investor portion as per the SEBI Guidelines.
• If at least 60% of the Net Issue cannot be allocated to QIBs ,than the entire
application money will be refunded forth with.

Contd.
• Not less than 10% of the Net Issue shall be available for allocation on a
proportionate basis to Non Institutional Bidders and not less than 30% of
the Net Issue shall be available for allocation on a proportionate basis to
Retail Individual Bidders, Subject to valid Bids being received at or above
the Issue Price
• 8 million Equity Shares shall be available for allocation on a proportionate
basis to Eligible Employees, Subject to valid Bids being receives at or
above the Issue Price.
Listing
• The Equity Shares offered through the Red Herring Prospectus
are proposed to be listed on the NSE and the BSE.
• The company has received an ‘in principle’ approval from the
NSE and the BSE, for the listing of the Equity Shares pursuant
to letters dated May 29,2009 and May 18,2009, respectively.
• For the purpose of the Issue, the Designated Stock Exchange
shall be the BSE.
Disclaimer Clause of SEBI
• SEBI only gives its observations on the offer
documents and this doesn't constitute approval of
either the issue or the offer document.
Disclaimer Clause of BSE
• It is to be distinctly understood that the permission given by BSE
Limited should not be in anyway be deemed or construed that the
Red Herring Prospectus has been cleared or approved by BSE
Limited nor does it certify the correctness or completeness of any of
the contents of the Red Herring Prospectus. The investors are
advised to refer to the Red Herring Prospectus for the full text of the
Disclaimer clause of the BSE Limited. It is to be distinctly
understood that the permission given by BSE to use their network
and software of the Online IPO System should not be in any way be
deemed or constitute that the compliance with various statutory
approved by BSE; nor does it in any manner warrant, certify or
endorse the correctness or completeness of any of the compliance
with the statutory and other requirements nor does it take any
responsibility for the financial or other soundness of this Issuer, its
promoters, its management or any scheme or project of this Issuer.
Disclaimer Clause of NSE
• It is to be distinctly understood that the permission given by NSE Limited
should not be in anyway be deemed or construed that the offer document
has been cleared or approved by NSE Limited nor does it certify the
correctness or completeness of any of the contents of the offer document
.the investors are advised to refer to the offer document for the full text of
the Disclaimer clause of the NSE Limited. It is to be distinctly understood
that the permission given by NSE to use their network and software of the
Online IPO System should not be in any way be deemed or constitute that
the compliance with various statutory and other requirements by Adani
Power Limited ,BRLMs, etc. are cleared or approved by NSE; nor does it
in any manner warrant, certify or endorse the correctness or completeness
of any of the compliance with the statutory and other requirements nor
does it take any responsibility for the financial or other soundness of this
Issuer, its promoters, its management or any scheme or project of this
Issuer.
IPO Grading
• This issue has been graded by ICRA Limited as IPO Grade 3,
indicating average fundamentals through its letter dated July
2,2009.
Book Running Lead Managers
• DSP Merrrill Lynch Limited
• Enam Securities Private Limited
• IDFC-SSKI Limited
• Karvy Computer Share Private Limited
• JM Financial Consultant Private Limited
• Kotak Mahindra Capital Company Limited
• Morgan Stanley India Company Private Limited
• ICICI Securities Limited
• SBI Capital Markets Limited
Bankers to the issue and Escrow
Collection Banks*
• Axis Bank Limited
• Bank of America
• HDFC Bank Limited
• ICICI Bank Limited
• Kotak Mahindra Bank
• IDBI Bank Limited
• Punjab National Bank
• Standard Chartered Bank
• State Bank of India
• HongKong and Shanghai Banking Corporation Limited
• UCO Bank
• Yes Bank Limited
*Engaged in activities such as acceptance of applications along with application
money from investors in respect of issues of capital and refund of application
money
Application Supported by Blocked
Amount(ASBA)
• ASBA means “Application Supported by Blocked
Amount”.
• ASBA is an application containing an authorization to
block the application money in the bank account, for
subscribing to an issue.
• If an investor is applying through ASBA, his application
money shall be debited from the bank account only if
his/her application is selected for allotment after the basis
of allotment is finalized, or the issue is withdrawn/failed.
Conditions

• ASBA investors can apply for an amount can bid at

cutoff price with single option as to no. of equity
shares bid up to Rs.2,00,000.
• Investors shall apply through blocking of funds in a
bank account with Self certified Syndicate Bank.
• Investors should agree to not revise his/her bid.
• This mode of payment is not applicable to applicants
bidding under reserved categories.
Thank You
Issue
Issue means an offer of sale or purchase of securities by any body
corporate, or by any other person or group of persons on its or his or
their behalf, as the case may be, to or from the public, or the holders
of securities of such body corporate or person or group of persons
through a merchant banker.

BACK
Capital Adequacy Requirement
Category Minimum Amount
• Category I *[Rs. 5, 00, 00, 000]
• Category II Rs. 50, 00, 000
• Category III Rs. 20, 00, 000
• Category IV Nil

BACK
Schedule II
• Every merchant banker shall pay a sum of ten lakh rupees as
registration fees at the time of the grant of certificate by the Board.

• A merchant banker to keep registration in force shall pay renewal

fee of five lakh rupees every three years from the fourth year from
the date of initial registration.

• The non-refundable fee payable along with an application for

registration an application for renewal of registration shall be a
sum of twenty five thousand rupees.

BACK
Underwriting Obligation
• In respect of every issue to be managed, the lead merchant banker
holding a certificate under Category I shall accept a minimum
underwriting obligation of five per cent of the total underwriting
commitment or rupees twenty-five lacs, whichever is less

• Provided that, if the lead merchant banker is unable to accept the

minimum underwriting obligation, that lead merchant banker shall
make arrangement for having the issue underwritten to that extent
by a merchant banker associated with the issue and shall keep the
Board informed of such arrangement.

BACK
Appointment of Compliance Officer
• Every merchant banker shall appoint a compliance officer who shall
be responsible for monitoring the compliance of the Act, rules and
regulations, notifications, guidelines, instructions, etc., issued by
the Board or the Central Government and for redressal of investors’
grievances.

• The compliance officer shall immediately and independently report

to the Board any non-compliance observed by him and ensure that
the observations made or deficiencies pointed out by the Board
on/in the draft prospectus or the letter of offer as the case may be,
do not recur

BACK
ICRA
• ICRA’s Grading of Initial Public Offerings (IPOs) is a service
aimed at facilitating assessment of equity issues offered to the
public.
• An ICRA IPO Grade does not comment on the valuation or
pricing of the issue that has been Graded, nor does it seek to
indicate the likely returns to shareholders from subscribing to
the IPO. The emphasis of the IPO Grading exercise is on
evaluating the prospects of the industry in which the company
operates.
• ICRA’s five point IPO Grading Scale is as follows:
▫ IPO Grade 5   Strong fundamentals
IPO Grade 4   Above-average fundamentals
IPO Grade 3   Average fundamentals
IPO Grade 2   Below-average fundamentals
BACK
IPO Grade 1   Poor fundamentals
Advantages
(i) The investor need not pay the application money by cheque rather the
investor submits ASBA which accompanies an authorization to block the
bank account to the extent of the application money.

(ii) The investor does not have to bother about refunds, as in ASBA only that
much money to the extent required for allotment of securities, is taken from
the bank account only when his application is selected for allotment after the
basis of allotment is finalized.

(iii) The investor continues to earn interest on the application money as the
same remains in the bank account, which is not the case in other modes of
payment.

(iv) The application form is simpler.

(v) The investor deals with the known intermediary i.e. its own bank.

BACK
 Red Herring Prospectus
• "Red Herring Prospectus" is a prospectus which does not have details of
either price or number of shares being offered or the amount of issue.
• This means that in case the price is not disclosed, the number of shares and
the upper and lower price bands are disclosed. On the other hand, an issuer
can state the issue size and the number of shares are determined later.
• In the case of book-built issues, it is a process of price discovery and the
price cannot be determined until the bidding process is completed. Hence,
such details are not shown in the Red Herring prospectus filed with the
RoC in terms of the provisions of the Companies Act.
• Only on completion of the bidding process, the details of the final price are
included in the offer document. The offer document filed thereafter with
RoC is called a prospectus.
BACK
 Bidding period

• The period for which an issue is required to be kept open is:

For Fixed price public issues: 3‐10 working days
For Book built public issues: 3‐7 working days extendable by 3
days in case of a revision in the price band
For Rights issues: 15‐30 days.

BACK
 • Book Running Lead Manager
In case of book building process the lead merchant bankers appointed by
the Issuer Company are referred to as the Book Running Lead Managers
because they also helps determine the price band.

BACK
Qualified Institutional Buyers
• A purchaser of securities that is deemed financially sophisticated and is
legally recognized by security market regulators to need less protection
from issuers than most public investors. Typically, the qualifications for
this designation are based on an investor's total assets under management.

a) Public financial institution as defined in section 4A of the Companies Act, 1956;

b) Scheduled commercial banks;
c) Mutual funds
d) Foreign institutional investor registered with SEBI
e) Multilateral and bilateral development financial institutions
f) Venture capital funds registered with SEBI.
g) Foreign Venture capital investors registered with SEBI.
h) State Industrial Development Corporations.
i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
j) Provident Funds with minimum corpus of Rs.25 crore
k) Pension Funds with minimum corpus of Rs. 25 crore
BACK
 Retail Individual Investor (RII)
In retail individual investor category, investors can not apply for
more then Rs one lakh (Rs 2,00,000) in an IPO. Retail Individual
investors have an allocation of 35% of shares of the total issue size
in Book Build IPO's.
NRI's who apply with less then Rs 2,00,000 /- are also considered as
RII category.

Non Institutional Bidders

Individual investors, NRI's, companies, trusts etc who bid for more
then Rs 1 lakhs are known as Non-institutional bidders. They need
not to register with SEBI like RII's. Non-institutional bidders have
an allocation of 15% of shares of the total issue size in Book Build
IPO's.

BACK