Capital Market and Securities Laws · Securities Market Intermediaries

Merchant Bankers and Underwriters under SEBI Regulations

Updated 11 October 2026 · Fact-checked

A merchant banker manages a public issue: it prepares the offer document, does due diligence and coordinates other intermediaries. An underwriter agrees to subscribe to the unsubscribed part of an issue. Both need a SEBI certificate of registration under section 12 of the SEBI Act, 1992, and must follow SEBI's regulations and code of conduct.

Understand Merchant Bankers and Underwriters

When a company raises money from the public, it cannot simply invite applications. It needs experts to prepare disclosures, price the issue, market it and make sure the money is raised. These experts are the merchant bankers and the underwriters.

A merchant banker is the lead manager of an issue. It advises the issuer, prepares the draft offer document, carries out due diligence on the information disclosed, files documents with SEBI and coordinates registrars, bankers to the issue, advertising agencies and others. Its core duty is to make sure the disclosures are true and adequate so investors are protected.

An underwriter gives a promise of support. It agrees to subscribe to the securities, up to the amount underwritten, if the public does not subscribe fully. This reduces the risk that the issue fails. Underwriting is done under an agreement with the issuer, and the underwriter earns a commission.

The legal base is the SEBI Act, 1992. Section 12(1) lists merchant bankers and underwriters among intermediaries who must not buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations. Section 12(2) says an application for registration must be in the manner and with the fees determined by regulations. Section 12(3) lets SEBI suspend or cancel the certificate by order, but only after giving the person a reasonable opportunity of being heard. Section 30(2)(d) empowers SEBI to make regulations on the conditions for granting registration, the fee, and the manner of suspension or cancellation.

SEBI also frames regulations under section 11A on issue of capital and disclosures. These regulations place responsibilities on merchant bankers in each issue. The detailed regulations carry the eligibility conditions, the categories of registration, the code of conduct and the penalties for default. Learn the Act-level framework first, then the working duties.

Key rules to remember

Registration requirement: Merchant banker / underwriter → no dealing in securities without a SEBI certificate of registration (SEBI Act, section 12(1)); The certificate must be obtained in accordance with the regulations, and the intermediary must act within its conditions.
Application for registration: Application in the manner and with the fee determined by regulations (section 12(2)); The Act leaves manner and fee to regulations.
Suspension or cancellation: SEBI may suspend or cancel by order, after giving a reasonable opportunity of being heard (section 12(3)); Natural justice is a condition. An order without a hearing is not valid under this section.
Regulation-making power: Section 30(2)(d): conditions of registration, fee, manner of suspension or cancellation; This is the source of the merchant banker and underwriter regulations on registration.
Merchant banker vs underwriter: Merchant banker = manages the issue and checks disclosures; Underwriter = agrees to subscribe to the shortfall; The most common comparison question. Link each to its core risk: disclosure risk and subscription risk.

How to solve Merchant Bankers and Underwriters questions

Use this method for any question on merchant bankers or underwriters, whether it asks for a role, a comparison, or a legal consequence.

1Identify what is asked: registration, role, obligation, code of conduct, or the difference between the two intermediaries.
2State the legal source first: section 12 of the SEBI Act, 1992 and the relevant SEBI regulations.
3Define the intermediary in one line: merchant banker manages the issue; underwriter covers the shortfall.
4List the duties or conditions in short points: due diligence, offer document, coordination, underwriting agreement, subscription of unsubscribed portion.
5Apply them to the facts given, such as an unregistered person acting as lead manager or a failed issue.
6Add the consequence: suspension or cancellation only after a reasonable opportunity of being heard.
7Close with a clear conclusion that answers the exact question.

Quickest way: Role, Registration, Risk

When to use it: Use this when you have a few minutes for a short-note or comparison question.

Role: write what the intermediary does in the issue.
Registration: write section 12(1) and that a SEBI certificate is needed.
Risk: merchant banker handles disclosure and process risk; underwriter handles subscription risk.
Action: SEBI may suspend or cancel under section 12(3) after a hearing.
Finish with a one-line conclusion.

Common mistakes in Merchant Bankers and Underwriters

Treating merchant banker and underwriter as the same thing.
Both are connected with a public issue and the same firm can act in both roles.
Fix: Separate the functions. Merchant banker manages and does due diligence. Underwriter commits to subscribe to any shortfall.
Saying SEBI can cancel registration immediately.
Students remember the power but forget the condition.
Fix: Always add that under section 12(3) an order needs a reasonable opportunity of being heard.
Stating the registration fee or capital figures from memory.
Students try to reproduce numbers from the regulations.
Fix: Unless you are sure of the current figure, say the fee and conditions are as determined by regulations (section 12(2)).
Writing only a definition and no conclusion.
Theory answers feel complete after listing duties.
Fix: In ICSI style give the provision, the analysis and a conclusion tied to the facts.
Confusing section 11A with section 12.
Both appear in the same chapter and both concern issues and intermediaries.
Fix: Section 11A deals with regulating disclosures and offer documents in issues. Section 12 deals with registration of intermediaries.

Worked examples

Example 1

Prime Capital Advisors, an unregistered firm, acts as lead manager for a public issue of Sundaram Textiles Ltd. Is this permissible? What can SEBI do?

Show the solution

Provision: section 12(1) of the SEBI Act, 1992 lists merchant bankers among intermediaries who must not buy, sell or deal in securities except under, and in accordance with, a certificate of registration obtained from the Board in accordance with the regulations.
Facts: Prime Capital acts as a merchant banker without registration.
Analysis: it is not holding the required certificate, so its activity is not in accordance with section 12(1).
Action: SEBI can take action under the Act and regulations. If it held a certificate and breached its conditions, SEBI could suspend or cancel it by order, but only after giving a reasonable opportunity of being heard (section 12(3)).
Conclusion: the arrangement is not permissible.

Answer: Acting as a merchant banker without a SEBI certificate of registration is not permissible under section 12(1). Sundaram Textiles should appoint a registered merchant banker.

Example 2

Distinguish between a merchant banker and an underwriter in a public issue.

Show the solution

Provision: both are intermediaries who need registration under section 12(1) of the SEBI Act, 1992.
Role: a merchant banker manages the issue, prepares the offer document, carries out due diligence and coordinates other intermediaries. An underwriter agrees to subscribe to the securities not taken up by the public, up to the amount underwritten.
Risk covered: merchant banker deals with disclosure and process risk. Underwriter deals with the risk of under-subscription.
Basis of work: merchant banker works on the appointment by the issuer. Underwriter works under an underwriting agreement and earns commission.
Action on default: for both, SEBI may suspend or cancel registration after a reasonable opportunity of being heard (section 12(3)).
Conclusion: they are different roles, though one registered firm may perform both if its registration allows.

Answer: A merchant banker manages the issue and ensures proper disclosures. An underwriter guarantees subscription to the extent of the shortfall. Both need SEBI registration under section 12.

Exam tips

Start every answer with section 12 of the SEBI Act. It shows the examiner you know the legal basis.
For a comparison question, write a point-wise contrast on role, risk, and agreement. Keep it short.
Do not quote numbers for fees or net worth unless you are sure. Say they are as per the regulations.
In a case-based question, always end with a conclusion that names the intermediary and the consequence.
Remember the hearing condition in section 12(3). It is a frequent scoring point.

Practice questions from Securities Market Intermediaries

Merchant Bankers and Underwriters in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ProfessionalMerchant Bankers and Lead Managers

Merchant Bankers and Underwriters: frequently asked questions

Is registration with SEBI compulsory for a merchant banker?

Yes. Section 12(1) of the SEBI Act, 1992 says a merchant banker cannot buy, sell or deal in securities except under a certificate of registration obtained from SEBI in accordance with the regulations.

What is the difference between a merchant banker and an underwriter?

A merchant banker manages the public issue and checks the disclosures. An underwriter agrees to subscribe to the unsubscribed part of the issue. They carry different risks, and each must be registered.

Can SEBI cancel the registration of a merchant banker?

Yes. Under section 12(3), SEBI may suspend or cancel a certificate by order. It must first give the person a reasonable opportunity of being heard.

Where does SEBI get power to make merchant banker regulations?

Section 30(2)(d) of the SEBI Act allows regulations on the conditions for granting registration, the fee and the manner of suspension or cancellation. Section 11A supports regulations on issue of capital and disclosures.