Merchant Banker: The Registration Behind Investment Banking

A merchant banker is an entity registered with the Securities and Exchange Board of India to manage issues of securities and to perform the work an issue requires. Investment banker is a job title used across the market, and it is not a registration. The activities that registration reaches, the enquiry it requires and the certification it carries are read at sebi.gov.in.

Underneath that sits a shape that recurs again and again in Indian finance, and it is worth more than the one registration. In a regulated process there is an entity that holds the permission and carries the answerability for the thing being done. Beside it there is very often a second entity that performs a large part of the actual work. A merchant banker performs part of an issue for the company raising the money. A lending service provider performs part of a lending process for a lender. In every one of these arrangements the same question decides everything: who is still answerable when the work is performed by somebody else.

The shape takes an everyday form before any of the finance arrives. A household decides to build an extra room on the roof, and hires a contractor. The contractor brings the mason, arranges the sand and the steel, argues with the electrician and does every hour of the work. When the municipal inspector comes to the gate, the person who has to answer is the owner of the flat, whose name is on the sanction, and not the contractor. Nobody was deceived and no rule was broken. The arrangement simply did not move the thing people assume it moves. Put securities into the picture, and everything below is the same arrangement.

The case running through this guide is the Vindhya Ceramics raise. Vindhya Ceramics Private Limited, an invented tile maker, is raising Rs 40,00,00,000, made up of an equity portion of Rs 25,00,00,000 and a debenture portion of Rs 15,00,00,000. Trilokpur Capital Markets Private Limited is the merchant banker to that issue, and Sulekha Bhandari leads its team. Ratnakar Deshpande is the finance director at Vindhya Ceramics and the person on the other side of every conversation. Beside them stand Suravali Registry Services Private Limited as registrar, Anantpur Trusteeship Services Limited where Ismail Qureshi is the trustee officer for the debenture portion, Sahyadri Ratings Limited which rated it, and Bhadra Securities Private Limited through which an investor reaches the market. None of these amounts is fixed by a regulation. The size of a raise, and its split between equity and debentures, are commercial decisions the issuer makes.

What is a merchant banker registered to do?

A merchant bankerAn entity registered with SEBI to manage issues of securities and the work an issue requires. is an entity registered with the Securities and Exchange Board of India to carry on issue managementThe activity of running an issue of securities for a company: preparing what has to be filed, and coordinating the entities around it. and the work that goes with it. Read the definition slowly. The two halves of it do completely different jobs. Registered names where the permission comes from. Issue management names the activity the permission reaches. A registration is a permission to carry on a defined activity, so the useful question about any firm is never what it calls itself but which activity its registration actually reaches.

Set beside real work, what does issue management actually cover? Running an issue of securities for a company that is raising money: preparing and filing what the issue requires, coordinating the other registered entities standing around it, and carrying the enquiry and the signed statement that the regulations attach to the role. On the Vindhya Ceramics raise that is Sulekha Bhandari's work from the first meeting with Ratnakar Deshpande to the day allotment is completed. How the issue is priced, how it is marketed and how the terms are put together is the commercial craft of the job, and the pricing mechanism is set out under book building.

Now notice what that sentence does not say. The definition does not say that Trilokpur Capital Markets Private Limited may do anything a financial firm might reasonably want to do. Executing transactions in securities for clients is a different activity under a different registration. Bhadra Securities Private Limited is a separate entity for exactly that reason. Acting as trustee for the debenture holders is another activity again, and Anantpur Trusteeship Services Limited exists to hold that one. Rating the debenture portion is another again, and maintaining the register of holders is another still. Five registered entities stand around this one invented raise, not because the work is too large for one firm but because permissions are drawn around activities and no single permission reaches them all.

Why is Investment Banker a title rather than a permission?

Investment bankerA job title used widely across the market. The title carries no permission of its own and nobody grants it. is what people call the job. The title appears on business cards, in job advertisements, in newspaper copy and in the way a team describes itself when it walks into a meeting. Investment banker is a useful and perfectly honest word, and it is not a status that anybody granted to anybody. A title describes what somebody calls their work, a registration describes what a firm has been permitted to do, and only the second of the two appears on a list a stranger can read.

A title and a registration also attach to different things, and that difference is the part that catches people out. Nobody issued the title and nobody can withdraw it. A title attaches to a person and travels with that person from one employer to the next. A registration is held by a firm and stays with the firm. Sulekha Bhandari may quite properly describe herself as an investment banker, and the description is an accurate description of her working life. The permission behind the Vindhya Ceramics mandate is not hers. The permission is held by Trilokpur Capital Markets Private Limited, and it would still be held there on a morning when she had resigned.

Think about the word chef for a moment. Anybody may use it, and most people who use it can genuinely cook. The licence for the kitchen, though, is issued to the establishment, it names the premises, and it is the licence rather than the word that a health inspector asks to see. Nobody thinks the inspector is being rude to the chef. The inspector is simply asking the only question that has an answer somebody outside the kitchen can verify.

Merchant Banker vs Stock Broker: what does each registration actually reach?

Half of the confusion comes from comparing a defined thing with an undefined one, so the two are worth taking apart before being set beside each other. A merchant banker, as above, is registered to manage issues of securities and to do the work an issue requires. A stock brokerAn entity registered to execute transactions in securities for clients. is registered to execute transactions in securities for clients. Both definitions are one line long and neither contains the other.

Now hold them together. The two registrations sit at different moments and face different people. The merchant banker faces the company raising the money and does its work while the securities are still being created, before anybody holds one. The stock broker faces a client and executes transactions in securities that are already out in the market. On this raise, Sulekha Bhandari is filing documents for Vindhya Ceramics Private Limited, and Bhadra Securities Private Limited is the route by which some investor, months later, buys or sells a share of the same company. The two never touch the same document.

The confusion is completely understandable. Both firms are in the securities market, both are registered with the same regulator, and both spend their days on transactions in securities. The resemblance is exactly why the answer has to be structural rather than intuitive. The two registrations do not overlap and neither stretches: a firm that wants to do both activities holds both registrations, and a firm that holds one and performs the other is doing something its permission does not reach.

What does the merchant banker owe the issuer it is acting for?

The first thing owed is the ordinary thing anybody owes when they are engaged to do a job. Manage the issue. Hold the timetable together. Coordinate Suravali Registry Services Private Limited, Ismail Qureshi at Anantpur Trusteeship Services Limited and Sahyadri Ratings Limited so that four sets of work arrive in the right order. Keep Ratnakar Deshpande informed rather than surprised. All of that is a commercial engagement and it looks like every commercial engagement in the country: a mandate, a scope, a timetable and a fee, the last of which is a commercial matter between the two firms.

There is a second thing owed to the issuer that people miss, and it matters more than the first. The merchant banker also owes the issuer the plain truth about what the issue documents can and cannot say. If the enquiry turns up something inconvenient, the duty is to say so and to have it dealt with in the documents rather than to make it quietly go away. The issuer is buying a firm whose name will go on a certification, and a merchant banker that would sign anything at all is worth nothing to the issuer either.

Notice the shape of that. Ratnakar Deshpande is not paying for agreement. He is paying for a firm whose signature carries weight, and a signature carries weight only because it is sometimes withheld. A signature that is sometimes withheld is an uncomfortable thing to sit with, and it is the reason the second file on Sulekha Bhandari's desk exists at all.

What does the merchant banker owe the market, and what does the certification put its name behind?

The second file is the one nobody is waiting for, and that is the whole difficulty with it. Due diligenceThe enquiry a merchant banker is required to make into what an issue document says before it goes out. here means the enquiry the merchant banker is required to make into what the issue documents say: whether the statements in them have something real behind them, whether what should be disclosed has been disclosed, whether a sentence that reads comfortably is actually supported. The enquiry is unglamorous work, and it is done before anybody outside the room could possibly notice whether it happened.

CertificationThe signed statement a merchant banker makes, putting the firm name behind the enquiry it carried out. is what turns that enquiry into something with consequences. Certification is a statement the merchant banker signs, in the firm's own name, saying that the enquiry the regulations require has been made. The wording, the form and the occasions for it are set by the Securities and Exchange Board of India and are read at sebi.gov.in on the day they are needed. The structural point does not move: a duty that ends in a signature is enforceable and a duty that ends in an intention is not, and the certification exists as a separate act for exactly that reason.

And who is on the other end of it? On the Vindhya Ceramics raise, Meera Vaidyanathan at Neelanchal Asset Managers Private Limited read those documents while deciding whether the Neelanchal India Growth Fund should subscribe. Orient Meridian Fund read them while weighing a stake. Beyond both of them, 12,400 applications arrived from people who will never meet anybody at Trilokpur Capital Markets Private Limited; 340 of those were rejected on verification, close to 2.7 per cent of them, and 12,060 became holders on the register at allotment. Not one of those 12,060 paid the merchant banker a rupee, and every one of them relied on its signature.

The everyday version of this is exact. When somebody takes a medical fitness certificate to a new employer, the person examined pays the doctor and the employer relies on the certificate. If doctors quietly signed whatever the person paying asked for, the certificate would be worth precisely nothing and employers would stop asking for it. The value of the document comes entirely from the fact that the person paying cannot dictate what it says.

What is Customer Due Diligence, and who has to perform it?

Customer due diligenceEstablishing and recording who a customer actually is, and who stands behind them, before acting for them. is establishing and recording who a customer actually is, and who stands behind that customer, before acting for them. Customer due diligence is a different animal from the diligence on the issue documents, and the two get muddled constantly because they share a word. One asks whether what a document says is supported. The other asks who is being dealt with at all.

Customer due diligence has an order to it, and the order is the point. First, the identity of the entity in front of the firm is established from evidence rather than from acquaintance. Second, who controls the entity and who ultimately benefits is established. A name on a form and the person behind the name are two different questions. Third, what was checked, against what evidence and on what date, is written down. Then, and only then, does the work begin. When Trilokpur Capital Markets Private Limited took the Vindhya Ceramics mandate, that enquiry ran before the first document was drafted, not alongside it.

Why is it an obligation rather than a sensible precaution? Because a precaution can be skipped by anybody who feels confident, and a duty cannot. Familiarity is not a record, and a firm that has known a customer for fifteen years still has nothing to show the person who eventually asks what was established and when. Everybody in that office may be certain about Vindhya Ceramics. Certainty is not inspectable and does not survive the departure of the people holding it.

Who carries this duty? Not merchant bankers alone. The duty sits across regulated entities dealing with customers, and in India the requirements come from the Reserve Bank of India for the entities it regulates and from the Securities and Exchange Board of India for the ones it regulates, each publishing its own current text at rbi.org.in and sebi.gov.in. Behind both sits a global standard, set through the Financial Action Task Force at fatf-gafi.org and implemented in India through its own instruments.

What does it mean for one entity to perform part of a regulated process for another?

The separate parts now come together. The Vindhya Ceramics issue is Vindhya Ceramics' issue. The documents are its documents. The answerability for what those documents say begins with the company and the people running it. Trilokpur Capital Markets Private Limited performs a very large part of the process, arguably most of the visible part of it, and at no point does it become the issuer. Engaging somebody to perform part of a regulated process moves the work and leaves the permission and the answerability exactly where they already were.

There is a second layer here that is easy to miss and worth having. Where the entity performing the work is itself registered, it does not merely borrow the principal's position. The performing entity picks up duties in its own name on top. Trilokpur Capital Markets is answerable for its enquiry and its certification as itself, not as a stand in for Vindhya Ceramics. So the arrangement adds a duty rather than dividing one. Two entities are now answerable for different things about the same issue, and neither can point at the other.

Three questions follow, and they carry into any arrangement of this shape, in any market. Who holds the permission and the process. Who performs the work. Who answers if the work turns out to be wrong. On this issue the answers are Vindhya Ceramics, Trilokpur Capital Markets, and both of them in their own different ways. With those three questions in hand, digital lending below is not a new subject at all.

What is a Digital Lending App, and what does the name leave out?

Change markets for a moment and watch the same skeleton walk past. A digital lending appAn application through which a lending process is offered to a borrower. The application is a channel, not an entity. is an application through which a lending process is offered to a borrower. The definition is deliberately thin, and the thinness is exactly what matters about it. An application is software with a name on it. An application is a channel: the surface through which somebody is reached.

Being a channel, there are things it cannot be. An application is not an entity, so it cannot hold a permission, cannot enter into anything and cannot lend a rupee, in the same way that a shop sign has never sold anybody rice. The name on the screen gives the name of the process and nothing whatever about which entity holds the permission behind it. Some company operates the application. Some entity is the source of the money, and it may or may not be that same company. Working out which is which is a separate step and it does not happen by reading the screen harder.

Each part of that is entirely ordinary. A brand is a normal commercial thing. Software operated under a contract is a normal commercial thing. Neither of them is odd on its own, and that is exactly why the structure goes unnoticed: there is nothing odd on the screen to notice.

What is a Lending Service Provider, and who holds the lending permission?

A lending service providerAn entity performing part of a lending process on behalf of a lender. The provider is not the lender. is an entity performing part of a lending process on behalf of a lender: finding borrowers, gathering documents, servicing an account after the money has gone out. Set beside the merchant banker, that description repeats a familiar shape. Performing part of a lending process is not lending, so the entity doing it is neither the source of the money nor the holder of the permission to lend it.

Line the two up honestly, including where they differ. A merchant banker performs part of an issue for the company raising money, and holds a registration of its own for that activity, so it carries duties in its own name. A lending service provider performs part of a lending process for a lender. In both, the process belongs to the principal, the work is performed by somebody else, and the permission never moved. The obligations that sit on each party in a particular lending arrangement are set by the Reserve Bank of India in its directions on digital lending, and are read at rbi.org.in on the day the answer matters.

Three roles, then, and it is worth being able to say them apart without hesitating. The application is a channel. The service provider is a role somebody performs. The lender is the entity whose money and whose permission are actually involved. Only the third of the three is lending, and only the third is the one to identify. Identifying the lender behind an application is set out under digital lending.

Who stays answerable when the work is performed by somebody else?

The entity that holds the permission, and it stays there whatever the contract between the two entities happens to say. The point is worth stating flatly because a great deal of confidence gets built on the opposite assumption. A contract can move a task. A contract can move a cost, and can say who pays whom when something goes wrong. A contract cannot move a duty owed to a regulator, for the simple reason that the regulator was never a party to it.

The same shape sits in ordinary life. Somebody hires an agent to file their tax return. The agent gathers everything, fills in every field and presses the button. If the return turns out to be wrong, the notice arrives at the taxpayer's address and not at the agent's. The taxpayer may well have a claim against the agent, and that is a real and separate thing. The obligation to file a correct return was written about the taxpayer. No arrangement between two other people rewrote it, so the claim from the department is against the taxpayer.

Arrangements of this kind are therefore a regulated question rather than an operational convenience. When a firm decides that another entity will perform a part of its process, it is not merely choosing a supplier. The firm is choosing to be answerable for work it is no longer doing with its own hands. Every rule in this area exists because somewhere, at some point, somebody assumed the opposite.

What do the files on Sulekha Bhandari's desk actually look like?

Three files, then, not two, and the gap between them is where this whole subject lives. The first is what Trilokpur Capital Markets Private Limited is doing for Ratnakar Deshpande: managing the Vindhya Ceramics issue, coordinating the registrar, the trustee and the rating agency, and getting a Rs 40,00,00,000 raise across the line. The second is what the firm owes everybody else: the enquiry into what the issue documents say, and the certification it signs. The third is the customer due diligence establishing who Vindhya Ceramics actually is and who stands behind it, and it runs underneath both files and belongs to neither.

Read the last two columns together and the design of the whole arrangement becomes visible. On file one, the paying party and the relying party are the same person, so a slip is noticed immediately and gets fixed by lunchtime. On file two, they are different people entirely, and the relying party is not in the room, has no way of knowing how much enquiry was made, and will not find out for a long time if the answer is not much. The file with nobody waiting for it is the one the rules had to reach, and that is why the enquiry and the certification are regulated rather than the timetable.

Who actually uses any of this, and what do they do with it?

Four people, in four quite different rooms. A finance director in Ratnakar Deshpande's position, choosing whom to appoint to a raise, asks for the name of the firm and checks the registration rather than being reassured by the seniority of the people who came to the meeting. An analyst reading an issue document looks at who certified it and in whose name. The name shows whose reputation is standing behind the document the analyst is about to rely on. A compliance officer inside a firm does the least glamorous version: before the firm says yes to a new kind of mandate, they map the activity against the registrations the firm actually holds, and say no where it does not reach.

And the fourth is somebody at home with a phone. The person with the phone sees one name on a screen and now knows that a name is a channel, that an entity performing part of the process is not the lender, and that there is a third party somewhere whose permission is the one that matters. The single habit worth carrying away is the reflex of asking who holds the permission. In every arrangement of this shape that question has exactly one answer, and it is almost never the name shown first. Finding that answer for a lending application is set out under digital lending.

Vindhya Ceramics Private Limited, Trilokpur Capital Markets Private Limited, Suravali Registry Services Private Limited, Anantpur Trusteeship Services Limited, Bhadra Securities Private Limited, Sahyadri Ratings Limited, Neelanchal Asset Managers Private Limited, the Neelanchal India Growth Fund, Orient Meridian Fund, Ratnakar Deshpande, Sulekha Bhandari, Ismail Qureshi and Meera Vaidyanathan are invented.
Educational material. Not advice on any investment, tax, budget or market position.