NISM-Series-IX: Merchant Banking Certification Examination Workbook for NISM-Series-IX: Merchant Banking Certification Examination National Institute of Securities Markets www.nism.ac.in 1 NISM-Series-IX: Merchant Banking Certification Examination This workbook has been developed to assist candidates in preparing for the National Institute of Securities Markets (NISM) Certification Examination for Merchant Banking. Workbook Version: February 2019 Published by: National Institute of Securities Markets © National Institute of Securities Markets, 2019 Plot 82, Sector 17, Vashi Navi Mumbai – 400 703, India All rights reserved. Reproduction of this publication in any form without prior permission of the publishers is strictly prohibited. 2 NISM-Series-IX: Merchant Banking Certification Examination Foreword NISM is a leading provider of high end professional education, certifications, training and research in financial markets. NISM engages in capacity building among stakeholders in the securities markets through professional education, financial literacy, enhancing governance standards and fostering policy research. NISM works closely with all financial sector regulators in the area of financial education. NISM Certification programs aim to enhance the quality and standards of professionals employed in various segments of the financial services sector. NISM’s School for Certification of Intermediaries (SCI) develops and conducts certification examinations and Continuing Professional Education (CPE) programs that aim to ensure that professionals meet the defined minimum common knowledge benchmark for various critical market functions. NISM certification examinations and educational programs cater to different segments of intermediaries focusing on varied product lines and functional areas. NISM Certifications have established knowledge benchmarks for various market products and functions such as Equities, Mutual Funds, Derivatives, Compliance, Operations, Advisory and Research. NISM certification examinations and training programs provide a structured learning plan and career path to students and job aspirants who wish to make a professional career in the Securities markets. Till March 2018, NISM has certified nearly 7 lakh individuals through its Certification Examinations and CPE Programs. NISM supports candidates by providing lucid and focused workbooks that assist them in understanding the subject and preparing for NISM Examinations. This book covers all important aspects of the functioning of the Merchant Bankers. These include the basic understanding of the Indian securities markets; various terminologies used in the issue management process; the process of issue management and underwriting; general obligations and due diligence to be taken care of during the issue management process; the role of merchant bankers in acquisitions, takeovers, buyback of securities, disinvestment etc. This book will be immensely useful to all those who want to learn about the various functional aspect of Merchant Bankers. Dr. M Thenmozhi Director 3 NISM-Series-IX: Merchant Banking Certification Examination Disclaimer The contents of this publication do not necessarily constitute or imply its endorsement, recommendation, or favoring by the National Institute of Securities Market (NISM) or the Securities and Exchange Board of India (SEBI). This publication is meant for general reading and educational purpose only. The statements/explanations/concepts are of general nature and may not have taken into account the particular objective/ move/ aim/ need/ circumstances of individual user/ reader/ organization/ institute. Thus NISM and SEBI do not assume any responsibility for any wrong move or action taken based on the information available in this publication. Therefore before acting on or following the steps suggested on any theme or before following any recommendation given in this publication user/reader should consider/seek professional advice. The publication contains information, statements, opinions, statistics and materials that have been obtained from sources believed to be reliable and the publishers of this title have made best efforts to avoid any errors. However, publishers of this material offer no guarantees and warranties of any kind to the readers/users of the information contained in this publication. Since the work and research is still going on in all these knowledge streams, NISM and SEBI do not warrant the totality and absolute accuracy, adequacy or completeness of this information and material and expressly disclaim any liability for errors or omissions in this information and material herein. NISM and SEBI do not accept any legal liability what so ever based on any information contained herein. While the NISM Certification examination will be largely based on material in this workbook, NISM does not guarantee that all questions in the examination will be from material covered herein. Acknowledgement This workbook has been developed jointly by the Certification Team of National Institute of Securities Markets and Ms. Ramadevi Iyer, Company Secretary. NISM gratefully acknowledges the contribution of AIBI and all the Examination Committee for NISM-Series-IX: Merchant Banking Certification Examination consisting of nominated representatives from the AIBI. 4 NISM-Series-IX: Merchant Banking Certification Examination About NISM National Institute of Securities Markets (NISM) was established by the Securities and Exchange Board of India (SEBI), in pursuance of the announcement made by the Finance Minister in his Budget Speech in February 2005. SEBI, by establishing NISM, articulated the desire expressed by the Government of India to promote securities market education and research. Towards accomplishing the desire of Government of India and vision of SEBI, NISM delivers financial and securities education at various levels and across various segments in India and abroad. To implement its objectives, NISM has established six distinct schools to cater to the educational needs of various constituencies such as investors, issuers, intermediaries, regulatory staff, policy makers, academia and future professionals of securities markets. NISM is mandated to implement Certification Examinations for professionals employed in various segments of the Indian securities markets. NISM also conducts numerous training programs and brings out various publications on securities markets with a view to enhance knowledge levels of participants in the securities industry. About NISM Certifications The School for Certification of Intermediaries (SCI) at NISM is engaged in developing and administering Certification Examinations and CPE Programs for professionals employed in various segments of the Indian securities markets. These Certifications and CPE Programs are being developed and administered by NISM as mandated under Securities and Exchange Board of India (Certification of Associated Persons in the Securities Markets) Regulations, 2007. The skills, expertise and ethics of professionals in the securities markets are crucial in providing effective intermediation to investors and in increasing the investor confidence in market systems and processes. The School for Certification of Intermediaries (SCI) seeks to ensure that market intermediaries meet defined minimum common benchmark of required functional knowledge through Certification Examinations and Continuing Professional Education Programmes on Mutual Funds, Equities, Derivatives Securities Operations, Compliance, Research Analysis, Investment Advice and many more. Certification creates quality market professionals and catalyzes greater investor participation in the markets. Certification also provides structured career paths to students and job aspirants in the securities markets. 5 NISM-Series-IX: Merchant Banking Certification Examination About the Workbook This workbook has been developed to assist candidates in preparing for the National Institute of Securities Markets (NISM) Certification Examination for Merchant Banking. NISM-Series-IX: Merchant Banking Certification Examination seeks to create a common minimum knowledge benchmark for employees working with SEBI registered Merchant Bankers and performing various SEBI regulated functions such as those relating to IPO, FPO, Open offer, Buy-back, Delisting etc., and are involved in, or deal with any of the following:  The investors, issuers or clients of intermediaries  Assets or funds of investors or clients  Redressal of investor grievances  Internal control or risk management  Activities having a bearing on operational risk  Maintain books and records pertaining to above activities. The book covers various aspects of capital market functions, the importance of the different rules and regulations governing the Indian securities market and the processes involved in various functions of registered Merchant Bankers and the regulatory environment in which it operates. 6 NISM-Series-IX: Merchant Banking Certification Examination About the Certification Examination for Merchant Banking In order to create a common minimum knowledge benchmark for employees working with SEBI registered Merchant Bankers and performing various SEBI regulated functions such as those relating to IPO, FPO, Open offer, Buy-back, Delisting etc., and are involved in, or deal with any of the following:  The investors, issuers or clients of intermediaries  Assets or funds of investors or clients  Redressal of investor grievances  Internal control or risk management  Activities having a bearing on operational risk  Maintain books and records pertaining to above activities. The exam will further seek to ensure basic understanding of various aspects of capital market functions, the processes involved in various functions of registered Merchant Bankers and the regulatory environment in which it operates. Examination Objectives The examination aims to enable a better understanding of various regulations in the Merchant Banking Domain. The examination also covers knowledge competencies related to the understanding of the financial structure in India and the importance of the different rules and regulations governing the Indian securities market. On successful completion of the examination the candidate should:  Know the basics of the Merchant Banking in India.  Understand the functioning of Merchant Bankers related to Issue Management Process, Substantial Acquisition of Equity Shares, Buyback of Equity Shares and Delisting of Shares.  Know the regulatory environment in which the Merchant Bankers operates in India. Assessment Structure The examination consists of 100 questions of 1 mark each and should be completed in 2 hours. The passing score on the examination is 60%. There shall be negative marking of 25% of the marks assigned to a question. How to register and take the examination To find out more and register for the examination please visit www.nism.ac.in 7 NISM-Series-IX: Merchant Banking Certification Examination Table of Contents Chapter 1- Introduction to the Capital Market ........................................................ 10 1.1 Introduction to the Indian Capital Market ................................................................. 10 Chapter 2 Introduction to the Merchant Banking .................................................... 19 2.1 Concept and Evolution of Merchant Banking............................................................. 19 2.2 Merchant Banking in India .......................................................................................... 21 2.3 Regulatory Framework for Merchant Bankers in India .............................................. 22 Chapter 3 - Registration, Code of Conduct & General Obligations of Merchant Bankers in India ...................................................................................................... 73 3.1 Introduction ................................................................................................................ 73 3.2 Registration of Merchant Bankers .............................................................................. 74 3.3 Code of Conduct for Merchant Bankers ..................................................................... 77 3.4 General obligations and Responsibilities ................................................................... 80 3.5 Redressal of Investor Grievances and SCORES ........................................................... 84 Chapter 4: Issue Management – Important Terms .................................................. 87 4.1 Understand the various terms related to Offering .................................................... 87 Chapter 5: Issue Management - Process and Underwriting ..................................... 98 5.1 Issue Management ..................................................................................................... 98 5.2 Pricing of Issue .......................................................................................................... 109 5.3 Underwriting ............................................................................................................. 110 5.4 Issuance Conditions and Procedures ........................................................................ 110 5.5 Minimum Subscription ............................................................................................. 111 5.6 Allotment, Refund and Payment of Interest ............................................................ 111 Chapter 6: Issue Management - General Obligations of Merchant Bankers and Due Diligence .............................................................................................................. 115 6.1 General Obligations of Merchant Bankers with regards to Issue Management ...... 115 6.2 Offer for Sale through Stock Exchange Mechanism ................................................. 137 6.3 Preferential Issue ...................................................................................................... 144 6.4 Qualified Institutions Placement .............................................................................. 149 8 NISM-Series-IX: Merchant Banking Certification Examination 6.5 Rights issue ............................................................................................................... 151 6.6 Bonus Issue ............................................................................................................... 155 6.7 Indian Depository Receipts ....................................................................................... 156 6.8 Due Diligence ............................................................................................................ 163 Chapter 7: Other Merchant Banking Activities - Mergers, Acquisitions & Takeover166 7.1 Mergers, Acquisitions & Takeovers .......................................................................... 166 7.2 Role of Merchant Banker in Mergers and Acquisition and Takeovers ..................... 167 7.3 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ............ 168 Chapter 8: Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares .................................................................................................................. 193 8.1 Disinvestment ........................................................................................................... 193 8.2 Role of Merchant Banker in Buy back of Equity Shares ........................................... 195 8.3 Role of Merchant Banker in Delisting of Shares ....................................................... 199 8.4 Role of Merchant Bankers in Issue and Listing of Debt Securities ........................... 200 8.5 Role of Merchant Banker in Share Based Employee Benefits .................................. 204 8.6 Role of Merchant Banker in cases where exit opportunity is required to be given to dissenting shareholders ....................................................................................................... 204 8.7 Role of Merchant Banker in Issue of Securities by Small and Medium Enterprises (SME) 205 9