INTRODUCTION

Financial services are an important component of financial system. The

smooth functioning of financial system depends upon the range of financial

services extended by the providers. Financial services in India have

witnessed remarkable changes in the recent past after the implementation of

“Liberalization, privatization and globalization”.

Funds are tapped from the capital market to finance various mega

industrial projects. In attracting public savings, merchant bankers play a vital

role as specialized agencies. The resource raising functions remains to be

the primary business of a merchant banker. The primary market holds the

key to rapid capital formation, growth in industrial productions and exports.

There has to be accountability to the end use of funds raised from the

market. The increase in the number of issues and amount raised the number

of merchant bankers. Therefore, the field became highly competitive market

where it requires a specialized skill in handling the situation. The merchant

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bankers have a social responsibility to in building an industrial structure in

India.

Merchant bankers assist corporate in raising capital. They assist in

issue of Shares, syndicating loans, public issue of debentures. They do not

provide funds. They only assist. They also actively arrange working capital,

appraisal Projects scrutinize & persuade merger proposals.

In BRITAIN merchant bankers & investment bankers are synonymous.

In the U.S., Merchant bank means as investment bank which is well-

equipped to handle multinational corporations.

In INDIA merchant bankers is a body corporate who carries on any

activity of the issue management, which consist of preparing prospectus &

other information relating to the issue. Merchant banks in India are not

allowed to conduct any business other than that related to securities market.

There is no official category in investment banking

DEFINITION:Page | 2

In banking, a merchant

bank is a financial institution

primarily engaged in offering

financial services and advice to

corporations and wealthy

individuals on how to use their

money. The term can also be

used to describe the private

equity activities of banking.

According to Cox D. merchant banking is defined as, “merchant banks

are the financial institutions providing specialist services which generally

include the acceptance of bills of exchange, corporate finance, portfolio

management and other banking services”.

The Notification of the Ministry of Finance defines a merchant banker

as, “any person who is engaged in the business of issue management either

by making arrangements regarding selling, buying or subscribing to

securities as manager, consultant, advisor or rendering corporate advisory

service in relation to such issue management”. In short, merchant bankers

assist in raising capital and advice on related issues.

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HISTORY AND ORIGIN OF MERCHANT

BANKING

ORIGIN:

Merchant banking originated through the entering of London

merchants in foreign trade through acceptance of bill. Later, the

merchants assisted the Government of under developed countries

in raising long – terms through floatation of bonds in London money

market. Over a period they extended their activities to domestic

business of syndication of long term and short term finance,

underwriting of new issues, acting as registrars and share transfer

agents, debenture trustees, portfolio managers, negotiating agents

for mergers, takeovers etc.

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MERCHANT BANKING IN INDIA-

HISTORICAL PERSPECTIVE:-

Till 18th century moneylenders, moneychangers, village

merchants (maharanis), & saucers performed the function of banks

& merchant banks. They also issued & discounted bills of exchange

(handiest) & bank draft. They gave loans on mutual trust, on

mortgage of lands, ornaments & other property. JAGAT SHETH

(1720-1773AD, BENGAL) HABIB & SONS which is now HABIB BANK

(founded in 1941, now is in PAKISTAN). These were the organized

merchant bankers in recent history of INDIA. Merchant Banking is

an activity that includes corporate finance activities, such as advice

on complex financings, merger and acquisition advice (international

or domestic), and at times direct equity investments in corporations

by the banks. Merchant banks are private financial institution. Their

primary sources of income are PIPE financings and international

trade. Their secondary income sources are consulting, Mergers &

Acquisitions help and financial market speculation. Because they do

not invest against collateral, they take far greater risks than

traditional banks. Because they are private, do not take money

from the public and are international in scope, they are not

regulated. Anyone considering dealing with any merchant bank

should investigate the bank and its managers before seeking their

help.

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The reason that businesses should develop a working

relationship with a merchant bank is that they have more money

than venture capitalists. Their advice tends to be more pragmatic

than venture capitalists. It is rare for a merchant bank to fail. The

last major failure was Barings Bank (1992). It failed because of

unsupervised trading of copper futures contracts and buybacks.

When the Dot Com Bubble burst in 2001, scores of venture capital

firms failed. The greatest merchant bank failure in history was the

Knights Templar. After the Crusades, the Order became immensely

wealthy controlling and funding the trade between the Middle East

and Western Europe. They foolishly loaned money to the French

Government. To avoid repaying the money, King Louie had the

Pope declare the Order heretics. Thousands of monks lost their

lives, but France balanced its budget.

To understand Merchant Banks, you should know something of

their history. Modern merchant banking started in Italy during the

7th Century. The banking practices evolved from the financing

structure of the Silk Road Trading that predates the Roman

Empire.The basic financing structure was the advance payment for

goods by merchant bankers at a great discount to the delivery

value of those goods. In the case of Italy and then Germany, wheat

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was the product. The merchant banks purchased the wheat soon

after planting. They accepted the risk of crop failure.

They profited when they sold the wheat. In most countries

today, the national government accepts the risk through

government crop insurance.

As the British Empire expanded in the 18th and 19th

Centuries, merchant banks prospered in London. For instance,

merchant bankers funded Canada’s Hudson Bay Company. This

period saw the rise of such merchant banks as Schroders,

Warburgs or Rothschilds. Amsterdam benefited from the trade

created by the Dutch East Indian Company. Since the 18th century,

the role of the merchant banker has been considerably broadened

to include a composite of modern day skills. Such skills are

inherently entrepreneurial, managerial, financial and transactional.

Today, North American merchant banks have taken the form of

"boutiques"- whereby, each offers its own specialized services. The

hallmarks of these merchant bank boutiques are that they typically

charge fees payable in cash and/or the client's stock for each

service rendered. You can find a merchant bank that meets any

reasonable set of needs.

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Merchant Banking in India –

Post Independence:

In 1967, RBI issued its first merchant banking license to grind

lays started with management of capital issues, production

planning, system design and also market research. It provides

management consulting services as well. Citibank setup its

merchant banking division in 1970 its scope includes assisting new

entrepreneur, evaluating new projects, rasing funds through

borrowing and issuing equity. Indian banks started banking services

as a part of multiple services they offered to clients from 1972.

State bank of India started the merchant banking division in 1972.

In the initial years the objective was to render corporate advice and

assistance to small and medium entrepreneurs. Merchant banking

activities are organized and undertaken in several forms.

Commercial banks and foreign development finance institutions

have organized them through formation of division; nationalized

banks have formed subsidiaries companies and share brokers and

consultancies constituted themselves into public ltd. Co. or

registered themselves as private ltd. companies. Some of them

have equity stake of foreign merchant bankers.

MERCHANT BANK

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A merchant bank deals with the commercial banking needs of

international finance, long term company loans, and stock

underwriting. A merchant bank does not have retail offices where

one can go and open a savings or checking account. A merchant

bank is sometimes said to be a wholesale bank, or in the business

of wholesale banking. This is because merchant banks tend to deal

primarily with other merchant banks and other large financial

institutions. The most familiar role of the merchant bank is stock

underwriting. A large company that wishes to raise money from

investors through the stock market can hire a merchant bank to

implement and underwrite the process. The merchant bank

determines the number of stocks to be issued, the price at which

the stock will be issued, and the timing of the release of this new

stock. The merchant bank files all the paperwork required with the

various market authorities, and is also frequently responsible for

marketing the new stock, though this may be a joint effort with the

company and managed by the merchant bank. For really large

stock offerings, several merchant banks may work together, with

one being the lead underwriter.

By limiting their scope to the needs of large companies,

merchant banks can focus their knowledge and be of specific use to

such clients. Some merchant banks specialize in a single area, such

as underwriting or international finance. Many of the largest banks

have both a retail division and a merchant bank division. The

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divisions are generally very separate entities, as there is very little

similarity between retail banking and what goes on in a merchant

bank. Although your life is probably affected every day in some way

by decisions made in a merchant bank, most people reading this

article are unlikely ever to visit or deal directly with a merchant

bank. Merchant banks operate behind the scenes and away from

the spotlight.

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MERCHANT BANKS AND COMMERCIAL

BANKS

There are differences in approach, attitude and areas of

operations between commercial banks and merchant banks. The

differences between merchant banks and commercial banks are

summarized below:

Commercial banks basically deal in debt and debt related

finance and their activities are appropriately arrayed around credit

proposals, credit appraisals and loan sanctions. On the other hand,

the area of activity of merchant bankers is ‘equity and equity

related finance’. They deal with mainly funds raised through money

market and capital market.

Commercial Banks are asset oriented and their lending

decisions are based on detailed credit analysis of loan proposals

and value of security offered against loans. They generally avoid

risks. The merchant bankers are management oriented. They are

willing to accept risks of business.

Commercial bankers are merely financiers. The activities of

merchant bankers include project counseling, corporate counseling

in areas of capital restructuring ,amalgamations, mergers, takeover

etc, discounting and rediscounting of short term paper in money

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markets, managing , underwriting and supporting public issues in

new issue market and acting as brokers and advisers on portfolio

management in stock exchange. Merchant banking activities have

impact on growth, stability and liquidity of money markets.

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IMPORTANCE AND NEED OF

MERCHANT BANKING

Important reason for the growth of merchant banking has

been developmental activity throughout the country, exerting

excess demand on the sources of funds for ever expanding industry

and trade, thus, leaving a widening gap under bridged between the

supply and demand of inventible funds. All Indian financial

institutions and experienced resources constraint to meet the ever

increasing demands for funds from the corporate sector

enterprises. In the circumstances corporate sector had the only

alternative to avail of the capital market services for meeting their

long-term financial requirements through capital issues of equity

and debentures. With the growing demand for funds there was

pressure on capital market that enthused the commercial banks,

share brokers and financial consultant firms to enter into the field

of merchant banking and share the growing capital markets. With

the result, all the commercial banks in nationalized and public

sector as well as in private sector including the foreign banks in

India have opened their merchant banking windows and are

competing in this field. There has been a mushroom growth of

financial consultancy firms and broker firms doing advisory

functions as well as managing public issues in syndication with

other merchant bankers.

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Notwithstanding the above facts, the need of merchant

banking institutions is felt in the wake of huge public savings lying

still untapped. Merchant banks can play highly significant role in

mobilizing funds of savers to investible channels assuring

promising return on investments and thus can help in meeting the

widening demand for investible funds for economic activity. With

the growth of merchant banking profession corporate enterprises in

both public and private sectors would be able to raise required

amount of funds annually from the capital market to meet the

growing requirements for funds for establishing new enterprises,

undertaking expansion/modernization/diversification of the existing

enterprises. This reinforces the need for a vigorous role to be

played by merchant banks.

Merchant banks have been procuring impressive support from

capital market for the corporate sector for financing their projects.

This is evidenced from the increasing amount raised form the

capital market by the corporate enterprises year after year. In view

of multitude of enactments, rules and regulations, guidelines and

offshoot press release instructions brought out by the government

from time to time imposing statutory obligations upon the

corporate sector to comply with all those requirements prescribed

therein, the need of skilled agency existed which could provide

counseling in these matters in a package form. Merchant bankers,

with their skills, updated information and knowledge, provide this

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service to the corporate units and advise them on such

requirements to be complied with for raising funds from the capital

market under different enactments viz. Companies Act, Income-tax

Act, Foreign Exchange Regulation Act, Securities Contracts

(Regulation) Act and various other corporate laws and regulations.

Merchant bankers advise the investors of the incentives available in

the form of tax relief’s, other statutory relaxations, good return on

investment and capital appreciation in such investment to motivate

them to invest their savings in securities of the corporate sector.

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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 suggest

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. He has to keep pace with the changing

environment where government rules, regulations and politics

affecting business conditions frequently change; where science and

technology create new innovations in production processes of

industries envisaging immediate renovations, diversifications,

modernizations or replacements of existing plant and machinery or

other equipments putting new demands for finances and

necessitating overhauling of the capital structure of the firms.

Merchant banker has to think and devise new instruments of

financing industrial projects. He has to assume wider

responsibilities of saving industrial units from going sick and

guiding industries to be setup in industrially backward areas to

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eliminate regional imbalances in industrial development of the

country.

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He has to guide the wider section of the community

possessing surplus money to invest in corporate securities and

other productive investment channels. He has to help the industry

in different forms to ensure that it runs risk free and devoid of

uncertainty by assisting the promoters with his knowledge and

skills to resolve the problems being faced by them. He has to watch

the interest and win over the confidence of the government, its

agencies, along with the entrepreneurs, the investors and the

whole community. He must bridge the communication gap between

different sections and resolve the problem being faced in different

areas concerned with the business world. To discharge the above

role, a merchant banker has to be dynamic.

In the days ahead, merchant bankers have very significant

role to play tuning their activities to the requirements of the growth

pattern of the corporate sector, the industry and the economy as a

whole which is, in it, a challenging task and to meet these

challenges merchant bankers will have to be more vigorous and

strategic in playing their role. They will have also to adopt new

ways and means in discharging their role.

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THE GROWTH OF MERCHANT BANKING

IN INDIA

Formal merchant activity in India was originated in 1969 with

the merchant banking division

setup by the Grindlays Bank, the

largest foreign bank in the

country. The main service

offered at that time to the

corporate enterprises by the

merchant banks included the

management of public issues

and some aspects of financial

consultancy. Following Grindlays

Bank, Citibank set up its

merchant banking division in

1970.The division took up the

task of assisting new

entrepreneurs and existing units

in the evaluation of new projects

and raising funds through

borrowing and equity issues. Management consultancy services

were also offered. Merchant bankers are permitted to carry on

activities of primary dealers in government securities. Consequent

to the recommendations of Banking Commission in 1972, that Page | 19

Indian banks should offer merchant banking services as part of the

multiple services they could provide their clients, State Bank of

India started the Merchant Banking Division in 1972. In the initial

years the SBI’s objective was to render corporate advice and

assistance to small and medium entrepreneurs.

The commercial banks that followed State Bank of India were

Central Bank of India, Bank of India and Syndicate Bank in

1977.Bank of Baroda, Standard Chartered Bank and Mercantile

Bank in 1978 and United Bank of India, United Commercial Bank,

Punjab National Bank, Canara Bank and Indian Overseas Bank in

late ‘70s and early ‘80s. Among the development banks, ICICI

started merchant banking activities in 1973 followed by IFCI (1986)

and IDBI (1991).

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ORGANIZATIONAL SETUP OF

MERCHANT BANKERS IN INDIA

In India a common organizational setup of merchant bankers

to operate is in the form of divisions of Indian and foreign banks

and financial institutions, subsidiary companies established by

bankers like SBI, Canara Bank, Punjab National Bank, Bank of India,

etc. Some firms are also organized by financial and technical

consultants and professionals. Securities and Exchange Board of

India has divided the merchant bankers into four categories based

on their capital adequacy. Each category is authorized to perform

certain functions. From the point of organizational setup India’s

merchant banking organizations can be categorized into four

groups on the basis of their linkage with parent activity.

They are:

A) Institutional Base

Where merchant banks function as an independent wing or as

subsidiary of various private/Central Governments/State

Governments financial institutions. Most of the financial institutions

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in India are in public sector and therefore such setup plays a role

on the lines of government priorities and policies.

B) Banker Base

These merchant bankers function as division/subsidiary of

banking organization. The parent banks are either nationalized

commercial bank or the foreign banks operating in India. These

organizations have brought professionalism in merchant banking

sector and they help their parent organization to make a presence

in capital market.

C) Broker Base

In the recent past there has been an inflow of qualified and

professionally skilled brokers in various stock exchanges of India.

These brokers undertake merchant banking related operations also

like providing investment and portfolio management services.

D) Private Base

These merchant banking firms are originated in private sector.

These organizations are the outcome of opportunities and scope in

merchant banking business and they are providing skill-oriented

specialized services to their clients. Some foreign merchant

bankers are also entering either independently or through some

collaboration with their Indian counterparts. Private sector

merchant banking firms have come up either as the sole Page | 22

proprietorship or public limited companies. Many of these firms

were in existence for quite some times before they added a new

activity in the form of merchant banking services by opening new

divisions on the lines of commercial banks and All India Financial

Institutions.

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QUALITIES OF MERCHANT

BANKERS:-

1. Knowledge:

Thorough understanding of technical issues related to

business, understanding of legal and statutory requirements,

appreciation of business acumen; financial expertise is a key thing

a merchant banker must know. Delivery of his services depends on

his basic understanding of these issues.

2. Capital market familiarity:

Merchant banker should be well versed with stock markets,

their movements. He should track imp happenings in the market on

ongoing basis.

3. Liasioning ability:

Merchant bankers are required to liaison with SEBI, RBI, the

stock exchanges, depositories and other government authorities for

public issue related duties. It is imperative that a merchant bank

maintains excellent rapport with all of them and also close relations

even at informal levels. This only can see speedy and favorable

clearances by the authorities.

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4. Innovation:

Corporate may approach with unique requirements. Standard

solutions and products may not solve problems sometimes.

Merchant bankers should do out of box thinking and be able to do

financial engineering. They can device new financial instruments

and get approved from the authorities. Innovation is required even

to address stringent legal requirements.

5. Integrity:

Merchant banker has valuable and confidential information of

its customers. Merchants bankers should take utmost care that the

information is not leaked and also not consumed for the purpose

other than for which it was disclosed to the merchant banker.

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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:

a. Sole proprietorship

b. Partnership firm

c. Hindu Undivided Family (HUF)

d. Corporate Enterprises

e. 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.

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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

MerchantBanking setup. Capital adequacy, profitability, growth

opportunities and current market size are some of the factors

which need to be looked into.

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MAIN OBJECTS OF MERCHANT BANKER

Merchant bankers render their specialized assistance in

achieving the main objectives which are presented below:

1. 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.

2. 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.

3. Merchant banker’s another objective is to set up and

provide services for the venture capital technology funds.

4. They also provide services to the finance housing schemes

for the construction of houses and buying of land.

5. 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.

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6. 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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SERVICES PROVIDED BY MERCHANT BANKS:

(in detail)

The development activity

through the country had exerted

excess demand on the sources of

funds by the ever expanding

industry and trade which could not

be met by the All India Financial

Institutions. In these circumstances,

the corporate sector enterprises had

the only alternative to avail

themselves of the capital market

services for meeting the long-term

fund requirements through capital

issues of equity and debentures. The growing demand for funds

from capital market has enthused many organizations to enter into

the field of merchant banking for managing the public issues.

The need of merchant banker is also felt in the wake of huge

untapped public savings as merchant bankers can play a highly

significant role in mobilizing funds from savers to invest in channels

assuring promising return on investments and thus narrow down

the gap between demand for and supply of investible funds.

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Merchant bankers not only provide advisory services to

corporate enterprises but also advise the investors of the

incentives available in the form of tax relief and other statutory

obligations. Thus, the merchant bankers help industry and trade to

raise funds, and the investors to invest their saved money in sound

and healthy concerns with confidence, safety and expectation of

higher yields

Broadly a merchant banker can provide the following services:

• Corporate Counseling

• Project Counseling And Pre-Investment Studies

• Credit Syndication And Project Finance

• Issue Management

•Underwriting

•Bankers

•Portfolio Management

•Venture Capital Financing

•Leasing

•Non-Resident Investment Counseling And Management

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•Acceptance Credit And Bill Discounting

•Advising On Mergers, Amalgamations And Take-Over

•Arranging Offshore Finance

•Fixed Deposit Broking

•Relief to Sick Industries

Let’s take a brief look at each of these

functions:

Corporate Counseling:

It includes a whole range of financial services provided by a

merchant banker to a corporate unit a view to ensure better

performance, maintain steady growth and create a better image

among investors.

It covers the entire field of merchant banking activities i.e.,

project counseling, capital restructuring, portfolio management and

the full range of financial engineering including venture capital,

public issue management, loan syndication, working capital, fixed

deposits, lease financing, acceptance credit, etc. However, the Page | 32

scope of corporate counseling is limited to suggestions and

opinions leaving to the client to take corrective actions for solving

its corporate problems.

A merchant banker finds out the problems of enterprise, which

shall include organizational goals for the enterprise, size of the

organization and operational scales, choice of a product, pricing,

etc, and suggests ways and means to solve those problems.

Project Counseling:

Project counseling is an important merchant banking service

which include preparation of project reports, deciding upon the

financing pattern to finance the cost of the project, appraising the

project report with the financial institutions/banks.

Project reports are prepared to obtain government approval of

the project, for procuring financial assistance from financial

institutions and banks, for ensuring market for the proposed

product, for planning public issues, etc.

Financing the project cost is an important aspect of project

counseling. The two sources of funds available to finance the

project cost are internal sources of funds (or owners' funds) which

includes promoter's contribution and retained earnings; and

external sources of funds which refers to the borrowed funds in the

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form of loans from banks, private investors and financial

institutions and in the form of debentures from the public.

Merchant banker has to decide the financing mix of the

internal and external sources of funds keeping in view the rules,

regulations and norms prescribed by the government or followed

by the term lending financial institutions. While rendering project

counseling services, the merchant banker has to ensure that the

application forms for obtaining the funds from financial institutions

are filled in with relevant and appropriate information and before

submitting the application, the merchant banker has to appraise

the project considering the various aspects as to the type of the

project, location, technical, commercial and financial viability of the

project.

Credit Syndication:

Once the client company has decided about the project

proposed to be undertaken, the next step is looking for the sources

wherefrom the funds could be procured to implement the project.

Merchant banker has to locate the sources of funds and

comply the formalities required to procure the funds. This service

rendered by the merchant banker in arranging and procuring credit

from financial institutions, banks and other lending and investment

organizations for financing the clients' project cost or meeting

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working capital requirement is referred to as loan syndication or

credit syndication.

Credit syndication in case of domestic borrowings is with the

institutional lenders and banks. Long and medium term funds are

obtained from the All India Financial Institutions like IFCI, IDBI etc.,

state level financial bodies like SFC, SIDC etc., commercial banks,

mutual funds etc. Short-term funds are also required by the firm for

purchase of raw materials, payment of wages, salaries etc. Sources

of financing these short term requirements or working capital

needs can be from internal sources like internal accruals from

working or operations and short term loans from friends and

relatives; or from external sources like short term borrowings from

banks etc.

Issue Management and Underwriting:

A fully underwritten public issue spells confidence to the

investing public, which ensures a good response to the issue.

Keeping this in view companies, which float a public issue usually,

desire a full underwriting of the issue. Underwriting is only the

guarantee given by the underwriter that in the event of under

subscription, the amount underwritten would be subscribed in

proportion by the underwriter. An underwriter of the issue gets the

following benefits:

• It earns a commission of the commitment given. Page | 35

• It earns the right to be appointed as bankers of that issue.

• It expands its clientele by underwriting more and more

issues.

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.

Portfolio Management

Portfolio refers to investment in different types of marketable

securities or investment papers like shared, debentures and

debenture stocks, bonds etc. from different companies or

institutions held by individuals firm or corporate units.

Portfolio management refers to managing efficiently the

investment in the securities held by professionals to others.

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Merchant bankers take up management of a portfolio of securities

on behalf of their clients, providing special services with a view to

ensure maximum return by such investments with a minimum risk

of loss of return on the money invested in securities.

A merchant banker while performing the services of portfolio

management has to enquire of the investment needs of the client,

the tax bracket, ability to bare risk, liquidity requirements, etc. they

should study the economic environment affecting the capital

market, study the securities market and identify blue chip

companies in which money can be invested. They should keep

record of latest amendment in government guidelines, stock

exchange regulations, RBI regulations, etc.

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 Page | 37

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.

Venture Capital Financing

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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.

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.

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.

Acceptance Credit and Bill Discounting

Though merchant bankers world over specialize in acceptance

credit and bill discounting, these services are not currently Page | 39

provided by merchant bankers in India the principal reasoning

being the lack of an active market for commercial bills.

Arranging Offshore Finance

The merchant bankers also help their clients in the following

areas involving foreign currency financing:

1. Financing Of Exports And Imports

2. Long Term Foreign Currency Loans

3. Joint Ventures Abroad

4. Foreign Collaboration Arrangements

The assistance rendered as in the case of financial services

covers appraisals, negotiations, compliance with procedural and

legal aspects etc.

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.

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Relief to Sick Industries

The services offered by merchant bankers to sick industries

can be summarized as follows:

1. Assessment of capital requirements and counseling on

capital restructuring;

2. Appraisal of technological, environmental, financial and

other factors causing sickness;

3. Preparations of programs and packages for rehabilitation of

sick units;

4. Providing necessary assistance where the rehabilitation

package involves mergers or amalgamation;

5. Obtaining necessary approval for implementation the

rehabilitation package from the statutory authorities;

6. Monitoring the implementation of the scheme of

rehabilitation.

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EXAMPLES FOR MERCHANT BANKING

SERVICES

MERCHANT BANKING SERVICES OF CANARA BANK

INTRODUCTION

Canara Bank

is also one of the

leading Merchant

Bankers in India,

offering

specialized

services to Banks,

PSUs, State owned

Corporations, Local

Statutory bodies

and corporate

sector. Its SEBI registered Category I Merchant Banker /

Underwriter to carry on Issue Management (Public / Rights / Private

Placement Issues), Underwriting, Consultancy and Corporate

Advisory Services etc.

Page | 42

They also hold SEBI registration Certificate to act as "Bankers

to an Issue" with network of exclusive Capital Market Service

Branches to handle “Capital Market" related assignments.

They undertake "project appraisals" with resource raising

plans from Capital Market/ Debt Markets and facilitate tie-ups with

Banks / Financial Institutions and Potential Investors.

Their uniqueness is extending services under single window

concept covering the following areas:

1. Merchant Banking

2. Commercial Banking

3. Investments

4. Bankers to Issue - Escrow Bankers

5. Underwriting

6. Loan Syndication

As leading Merchant Bankers in India, they have associated

with issues ranging from Rs.1crore to Rs.1500 crores, involving

various types of industries, banks, statutory Bodies etc. and have

an edge in handling Private Placement issues –both retail & HNIs.

Page | 43

SPECTRUM OF SERVICES:-

1. Issue (Public/Rights) Management

2. Debt Issue Management

3. Private Placements

4. Project Appraisals

5. Monitoring Agency Assignments

6. IPO Funding

7. Security Trustee Services

8. Agriculture Consultancy Services

9. Corporate Advisory Services

10. Mergers and Acquisitions

11. Buy Back Assignments

12. Share Valuations

13. Syndication

Page | 44

Page | 45

Investment Criteria:-

A wide range of later stage opportunities are considered.

Targeted companies include the following characteristics:

1. Having weathered the start-up process and established a

core business model that is sustainable;

2. Proven management team;

3. If not already profitable, visibility to profitability within a 12-

month period;

4. Having established business partnerships that give it a

major position in a market space;

5. Significant barriers to entry; and

6. Technology or business that is scalable with global

applications.

They look for opportunities for synergistic consolidation and/or

companies that are on the verge of extraordinary growth.

Page | 46

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

Page | 47

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:

a) If any Company’s other income exceeds 10 per cent of the

total income, the details should be disclosed.

b)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.

c) The Company should also disclose the information

regarding the capacity utilization of the plant for the last 3 years.

d) The Promoters of the Company must maintain their holding

at least at 20 per cent of the expanded capital.

e) The minimum application money payable should not be less

than 25 per cent of the issue price.

f) The company should disclose the time normally taken for

the disposal of various types of investor’s grievances.

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g) 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%).

h) 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.

Page | 49

CODE OF CONDUCT

According to the 13 Regulation of the SEBI of 1992 (Merchant

bankers), every merchant banker should comply with following

codes of conduct. They are:

a) The merchant banker must observe high integrity and

fairness in all his dealings.

b)He shall render at all times high standard of services,

exercise due diligence, exercise independent professional

judgment.

c) If necessary, he must disclose to his clients the possible

source of conflict of duties and interests.

d) The merchant banker should not indulge in unfair practice

or unfair competition with other merchant bankers.

e) He should not make any exaggerated statement about his

capacity or achievement.

f) He should always Endeavour to give the best possible

advice and prompt efficient and cost effective service.

g) He should maintain the secrecy of all the confidential

information received during the course of service to his client.

Page | 50

h) He should not engage in the creation of a false market or

price rigging or manipulation.

Page | 51

MERCHANT BANKERS COMMISSION

SEBI and ministry of finance, ceiling rates on merchant

bankers’ commission:

Project appraisal feeDiscretion and

negotiable(no ceiling)

Public issue

management fees0.5% of total issue

Lead managers

commission0.5% up to Rs.25 crores

Underwriting

commission

On

devolving

amt

On amt

subscribed by

the public

Equity shares 2.5% 2.5%

Pref. Shares and

debentures

Up to Rs.5lakh 2.5% 1.5%

In excess of Rs.5lakh 2% 1%

Page | 52

Registration of Merchant Bankers :

A.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:-

Category I

(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

To act as adviser, consultant, co- manager, underwriter,

portfolio manager;

Category III

To act as underwriter, adviser, consultant to an issue;

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Category IV

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.

B.Application to conform to the requirements

The application should conform to all the requirements under

the SEBI guidelines, otherwise it may be rejected.

C.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

Page | 54

relating to merchant banker and in particular the applicant

complies with the following requirements, namely: -

• 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 networth shall be as follows,

Page | 55

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

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 recognised by the Government in finance, law or

business management

• Grant of certificate to the applicant is in the interest of

investors.

D.Procedure for Registration

Page | 56

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.

E. 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.

Page | 57

MERCHANT BANKERS AS LEAD

MANAGERS

As SEBI guidelines it is mandatory that all public issues should

be managed by merchant bankers in the capacity of lead

managers. Only in the case of right issues not exceeding Rs.

50lakhs such an obligation is not necessary. The number of lead

managers to be appointed by a company depends upon the size of

the issue as shown below:

Page | 58

Size of the issueMaximum number of

lead managers

Less than Rs. 50 crores 2

Rs. 50 crores to Rs. 100

crores3

Rs. 100 crores to Rs.

200 crores4

Rs. 200 crores to Rs.

400 crores5

Above Rs. 400 crores5 or more as prescribed by

SEBI

DUTIES AND RESPONSIBILITIES OF LEAD

MANAGERS

The most important aspect of

merchant banking business is to

function as lead managers to the

issues management. As lead

managers, they have to exercise

reasonable care and diligence in issue

management by paying attention to

the following:

1. AGREEMENT-

It is the duty of every lead manager to enter into an

agreement with the issuing companies stating the details regarding

their responsibilities, liabilities, mutual rights, functions,

disclosures, refund, allotment etc. A copy of this at least one month

before the opening of the issue for subscription.

2. REGISTRATION-

One merchant banker cannot have association with another

merchant banker who does not hold a certificate of registration

with the SEBI.

Page | 59

3. ISSUE MAGNAGEMENT-

Similarly a lead manager cannot undertake the work of issue

management if the issuing company is its associate.

4. RESPONSIBILITIES-

In case there is more than one lead manager to an issue, the

responsibilities of each of them should be clearly defined in the

agreement.

5.MINIMUM UNDERWRITING-

A lead manager is under an obligation to accept a minimum

underwriting obligation of 5 per cent of the total underwriting

commission or Rs. 25 lakhs whichever is less. If he is not able to

comply with the above provision it is his duty to make

managements with another merchant banker associated with that

issue to underwrite the said amount. Of course it must be duly

intimated to the SEBI.

6.CARE & DILIGENCE-

A lead manager has to exercise due care and diligence in the

verification of prospectus or letter of offer.

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7.SUBMISSION OF RATING CERTIFICATE-

He has to submit due diligence certificate rating that the

prospectus or letter of offer is in conformity with the documents

relevant to the issue, the disclosures are true, fair and adequate

and all legal requirements connected with the issue have been duly

complied with.

8.SUBMISSION OF DRAFT PROSPECTUS OR LETTER OF OFFER-

Every lead manager has to submit all the particular of an

issue, draft prospectus or letter of offer etc. to the SEBI at least two

weeks before the date of filing with the Registrar of Companies or

regional stock exchanges or both.

9.ACCEPTANCE OF MODIFICATION-

In case of any suggestions or modifications given by the SEBI,

he has to ensure that they are properly incorporated in the

appropriate areas.

10.COLLECTION OF AMOUNT FROM UNDERWRITERS-

In the case of development, the lead manager has to ensure

the collection of the specification amount from the underwriters.

Page | 61

OBLIGATIONS AND RESPONSIBILITES

Merchant bankers have the following obligations and

responsibilities:

1. Merchant banker should maintain proper books of accounts,

records and submit half yearly/annual financial statements to the

SEBI within stipulated period of time.

2. No merchant banker should associate with another

merchant banker who is not registered in SEBI.

3. Merchant bankers should not enter into any transactions on

the basis of unpublished information available to them in the

course of their professional assignment.

4. Every merchant banker must submit himself to the

inspection by SEBI when required for and submit all the records.

5. Every merchant banker must disclose information to the

SEBI when it requires any information from them.

6. All merchant bankers must abide by the code of conduct

prescribed for them.

7.Every merchant banker who acts as lead manager must

enter into an agreement with the issuer setting out mutual rights,

Page | 62

liabilities, obligations, relating to such issues with particular

reference to disclosures allotment, refund etc.

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SCOPE FOR MERCHANT BANKING

IN INDIA

Scope for merchant

banking depends upon size of

the market, restriction-

liberation, banking policies,

corporate culture, and

corporate dynamics.

1.Size and dynamics of

the market : Indian market is

growing. In fact India is one of

the largest emerging markets.

Obviously, public issues, FDI, debt raising are on rise. Lots of new

and green fried projects are happening. Merchant bankers have

lots space to contribute.

2. Restrictions - liberalization: more liberal the market is, more

the things left to be decided by the corporate. Merchant bankers

assist in decision making and hence their scope increases. With

significant market freedom, merchant bankers work has increased

many folds.

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3. Banking policies: RBI prefers that commercial banks do not

indulge in merchant banking business directly. They should setup a

subsidiary for the purpose. This limits scope of commercial banks

and gives space to merchant bankers. This policy also results in fair

business practices. Some countries allow commercial bankers to

get involved in IPO’s, placement of debentures, etc. Indian scenario

is favorable to merchant bankers.

4. Corporate culture: corporate can do project appraisal,

strategic restructuring in house as well. If the corporate prefer

third-party independent assessment, then only they will engage

merchant bankers. Otherwise merchant banker’s role is only

statutory as in issue management. India inc. apparently prefers and

is happy with merchant bankers work.

5. Corporate dynamics: more happening in business gives

more opportunities to merchant bankers. Mergers, takeover

acquisition, new Greenfield projects, fund raising for government

institutions, active money market are all providing better business

prospectus to merchant bankers.

Page | 65

Problems of Merchant Bankers:

1.ISSUE RELATED ACTIVITIES

SEBI guidelines has authorized merchant bankers to

undertake issue related activities only with an exception of portfolio

management.

2.SCOPE OF ACTIVITIES-

These guidelines have made the merchant bankers either to

restrict their activities or think of separating their activities from

the present ones and float new subsidiary and enlarge the scope of

its activities.

3.NET WORTH-

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

for authorization of Merchant bankers.

4.ELIGIBLITY-

Small but professional and specialized merchant bankers who

do not have a net worth of Rs.1 crore may have to close down their

business. The entry is denied to young, specialized professionals

into merchant banking business. Page | 66

5.RESPONSIBILITIES-

Non- co- operation of the issuing companies in timely

allotment of securities and refund of application money is another

problem of merchant bankers. The guidelines have put the

responsibility on the merchant bankers. They have to seek the co-

operation of the issuing company to shoulder the responsibility.

PROGRESS OF MERCHANT BANKING IN

INDIA

Page | 67

Merchant banker’s

main activity is of

management of public

issue of shares. As

stock markets in the

country progress or

move, merchant

banker’s business

activity grows. Earlier,

stock markets in India

nascent stage.

Controller of capital

issues was the

controlling authority.

Issue pricing was also

dictated by CCI. Later, it

was replaced with

SEBI. Physical shares

were replaced with

demat. BSE got a

strong companion as

NSE. Both are highly automated and sophisticated now. Merchant

banker’s role in CCI era and in restricted freedom was of course not

so significant. As the size of capital market increased, pricing

became a critical issue. Book building and book running is an imp

Page | 68

exercise. With India liberalizing its policies, its presence in

international markets has increased. Number of merchant bankers

is on rise since liberation. Virtually every PSU bank has merchant

banking subsidiary. Indian finance companies dominated merchant

banking in early years. Now giant multinational merchant bankers

are showing presence in India. Market and its scope are growing.

Page | 69

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.

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 growing awareness and interest into a

committed, discerning and 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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