“MERCHANT BANKING”

Bachelor of Commerce

Banking & Insurance

Semester v

(Academic Year: 2010-2011)

Submitted By

HEBTULLAH KAPADIA

Seat No:

JAI HIND COLLEGE

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‘A’ Road, Churchgate, Mumbai-400 020

MERCHANT BANKING

BACHELOR OF COMMERCE

BANKING & INSURANCE

SEMESTER V

SUBMITTED BY

HEBTULLAH KAPADIA

SEAT NO.

JAI HIND COLLEGE

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‘A’ ROAD, CHURCHGATE, MUMBAI-400 020

DECLARATION

I, HEBTULLAH KAPADIA, student of B.Com. Banking & Insurance Semester V (2010-11) hereby declare that I have completed the project on “MERCHANT BANKING”.

The information submitted is true and original to the best of my knowledge.

HEBTULLAH KAPADIA

SEAT NO:

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MERCHANT BANKING

BACHELOR OF COMMERCE

BANKING & INSURANCE

SEMESTER V

SUBMITTED

IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF DEGREE OF

BACHELOR OF COMMERCE –

BANKING & INSURANCE

BY

HEBTULLAH KAPADIA

SEAT NO:

JAI HIND COLLEGE

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‘A’ Road, Churchgate, Mumbai-400 020.JAI HIND COLLEGE

‘A’ Road, Churchgate, Mumbai-400 020.

CERTIFICATE

This is to certify that Mr. HEBTULLAH KAPADIA of B.Com. Banking & Insurance Semester V (2010-11) has successfully completed the project on MERCHANT BANKING under the guidance of Professor Adarsh Suri and Professor Neha Shah.

Course Co-ordinator Principal

Internal Examiner External Examiner

College Seal

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ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the writing of this book.

My deepest thanks to Lecturer, Adarsh Suri the Guide of the project for guiding

and correcting various documents of mine with attention and care. She has taken

pain to go through the project and make necessary correction as and when needed.

I express my thanks to the Principal of, JAI HIND COLLEGE, Churchgate,

Mumbai, for extending her support.

My deep sense of gratitude to Mr. Amit Bansod, Chief Syndicated Loan Manager,

SBI CAPITAL MARKETS LIMITED support and guidance. Thanks and

appreciation to the helpful people at SBI CAPITAL MARKETS LIMITED for

their support.

I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.

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INDEX

PARTICULARS1 EXECUTIVE SUMMARY 12 INTRODUCTION 23 HISTORY OF MERCHANT BANKING 34 TRADATIONAL MERCHANT BANKING 55 MODERN MERCHANT BANKING 66 MAIN OBJECTIVES OF MERCHANT BANKERS 8

7 98 MERCHANT BANKING IN INDIA 12

9 1410 ROLE OF MERCHANT BANKER 16

11 1712 GUIDELINES OF SEBI 2113 INVESTMENT BANKS V/S MERCHANT BANKS 2314 MERCHANT BANKS V/S COMMERCIAL BANK 2315 FUNCTIONS OF MERCHANT BANKERS 2416 PROBLEMS OF MERCHANT BANKING 3017 CASE STUDIES 3218 ANALYSIS AND INTERPRETATION 3719 CONCLUSION 4720 BIBLIOGRAPHY 4821 ANNEXURE - QUESTIONAIRE 49

Sr.No.

PAGENo.

SCOPE FOR GROWTH OF MERCHANT BANKING IN INDIA

DEVELOPMENTS IN MERCHANT BANKING ESTABLISHMENTS IN INDIA

REQUIREMENTS FOR SETTING UP A MERCHANT BANKING OUTFIT

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EXECUTIVE SUMMARY

Merchant Banking is an important service provided by a number of financial institutions that helps in the growth of the corporate sector which ultimately reflects into the overall economic development of the country. Merchant banks were expected to perform several functions like issue management, underwriting, portfolio management, loan syndication, consultant, advisor and host of other activities. SEBI was also made all powerful to regulate the activities of merchant banks in the best interest of investors and economy. Apart, merchant banking was the necessity of banks themselves which were in need of non-fund based income so as to improve their profitability margins by all means in the changed economic scenario. Now, it could be anybody's anxiety to know whether merchant banks are performing their duties honestly as they were expected to do. What duties they performs most and in what capacity. Whether merchant banking business helped banks themselves to improve their overall profitability. Does the socio, political and economic environment prevailing today sufficiently warrant, the growth of merchant banking or otherwise? An honest attempt is being made to seek answer of these questions and also to suggest remedial measures wherever possible on the basis of empirical study done.

HYPOTHESIS

“CONSUMER ‘KNOW HOW’ AND ‘AWARENESS’ IS ESSENTIAL FOR THE PROFITABILITY OF MERCHANT BANKING BUSINESS.”

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INTRODUCTION

Original Definition: A Merchant Bank is a British term for a bank providing

various financial services such as accepting bills arising out of trade, providing

advice on acquisitions, mergers, foreign exchange, underwriting new issues, and

portfolio management.

The Focus Definition: In banking, a merchant bank is a traditional term for an

Investment Bank. It can also be used to describe the private equity activities of

banking.

Amidst the swift changes sweeping the financial world, Merchant Banking has

emerged as an indispensable financial advisory package. Merchant banking is a

service-oriented function that transfers capital from those who own to those who

can use it. They try to identify the needs of the investors & corporate sector &

advice entrepreneurs what to do to be successful.

The merchant banking has been defined as to what a merchant banker does. A

merchant Banker has been defined by Securities Exchange Board Of India

(Merchant Banker) rules, 1992, as “Any person who is engaged in the business of

issue management either by making arrangements regarding selling, buying or

subscribing to securities or acting as manager, consultant, advisor or rendering

corporate advisory services in relation to such issue management.

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HISTORY OF MERCHANT BANKING

In late 17th and early 18th century Europe, the largest companies of the world was

merchant adventurers. Supported by wealthy groups of people and a network of

overseas trading posts, the collected large amounts of money to finance trade

across parts of the world. For example, The East India Trading Company secured a

Royal Warrant from England, providing the firm with official rights to lucrative

trading activities in India. This company was the forerunner in developing the

crown jewel of the English Empire. The English colony was started by what we

would today call merchant bankers, because of the firm's involvement in financing,

negotiating, and implementing trade transactions. The colonies of other European

countries were started in the same manner. For example, the Dutch merchant

adventurers were active in what are now Indonesia; the French and Portuguese

acted similarly in their respective colonies. The American colonies also represent

the product of merchant banking, as evidenced by the activities of the famous

Hudson Bay Company. One does not typically look at these countries' economic

development as having been fueled by merchant bank adventurers. However, the

colonies and their progress stem from the business of merchant banks, according to

today's accepted sense of the word. Merchant banks, now so called, are in fact the

original "banks". These were invented in the middle Ages by Italian grain

merchants. As the Lombardy merchants and bankers grew in stature on the back of

the Lombard plains cereal crops many of the displaced Jews who had fled

persecution after 613 entered the trade. They brought with them to the grain trade

ancient practices that had grown to normalcy in the middle and far east, along the

Silk Road, for the finance of long distance goods trades.

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The Jews could not hold land in Italy, so they entered the great trading piazzas and

halls of Lombardy, alongside the local traders, and set up their benches to trade in

crops. They had one great advantage over the locals.

Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the

other hand, could lend to farmers against crops in the field, a high-risk loan at what

would have been considered usurious rates by the Church, but did not bind the

Jews. In this way they could secure the grain sale rights against the eventual

harvest. They then began to advance against the delivery of grain shipped to distant

ports. In both cases they made their profit from the present discount against the

future price. This two-handed trade was time consuming and soon there arose a

class of merchants, who were trading grain debt instead of grain.

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TRADATIONAL MERCHANT BANKING

Merchant Banking, as the term has evolved in Europe from the 18th century to

today, pertained to an individual or a banking house whose primary function was

to facilitate the business process between a product and the financial requirements

for its development. Merchant banking services span from the earliest negotiations

from a transaction to its actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity

was directed towards a commodity trader/cargo owner who was involved in the

buying, selling, and shipping of goods. The role of the merchant banker, who had

the expertise to understand a particular transaction, was to arrange the necessary

capital and ensure that the transaction would ultimately produce "collectable"

profits. Often, the merchant banker also became involved in the actual negotiations

between a buyer and seller in a transaction.

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MODERN MERCHANT BANKING

During the 20th century, however, European merchant banks expanded their

services. They became increasingly involved in the actual running of the business

for which the transaction was conducted. Today, merchant banks actually own and

run businesses for their own account, and that of others.

Since the 18th century, the term merchant banker has, therefore, been considerably

broadened to include a composite of modern day skills. These skills include those

inherent in an entrepreneur, a management advisor, a commercial and/or

investment banker plus that of a transaction broker. Today a merchant banker is

who has the ability to merchandise -- that is, create or expands a need -- and fulfill

capital requirements. The modern European merchant bank, in many ways, reflects

the early activities and breadth of services of the colonial trading companies.

Most companies that come to a U.S. merchant bank are looking to increase

their financial stability or satisfy a particular, immediate capital need.

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Professional merchant bankers must have:

1) An understanding of the product, its industry and operational management;

2) An ability to raise capital which might or might not be one's own (originally

merchant bankers supplied their own capital and thereby took an equity interest in

the transaction);

3) And most importantly, effective skills in concluding a transaction - the actual

sale of the product and the collection of profit. Some people might question

whether or not there are many individuals or organizations that have the abilities to

fulfill all three areas of expertise.

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MAIN OBJECTIVES OF MERCHANT BANKERS

Merchant bankers render their specialized assistance in achieving the main objectives which are presented below:

To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India.

The main object of merchant banker is to create secondary market for bills and discount or re-discount bills and acts as an acceptance house.

Merchant banker’s another objective is to set up and provide services for the venture capital technology funds.

They also provide services to the finance housing schemes for the construction of houses and buying of land.

They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India.

They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

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SCOPE FOR GROWTH OF MERCHANT BANKING IN INDIA

As planning and industrial policy of the country envisaged the setting of up of new industries and technology, greater financial sophistication and financial services are required. There is a well proven link between economic growth and financial technology.

Economic development requires specialist financial skills: savings banks to marshal individual savings; finance companies for consumer lending and mortgage finance; insurance companies for life and property cover; agricultural banks for rural development; and a range of specialized government or government sponsored institutions. As new units have been set up and business is expanding, they require additional financial services. A public equity or debt issue is the logical source of fund in this situation and merchant banks can tap this opportunity of growth.

The areas of great scope could be,

Growth of Primary market:If the primary market grows and number of issues increases, the scope of merchant banking will be enhanced.

Entry of Foreign Investors:Now India capital market directly taps foreign capital through euro issues.FDI is increased in capital market. So Merchant bankers are required to advice them for their investment in India. The increasing number of joint ventures also requires expert services of Merchant Bankers. If more and more NRIs participate in capital market, there will be great demand for merchant banker services.

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Changing policy of Financial Institutions:Now the lending policies of financial institutions are based on project orientation, so the merchant banker services will be needed by corporate enterprise to provide expert guidance.

Development of debt markets:If the debt market is enhanced, there will be tremendous scope for Merchant bankers. Now NSE and OTCEI are planned to raise their fund through debt instruments.

Corporate restructuring:Due to liberalization and globalization Companies are facing lot of competition. In order to compete, they have to go for restructuring, merger, acquisitions or disinvestments. They may offer good opportunities to merchant bankers.

The scope could be extended to:-

1. Advising the company on designing of its Capital Structure.

2. Advising the company on the instrument to be offered to the public.

3. Pricing of the instrument.

4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ ROC/ Stock

5. Exchanges and other regulatory authorities.

6. Assisting the company in marketing the issue.

7. In channelizing the financial surplus of the general public into productive investment avenues.

8. To coordinate the activities of various intermediaries to the share issue such as the registrar, Bankers, advertising agency, printers, underwriters, brokers etc.

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THE FACTORS ON WHICH GROWTH OF MERCHANT BANKING DEPENDS:

Planning and industrial policy of the country i.e. India in this case

Prevailing Economic condition of the country.

Regulatory system of the market and economy prevailing in India.

Confidence of the people, traders, buyers, marketers, business houses, financial institutions etc.

The economic environment of the outside world.

Competition among the existing players and the upcoming entrants.

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MERCHANT BANKING IN INDIA

In India Merchant Banking activities started from the year 1967, following the

footsteps of similar activities in UK & USA. Currently Merchant Banking activity

has mushroomed in the Indian capital market with both public & private sector

settings up their respective merchant Banking divisions. Currently, the total no. of

merchant bankers in India are approx. 1450 with more than 930 registered with

SEBI. The SEBI authorized Merchant Bankers Include merchant Banking

divisions of All India Financial Institutions, nationalized & foreign banks,

subsidies of the commercial banks, private merchant banks engaged in stock

broking, underwriting activities & financial consultancy & investment advisory

service firms.

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Grindlays Banks – 1967

Citi banks – 1970

SBI – 1973

ICICI – 1974

Merchant banking in India - an overview

Companies raise capital by issuing securities in the market. Merchant bankers act

as intermediaries between the issuers of capital and the ultimate investors who

purchase these securities.

Merchant banking… is the financial intermediation that matches the entities that

need capital and those that have capital. It is a function that facilitates the low of

capital in the market.

Merchant banker registered with SEBI:

Public Sector: - Commercial banks (24), Financial Institutions (6), State

Institutions (4)

Private sector: - International bankers (10), Banks (10), finance & investment

(231)

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DEVELOPMENTS IN MERCHANT BANKING ESTABLISHMENTS IN INDIA

Setting up of banks Subsidiaries:

In order to meet the growing demand for broad-based finacial services from the corporate sector more effectively, the merchant banking division of the nationalise banks have stated forming independent subsidiaries. These subsidiaries offer more specialized services with professional expertise & skills. SBI capital market ltd. Was incorporated as the first such subsidiary of SBI on 2 July, 1986. Then CAN BANK financial services ltd was set up as wholly owned subsidiary of Canra bank in 1987. PNB Capital Market was promoted by PNB during Mid 1988. Many more subsidiaries are being set up by another nationalize banks.

Reorganisation of private Firms:

Expecting tough Competition from growing number of merchant banking subsidiary of nationalised banks, private merchant bankers have also started reorganising their activities e.g., J.M financial & investment consultancy ltd., 20th century finance corporation ltd., LKP merchant financing ltd are some of the private sector firms of merchant bankers who have taken steps to reorganise their activities.

Establishment of SUA:

In order to educate and protect the interest of investor , to provide information about new issues of capital market, to evolve a code of conduct for underwriters & to render legal & other services to members & public, the STOCKBROKER UNDERWRITER ASSOCIATION(SUA) was established in 1984

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Discount & Finance House of India(DFHI)

DFHI was incorporated as a company under the company act 1956 with an authorized & paid up capital of Rs 100 crores. Out of this Rs 51 crores has been contributed by RBI, Rs 16 crores by financial intuitions & 33 crores by public sector banks. It would also have line of credit from public sector banks; refinance facility from the RBI in order to meet the working capital requirement. DFHI aims at providing liquidity in money market as it deals mainly in commercial bills.

Credit Rating Information Services of India Ltd.(CRISIL)

CRISIL has been set up in 1987 to provide help to investors, merchant bankers, underwriters, brokers, banks & financial institutions etc. CRISIL rates various types of instruments such as debt, Equity, & Fixed return security offered to the public. It help the investor in taking investment decisions.

Stock-Holding Corporation of India Ltd. (SHC)

SHC was set up in 1986 by the all Indian financial institutions to take care of safe custody, delivery of shares & collection of sale proceeds of the securities.

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ROLE OF MERCHANT BANKER

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant banker’s dynamism lies in promptly attending to the corporate problems and suggests ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world.

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REQUIREMENTS FOR SETTING UP A MERCHANT BANKING OUTFIT

1. Formation of the Business Organization:-

SEBI act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the types of organizations are listed below:

Sole proprietorship Partnership firm Hindu Undivided Family (HUF) Corporate Enterprises Co-operative Society

Generally it is preferred that the Merchant Banking outfit be a registered company. Merchant Banks are generally setup as subsidiary companies of banks (Public or Private). For example, SBI caps, ICICI Securities etc.

2. Adoption of a viable business plan:-

All the basic tests required to find out whether the business to be undertaken is viable or not are also applicable to a Merchant Banking setup. Capital adequacy, profitability, growth opportunities and current market size are some of the factors which need to be looked into.

3. Registration of Merchant Bankers:-

Application for grant of certificate

An application for grant of a certificate needs to be made to SEBI.

The application can be made for any one of the following categories of the merchant banker namely:-

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Category I, that is –

(i) To carry on any activity of the issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and

(ii) To act as adviser, consultant, manager, underwriter, portfolio manager.

Category II, that is, to act as adviser, consultant, co- manager, underwriter, portfolio manager;

Category III, that is to act as underwriter, adviser, consultant to an issue;

Category IV, that is to act only as adviser or consultant to an issue.

To carry on the activity as underwriter or portfolio manager a separate certificate of registration needs to be obtained from SEBI.

Application to conform to the requirements

The application should conform to all the requirements under the SEBI guidelines, otherwise it may be rejected.

Furnishing of information, clarification and personal representation

The Board may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker for the purpose of disposal of the application. The applicant or its principal officer may appear before the Board for personal representation.

Consideration of application

The Board shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely: -

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The applicant shall be a body corporate other than a non- banking financial company

The merchant banker who has been granted registration by the Reserve Bank of India to act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit

The applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities

The applicant has in his employment minimum of two persons who have the experience to conduct the business of the merchant banker

A person directly or indirectly connected with the applicant has not been granted registration by the Board;

The applicant fulfils the capital adequacy requirement is as follows:

The capital adequacy requirement should not be less than the net worth of the person making the application for grant of registration. The net worth shall be as follows,

Category Minimum Amount

Category I Rs. 5, 00, 00, 000

Category II Rs. 50, 00, 000

Category III Rs. 20, 00, 000

Category IV Nil

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The applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant and have not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence

The applicant has the professional qualification from an institution recognized by the Government in finance, law or business management

Grant of certificate to the applicant is in the interest of investors.

Procedure for Registration

The Board on being satisfied that the applicant is eligible shall grant a certificate. On the grant of a certificate the applicant shall be liable to pay the fees as prescribed.

Payment of fees and the consequences of failure to pay fees

Every applicant eligible for grant of a certificate shall pay such fees in such manner and within the period specified.

Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may suspend the registration certificate, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists.

The Merchant Bank can commence business on acquisition of a Certificate of Registration from the SEBI after completion of the above mentioned formalities.

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GUIDELINES OF SEBI

After the obligations of the CCI, the place was occupied by a legal organ called as “Securities and Exchange Board of India”. The issue of capital and pricing of issues by companies has become free of prior approval. The SEBI has issued guidelines for the issue of capital by the companies. The guidelines broadly covers the requirement of the first issue by a new or the first issue of a new company set up by the existing company, the first issue by the existing private companies and public issues by the existing listing companies. The SEBI is the most powerful organization to control and lead both the primary market and secondary market.

The SEBI has announced the new guidelines for the disclosures by the Companies leading to the investor protection. They are presented below:

If any Company’s other income exceeds 10 per cent of the total income, the details should be disclosed.

The Company should disclose any adverse situation which affects the operations of the Company and occurs within one year prior to the date filing of the offer document with the Registrar of Companies or Stock Exchange.

The Company should also disclose the information regarding the capacity utilization of the plant for the last 3 years.

The Promoters of the Company must maintain their holding at least at 20 per cent of the expanded capital.

The minimum application money payable should not be less than 25 per cent of the issue price.

The company should disclose the time normally taken for the disposal of various types of investor’s grievances.

The Company can make firm allotments in public issues as follows: Indian mutual funds (20%), FIIS (24%), Regular employees of the company (10%), Financial institution (20%).

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The Company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities.

According to the guidelines, in case of the public issues, at least 30 mandatory collection centres should be established.

According to the SEBI guidelines regarding rights issue, the Company should give advertisements in not less than two news-papers about the dispatch of letters of offer. No preferential allotment may be made along with any rights issue.

The Company should also disclose about the fee agreed between the lead managers and the Company in the memorandum of understanding.

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INVESTMENT BANKS V/S MERCHANT BANKS

INVESTMENT BANKING

Both fee-based and fund-based. Commit their own funds.

MERCHANT BANKING

Purely fee-based.

Impossible to stay aloof from international trends.

MERCHANT BANKS V/S COMMERCIAL BANK

COMMERCIAL BANKING

Deals with Debt & Debt related finance. Asset oriented. Generally avoid risks.

MERCHANT BANKING

Deals with Equity & Equity related finance. Management oriented. Willing to accept risks.

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FUNCTIONS OF MERCHANT BANKERS

Consulting advice on going public and international business.

Advice and help in taking your company public. If they are unwilling to supply Investment

Banking bridge loans, they have a low cost strategy for taking your company public.

They do PIPE (Private Investment in Public Equities) financings.

They can advise or help with a company’s M&A strategy.

They are essential advisors for companies seeking to become multinational corporations

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o Corporate Counseling

Corporate counseling covers the entire field of merchant banking activities viz. project counseling, capital restructuring, public issue management, loan syndication, working capital, fixed deposit, lease financing acceptance credit, etc. Merchant bankers also offer customized solutions to their client’s financial problems.

o Project   Counseling

Project counseling includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions or banks. It also includes filling up of application forms with relevant information for obtaining funds from financial Institutions and obtaining government approval.

o Credit Syndication

Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly they analyses the pattern of the client’s cash flows, based on which the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.

o Issue Management and Underwriting

Management of issue involves marketing of corporate securities viz. equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as an intermediary whose main job is to transfer capital from those who own it to those who need it.

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After taking action as per SEBI guidelines, the merchant banker arranges a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issue, registration of prospectus, launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions. Pricing of issues is done by the companies in consultant with the merchant bankers.

o Under writing of public issue

Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue.

o Bankers to the Issue

The merchant banker can automatically become the banker to the issue in the following cases:

The bank is a broker to the company

It has given underwriting commitments.

It acts as a manger to the issue

The function of a banker to the issue is to accept application forms from the public together with subscription money and transfer them to the account of the controlling branch.

o Portfolio Management

Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and government securities.

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Portfolio management refers to maintaining proper combinations of securities in a manner that they give maximum return with minimum risk.

o Advisory Services Relating To Mergers and Takeovers

A merger is defined as a combination of two or more companies into a single company where one services and other looses their corporate existence. A merger is also defied as an amalgamation wherein the shareholders of the combining companies become substantially the shareholders of the company formed.

A takeover is referred to as an acquisition, which is the purchase, by one company of a controlling interest in the share capital of another existing company.

Merchant bankers are the middlemen settling negotiations between the offered and the offeror. Their role is specific and specialized in handling the mergers and taker over assignments. Being a professional expert, the merchant banker is apt to safeguard the interest of the shareholders in both the companies and as such his assistance is useful for both the companies, i.e. the acquirer as well as the acquired company.

Based on the purpose of business objective, the search of the acquirer company will start for a merger partner company. If the objective of merger is growth oriented i.e. seeking expansion in production and market segments, utilization of existing companies or optimum utilization of resources, then the acquirer company will select a business related company as a merger partner.

If the objective is diversification in production line or business activities, then it will select a non-related company as a merger partner.

Once the merger partner is proposed the merchant banker has to appraise the merger/takeover proposal with respect to financial viability and technical feasibility. He has to negotiate with the parties and decide the purchase consideration and mode of payment. He has to comply with the legal formalities like getting approval from the Government/ RBI; drafting the scheme of amalgamation; getting approval of company Board, financial institution, high court if required; arranging for the meeting etc.

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o Venture Capital Financing

Financing an emerging high-risk project is called venture capital financing. Many merchant bankers are entering into this area by also financing viable upcoming projects. The financing is by subscription to the equity capital, while repayment is by selling the equity through stock market when the shares are listed.

o Leasing

Is there another lucrative area of financing where merchant bankers are turning? Leasing is a viable source of financing while acquiring capital assets. The services include arrangement for lease finance facilities for leasing companies, legal; documents and tax consultancy.

o Non Resident Investment

To attract NRI investments in the primary and secondary markets, the merchant bankers provide investment advisory services to the NRIs in terms of identification of investment opportunities, selection of securities, portfolio management, etc. they also take care of operational details like purchase and sale of securities securing the necessary clearance from RBI under FERA for repatriation of dividends and interest, etc.

o Acceptance Credit and Bill Discounting

Though merchant bankers world over specialize in acceptance credit and bill discounting, these services are not currently provided by merchant bankers in India the principal reasoning being the lack of an active market for commercial bills.

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o Arranging Offshore Finance

The merchant bankers help their clients in the following areas involving foreign currency.

(a) Long term foreign currency loans(b) Joint Ventures abroad(c) Financing exports and imports(d) Foreign collaboration arrangements

o Management of Fixed Deposits of Companies

Recently, merchant’s bankers have begun to structure and mobilize fixed deposits for their corporate clients. They take care of the procedural and legal aspects, and also mange the collection and subsequent servicing of the deposits. Advice with regard to the amount to be raised, interest charges, terms of deposits and other related issues are also offered to the client.

o Relief to Sick Industries

The services offered by merchant bankers to sick industries can be summarized as follows:

Assessment of capital requirements and counseling on capital restructuring; Appraisal of technological, environmental, financial and other factors

causing sickness; Preparations of programs and packages for rehabilitation of sick units; Providing necessary assistance where the rehabilitation package involves

mergers or amalgamation; Obtaining necessary approval for implementation the rehabilitation package

from the statutory authorities; Monitoring the implementation of the scheme of rehabilitation.

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PROBLEMS OF MERCHANT BANKING

Restriction of merchant banking activities:

SEBI guidelines have authorized merchant bankers to undertake issue

related activities and made them restrict their activities or think of

separating these activities from present one and float new subsidiary

and enlarge the scope of its activities.

Minimum net worth of Rs.1 crore:

SEBI guidelines stipulate that a minimum net worth of Rs.1 crore for

authorization of merchant bankers.

Non co-operation of issuing companies:

Non co-operation of the issuing companies in timely allotment of

securities and refund of application money is another problem faced

by merchant bankers.

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Merchant Banker’s Commission:

Maximum :- 0.5%

Project appraisal fees

Lead Manager :-

- 0.5% up to Rs.25 crores

- 0.2% more in excess of Rs.25 crores

Underwriting fees

Brokerage commission :- 1.5%

Other expenses :-

- Advertising

- Printing

- Registrar’s expenses

- Stamp duty

In spite of problems popping up, merchant banking in India has vast scope to develop because of lot of domestic as well as foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.

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CASE STUDIES

SBI Merchant Banking Group is strongly positioned to offer perfect financial

solutions to your business. We specialize in the arrangement of various forms of

Foreign Currency Credits for Corporate.

State Bank of India is the nation's largest bank. Tracing its roots back some 200

years to the British East India Company (and initially established as the Bank of

Calcutta in 1806), the bank operates more than 13,500 branches and over 5,000

ATMs within India, where it also owns majority stakes in seven associate banks.

State Bank of India has more than 50 offices in nearly 35 other countries, including

multiple locations in the US (California), Canada, and Nigeria. The bank has other

units devoted to capital markets, fund management, factoring and commercial

services, and brokerage services. The Reserve Bank of India owns about 60% of

State Bank of India.

SBI being an Indian entity has no India exposure ceiling. Our Primary focus is On

Indian Clients. SBI’s seasoned Team of professionals provides you with Insightful

credit Information and helps you Maximize the Value from the transaction.

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OUR PRODUCTS AND SERVICES

Arranging External Commercial Borrowings (ECB)

Arranging and participating in international loan syndication

Loans backed by Export Credit Agencies

Foreign currency loans under the FCNR (B) scheme

Import Finance for Indian corporate

SBI CAPITAL MARKETS LIMITED (SBICAPS) is India's leading investment bank and project advisor, assisting domestic company’s fund-mobilization efforts for last many years.

We began operations in August 1986 as a wholly owned subsidiary of the State Bank of India, which is the largest commercial bank in India. In January 1997, fresh equity shares were issued to Asian Development Bank (ADB) and ADB now holds 13.84% stake in the equity of SBICAPS. The distinguished parentage (with a 86.16% stake) together with the long standing association of an internationally renowned financial institution like the Asian Development Bank further enhances our image as a truly 'World Class Investment Bank'.

Our Mission - To provide Credible, Professional and Customer Focused world-class investment banking services.

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Our Vision - To be the best India based Investment Bank.

SBI Group:

The largest commercial bank group in India Position in the domestic banking sector as on 31 March 2008: 15.44% of the aggregate deposits. 15.28 % of total advances. The only Indian Bank to find a place in the Fortune Global 500 List. First Indian Bank to take up merchant banking in 1986.

SBI Capital Markets Limited:

No. 1 in Asia – Pacific for Project Advisory. Rating by Thomson Project Finance International.

No. 1 in IPO’s, managed 700+ issues (since 1989 – source Prime Database). The only Indian Merchant Banker in the Global 10, Thomson Project

Finance International 2007. Pioneer in Privatization.

Subsidiary:-

SBICAPS Ventures Ltd. SBICAP Securities Ltd. SBICAPS (UK) Ltd. SBICAP Trustee Company Ltd.

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Promoters’ Share: - Performance:-

SERVICE’S:-

Project Advisory & Structured Finance

SBICAP has built a formidable presence in the area of Project Finance Advisory and Funds Syndication with several prestigious mandates in almost every sector of the industry to its credit.

Our product portfolio includes:

Project Appraisal Structured Finance and Syndication Infrastructure Project Advisory Securitisation

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Debt & Equity Syndication

Capital Markets

Capital Markets Group handles transactions in the capital markets space across multiple instrument structures.

Our product and solutions bouquet includes:

Managing Initial Public Offerings and Follow-on Public offerings and Offers-for-Sale

Managing Rights Offering, be it the traditional or the structured formats Qualified Institutional Placements Open offers, Buyback and Delisting of securities Offerings of convertible securities Public offering of Corporate structured bonds Arranging Private Equity to include growth capital, pre-IPO convertibles,

private investments in public equity (PIPES), mezzanine debt and equity, and equity offerings completed as a private placement.

Private placement of bonds Capital restructuring advisory services Advisory and arrangement services for products such as AIM Listing, Indian

Depository Receipts, ADR/GDR and other off-shore equity or bond listing options

M&A and Advisory

The M & A product portfolio includes:

Mergers & Acquisitions Private Equity Foreign Currency Convertible Bonds (FCCB) Corporate Advisory

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ANALYSIS AND INTERPRETATION

Q 1 Do you take any financial services from bank?

Sr. No.

Take Financial Service Nos. Percentage

1 Yes 36 45

2 No 44 55

  Total 80  

GRAPH

Take Financial Service

45%

55%

1 Yes

2 No

Interpretation

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Out of total respondents, 45% respondents have taken Financial Service and rest

55% respondents have not taken the Financial Service.

Q 2 Do you know about Merchant Banking?

Sr. No.

Know about Merchant Nos. Percentage

1 Yes 32 40

2 No 48 60

  Total 80  

1 Yes, 40

2 No, 60

0

10

20

30

40

50

60

Nos.

Know about Merchant

1 Yes

2 No

Interpretation

Out of total respondents, 40% respondents Know about merchant banking and rest

60% respondents don’t know about merchant banking.

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Q 3 Are you satisfied with the services provided by your bank?

Sr. No. Satisfied Nos. Percentage

1 Yes 35 43.75

2 No 45 56.25

  Total 80 100

Percentage, 43.75

Percentage, 56.25

0

10

20

30

40

50

60

Percentage

1 Yes

2 No

Interpretation

Out of total respondents, 43.75% respondents Satisfied and rest 60% respondents

don’t Satisfied.

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Q4 Are you satisfied with services offered by banks?

Sr. no Bank Percentage

1 ICICI 20

2 SBI 35

3 PNB 20

4 BOI 15

5 Other 10

Interpretation

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0

5

10

15

20

25

30

35

40

icici sbi pnb boi anyother

icici

sbi

pnb

boi

any other

Large no. of companies takes financial services from SBI.

Q 5 What is the position of Merchant Banking in Private Sector?

sr.no Position Percentage

1 Good 50

2 Normal 35

3 Bad 15

  Total 100

Position

Good1

50%Normal

235%

Bad3

15%1 Good

2 Normal

3 Bad

Interpretation

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Out of total respondents, 50% respondents Say Good, 35% Say Normal and rest

15% respondents say bad.

Q 6 What is the position of Merchant Banking in Public Sector?

Sr.No Position Percentage

1 Good 40

2 Normal 55

3 Bad 5

  Total 100

Position

40%

55%

5%

1 Good

2 Normal

3 Bad

Interpretation

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Out of total respondents, 40% respondents Say Good, 55% Say Normal

and rest 5% respondents say bad.

Q7 What type of security have you deposited/you will deposit with the banks ?

Sr.No. Type of Security Nos. Percentage

1. Bank Security (F.D.) 18 22.5

2. Gold 0 0

3. Land Papers 50 62.5

4. Third person security 12 15

Total: 80 100

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bank sec. gold land paper third person0

5

10

15

20

25

30

35

40

45

50

bank sec.

gold

land paper

third person

Q 8 Are you satisfied by Security margin of bank?

Sr.No. Satisfaction by Security

Margin

Nos. Percentage

1. Yes 64 80

2. No 16 20

Total: 80 100

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Yes No0

10

20

30

40

50

60

70

Yes

No

Interpretation

Out of total respondents, 80% respondents Satisfied and rest 20% respondents

don’t Satisfied.

Q 9 Are you satisfied with timely services provide by banks?

Sr. No. Depends on M.B Nos. Percentage

1 Yes 56 70

2 No 24 30

  Total 80 100

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Nos.

2 No

1 Yes

56

24

Depends on M.B

2 No

1 Yes

Interpretation

Out of total respondents, 75% respondents Say that They are timely heared and rest

25% say that They are not timely served by merchant banking.

Q10 Will it differ from investment banks?

Sr. No. Difference Nos. Percentage

1 Yes 60 75

2 No 20 25

  Total 80 100

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Yes No0

10

20

30

40

50

60

YesNo

Interpretation

Out of total respondents, 75% respondents think that it is differ and rest 25%

respondents don’t think so.

Thus I conclude by saying that Merchant Banking business can help banks to

improve their profitability and achieve sustained growth, but for that the

‘know how’ and ‘awareness’ of their features, functions and benefits to the

prospective users should be known; by taking up various measures like

advertisement and other forms of media and campaigns.

CONCLUSION

The merchant banker plays a vital role in channelizing the financial surplus of the society into productive investment avenues.

Hence before selecting a merchant banker, one must decide, the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the client will ensure success.

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It can be said that this project helped me to understand every details about Merchant Banking and in future how it’s going to get emerged in the Indian economy. Hence, Merchant Banking can be considered as essential financial body in Indian financial system.

Market development is predicted on a sound, fair and transparent regulatory framework.

To sustain the growth of the market and crystallize the growing awareness and interest into an essential, to remove the trading malpractice and structural inadequacies prevailing in the market, and provide the investors an organized, well regulated market.

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BIBLIOGRAPHY

Primary Sources: SBI CAPITAL MARKETS LIMITED- Chief Syndicated Loan Manager- Mr. Amit Bansod

Secondary Sources:

Books:

1. Merchant Banking in India- K C Gupta and Joginder Singh.

2. Merchant Banking In India: Evolution And Emergence, Functions, Rules And Regulations, Experiences And Challenges- C N Krishna Naik B C Lakshmanna.

3. Merchant Banking- H R Machiraju.

Websites:

1. www.google.com/news2. www.answer.com3. www.emissarycapital.com4. www.wikipedia.com5. www.sebi.gov.in6. http://unionbankofindia.co.in7. http://www.asialaw.com/Article/1988860/Merchant-Banking.html8. http://www.icicisecurities.com9. http://www.sbicaps.com10.http://www.bobcapitalmarkets.com11.http://www.pnbindia.in/subsidiaries12.http://www.kotaksecurities.com13.http://www.canmoney.in

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Questionnaire

Respondent’s Profile

Name :_______________

Age :_______________

Gender :_______________

Occupation :_______________

1. Do you take any financial services from bank?

(a) Yes ( ) (b) NO ( )

2. Do you know about Merchant Banking?

(a) Yes ( ) (b) No ( )

3. Are you satisfied with the services provided by your bank?

(a) Yes ( ) (b) No ( )

4. Which bank provides you maximum services?

(a) ICICI ( ) (b) SBI ( )

(c) PNB ( ) (d) BOI ( )

(e) OTHER(specify)

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5. What is the position of Merchant Banking in Private Sector?

(a) Good ( ) (b) Normal ( )

(c) Bad ( )

6. What is the position of Merchant Banking in Public Sector?

(a) Good ( ) (b) Normal ( )

(c) Bad ( )

7. What type of security have you deposited/you will deposit with the banks

(a)Bank security ( ) (b) Gold ( )

(c) Land paper ( ) (d) Third party security ( )

8. Are you satisfied by Security margin of bank?

(a) Yes ( ) (b) No ( )

9. Non-financial institution depends on merchant banking. Are you satisfied?

(a) Yes ( ) (b) No ( )

10. Will it differ from investment banks?

(a) Yes ( ) (b) No ( )

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