NISM Series - IX Merchant Banking Cert. - Full-Length Test

To be registered as a Merchant Banker with SEBI, an applicant must fulfill multiple criteria including:

• Payment of registration fees as prescribed by SEBI

• Capital adequacy requirements, which involve maintaining a minimum net worth (currently Rs. 5 crore for Category I Merchant Bankers)

• Fit and proper person criteria, which ensures that the applicant and its key personnel have a clean regulatory and financial track record, integrity, and competence.

All these conditions are necessary for SEBI to grant registration.

The shareholders may make an application in the application form or who have not received the application form, on a plain paper along with the requisite application money. Where the shareholder makes an application on both the application form and the plain paper, the application is liable to be rejected.

When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both; for the first time to the public; it is termed as an IPO. This paves the way for listing and trading of the issuer’s securities.

Anchor investor means a qualified institutional buyer making an application for a value of Rs. 10 crore or more in a public issue, one day before opening of that public issue.

There shall be a lock-in of 30 days on the shares allotted to the Anchor Investor from the date of allotment in the public issue.

Offer Document is called “Prospectus” in case of a public issue or offer for sale and “Letter of Offer” in case of a rights issue.

The lead merchant banker is required to submit the post-issue reports to SEBI as specified in the Regulations. The initial post-issue report shall be submitted within 3 days of closure of the issue in specified formats and the final post issue reports within 15 days of the date of finalization of basis of allotment or within 15 days.

The issuer company has a net worth of at least Rs.1 crore in each of the preceding 3 full years.

A financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor and Mutual Fund shall not be deemed to be a promoter merely by virtue of the fact that 20% or more of the equity share capital of the issuer is held by such person.

As per the SEBI ICDR Regulation, allotment pursuant to the special resolution shall be completed within a period of 15 days from the date of passing such resolution.

Please note it 21 days for equity shares and 7 days for debt securities.

Government securities are issued by the central government, state government and semigovernment authorities.

An application for the grant of certificate of registration as merchant bankers needs to be submitted to SEBI in Form A as specified in the SEBI (Merchant Bankers) Regulations. The regulation states that an application for registration made under this regulation shall be accompanied by a non-refundable application fee of Rs.50,000/- and can be made only for Category I Merchant Banker, if it is for issue management.

“Green shoe option” is an option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilizing mechanism. Green Shoe Option is a price stabilizing mechanism in which shares are issued in excess of the issue size, by a maximum of 15%.

“Safety net arrangement” means an arrangement provided by the issuer under which a person offers to purchase specified securities from the original resident retail individual allottees at the issue price.

Mutual Funds are investment vehicles where people with similar investment objective come together to pool their money.

The issuer while filing draft offer document with the recognized stock exchange where the specified securities are proposed to be listed, submit the Permanent Account Number (PAN), bank account number and passport number of its promoters to such stock exchange.

A company can buy-back its shares or other specified securities using any of the following methods:

(a) from the existing security-holders on a proportionate basis through the tender offer;

(b) from the open market through (i) book-building process, or (ii) stock exchange;

(c) from odd-lot holders.

Index/Stock Options are of two types – Calls and Puts.

Calls give the buyer the right, but not the obligation, to buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts give the seller the right, but not the obligation, to sell a given quantity of the underlying asset at a given price on or before a given date.

When trading and settlement is done through the stock exchanges, the buyers and sellers may not be in touch with each other.

In the Forwards / Over The Counter market, the buyer and sellers know each other as the transaction is generally on a one to one basis.

In Primary market there is no trading and settlement.

Regulation 13 of SEBI ICDR states an issuer shall be eligible to issue warrants in an initial public offer subject to the following:

a) the tenure of such warrants shall not exceed eighteen months from the date of their allotment in the initial public offer;

b) a specified security may have one or more warrants attached to it.

Securities Contracts (Regulation) Act, 1956 deals with laws relating to listed as well as unlisted Companies.

The certificate of initial registration granted shall be valid for a period of five years from the date of its issue to the applicant.

A merchant banker who has been granted a certificate of registration, to keep its registration in force, shall pay a fee of nine lakh rupees every three years from the sixth year, from the date of grant of certificate of registration or from the date of grant of certificate of initial registration.

In a merger, functions relating to (i) preparation and circulation of information memoranda, (ii) deal structuring & negotiations, (iii) valuation and due diligence are taken care of by the merchant banker.

The appeal must be filed within a period of 45 days from the date on which a copy of the order is received.

On being intimated of the grant of this certificate the merchant banker is required to pay the requisite fees as mentioned in the SEBI (Merchant Bankers) Regulations within 15 days of receipt of such intimation from SEBI.

The lead merchant banker is required to submit the following documents to SEBI:

– Statement certifying that all changes, suggestions and observations made by SEBI have been incorporated in the offer document;

– Due diligence certificate at the time of registering the prospectus with the Registrar of Companies;

– Copy of the resolution passed by the board of directors of the issuer for allotting specified securities to promoters towards amount received against promoters’ contribution, before opening of the issue;

– Certificate from a Chartered Accountant, before opening of the issue, certifying that promoters’ contribution has been received in accordance with these regulations, accompanying therewith the names and addresses of the promoters who have contributed to the promoters’ contribution and the amount paid by each of them towards such contribution;

– Due diligence certificate as per the prescribed format immediately before the opening of the issue, certifying that necessary corrective action, if any, has been taken;

– Due diligence certificate as per format provided in the Regulation after the issue has opened but before it closes for subscription.

In case an issuer makes an issue through the book building process, he shall appoint syndicate members.

In case of any other issue, the issuer company shall appoint bankers to issue at all mandatory collection centers as specified in the Regulation.

As per these regulations, before making the public announcement, the promoter shall appoint a merchant banker registered with SEBI. It shall be the responsibility of the promoter and the merchant banker to ensure compliance with the provisions as stated by SEBI in its regulations.

The SEBI (Intermediaries) Regulations, 2008 prescribes the procedure for registration of intermediaries, general obligations, inspection and disciplinary proceedings and inter alia, criteria for determining a fit and proper person and code of conduct.

As per the SEBI ICDR Regulation, a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by SEBI from time to time, shall not be deemed to be a promoter merely by virtue of the fact that twenty percent or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations.

It has to issue certificates in respect of shares or debentures lodged for transfer within a period of one month of the date of lodgement of transfer and to issue balance certificates within the same period where the transfer is accompanied by a larger certificate.

Regarding ‘Mode of Payment’ when securities of the acquirer company are offered in lieu of cash payment, the value of such securities shall be determined in the specified manner, as duly certified by an independent merchant banker (other than the manager to the offer) or an independent chartered accountant having a minimum experience of ten years.

The issuer and the merchant banker have to ensure that specified securities are allotted and/or application money are refunded within 15 days from the date of closure of the issue.

A rights issue shall be open for subscription for a minimum period of 15 days and a maximum period of 30 days.

The excess fees must be paid within 7 working days.

As per the listing agreement, a company should have a minimum paid up capital of Rs 10 crore to be eligible for listing on both BSE and NSE.

Activities Covered under Merchant Banking

a) Managing the public issue of securities

b) Underwriting the public issue

c) Managing/advising on international debt/equity offerings like GDRs, ADRs, FCCBs etc.

d) Private placement of securities

e) Primary/satellite dealership of government securities

f) Corporate advisory services such as mergers, takeovers, buybacks etc.

g) Stock broking

h) Advisory services for projects

i) Syndication of domestic loan offerings

j) International financial advisory services

Investment banking encompasses not merely merchant banking but other related capital market activities such as stock trading, market making and underwriting, stock broking and asset management as well.

The compliance officer has to immediately and independently report to SEBI any noncompliance observed by him.

The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits.

The non-refundable fees are prescribed in the SAST Regulations.

Non-refundable fees payable under the Open Offer of over Rs. 1000 crore is Rs. 5 crore plus 0.125 percent of the portion of the offer size in excess of one thousand crore rupees.

Mergers and Acquisitions in India are regulated by the following legislations and regulators:

1. The Companies Act, 1956

2. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

3. The Monopolies and Restrictive Trade Practices Act, 1969

4. The Foreign Exchange Management Act, 1999

5. The Reserve Bank of India and the RBI Act, 1934.

6. The Income Tax Act, 1961

7. The Competition Act 2002

Offer Document is called “Prospectus” in case of a public issue or offer for sale and “Letter of Offer” in case of a rights issue.

Activities Covered under Merchant Banking

a) Managing the public issue of securities

b) Underwriting the public issue

c) Managing/advising on international debt/equity offerings like GDRs, ADRs, FCCBs etc.

d) Private placement of securities

e) Primary/satellite dealership of government securities

f) Corporate advisory services such as mergers, takeovers, buybacks etc.

g) Stock broking

h) Advisory services for projects

i) Syndication of domestic loan offerings

j) International financial advisory services

As per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, after the completion of payment of consideration to shareholders who have accepted the open offer, the balance amount in the escrow account (after transferring the required funds to the special escrow account) shall be released to the acquirer within 30 days. This regulation ensures: Transparency in the takeover process. Timely settlement of payments. Fair treatment of both acquirers and shareholders.

Thus, the correct answer is “30 days.”

As per SEBI regulations, merchant bankers must maintain transparency and avoid conflicts of interest when managing public issues. If a merchant banker is involved in any transaction for acquiring securities of a company whose issue they are managing, they must report full details to SEBI within 30 days from the date of the transaction. This ensures fairness, prevents insider trading, and upholds the integrity of the capital markets.

Thus, the statement is True.

• As per SEBI (ICDR) Regulations, if SEBI seeks clarification or additional information on the draft offer document from the lead merchant bankers, SEBI must provide its observations or specify necessary changes within 30 days from the date of receipt of a satisfactory reply.
• This ensures timely regulatory review while allowing issuers to make the necessary compliance adjustments before proceeding with the public issue.

The Competition Act, 2002 aims at prohibiting anti-competitive agreements, preventing the abuse of dominant position by enterprises, and regulating combinations (acquisitions, mergers, and amalgamations) that may have an appreciable adverse effect on competition in India. The Act led to the establishment of the Competition Commission of India (CCI), which ensures fair competition in the market.

ASBA (Applications Supported by Blocked Amount) is an application process where an investor authorizes their bank to block funds in their account for subscribing to an IPO, Rights Issue, or FPO. The application money remains in the investor’s bank account until the allotment is finalized. If shares are allotted, the money is debited, and if not, the funds are unblocked without any interest loss. ASBA ensures efficient, transparent, and hassle-free IPO applications.

Thus, the correct answer is “ASBA.”

As per SEBI rules – A person directly or indirectly connected with the applicant should not have been granted registration by the SEBI.

When one category of investors is offered shares at a price different from the other category it is called differential pricing.

An issuer company can allot the shares to retail individual investors and certain other categories of investors at a prescribed discount to the price at which the shares are offered to other categories of the public.

To prevent the misuse of confidential information the organization shall adopt a “Chinese Wall” policy which separates those areas of the organization/firm that routinely have access to confidential information ie. “insider areas” from those areas that deal with sales/marketing/investment advice or other departments providing support services considered public areas.

The employees in the insider area shall not communicate any Price Sensitive Information to anyone in the public area.

In case of soft underwriting, the underwriter agrees to buy his commitment at a later stage only when the price of shares is known.

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 provides cases that are exempt from the obligation to make an open offer.

In the case of a further public offer or a rights issue the issuer shall obtain in-principle approval from:

a) All recognized stock exchanges where the specified securities are listed;

b) From all exchanges on which the securities are proposed to be listed, in cases where the specified securities are not listed on any recognized stock exchanges having nationwide terminals;

c) All recognized stock exchanges having nationwide terminals, in case the securities are traded on recognized stock exchanges, with nationwide terminals as well as those that do not have nationwide terminals.

“Net offer to the public” means an offer of specified securities to the public but does not include reservations made for certain investor-categories. It also does not include securities if any, to be subscribed by the promoter group.

The applicant shall have a net worth of not less than Rs. 5 crore.

When the public fails to respond / subscribe to an issue, Underwriters have to chip in and get the issue subscribed.

Government securities are issued by the central government, state government and semi-government authorities.

Issuers are allowed to retain over-subscription money upto a maximum of 100% of the base issue size.

As per the SEBI ICDR regulations, the minimum number of allottees for each placement of eligible securities made under QIP shall not be less than:

(a) two, where the size is less than or equal to Rs.250 crore;

(b) five, where the issue size is greater than Rs. 250 crore, subject to the condition that no single allottee shall be allotted more than 50% of the issue.

Any acquisitions of shares or control in listed Indian companies are governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011

Mergers, amalgamations, de-mergers, and acquisitions of business units or divisions, are all governed by The Companies Act of 1956

The advertisement shall be made in at least 1 English, 1 Hindi national daily newspaper with wide circulation, and 1 regional language daily newspaper with wide circulation at the place where the registered office of the issuer is situated, at least three days before the date of opening of the issue.

In the case of private placement of debt securities, there is a limit on the number of potential investors who can be approached, in the event this limit is breached, it shall be deemed to be a public issue and all requirements of a public issue shall apply

Offer Document is called a “Prospectus” in case of a public issue or offer for sale and “Letter of Offer” in case of a rights issue.

As per SEBI ICDR Regulations – The merchant banker related to the post-issue activities shall ensure that advertisements giving details relating to over subscription, the basis of allotment, etc. are released within ten days from the date of completion of the various activities in atleast one English national daily newspaper and one Hindi national daily newspaper with wide circulation and one regional language daily newspaper with wide circulation at a place where the issuer company has its registered office.

Complaints arising out of issues that are covered under the SEBI Act, Securities Contract Regulation Act, Depositories Act and Rules and Regulation made there under and provisions that are covered under section 26 of the Companies Act are complaints dealt with by SEBI under the online system called SEBI Complaints Redress System (SCORES).

Certain complaints not dealt with by SEBI like complaints falling under the purview of other regulatory bodies viz. RBI, IRDA, PFRDA, CCI, FMC, etc., or under the purview of other ministries viz., MCA, etc.

In the overall process of issue management, the merchant banker plays a variety of important roles such as, an expert advisor to the management of the issuer company, who performs due diligence on the company, as an event manager and coordinator to ensure timely completion of the issue, as a watch dog for the statutory compliance and as a person in fiduciary capacity for the protection of the interests of the investors.

At the time of an issue, it also acts as an interface between the issuer company and the SEBI.

the Insurance Regulatory and Development Authority of India (IRDAI) is the watchdog for the insurance sector.

Its mission is “to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”

An announcement regarding the closure of the issue should be made only after the lead merchant banker is satisfied that atleast 90% of the offer through the offer document has been subscribed and a certificate regarding that has been obtained from the registrar to the issue.

Only if the person is a Principal or is over 50 years of age or has 10 years of experience can the certificate be obtained by any of the three options mentioned above. Otherwise he/she has to pass the NISM exam to get the certificate for the first time.

As per the listing agreement, a company should have a minimum paid up capital of Rs 10 crore to be eligible for listing on BSE and NSE.

The promoter is required to despatch the letter of offer to the public shareholders of equity shares, not later than 45 working days from the date of the public announcement, so as to reach them at least 5 working days before the opening of the bidding period.

The letter of offer shall contain all the disclosures made in the public announcement and such other disclosures as may be necessary for the shareholders to make an informed decision. The bidding form also needs to be sent along with the letter of offer.

If the issuer itself is a registrar to an issue registered with SEBI, then another registrar to an issue shall be appointed as the registrar to the issue.