Merchant bankers can not refer clients for alternative investments beyond securities market, such as corporate deposits and real estate, regulator SEBI has said while rejecting a plea by Barclays Securities.
Merchant bankers act as intermediaries between entities seeking to raise capital through sale of securities and the purchasers of these securities.
Referring clients to entities providing alternative investment services beyond securities market do not fall under the permitted businesses for merchant bankers, SEBI has said.
Barclays Securities India Pvt Ltd (BSIPL), a wholly-owned subsidiary of U.K.-based banking major Barclays Bank Plc, is registered with SEBI as a portfolio manager, stock broker, merchant banker and depository participant.
The company had approached SEBI in June 2010 seeking an ’informal guidance’ on whether it can engage in the business of referring clients to “Alternative Service Providers (ASP) for non-security related products and/or services.”
Barclays said such ASPs could include investment banking firms arranging investment in corporate deposits and inter-corporate deposits, property consultants for purchase and sale of real estate, companies accepting corporate deposits and firms assisting in placement of such deposits.
Besides, Barclays also listed out banks, NBFCs, home finance companies or any other lenders, including but not limited to the Barclays group, who can provide credit products.
Barclays said that such referral agreements would have no financial liabilities and would involve payment of referral fees to it based on volume of business.
BSIPL sought a ‘no action letter’ from SEBI, stating that its proposed activities would not attract any sanction from the regulator for it being a stock broker or merchant banker.
In its guidance, SEBI said that a stock broker may engage in referral business which does not involve any personal financial liability, subject to some conditions.
However, BSIPL was also registered as a merchant banker and the regulations do not allow merchant bankers to carry on any business other than the securities market.
SEBI said that an amendment to its merchant banking regulations permitted merchant bankers to engage in activities such as project advisory services, rupee loan syndication and international financial advisory services, but these did not include the activities requested by Barclays.
“Since referral activities for non-security related products and/or services does not fall within the purview of the activities permitted by regulation..., you are not permitted to undertake such business,” SEBI informed BSIPL.
