Role of Merchant Bankers and Underwriters

No company can walk to the capital market alone. Between the issuer and the public stands the merchant banker, who as lead manager drafts the offer document, signs the due diligence certificate, and stakes its registration on the truth of every disclosure; and the underwriter, who promises to absorb the securities the public declines to buy. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 place these two intermediaries at the structural centre of every public issue. This chapter maps their statutory role under Part V (Regulation 23), the due-diligence duty in Regulation 24, the underwriting architecture in Regulation 40, and the body of SAT and SEBI case law that has converted a paperwork formality into a substantive, personal accountability.

Who is a Merchant Banker and Lead Manager

The ICDR Regulations do not separately define a "merchant banker"; they borrow it. Under the SEBI (Merchant Bankers) Regulations, 1992, a merchant banker is a person engaged in the business of issue management, either by making arrangements regarding selling, buying or subscribing to securities, or by acting as manager, consultant or adviser, or rendering corporate advisory services in relation to such issue management. The ICDR Regulations then channel this entity into a specific role. Regulation 2(1)(cc) defines a "lead manager" as "a merchant banker registered with the Board and appointed by the issuer to manage the issue," and provides that in a book built issue the lead manager(s) appointed by the issuer shall act as the book running lead manager(s) for the purposes of book building.

The distinction matters. "Merchant banker" is the licence; "lead manager" (or BRLM) is the function that licence performs in a particular public issue. Only a merchant banker registered with SEBI under the 1992 Regulations may be appointed as a lead manager, so the gatekeeping begins at registration. For the foundational architecture of the entire ICDR framework within which this role sits, see our chapter on the introduction and object of the Regulations, and for the surrounding vocabulary, the chapter on definitions and scope.

Appointment of Lead Managers: Regulation 23

Part V of the ICDR Regulations, titled "Appointment of Lead Managers, Other Intermediaries and Compliance Officer," opens with Regulation 23. Sub-regulation (1) is mandatory and unambiguous: "The issuer shall appoint one or more merchant bankers, which are registered with the Board, as lead manager(s) to the issue." There is no discretion to dispense with a lead manager; a public issue without one is not contemplated by the scheme.

Where more than one lead manager is appointed, Regulation 23(2) requires that "the rights, obligations and responsibilities, relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each lead manager shall be predetermined and be disclosed in the draft offer document and the offer document as specified in Schedule I." The purpose is accountability: in a syndicate of book running lead managers, an investor and the regulator must be able to identify which manager carried which duty, so that responsibility cannot be diffused into anonymity.

Regulation 23(4) adds that the issuer shall, in consultation with the lead manager(s), appoint other intermediaries registered with the Board "after the lead manager(s) have independently assessed the capability of other intermediaries to carry out their obligations." The lead manager is thus made the vetting hub for registrars, bankers to the issue and syndicate members. Regulation 23(5) requires the issuer to enter into an agreement with the lead manager(s) in the format specified in Schedule II, with a proviso that no clause may diminish or limit the liabilities and obligations of the lead manager(s) under the SEBI Act, the Companies Act, 2013 or the Securities Contracts (Regulation) Act, 1956.

The Independence Rule: Associates and Conflicts

A lead manager who is financially entangled with the issuer cannot be a credible gatekeeper. Regulation 23(3) addresses this directly: "At least one lead manager to the issue shall not be an associate (as defined under the SEBI (Merchant Bankers) Regulations, 1992) of the issuer and if any of the lead manager is an associate of the issuer, it shall disclose itself as an associate of the issuer and its role shall be limited to marketing of the issue."

Two safeguards operate together. First, there must always be at least one genuinely independent lead manager whose judgment is not compromised by an associate relationship. Second, an associate lead manager is not banned outright but is firewalled: it must publicly label itself as an associate and its role is statutorily confined to marketing the issue, not to certifying disclosures or running due diligence. This prevents the conflicted entity from controlling the very disclosures on which investors rely while still permitting the issuer to use a friendly distribution channel. The reservation provisions reinforce the conflict logic: Regulation 33 bars the issuer from making any reservation on a competitive basis in favour of the lead manager(s), the registrar, syndicate members, or their promoters, directors, employees and group or associate companies.

The Due Diligence Duty: Regulation 24

The heart of a merchant banker's responsibility is verification. Regulation 24 governs disclosures in the offer document and fixes the lead manager's role. Sub-regulation (1) requires that the draft offer document and offer document "shall contain all material disclosures which are true and adequate to enable the applicants to take an informed investment decision." The lead manager is the person who must make that true and adequate.

Regulation 24(3) is the operative command: "The lead manager(s) shall exercise due diligence and satisfy themselves about all aspects of the issue including the veracity and adequacy of disclosure in the draft offer document and the offer document." This is an affirmative, independent duty owed to the market, not merely to the client. Regulation 24(4) requires the lead manager(s) to "call upon the issuer, its promoters and its directors" (or, in an offer for sale, the selling shareholders) to fulfil their disclosed obligations, and Regulation 24(5) requires the lead manager(s) to ensure that the information and the restated audited financial statements in the offer document are not more than six months old from the issue opening date. For how these disclosures are first assembled and tested, read alongside our chapter on the disclosure requirements in the draft red herring prospectus.

The Due Diligence Certificate as a Substantive Representation

The lead manager's verification crystallises into a signed instrument. At the filing stage the lead manager(s) must furnish, among other items, "a due diligence certificate as per Form C of Schedule V, at the time of filing of the offer document," along with a statement certifying that all changes, suggestions and observations made by the Board have been incorporated, and a Form D due diligence certificate where the issuer has made a disclosure of any material development by public notice under Schedule IX. The merchant banker must also submit a due diligence certificate in Form A at the time of filing the draft offer document.

SEBI and the Securities Appellate Tribunal have repeatedly stressed that this certificate is not a clerical formality but a substantive representation. A merchant banker who signs Form C is telling the regulator and the investing public that it has personally satisfied itself, after reasonable investigation, of the truth and adequacy of the disclosures. The certificate is therefore the document on which liability most often turns: when disclosures later prove false or inadequate, the merchant banker cannot retreat behind the issuer's representations, because the certificate represents an independent professional judgment.

The Standard of Due Diligence: Keynote Corporate Services

What does "due diligence" actually demand? The leading articulation is the Securities Appellate Tribunal's decision in Keynote Corporate Services Ltd. v. Securities and Exchange Board of India (Appeal No. 84 of 2012, decided on 19 February 2014). SAT held that due diligence "does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out," describing it as "making an active effort to find out material developments that would affect interest of investors." The merchant banker is an investigator, not a stenographer.

SAT anchored its definition in the Supreme Court's exposition in Chander Kanta Bansal v. Rajinder Singh Anand, (2008) 5 SCC 117, where the Court defined "diligence" as "careful and persistent application or effort" and "diligent" as a person showing "care and steady application" to his work and duties. Imported into securities regulation, this means the merchant banker must probe board minutes, related-party arrangements, the real use of funds and any litigation or contingent liability, rather than accepting management's word at face value. The duty is one of active inquiry proportionate to the gravity of a public issue.

Reasonable, Not Limitless: Almondz Global Securities

The duty of active inquiry is bounded by reasonableness. In Almondz Global Securities Ltd. v. Securities and Exchange Board of India (SAT order dated 13 May 2016), the merchant banker had been debarred by SEBI for five years for failure to carry out reasonable due diligence in preparing the prospectus, including non-disclosure that funds raised through inter-corporate deposits effectively constituted bridge financing and failure to disclose material committee decisions revealed in board minutes.

SAT affirmed that a lapse had occurred but recalibrated the standard, holding that due diligence in law means "reasonable diligence" and doing "everything reasonable, not everything possible." Significantly, SAT observed that "a Merchant Banker cannot be expected to start a due diligence exercise with a presumption of fraud or mischief to be committed by a company whose IPO is to be issued through the Merchant Banker," and that the banker works on materials made available to it and cannot perform the duty "in a vacuum." On proportionality, SAT found the five-year debarment "extremely harsh and highly disproportionate" and quashed the residual punishment. Read together, Keynote and Almondz set the boundaries: active investigation is mandatory, but the yardstick is reasonable diligence calibrated to the information reasonably discoverable, not omniscience.

Underwriting Architecture: Regulation 40

Underwriting is the mechanism that protects an issue against the risk of under-subscription. Regulation 40 of the ICDR Regulations distinguishes two routes. For an initial public offer made other than through the book building process, Regulation 40(1) provides that if the issuer "desires to have the issue underwritten, it shall appoint underwriters in accordance with the SEBI (Underwriters) Regulations, 1993." In a fixed-price issue, underwriting is therefore optional, exercised at the issuer's election.

For a public issue made through the book building process, Regulation 40(2) makes underwriting compulsory and assigns it to the syndicate. The issue "shall be underwritten by lead manager(s) and syndicate member(s)," subject to the carve-out that at least the 75 per cent of the net offer that must be compulsorily allotted to qualified institutional buyers for compliance with the eligibility conditions in Regulation 6(2) cannot be underwritten. Before filing the prospectus, the issuer must enter into an underwriting agreement with the lead manager(s) and syndicate member(s) indicating the number of specified securities they shall subscribe to at the predetermined price in the event of under-subscription. For the eligibility backdrop that triggers this QIB carve-out, see our chapters on eligibility for an IPO and the broader hub at SEBI ICDR notes.

The Lead Manager as Underwriting Backstop

Regulation 40(2) builds a layered safety net. Clause (c) provides that "if the syndicate member(s) fail to fulfil their underwriting obligations, the lead manager(s) shall fulfil the underwriting obligations." The lead manager is thus the ultimate backstop: the entity that drafted the prospectus and certified its truth is also the one that must put its own capital behind the issue if the syndicate falters. This alignment of certification and financial risk is deliberate, since a manager that may have to buy the unsold securities itself has every incentive to price and disclose honestly.

Clause (d) forbids the lead manager(s) and syndicate member(s) from subscribing to the issue "in any manner except for fulfilling their underwriting obligations," preventing the syndicate from artificially propping up subscription numbers. Clause (e) requires that, in every underwritten issue, the lead manager(s) shall undertake the minimum underwriting obligations specified in the SEBI (Merchant Bankers) Regulations, 1992. Clause (f) ensures that where an issue is required to be underwritten, the underwriting obligations should be at least to the extent of minimum subscription, linking the underwriting commitment to the floor set by Regulation 45.

Minimum Subscription and the Refund Backstop

Underwriting exists to guard the minimum-subscription threshold. Regulation 45(1) requires that "the minimum subscription to be received in the issue shall be at least ninety per cent. of the offer through the offer document," except in an offer for sale, and subject to the allotment of the minimum number of specified securities prescribed under the Securities Contracts (Regulation) Rules, 1957. If that 90 per cent floor is not reached, Regulation 45(2) mandates that "all application monies received shall be refunded to the applicants forthwith, but not later than fifteen days from the closure of the issue."

The consequence of ignoring the refund duty is enforcement, as illustrated by Kunnamkulam Paper Mills Ltd. v. Securities and Exchange Board of India (High Court of Madras, Crl. A. No. 626 of 2019, judgment dated 5 July 2022). There the company and its directors made an allotment in violation of the disclosure norms then in force and, on SEBI's direction to refund the money collected to investors with interest, failed to comply; SEBI prosecuted under Sections 24(1) read with 27 of the SEBI Act, 1992. The case is a reminder that the refund obligation is backed by criminal sanction, and that the underwriting commitment a merchant banker gives is the market mechanism designed to keep an issue above the minimum-subscription line and avoid this very situation.

Pre-Issue and Post-Issue Functions of the Lead Manager

The lead manager's mandate runs the full length of the issue, not merely its certification moment. In the pre-issue phase, the merchant banker conducts the due diligence exercise, drafts and files the draft offer document with SEBI under Regulation 25, coordinates the in-principle approval from the stock exchanges, and works with the issuer to incorporate SEBI's observations before the prospectus is registered with the Registrar of Companies. The merchant banker also assesses, under Regulation 23(4), the capability of every other intermediary the issuer proposes to engage, and ensures, under Regulation 26, that the draft offer document is hosted for public comment for at least twenty-one days. It is during this phase that the most consequential decisions about pricing, disclosure architecture and risk factors are taken, and it is here that the duty articulated in Keynote Corporate Services Ltd. v. SEBI to "find out everything that is worth finding out" bites hardest.

In the post-issue phase, the lead manager supervises the orderly closure of the issue, the finalisation of the basis of allotment in consultation with the designated stock exchange and the registrar, the despatch of refunds and allotment advices, and the listing and trading approvals. Where the minimum subscription under Regulation 45 is not received, the lead manager must ensure that all application monies are refunded within fifteen days of closure, and where the issue is underwritten, that the underwriters honour their commitments. The merchant banker also assists in putting in place the monitoring agency required by Regulation 41 for issues exceeding one hundred crore rupees and in filing the post-issue reports SEBI requires. The role is therefore continuous stewardship of the offering's integrity from conception to listing.

Other Statutory Duties of the Lead Manager

The lead manager's responsibilities extend across the entire issue timeline beyond drafting and underwriting. Under Regulation 36, the lead manager(s) must ensure the availability of the offer document and other issue material, including application forms, to the stock exchanges, syndicate members, registrar, depository participants, stock brokers, underwriters, bankers to the issue and self-certified syndicate banks before the issue opens. Under Regulation 25, when SEBI specifies changes or issues observations on the draft offer document, the issuer and lead manager(s) must carry out those changes and submit an updated draft highlighting all modifications.

The lead manager also operates the demand-discovery machinery. The definition of "nominated investor" in Regulation 2(1)(ii) contemplates a qualified institutional buyer or private equity fund that enters into an agreement with the lead manager(s) to subscribe in case of under-subscription or to participate in market-making. Where the issue size (excluding any offer for sale) exceeds one hundred crore rupees, Regulation 41 requires the issuer to appoint a monitoring agency to track the use of issue proceeds, a discipline the lead manager helps put in place. These duties show that the merchant banker manages not just a document but the integrity of the entire offering process.

A Live Caveat: The 2021 Repeal of the Underwriters Regulations

Aspirants must note an important transitional point. Although Regulation 40(1) of the ICDR Regulations still textually refers to the SEBI (Underwriters) Regulations, 1993, those standalone regulations were repealed by the SEBI (Underwriters) (Repeal) Regulations, 2021, pursuant to a decision of SEBI's Board on 17 February 2021. Certificates of registration granted under the 1993 Regulations were deemed surrendered.

After the repeal, underwriting is no longer a separate registration category. The activity is now carried on under the SEBI (Merchant Bankers) Regulations, 1992 (merchant bankers continuing to undertake underwriting) and under the SEBI (Stock Brokers) Regulations, 1992, which were amended to incorporate underwriting as a permissible activity for registered stock brokers, complete with definitions, mandatory compliances, code of conduct and book-keeping requirements. In an examination answer, the safe statement is that underwriting under a public issue is undertaken by SEBI-registered merchant bankers and stock brokers, the dedicated 1993 regime having been folded into those broader frameworks, while the ICDR Regulations continue to govern the underwriting obligations attached to a particular issue under Regulation 40.

Liability, Sanctions and the Cost of Failure

The merchant banker's accountability is enforced through SEBI's full disciplinary toolkit. A failure of due diligence can attract debarment from taking up new assignments or new issues of capital, as in Almondz Global Securities; monetary penalties under Chapter VIA of the SEBI Act, 1992 (including Section 15HB for contravention where no specific penalty is provided); and, in egregious cases, prosecution under Section 24 read with Section 27 of the SEBI Act, as the Kunnamkulam Paper Mills prosecution demonstrates against issuers and their officers.

The jurisprudence drawn from Keynote Corporate Services, Chander Kanta Bansal and Almondz Global Securities establishes a coherent liability standard. The merchant banker owes an independent, active duty of verification to the market; that duty is measured by reasonable diligence rather than perfection; the due diligence certificate is a substantive personal representation, not a formality; and sanctions, while real, must be proportionate to the lapse. For students mapping where this fits in the issue lifecycle, the role of merchant bankers and underwriters bridges the eligibility gateways and the disclosure regime, and connects naturally to the discipline of promoters' contribution and lock-in, which the lead manager must also certify.

Exam Takeaways and Common Pitfalls

For judiciary and CLAT-PG aspirants, a few precise propositions repay memorisation. First, the source of definitions: "lead manager" is defined in Regulation 2(1)(cc) of the ICDR Regulations, but "merchant banker" is borrowed from the SEBI (Merchant Bankers) Regulations, 1992. Second, the mandatory character of Regulation 23(1) and the associate firewall in Regulation 23(3) (at least one independent lead manager; an associate's role confined to marketing). Third, the due-diligence duty in Regulation 24(3) and the Form A and Form C due diligence certificates of Schedule V as substantive representations, not formalities.

Fourth, on underwriting, distinguish the optional underwriting of a fixed-price IPO under Regulation 40(1) from the compulsory underwriting of a book built issue under Regulation 40(2), the QIB carve-out tied to Regulation 6(2), and the lead manager's backstop liability under Regulation 40(2)(c). Fifth, the case-law standard: Keynote Corporate Services Ltd. v. SEBI (active inquiry), Chander Kanta Bansal v. Rajinder Singh Anand, (2008) 5 SCC 117 (the meaning of diligence) and Almondz Global Securities Ltd. v. SEBI (reasonable, proportionate diligence). The common pitfall is to cite the SEBI (Underwriters) Regulations, 1993 as current law; remember they were repealed in 2021 and that underwriting now sits within the Merchant Bankers and Stock Brokers Regulations. State only what the bare text and the verified decisions support, and the answer will hold.