iv. Intermediaries Associated with the Securities Markets

Primary market intermediaries

Merchant bankers

During the year 1997-98, there were a few changes in the Merchant Bankers Regulations in order to streamline and strengthen the role of SEBI and RBI to impart transparency to merchant banking activities.

Prior to these amendments, most of the merchant bankers were carrying on both fund-based as well as fee-based activities. Fund-based activities included leasing, hire-purchase etc. whereas fee-based activities included merchant banking and underwriting. However, it was seen that fund-based activities, which were regulated by the RBI, were resulting in erosion of net worth. The SEBI requires merchant bankers (Category I) registered with it to have a minimum networth of Rs. 5 crore. Since this was an essential condition to grant registration and erosion of the same was not in the interest of merchant bankers. As one entity was being regulated by two regulatory bodies viz. the SEBI and RBI, close monitoring of the networth on a continuous basis was not possible. Thus, it was decided to clearly segregate the activities (carried on by the same entity) as those which would be regulated by the SEBI and RBI. To achieve this end, Merchant Banking Regulations were amended with effect from December 9, 1997.

As per the amended guidelines, a merchant banker Category I (excluding banks and financial institutions) is disallowed from carrying on any activity other than that relating to securities market. The amendment stipulates that a merchant banker carrying on fund based and merchant banking activities would have to either discontinue the activities not related to the securities market or hive off its merchant banking activity. The rational to segregate the two functions of the merchant bankers is to eliminate the overlapping of accounts of merchant banking and fund based activities thus facilitating greater accountability and better monitaring.

On repeated representations from Merchant Bankers for extension of time to comply with the aforesaid notifications the merchant bankers were given 6 months upto June 30, 1998 to segregate their activities. The above amendment also abolished the pre-existing multiple categories of merchant bankers viz. Category II,III and IV. Category II merchant banker could carry on activities of a portfolio manager and underwriter whereas Category III merchant banker could carry on activities of underwriter only. The SEBI already has separate Regulations for Portfolio Managers and Underwriters and to take care of the overlapping, it was felt that the Category II and III Merchant Bankers could continue to carry on their activities but by applying for registration under the Underwriters and Portfolio Managers Regulations. However, existing Category II and III Merchant Bankers could continue to carry on underwriting and portfolio management activities until their registration expires. Thus, there is only one entity i.e. Category I Merchant Banker who can carry on issue management activity only.

As the SEBI has given up vetting of prospectuses, the merchant bankers role of exercising due diligence and compliance with the SEBI regulations has acquired more importance. Part III gives further details of registration of merchant bankers during 1997-98.

Underwriters and Portfolio managers

Underwriters include those merchant bankers in categories I,II and III, Stock brokers and mutual funds. Portfolio Mangers include Category I and II merchant bankers as well as those who are registered separately under the Portfolio Managers Regulations. As per the aforesaid notification, falling category I, II and III under the existing merchant bankers can continue to carry on underwriting activities and/or portfolio management activities as the case may be, until their registration expires. On expiry of the same, all merchant bankers will have to seek separate registration under the Underwriting/Portfolio Management Regulations in order to carry on underwriting activity. Part III gives further details of registration of underwriters and portfolio managers during 1997-98.

Debenture trustees

The SEBI (Debenture Trustee) Rules, 1993 was amended by the Central Government on September 16, 1997 to modify the procedure in respect of considering the application for registration of debenture trustees. The amendment provides that the Board shall take a decision on the application for registration within three months from the date of receipt of information.

Bankers to an Issue

Scheduled banks acting as bankers to an issue are required to be registered with the SEBI in terms of the SEBI(Bankers to an Issue) Rules and Regulations, 1994. These regulations lay down eligibility criteria for bankers to an issue and require registrants to meet periodic reporting requirements.

Registrars to Issue and Share Transfer Agents

Registrars to an issue (RTI) and share transfer agents (STA) are registered with the SEBI in terms of the SEBI (Registrar to an Issue and Share Transfer Agent) Rules and Regulations, 1993. Under these regulations, registration commenced in 1993-94 and is granted under two categories: category I - to act as both registrar and share transfer agent and category II - to act as either registrar to an issue or share transfer agent. With the setting up of the depository and the expansion of the network of depositories, the traditional work of Share Transfer Agent is likely to undergo a change.

Secondary market intermediaries

Stock brokers

All stock brokers dealing in securities are registered with the SEBI in terms of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992. During 1997-98, 138 additional brokers were registered with the SEBI making the total registered membership to 9005 as on March 31, 1998. Further statistical details of the brokers are provided in Part III of this Report.


In many cases, individual investors transact in securities through sub-brokers. It is therefore absolutely imperative to regulate this class of intermediary. As on March 31, 1997 only 1,798 sub brokers were registered with the SEBI. The main reason for the limited success in registering large number of sub-brokers is that brokers are reluctant to take responsibility of the acts of the sub-brokers. Measures have been initiated by the SEBI for bringing more sub-brokers under the ambit of regulatory oversight. As a result the number of sub-brokers registered with the SEBI, as on March 31, 1998 rose to 3,760. Further statistical details of the sub-brokers are provided in Part III of this Report.