CONTENTS

Sno. Topic Page no.

1 Introduction and Meaning

2 Evolution and emergence

3 Objective of merchant banking

4 Need and importance

5 Role of merchant banking

6 Responsibilities of merchant banking

7 Function of merchant banking

8 Qualities

9 Registration

10 Advantages

11 Merchant banking organizations

12 Services of merchant banking

13 Growth of merchant banking in India

14 Players in merchant banking

15 Challenges

16 Future development

17 Leading merchant banking in india

18 Conclusion

19 Bibliography

MERCHANT BANKING SERVICES

INTRODUCTION

The term Merchant Banking has its origin in the trading methods of countries in the late

eighteenth and early nineteenth century when trade-taking place was financed by bill of

exchange drawn by merchanting houses. At that time the merchants were merely financing their

own activities. As international trade grew and other lesser-known names wanted to import

goods from abroad, the established merchants ‘lent their names’ to the newcomers by agreeing to

accept bills of exchange on their behalf. The acceptance houses would charge a commission for

this service and thus there grew up the business of accepting bills of finance trade not merely of

themselves, but of others. Acceptance business thus became and to a degree always has been

hallmark of true Merchant Banks.

The second historical of Merchant Banks was the raising of capital for foreign Government. In

many cases, the Merchant Banks have been trading in the countries concerned and gained the

confidence of Governments and other authorities in those countries. Thus the second principal

ingredient of Merchant Banking became and still is, raising of capital through the issue of stocks

and bonds.

Therefore, Merchant Banks can be accepting houses or issuing houses or both. Merchant

Banking started in the beginning of 20th century in UK and USA. More recently, the services

offered by Merchant banks have entered into the other areas of operations. Their role is wide

and they can now provide most of the financial services required by a company, touching almost

all aspects of establishing and running of industrial units on sound financial footing.

Dictionary meaning of ‘merchant bank’ refers to an organization that underwrites corporate

securities and advises such clients on issues like corporate mergers, etc. involved in the

ownership of commercial ventures. This organization may be a bank, corporate body, firm or

proprietary concern.

This definition suits well in Indian context. Merchant banking in India started with management

of public issues and loan syndication and has been slowly and gradually covering activities like

project counseling, portfolio management, investment counseling and mergers and amalgamation

of the corporate firms. Although, merchant banking organizations present a long list of services

they contemplate to render to their clients but the main services so far being rendered by them

are those as authorized by the Securities & Exchange Board of India (Merchant Bankers) 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 as manager, consultant,

advisor or rendering corporate advisory service in relation to such issue management”.

MEANING OF MERCHANT BANKING

Merchant banker is one who underwrites corporate securities and advises clients on issue. The

merchant banker may be in the form of a bank, a company, firm or even a proprietary concern. It

is basically service banking which provides non-financial services such as arranging for funds

rather than providing them. The merchant banker understands the requirements of the business

and arranges finance with the help of financial institution, stock exchange, banks and money

market.

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.

EVOLUTION & EMERGENCE OF MERCHANT BANKING

India has entered the 21st century as one of the Asia’s most dynamic economies. This is the part

of the assessment made by International Financial and Capital Market Institutions based on

India’s economic and financial reforms initiated in 1991 and brought to fruition in various

budget. In fact, the achievement is the cumulative effect of yester years coupled with economic

reforms in the Indian economy.

The progress of any economy mainly depends on the efficient financial system of the country.

Indian economy is no exception financial system of the country. The importance of the financial

sector reforms affirms an effective means for solving the problems of economic, financial and

social in India and elsewhere in the developing nations of the world. The progress of the

Securities Industry of any country depends mainly on the flow of funds. In fact, capital

generation is the lifeblood of the capital market without which the health and soundness of the

financial system cannot be geared and for which well-developed capital market as well as money

market is essential.

The Indian financial system, as it has evolved, is comparable in many respects with the financial

system of the most advanced developing countries as well as some of the developed countries. It

has a well-diversified structure of financial institutions and instrument and, in fact financial

development has out-placed economic development. India’s capital market is among the largest

in the developing world. The market is comprised of 24 stock exchanges transacting long-term

debt; debentures and equity shares both electronic and physical forms. Derivatives financial

instruments are also be added to the market shortly. The number of firms listed on the Indian

Stock Exchange is more than the USA. Market Capitalisation of listed firms is 1980s was

similar to Brazil, Malaysia, Singapore and Denmark.

The capital market of the country, however, underwent dramatic changes since the beginning of

1980s basically because of a progressive realization that the command economy on which the

emphasis was placed could not lead to higher levels of economic development and that a slant

towards a market-oriented economy is necessary. Government did this gradually by opening up

progressively new areas of economic activity for the private sector.

It is in the context of fast expanding economy and a liberalized and deregulated atmosphere that

the growth of the Indian Stock Market activities has to be viewed. No wonder that the markets

have registered a quantum jump judge by any standards. India is now a major player in the

emerging markets of the world, next only to Mexico, Korea and Taiwan both in respect of

market capitalization and turnover.

MERCHANT BANKING

Objectives:

Merchant Banker plays a vital role in the economic and financial development of the country.

As a result of economic and financial liberalization new companies are formed and number of

issues floated to raise resources from the investor community.

Considering the significance of the issue the Government of India instituted SEBI in 1990 to

regulate and control various market intermediaries. SEBI issued various rules and regulations

for each and every segment of the capital market. To regulate Merchant bankers, with the twin

objective viz., investor protection and development of the capital market, SEBI issued rules and

regulations for Merchant Bankers. Subsequent amendments also have been made to these

regulations to further strengthen this segment of the securities industry. These regulations

(Merchant Banking) specified that every company desires to float an issue to the public should

engage Merchant Banker (Registered under these regulations with SEBI) as Lead Manager.

In this context Merchant Banker gained the importance in the Indian Securities Industry. In the

wake of economic reforms and financial liberalization the need for financial resources has

significantly increased. As an intermediary-Merchant Banker plays a crucial role in exploring

the ways and means for the funds. Besides, issue management, Merchant Banker also performs

several other important functions like underwriting of securities, Private placement of securities,

corporate advisory services e.g., Takeovers, Acquisitions, Disinvestments Managing &

International offerings of debt/equity, i.e. GDR, ADR, Primary dealership of government

securities, Syndication of rupee, term loans, international financial advisory services, etc. which

require special skills.

Having given a serious and careful thought to securities industry reforms, SEBI has taken efforts

seriously to boost the splendid endeavor of securities market intermediaries. As a result,

Merchant Bankers came into being to look after the promotion and administration of issues. It is

well known fact that without adequate professional support of Merchant Bankers the securities

industry cannot prosper.

NEED & IMPORTANCE OF MERCHANT BANKING IN INDIA

Important reason for the growth of merchant banking has been the developmental activity

throughout the country, exerting excess demand on the sources of funds forever expanding

industry and trade, thus, leaving a widening gap unabridged between the supply and demand of

investible funds.

All Indian financial institutions had experienced resource constraint to meet the ever-increasing

demand 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 consultancy firms to enter into the field of

merchant banking and share the growing capital market. With the result, all the commercial

banks in nationalized and public sector as well as 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 merchant bankers as well as managing public issues in syndication with other

merchant bankers.

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 the 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 from 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 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 reliefs, other

statutory relaxations, and good return on investment and capital appreciation in such investment

to motivate them to invest their savings in securities of the corporate sector. 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 organizations for higher yields.

ROLE OF MERCHANT BANKERS

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 skills, develop expertise in new areas so as to equip oneself with the knowledge and

techniques to deal with emerging new problems of corporate business world. He/she has to keep

pace with the changing environment where government rules, regulations and policies affecting

business conditions frequently change; where science and technology create new innovations in

production processes of industries envisaging immediate renovations, diversification,

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/she has to assume wider responsibilities of saving industrial units from going sick and

guiding industries to be set up industrially backward areas to eliminate regional imbalances in

industrial development of the country. Merchant banker has to guide the wider section of the

community possessing surplus money to invest in corporate securities and other productive

investment channels. He/she has to help the industry in different forms to ensure that it runs risk

free and devoid of uncertainty by assisting the 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/she 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 roles, a merchant banker has to be dynamic; he/she depicts a personality cult,

which is unique and envious to be followed by others. In the days ahead, merchant bankers

would have very significant role to play tuning their activities to the requirements of the growth

pattern of 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.

RESPONSIBILITIES OF MERCHANT BANKER

Investor protection is fundamental to a healthy growth of the Capital Market. Protection is not to

be conceived as that of compensating for the losses suffered. The responsibility of the Merchant

Banker in ensuring the completeness of the disclosures is of paramount importance in view of

the fact that entire reliance is based on offer document either Prospectus or Letter of Offer

because an independent agency like a Merchant Banker has done the scrutiny.

o Capital structuring: The Merchant Bankers while designing the capital structure take into

account the various factors such as Leverage effect on earnings per share, the project cost and

the gestation period, cash flow ability of the company, the cost of capital, the considerations

of management control, size of the company, and general economic factors. These exercise

are done mainly in order to meet the fund requirement of the company taking due cognizance

of the investor’s preference.

o Project Evaluation and due Diligence: Due diligence and project evaluation is another

major responsibility of the Merchant Banker. Where the project has already been appraised

by a bank/financial institution, the Merchant Banker relies on the said appraisal before

accepting an assignment. However, where the project has not been appraised by as

bank/financial institution, the Merchant Bank undertakes a detailed evaluation of the project

before taking up an assignment for issue management.

o Legal aspect: The factors that are looked into in case of the legal aspects are:

Compliance with the SEBI guidelines and the various guidelines issued by the Ministry

of Finance and Department of Company Affairs.

Pending litigation’s towards tax liabilities or any criminal/civil prosecution any of the

directors for any offenses.

Fair and adequate disclosures in the prospectus.

o Pricing of the Issue: The Merchant Banker looks into the various factors while pricing the

issue. Some of the factors are past financial performance of the company, book value per

share, stock market performance of the shares. The Merchant Banker has a vital role to play

in pricing of the instrument.

o Marketing of the Issue: Marketing of the issue is a vital responsibility of the Merchant

Banker. The first stage is Pre-issue marketing for placement of the issue with the financial

institutions, banks, mutual funds, FII’s and NRI’s. The second stage is the marketing of the

issue to the general public through various vehicles such as press, brokers, etc.

o Bought out Deals: The concept of wholesale but out of public offerings by the Merchant

Bankers started off with over the Counter Exchange of India where a Merchant banker acts

also as a sponsor and either takes up the entire issue to be offered wholly of jointly with other

co-investors and off-loads the same to the public at a later date by an offer for sale. Major

amendments were made to the SEBI regulations regarding Merchant Bankers. The duration

of this transaction period has not officially been announced.

company

agreement

merchant banker

FUNCTIONS OF MERCHANT BANKING

1. Lead manager:

A company coming out with a public issue has to come out with an Offer Document/

Prospectus. An offer document is the document that contains all the information you

need about the company. It will tell you why the company is coming is out with a public

issue, its financials and how the issue will be priced. Just because the prospectus has been

filed with SEBI, it doesn't mean it recommends the issue or guarantees its contents. That

responsibility rests with the lead managers to the issue, who are supposed to do due

diligence on the issue. That means lead managers have to ensure the company is

following the rules laid down for an IPO, that it has made available all the information a

potential investor needs to know and that the facts in the prospectus are correct. They are

also called merchant bankers and are in charge of the issue process. They act as

intermediaries between the company and the investors. They are also responsible for

drawing up the prospectus and marketing the issue.

MERCANT BANKING

LEAD MANAGER

UNDERWRITER

BANKER TO ISSUE

BROKERS TO ISSUE

REGISTRAR TO ISSUE

AND SHARE TRANSFER

AGENT

PORTFOLIO MANAGEME

NT

Eligibility of issue: Eligibility of issue of the company is done by the lead manager, the

company must fulfill certain rules of SEBI they are as follows

It should have net tangible assets of Rs. 3 cores, which not 50% should not be a monetary

assets.

It should have track record of distributable profit s according to the sec 205 for at least 3 out

of immediate 5 year.

In case of change in the name of the company they should have earned profit in the current

name.

i. Offer of document made to SEBI:

The offer document should be made to public for a period of 21 days from the

date of filling the draft offer document with SEBI. The lead merchant banker

should while filing the document with SEBI has to file a document with stock

exchange where the share is to be listed making it available to the public.

company

capital < 50 lakhs

letter of offer in accordance to sebi

capital >50 lakhs

draft of prospectus should be filed with

sebi -- 21 day prior to filing with roc

Offer document made to sebi

Pre issue advertisement

IPO grading

Despatch of issue material

No complaint certificate

Mandatory collection centre

Authorised collection agent

Post issue management

ii. Pre issue advertisement:

Subject to sec 66 of companies act, the issuer company should soon after

receiving a final observation from SEBI make an advertisement in English news

paper national daily with wide circulation, one Hindi and regional newspaper at

the place of its registered office .

iii. IPO grading:

The issue must disclose all the grades including unaccepted grades in the

prospectus.

iv. Despatch of issue management:

The merchant banker should dispatch all the documents relating to issue of

prospectus to underwriters, investors, banker.

v. No complaint certificate:

After 21 days from the date of draft offer document the merchant banker should

file a statement with SEBI giving the list of complaints received by it.

vi. Mandatory collection centre:

The issuing companies are free to issue as many issue as many deemed issue

centre.

vii. Post issue management:

2. Underwriter:

Underwriting is an act guarantee by an organization for a sale of certain minimum

amount of shares issued by public company. When the shares are not fully subscribed the

underwriters, underwrite those share. They have to get prior permission from SEBI.

SEBI will permit the underwriter only if it finds the net worth of the underwriter is good.

3. Banker to issue:

The banker to issue is engaged in acceptance of application money from the investor and

refund of application money. To act as banker to issue the banker has to get certificate

from SEBI. They should have necessary infrastructure.

4. Registrar to an issue

Register to an issue acts act as intermediary in the issue market, carry on activities such

as collecting of application money from the investors and maintaining a proper record of

application money received from the investors. They also assist the company in allotment

process; finalize allotment, dispatch of letters, refund orders and certificate in respect of

issue capital.

5. Portfolio management

Merchant banker helps the investor in mater pertaining to investment decision. Taxation

and inflation are taken in to account while advising in investment in different securities.

The merchant banker also undertakes function of buying and selling of securities on

behalf of their client companies. Shifting of investments is done in such a way that it

ensures maximum return and minimum risk.

6. Corporate counseling

Merchant bank provides advice to ensure better corporate performance in terms of

prolonged existence and survival, steady growth through better working results and also

provide suggestions and opinions to take corrective actions for solving corporate

problems and help by restructuring the corporate set-up if necessary. With improper

corporate structure of company, it may experience high financial risk, low or no growth,

etc. Merchant bank help redesign capital and provide an appropriate structure for an

optimum growth and minimum risk. It helps diagnose the financial problems and provide

customized solution for company.

7. Project counseling

Merchant banker offers service as to Preparation of Project Reports as per Institutional

Norms and Loan Syndication etc., suggest Feasible Projects as per budget and attitude of

clients as well as Monitoring of Industrial Projects etc.

a. Loan Syndication: Syndication is an arrangement where a group of banks, which

may not have any other business relationship with the borrower, participate for a

single loan. A syndicated facility is a lending facility, defined by a single loan

arrangement, in which several or many banks participate.

b. Mergers / Acquisitions: The services offered are:

i. Identification of the potential targets for takeover.

ii. Appraisal of merger/takeover proposals with respect to the financial viability

and technical feasibility.

iii. Negotiating with the interested parties.

iv. Determination of the purchase consideration and the appropriate exchange

ratio.

v. Assistance related to procedural and legal aspects.

vi. Obtaining necessary approval.

8. Capital market

i. Preparation of prospectus and other related information.

ii. Advising the company regarding the issue.

iii. Advising the management on the company's financing structure.

iv. Selection of brokers, bankers and advertisers for the issue.

v. Coordinating with the stock exchanges.

vi. Final allotment and/or refund of subscription amount.

Other functions

Venture capital:

Venture capital is a kind of finance where in new venture proposed by an entrepreneur is

financed. Venture capital carries more risks and hence very few financial institutions

come forward to finance. As the risk involved is more, the technical competency of the

entrepreneur is an important for the venture capital finance.

QUALITIES OF GOOD MERCHANT BANKERS

Merchant bankers are individual experts who organize and manage the merchant banks. The

operations of merchant banks are, therefore, influenced by the personality trait of these

individuals. For the success of merchant bank’s operations, the qualities which merchant

bankers should have are discussed below:-

a. Leadership: merchant banker should possess all relevant skills, update knowledge to

interact with the clients and effectively communicate.

b. Aggressive action: aggressiveness is a personality trait of a good leader but in merchant

banking it has a wider connotation. Aggressive merchant bankers are always looking for

new business. Once a business opportunity has been located, the merchant banker has got

to obtain the mandate for the merchant banking assignment from the clients at once

which will depend upon his/her own communication skills, persuasiveness and the

background of the organization to which he belongs. A good merchant banker is one

who does not allow client to think anything outside except what has been advised.

Therefore, promptness in grasping the clients’ problems and providing better choice

amongst alternative solutions evidence aggressive approach in the profession to hold the

clients’ interest in entirely for the present as well as for the future.

c. Cooperation and friendliness: these two characteristics are the symbols of good

leadership, coupled with persuasiveness are the main instruments with which a merchant

banker mixes with the people, gathers information, obtains business mandate and renders

satisfactory services to the clients. Business of an honest business merchant banker

spreads with geometrical propagation when he shares the thoughts of his clients with

sympathetic gestures and offers pragmatic suggestions without greed or favors.

d. Contacts: Success of merchant banker depends upon sociable nature and the richness of

wider contacts. A merchant banker is supposed to be acquainted deeply with all the

constituents of merchant banking. The scope of contact encompasses intimate contiguity

and acquaintances within own organization, Central and State Government Offices where

compliances under various relevant enactments are to be reported, Indian and foreign

banks, financial institutions at Central and State levels, promoters/directors/owners and

chief executives of the private and publc enterprises which would be prospective

beneficiaries of merchant banking services, printers, advertising agencies, brokers and

stock exchange dealers, advocates and solicitors and members of the press whose

services are availed of in executing merchant banking assignments. Merchant bankers

should widen contacts and references and continue to maintain them with goodness,

honour and humour.

e. Attitude towards problem solving: an important personality trait of a merchant banker

is attitude towards problem solving. Positive approach to understand the view points of

others, their difficulties and adverse circumstances is possible only when a person is

skilled in human relations particularly the inter-personal and intra-personal behavior.

Effective communication and proper feedback are the pre-requisite for creating a positive

attitude towards problem solving which could be gained partly through learning process

and partly as an in born quality. This trait is a subject matter of personality development

but is so important that it must be treated as a separate objective quality of a good

merchant banker.

f. Inquisitives for acquiring new skills, information and knowledge: Merchant bankers

rely on their wits they earn by giving information to clients. Therefore, they should keep

abreast with latest information in the area. This is possible if merchant bankers possess

the quality of inquisitiveness.

All good qualities in merchant bankers are difficult to be defined so elaborately. Nevertheless,

merchant banker should possess super business acumen, managerial abilities, administrative

capacities and salesmanship so as to understand the problems and sell the service product to the

needy clients.

REGISTRATION OF MERCHANT BANKER

Although Merchant Banking activity ushered in two decades ago, it was only in 1992 in India,

after the formation of SEBI that defined and set rules and regulations governing it.

A Merchant Banker is defined 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 issue management. No person allowed carrying out any activity as a Merchant

Banker unless he or she holds a certificate grated by SEBI.

Registration with SEBI is mandatory to carry out the business of merchant banking in India. An

applicant should comply with the following norms:

o The applicant should be a body corporate.

o The applicant should not carry on any business other than those connected with the securities

market.

o The applicant should have necessary infrastructure like office space, equipment, manpower

etc.

o The applicant must have at least two employees with prior experience in merchant banking.

o Any associate company, group company, subsidiary or interconnected company of the

applicant should not have been a registered merchant banker.

o The applicant should not have been involved in any securities scam or proved guilt for any

offence.

o The applicant should have a minimum net worth of Rs.5 crores.

Procedure for getting registration:

Capital structure decision: The capital requirement depends upon the category. The minimum

net worth requirement for acting as merchant banker is given below:

Category I – Rs. 5 crores

An application should be submitted to SEBI in form A of the SEBI (merchant bankers) regulations, 1992.

SEBI shall consider the application and on being satisfied issue a certificate of registration in Form B of the SEBI (Merchant Bankers) Regulations, 1992

Rs. 5 lakhs should be paid within 15 days of date of receipt of intimation regarding grant of certificate

the certificate is valid only for a period of 3 years

Three months before the expiry period, an application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the

application and on being satisfied renew certificate of registration for a further period of 3 years.

Rs. 2.5 lakhs which should be paid within 15 days of date of receipt of intimation regarding renewal of certificate.

Failing to pay registration fees

Cancellation of certificate

Category II – Rs, 50 lakhs

Category III – Rs. 20 lakhs

Category IV – Nil

The categories for which registration may be granted are given below:

Category I: to carry on the activity of issue management and 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 or consultant to an issue.

Category IV: to act only as adviser or consultant to an issue.

MERCHANT BANKING FOR INDIA: ADVANTAGES

The bane of Indian capital markets today is lack of investor confidence. This is reflected in the

poor performance in the primary and secondary markets. The cause for the existing situations

are many but primarily arise on account of lack of liquidity, unscrupulous issuers and Merchant

Bankers and poor or unappeased issues. Merchant banking can solve this problem because

investors would be dealing with reputed merchant bankers in the primary market rather than

unknown issuers.

The Merchant Banks, whatever are their issue management techniques have their own capital on

hold. The issues are likely to be properly appraised and priced. Merchant banks would hold the

issue until the market conditions are appropriate for issue, thus reducing risk exposure of

investor’s to gestation for issue. Merchant Banks make the primary market for IPO’s thus

assuring protection to the issuers also about subscription. In sum, the quality of pricing appraisal

and primary market functions will improve resulting in substantial improvement in investor

confidence. The necessity of Merchant Banking is indicated in the view of the wide industrial

base of the Indian Economy.

MERCHANT BANKING ORGANISATIONS

In India, merchant banks operate in the form of Divisions of Indian and Foreign banks and

financial institutions, subsidiary companies established by banks like SBI Capital Markets Ltd.,

can Bank Financial Services Ltd., PNB Capital Services Ltd., BOI Finance Ltd., Indian Bank

Merchant Banking services Ltd., etc., the firm organized by the stock brokers, stock exchange

dealers, the financial and technical consultants and chartered accountants. Securities and

Exchange Board of India (SEBI) has divided merchant bankers into four categories, which are as

follows:

CATEGORIES ACTIVITIES NETWORTH

Category I To carry on the activity of issue management and to

act as adviser, consultant, manager, underwriter,

portfolio manager.

Rs.1crore

Category II To act as adviser, consultant, co-manager,

underwriter, portfolio manager.

Rs.50 lakhs

Category III To act as underwriter, adviser or consultant to an

issue.

Rs. 20 lakhs

Category IV To act only as adviser or consultant to an issue Nil

Merchant Bankers are classified into 4 categories as shown in the above table having regard to

their nature and range of activities and their responsibilities to SEBI, investors and issuers of

securities. The minimum net worth and initial authorization fee depends on the category. The

first category consists of merchant bankers who carry on any activity of issue management,

determining financial structure, tie-up of financiers, advisor or consultant to an issue, portfolio

manager and underwriter. The second category consists of those authorized to act in the capacity

of co-manager/advisor, consultant, and underwriter to an issue or portfolio manager. The third

category consists of those authorized to act as underwriter, advisor or consultant to an issue. The

fourth category consists of merchant bankers who act as advisor or consultant to an issue.

SERVICES OF MERCHANT BANKERS

Introduction

Among the important financial intermediaries are the merchant bankers. The services of

Merchant bankers have been identified in India with just issue management. It is quite common

to come across reference to merchant banking and financial services as though they are distinct

categories. The services provided by merchant banks depend on their inclination and resources -

technical and financial. Merchant bankers (Category 1) are mandated by SEBI to manage public

issues (as lead managers) and open offers in take-over’s. These two activities have major

implications for the integrity of the market. They affect investors' interest and, therefore,

transparency has to be ensured. These are also areas where compliance can be monitored and

enforced.

Merchant banks are rendering diverse services and functions, which are as follows:

Issue Management

Underwriting

Mergers & Acquisitions

Project Counselling

Loan Syndication

Restructuring service

Corporate Advisory Services

Factoring Services

Asset Securitisation

Forex Services

Hire Purchase

Lease finance

Venture capital

MERCHANT BANKING SERVICES: SCOPE

In the present dynamic environment where public money is playing a vital role in financing a

large number of projects, both in the public and private sectors, Merchant Banking has a

significant role in managing the show and meeting the growing demands for funds by the

corporate sector. Merchant Banking includes a whole gamut of activities which meet the needs

of both corporate and individual investors and which range from identification, evaluation,

promoting and financing of projects (both domestic and overseas) by raising resources in the

equity and long-term loans, to organize and participate in international consortia, to raise foreign

currency loans and to offer advisory services on various matters related to finance, investment,

capital management, structure, mergers, amalgamation, takeovers and acquisitions. They also

play a useful role in the portfolio management, money market operations, venture capital,

leasing, etc. Merchant bankers act as a guide for the entrepreneurs who are unaware, or have

little knowledge or experience, of the complexities involved in the above spheres.

In addition to the above, the scope of Merchant Banking services has extended to providing

advisory services to companies to increase or divest their stakes, public sector undertaking

disinvestments, international issues, etc. With the OTCEI being operation now, Merchant

Bankers will have a key role to play in terms of appraising the projects and offering two-way

quotes for market making in case of entrepreneur going for listing in the above exchange.

Merchant Bankers act as a critical link between the corporate who are intend to raise funds and

the investors who are interested to invest in securities Industry. Besides issue management, the

Merchant Bankers are also undertake the activities like underwriting connected with the public

issue management business, Managing/advising on International offerings of Debt/Equity i.e.,

GDR, ADR, Bonds and other instruments, Private placement securities, Primary or Satellite

dealership of government securities, Corporate Advisory services related to securities market

(e.g., Takeovers, acquisitions, disengagement), Stock-Broking, Advisory Services for projects,

Syndication of rupee term loans and International Financial Advisory Services. The services can

be represented as follows: -

SERVICES RENDERED BY MERCHANT BANKERS

ISSUE MANAGEMENT:

The public issue of securities is the core of merchant banking function. At one time it was

constructed as the sole function. Merchant bankers were identified as issue houses. It was later

perceived that they provide other financial services. When companies seek to raise resources for

implementation of a new project or finance expansion or modernization or diversification of an

existing unit or fund long term working capital requirement, they retain the services of a

merchant banker. To a large extent the type of issue would vary with the purpose for which

funds are raised. Merchant bankers when retained as managers to issue will have to assist the

company in all the stages connected with public issue.

The merchant bankers help corporate to raise money from the markets through the issue of

shares, debentures, bonds etc. They are designated as managers to the issue. Their main

business is to attract public money to capital issues.

They usually render the following services:

Drafting of prospectus and getting it approves from the stock exchanges.

Obtaining consent/acknowledgement from SEBI.

Appointing bankers, underwriters, brokers, advertisers, printers etc.

Obtaining the consent of all the agencies involved in the public issue.

Holding road shows, to sell the issue. These shows are held for the analysts, brokers &

institutional investors. The purpose of these shows is to answer queries from these people

about the company and the project for which the funds are being raised.

Deciding the pattern of advertising.

Deciding the branches where application money should be collected.

Deciding the dates of opening and closing of the issue.

Obtaining the daily report of application money collected at various branches.

Obtaining subscription to the issue.

After the close of the issue, obtaining consent of stock exchange for deciding basis of

allotment etc.

Corporate advisory services relating to the issue

In India, the pricing of issues is now freely decided by the company, with valuable inputs from

the merchant bankers, who have to sell the issue at the decided price. The pricing of the issue

especially in a public issue is very important. The pricing has to be such, that the investors will

be attracted to invest in the issue at that price, at the same time the company should get the

premium that it is looking for. After all, the premium can play a very role in deciding the

company’s capital structure, as larger the premium lesser will be the requirement for borrowed

funds.

The promoter also needs to decide whether to go in for a fresh issue or to go for a rights issue.

However this will depend mainly on the quantum of funds that the company needs to raise. The

success of the issue is dependent on the selection of the right type of security. In this matter, the

expert advice of merchant bankers is of immense importance.

In the issue management the merchant bankers have to coordinate the various agencies to the

issue. The success of the issue depends on the cooperation of all the agencies involved.

The merchant bankers offer following services during the public issues:

Preparing an action plan and budget for the total expenses for the issue.

Preparation of application to SEBI and assistance in obtaining the consent from SEBI.

Drafting of the prospectus.

Selection of underwriters. Brokers etc.

Selection of bankers to the issue.

Selection of advertising agency for publicity.

Obtaining approval of the institutional underwriters and stock exchanges for publication of

the prospectus.

Companies are free to appoint one or more agencies as Managers to an issue. SEBI guidelines

insist that all issues should be managed by at least one authorized merchant banker, functioning

either as the sole or lead manager to the issue. Ordinarily, not more than two merchant bankers

should be associated as lead managers, advisors and consultants to a public issue. In issues of

over Rs. 100 crores, the number could be up to a maximum of four.

The responsibilities of merchant bankers in management of public issues are many. Some of

these are:

We have seen that many unscrupulous promoters have raised money from the market. This has

hurt the investors a lot and has also made investors nervous about stock market investments.

This in turn affects the functioning of stock markets both the primary and the secondary markets.

It is therefore necessary that merchant bankers are satisfied with the viability of the project,

which they can then sell to the investors with confidence. It is therefore important for the

reputation of merchant bankers, to only associate themselves with good issues.

The merchant banker should act as the custodians of the investors money and this puts a lot of

responsibility on them. To discharge this function the merchant bankers have to exercise due

diligence independent by verifying the contents of the prospectus and the reasonableness of the

views expressed therein.

It is the responsibility of the merchant bankers to get the securities listed on all the stock

exchanges mentioned in the prospectus. With the introduction of Demat accounts the complaints

about allotment have surely gone down. It is the responsibility of the merchant bankers to ensure

timely refunds and allotment of securities to the investors.

The merchant bankers have to certify that they verified everything and that they believe it to be

true. This assures the investing public about the safety of their investment. The precautions by

the merchant bankers would ensure that all the fake companies, whose intention is to defraud the

investors, don’t have access to the market.

UNDERWRITING

Underwriting is like insurance against the failure of an issue. It is a guarantee to the issuing the

company, that the money that it requires for its project will definitely be raised. It means that

even if the issue is not fully subscribed to by the public, the underwriters will make up the short

fall.

Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription

for the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter

takes, he is paid commission. Underwriting is a device that ensures the success of new issues.

New companies entering the markets for the first time, always face number of problems in

raising funds from the market. One of the biggest problems of course that the company is not

well known to the investors and many of them will be unwilling to invest their money in such

ventures. Many a times even existing companies may find it difficult to raise money, due to

some reasons. Issuing companies therefore approach different underwriters with a request to

underwrite the issue.

Underwriters on their part need to satisfy themselves about the viability of the project and also

about the integrity of the promoters of the company. It must be noted that when an issue is under

subscribed, the underwriters will pick the shares and only if the project is good enough, then in

future they can sell the shares in the market and get not only their money back, but can also make

a decent profit as well.

It is obligatory for the merchant bankers to accept a minimum 5% underwriting in the issue

subject to a ceiling. By taking underwriting in an issue managed by them, they show their full

commitment to the issue that they are managing. The SEBI has made it mandatory for issuing

companies to underwrite all issues.

MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate

finance world. Every day, Wall Street investment bankers arrange M&A transactions, which

bring separate companies together to form larger ones. When they're not creating big companies

from smaller ones, corporate finance deals do the reverse and break up companies through spin-

offs, carve-outs or tracking stocks.

Role of Merchant Banker

Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in negotiating

on one with corporate interested in hiving of divisions/companies which are not with in the

purview of the long-term business strategy of the group/company, and on the other hand for

Corporate interested in non organic growth by acquiring companies/units for reason strategic or

non strategic in nature. Mergers can be beneficial for both the entities, as due to competition the

companies unable to survive or prosper on their own may like to merge and face competition and

achieve growth targets. Takeovers may be hostile or friendly in nature, hostile takeovers are

without the consent of the company and company being takeover may work out an anti takeover

strategy to counter the threat. Merchant Bankers provide following services in M&A: -

Identification of potential takeover targets.

Financial & Technical appraisal of the merger/takeover proposal.

Negotiation with the parties for arriving at the suitable price or exchange ratio.

Assistance in obtaining necessary approval & addressing procedural & legal issues.

PROJECT COUNSELLING

Project counseling is very important and lucrative merchant banking services which only very

few merchant bankers having advantages of knowledge, skills and experience over others are

able to render satisfactorily. The corporate seek advice in respect of identification of profitable

investment opportunities in the related business areas (like forward/backward integration) or as

part of diversification process. The merchant bankers carry out detailed studies on product

demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study.

It may involve arrangement of a foreign collaboration, advice on technical parameters and also

legal issues.

Scope of services Project counseling services are needed by industrial entrepreneurs in India in

the following areas:

Preparation of project report

Deciding upon the financing pattern to finance the cost of the project.

Aspects of project appraisal with financial institutions/banks.

Project report

Project report consists of technical process, location, management profile, means of financing,

reports on market surveys and market explorations. Merchant bankers advise the clients on

project preparation. Merchant bankers, on behalf of their clients, engage technical consultants

specialized in the specific area, and marketing experts to prepare technical feasibility report and

market survey reports. Merchant bankers maintain the list of such experts approves by financial

institutions and assign the work to these experts.

Project report purpose

Project report about the proposed activity is prepared to obtain government approvals

particularly in the following areas:

Grant of industrial license to undertake specified industrial activity.

Foreign investment and technology tie-up.

Grant import license for importing raw material, plant, machinery and equipments.

Grant of foreign exchange allocation for import of capital goods or raw materials, etc.

Grant of subsidies and other concessions from the government at center or state levels or

from government sponsored agencies, etc.

LOAN SYNDICATION

Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for

projects. Such loans may be obtained from a single development finance institution or a

syndicate or consortium as in the case of large term loans. Merchant banks can also help

corporate clients to raise syndicated loans from commercial banks.

Scope of service

Once the client company has decided about the project proposed to be undertaken, the next step

is looking for the sources wherefrom funds could be procured to implement the project. The

responsibility of locating the sources of finance, approaching these sources by putting in

requisite prescribed applications and complying with all the formalities involved in the sanction

and disbursal of loan rests with the merchant bankers who provide the service of loan/credit

syndication.

Loan syndication in the case of domestic borrowing is undertaken with the institutional lenders

and the banks. Amongst institutional lenders the following institutions are the main suppliers of

the long and medium term funds with which the merchant bankers contact, liaison and arrange

loans working for and on behalf of their clients.

1. All India financial institutions

i. Industrial Finance Corporation of India (IFCI)

ii. Industrial Development Bank of India (IDBI)

iii. Industrial Credit & Investment Corporation of India Ltd (ICICI)

2. State level financial bodies

i. State Financial Corporations (SFCs)

ii. State Industrial Development Corporations (SIDCs)

iii. State Industrial & Investment Corporations (SIICs)

3. All India level investment institutions

i. Life Insurance Corporation of India (LIC)

ii. Unit Trust of India (UTI)

iii. General Insurance Corporation of India (GIC) & its subsidiary companies.

4. Commercial banks: Commercial banks join in consortium loan being provided by the above

institutions.

5. Mutual Funds & Venture Capital Funds: these funds generally invest in equity but mutual

funds contribute to the issues of Debentures/Bonds on private placement basis as well as

subscribe to public issues.

RESTRUCTURING SERVICES

Merchant bankers assist the management of the client company to successfully restructure

various activities, which include mergers and acquisitions, divestitures, management buyouts,

joint venture among others.

To help companies achieve the objectives of these restructuring strategies, the merchant banker

participates in different activities at various stages which include understanding the objectives

behind the strategy (objectives could be either to obtain financial, marketing, or production

benefits), and help in searching for the right partner in the strategic decision and financial

valuation of the proposal.

CAPITAL ASSISTANCE

In providing financial assistance, merchant banks offer a full understanding of all facets of the

capital markets. This includes all types of debt and equity financing available from both the

domestic and international markets. A merchant banker, cognizant of capital costs, looks for the

best sources of capital, including its restrictions and dollar limitations.

It should be understood that interest rates are not the only definition of capital costs. Restrictions

on availability, prepayment terms, and operating effectiveness can often outweigh what might

appear to be inexpensive capital with low interest rates. Too often, capital includes costs, which

force an entrepreneur or a business to undertake undesirable actions. In the short-run, some

actions might be necessary, but often in the long run are detrimental. The traditional merchant

banker understands these capital limitations and can structure a transaction, which is beneficial to

all sides of the table -- not just the capital source.

He also knows how to substitute one type of capital for another, sometimes utilizing internal

sources from asset repositioning or cash creation from improvements in working capital. He

understands fully the risk versus return elements necessary to complete the capital procurement

process.

CORPORATE ADVISORY SERVICES

Merchant bankers offer customised solutions to solve the financial problems of their clients.

Advice is sought in areas of financial structuring (as shown in the Modern Manufacturing case

above). Merchant bankers study the working capital practices that exist within the company and

suggest alternative policies. They also advise the company on rehabilitation and turnaround

strategies, which would help companies to recover from their current position. They also provide

advice on appropriate risk management strategies like hedging strategies.

FACTORING SERVICE

Factoring involves the outright sale of account receivable. By such sale a client (the exporter or

manufacturer) transfers his/her ownership of the accounts to a factor (an organization, firm). The factor

buys all the client’s outstanding invoices and takes over all the subsequent dealings with the

buyer/importer/customer. It is short-term debt financing. Here three parties are involved

1. The factoring organization /firms

2. The manufacturer/exporter/seller

3. The importer/customer/buyer

Role Of Merchant Banker In Factoring

The merchant banker may act as factor organization with a view to earning a great amount of

commission. The factor provides the following services:

(a) Financing

(b) Advisory services if necessary

(c) Collection of bills/Account Receivable against sales proceeds.

(d) Maintenance of sales ledger

(e) Provide further if necessary

f) Covering losses if there are any

ASSET SECURITIZATION

It is a process through which some inactive assets (mortgage assets) are converted into cash/active

assets. It is long-term debt financing. Here assets are converted into long-term bonds. The whole

process is done by the Special Purpose Vehicle (SPV). In this approach, the merchant banker for

issuance of security bonds against the assets with a matching of time and terms between mortgage

property and security bonds. Here the selection of asset is generally considered on the basis of the

following:

(I) Quality of assets

(ii) Certainty of repayment

(iii) Good ranking from the credit rating agency.

The process of asset securitization takes place in the following firms:

Originating Institutions/Firm

Special Purpose Vehicle (SPV)

Merchant Banker (MB)

FOREX SERVICES

This aspect of banking is becoming increasingly important as the forex flow in the country is

increasing and the international markets are funding the operations of the corporate in India. The

success of any business is measured by the fund management; this makes treasury management

as a very critical finance function. Management of treasury profit center requires a wide variety

of knowledge in the area of global money markets and financial instruments such as deposit

certificates, treasury bills, forecasting, source evaluation and cost of domestic and foreign

currency funds. Treasury and risk management ensures cost effectiveness in planning strategies

in this era of deregulation.

Role of merchant banker in Forex function

The currency values, interest rates, share index and commodities affect the financial derivatives

like futures, swaps and other tools of risk management. Corporates therefore employ well-trained

professionals to manage treasury and forex functions so that they can ensure competent

management. Thus, this service is provided to Corporates through merchant bankers. Merchant

bankers assess various markets to advice Corporates or other banks that needs currency.

Merchant bankers constantly update about the policies of the regulatory bodies, monitors the

current prices, makes predictions based on the analysis of trends etc

HIRE PURCHASE SERVICE

Hire-purchase involves a system under which term loans for purchases of goods and services are

advanced to be liquidated in stages through a contractual obligation. The goods whose purchases

are thus financed may be consumer goods or producer goods or they may be simply services

such as air travel. Hire-purchase credit may be provided by the seller himself or by any financial

institution. However, unlike in other countries, the emphasis in India is on the provision of

instalment credit for productive goods and services rather than for purely consumer goods.

Suppliers of hire-purchase finance include retail and wholesale traders, commercial banks.

Role of Merchant Banker

Merchant Banker undertakes the activity of financing for hire-purchase activities. The merchant

banker looks more to the credit-worthiness and business morality of the buyer than the value of

security.

LEASE FINANCE COMPANIES

Lease finance companies provide finance to acquire the use of assets for a stipulated period of

time without owning them. The user of the asset is known as the lessee, and the owner of the

asset is known as the Lessor. Leasing is medium-term arrangement for finance.

Role of Merchant Banker

Merchant Bankers helps in assessing the credit risk of industrial borrowers. The merchant

bankers provide help in evaluating lease proposals. He analyse the merits and demerits of lease

finance with reference to a given proposal and leave it to their clients to decide on the

appropriate source and type of finance, thus enlarging their range of choices and the variety of

services available to them.

VENTURE CAPITAL

Venture capital is money provided by professionals who invest alongside management in

young, rapidly growing companies that have the potential to develop into significant economic

contributors. Venture capital is an important source of equity for start-up companies.

Professionally managed venture capital firms generally are private partnerships or closely-held

corporations funded by private and public pension funds, endowment funds, foundations,

corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Role of Merchant Banker

Merchant Bankers assist ventures proposals of technocrats, with high technology, which are new,

and high risk. To seek assistance from venture capital funds or companies.

They also provide technical, financial & managerial services & help the company to set up a

track record.

The assistance should mainly be for equity support, through loan support to supplement this

may be extended.

GROWTH OF MERCHANT BANKING IN INDIA

Formal merchant banking activity in India was originated in 1969 with Merchant Banking

Division set up 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. Other foreign banks like Citi Bank,

Chartered Bank also assumed the merchant banking activity in India. State Bank of India started

merchant banking in 1973 followed by ICICI in 1974. Both these Indian merchant bankers

emerged as leaders in merchant banking having done significant business during the period of

1974-1987 in comparison to foreign banks. The early and mid-seventies witnessed a boom in the

growth of merchant banking organizations in the country with various commercial banks,

financial institutions, broker’s firms entering in to the field of merchant banking.

The early growth of merchant banking in the country is assigned to the Foreign Exchange

Regulation Act, 1973 (FERA) where under large number of foreign companies operating in India

were required to dilute their foreign holdings in order to continue business in the country. This

had caused two-pronged effect viz. firstly, in the form of spate in ‘Foreign Exchange Regulation

Act Issues’ eliciting interest of the investors by creating massive awareness about capital markets

amongst the new class of investing public, secondly, merchant banking activity became attractive

to banks and the firms of consultants and share brokers who entered into this fields vigorously to

reap the advantages of the expanding capital markets.

PLAYERS IN MERCHANT BANKING

1. ENAM

ENAM was founded in1984 to provide knowledge-driven financial services at the time when

Indian economy investors faced a bewildering array of options. ENAM is the one of the largest

underwriters in India. ENAM offers promising & exciting companies the opportunity of

assessing the public market equity finances. ENAM’s long-term association with capital markets

& primary markets has provided it with deep insights of the functioning of Indian financial

institutions. The merchant banking services provided by ENAM are: -

Equity debt/syndication: Raising capital through a private placement of a company’s

securities is an effective & timely offering to a public offering. ENAM represents the clients

in the private placement of debt and equity with institutional & high net worth investors.

Corporate Restructuring: - ENAM provides client with strategic and practical solutions to

financial challenges. Their restructuring services includes Mergers & Acquisitions,

Takeovers, Debt restructuring, Buyers services etc.

ENAM also provide the seed stage services, value creation services and IPO’s advisory

services which are represented below:

2. ICICI SECURITIES

ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are

experienced in every aspect of the business from domestic and international capital markets

advisory, to M&A advisory, Private Equity syndication, Restructuring and infrastructure

advisory. Our investment banking team, based across key cities in India and New York,

London, and Singapore consists of professionals with expertise across a range of industries.

ICICI SECURITIES provide following services:

Mergers and Acquisitions: - ICICI Securities Limited is amongst the first Indian investment

Banks to form a dedicated M&A practice and continues to be a leader by providing

innovative and unique solutions to achieve varied objectives of the client. They offer a full

range of advisory services, which include joint ventures, mergers, acquisitions, and

divestitures.

Equity Capital Markets: - ICICI Securities Limited is at the forefront of capital markets

advisory having been involved in most major book building and fixed price offerings over

the last decade. It is amongst the leading underwriters of Indian equity and equity-linked

offerings.

Infrastructure Advisory: - ICICI Securities Limited has a dedicated infrastructure vertical

focused on assisting clients in identifying and capitalising on the opportunities thrown up by

the all pervasive boom in the Indian infrastructure sector.

Dealing with Bulls and Bears: - ICICI Securities Limited assists global institutional

investors to make the right decisions through insightful research coverage and a client

focused Sales and Dealing team. The equity group leverages research and distribution reach

to domestic and foreign institutional investors in case of public offerings.

Thus the quality of analysis and client servicing standards, are a testimony to the quality of

ICICI SECURITIES team.

3. KOTAK SECURITIES LIMITED

Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock broking and

distribution arm of the Kotak Mahindra Group. The company was set up in 1994. Kotak

Securities is a corporate member of both The Bombay Stock Exchange and The National Stock

Exchange of India Limited. Its operations include stock broking and distribution of various

financial products - including private and secondary placement of debt and equity and mutual

funds. Currently, Kotak Securities is one of the largest broking houses in India with wide

geographical reach. The company has four main areas of business:

Kotak Institutional Equities: - Kotak Institutional Equities, among the top institutional

brokers in India. It mainly covers secondary market broking and the marketing of equity

offerings, including IPOs, to domestic and foreign institutional investors.

Structured Finance (Project Finance & Advisory Business): -KMCC has developed

expertise in various vertical segments in the infrastructure sector including power, oil, gas,

ports, automobiles, steel & metals and hotels, by offering structured finance solutions. Some

of the transactions executed by this team include:

Advisor to Ford on financial closure for its Car project in India.

Advisor to one of the largest LNG projects on the Western coast of India.

Financial advisors and loan syndications to British Gas and GAIL.

Mergers & Acquisitions: -In the area of Mergers & Acquisitions, we provide our clients

expertise and a comprehensive set of services that help them achieve their strategic and

financial objectives. Our spectrum of services include:

Divestments

Spin-Offs / Restructuring & Joint Ventures / Strategic Alliances

4. CITIGROUP

Citigroup Corporate and Investment Banking achieve the extraordinary for our clients around the

world. No financial institution is more committed to advancing the goals of its clients—our

diverse and talented staff in more than 100 countries advises companies, governments and

institutions on the best ways to realize their strategic objectives. We create solutions for and

provide the broadest possible capital and market access to thousands of issuer and investor

clients. And no institution better executes the increasingly complex payment and cash

management solutions required in today's global economy. The features Citigroup are as follows:

-

1. Over the years, Citigroup has established a track record of outstanding business milestones

such as Cash Management, pioneered by Citigroup in 1986 and utilized by over 900

Corporates with through-puts totaling around $ 35 billion (8% of India's GDP).

2. It is India's largest foreign bank in the FX (foreign exchange) market with a 14 per cent

market share.

3. As the leading custodian, Citibank has over $22 billion of custody assets under management.

5. DSP MERRILL LYNCH LTD.

DSP Merrill Lynch Limited (DSPML), among India's leading

investment banking and brokerage company, is a culmination of a long standing relationship

between DSP Financial Consultants Ltd., and Merrill Lynch & Co., the leading international

capital raising, financial management and advisory company. DSPML is a full service

investment bank and broking company with leadership position in M&A, Capital

Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory services.

Euro money Magazine has ranked DSPML as the "Best Domestic Securities firm in India"

for the last four consecutive years. This Transaction heralds DSPML as a key player in the

private equity market. The service features of DSPML are as follows: -

DSPML has consistently been rated as one of India's leaders in origination, distribution,

and trading of equity and debt securities.

DSPML has consistently brought reputable issues to the capital markets.

A diverse client base made up of India's most prestigious private and public sector

corporations and multinational corporations have rendered DSPML a commanding

presence in the Indian capital market.

Through direct market's group, DSPML offers investors access to every major initial or

subsequent public offering.

DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked offerings

across domestic and international markets. By leveraging their extensive knowledge of

local markets and global resources, they have delivered innovative and customized

solutions to their clients.

6. UPFC (Uttar Pradesh Financial Corporation)

Introduction to Scheme for merchant banking & financial

services

Decades ago UPFC has taken a humble step for the industrial development of U.P. by

providing term loan assistance to small & medium scale units. Since then it has acquired a

matured professional approach in Industrial Financing, several small-scale units nurtured by

UPFC has groomed into big enterprises.

In order to meet the challenges of liberalized policy of the Government & Changed economic

Scenario, UPFC has started Merchant Banking & other financial Services to serve its valued

clients. UPFC, a category-I Merchant Banker with unmatched expertise in project appraisal

and term lending offers a whole gamut of Merchant Banking Services.

1. Issue management: UPFC provides expert services to manage public issues of the

companies successfully; it has already managed Public Issues as a lead Manager with

great success.

2. Underwriting: In order to provide a protective umbrella to the public issues of its clients,

UPFC also underwrites the issue.

3. Subscription to equity share: UPFC subscribes to the equity shares reserved under FI

quota, to enable the company to market the public issue effectively.

4. Advisory services: UPFC, with its long experience, advises its clients for various

advisory services such as capital Structuring, loan syndication etc.

5. Project certification: UPFC also certifies the projects going to capital markets for

raising funds. This is a specialized activity of the Corporation.

6. Other financial services: As a part of its commitment to provide professionalized

financial services to its clients, UPFC also offers Bill Discounting, Equipment Leasing &

Hire Purchase Services, Short- term loan, Brand Equity loan, etc to meet diversified

requirements of it's clients

CHALLENGES AHEAD

Merchant bankers have to tap the opportunities lying ahead with the developing pace of the

economy. These opportunities arise in the form of challenges before the merchant bankers to test

their skills, expertise and efforts to attune their activities with the programme of economic

development of the country, adopt new instruments and innovative means of financing to meet

the growing financial requirements of the corporate clients. Some of the areas of challenges,

which have been explored on the basis of research, are classified as under:

Merchant bankers will have to conduct management of capital issues in a different fashion

than what is being done at present. If small industries are to be provided the full benefit of

their services of corporate counseling, project counseling and loan syndication than besides

distributions of their securities to the public and arranging long-term institutional or banking

finance for them, it would be necessary for merchant banks to make out-right purchase of

capital issues in Toto and to retain the purchased equity of the company till the

implementation of the project, commencement of production and profitable working of the

company when the issue may be treated as good for marketing to the general public, may be

on premium, so as to make capital gains on that. This course of action will benefit the smell

industries in many ways; firstly, they will have the quick liquidity and secondly, their project

will be implemented under the skilled supervision and expert guidance of the merchant

bankers. Besides, the investing public will be interested in purchasing the issue at premium,

having foreseen the dividend paying capacity of the company.

If the planned objective of economic decentralization and rapid development of rural

economy is to be achieved merchant bankers will have to make expert efforts in the interest

of the national economy by mobilizing the savings from the rural sector and creating avenues

for its investment in rural areas in industry, trade and commerce in different shapes and

different magnitudes encouraging the local people to espouse entrepreneurship in industrial

undertakings in higher degree so as to reduce their dependence on land farming to other

means of rural avocations. Alternatively, this poses a big challenge for the merchant bankers

to manage the surplus money available with the villagers by holding portfolio on their behalf

or by channelising it directly to industry in the shape of fixed deposits, etc.

Increasing number of sick industries is the ever-growing threat for the industrial economy of

the country. Merchant bankers have to find out ways and means for rehabilitating the sick

industries and also devise the manner by which the running industry might be saved from

going sick. They should so closely associate with the units so as to smell developing

weakness in the management of the enterprise and suggest timely action to check any mis-

management leading to sickness of the industrial unit. “Management buy-out” is one of the

techniques that have been successfully tried in European countries as well as in USA, to

check sickness in industry. This device encourages the executive staff of the company to

purchase the shareholdings of the proprietors and promoters and run the factory on

professional basis. Venture capital funds contribute substantially in this area of finance.

The millions of small savers are unable to manage their savings in India in both rural and

urban areas. There are mainly the people from the middle class and lower middle class.

Merchant bankers must devise ways and means to provide services for portfolio management

to these citizens. This may be by taking recourse to encouraging the “mutual funds”.

Public and private sector institutions engaged in trade, commerce and industry have many

times surplus funds lying with them awaiting opportunity outside. These funds should be

tapped by the merchant bankers from time to time by mobilizing them to deficit areas on

profitable return basis playing the interest rate games as is done in SWAP deals in

international finance.

In the international field, where the public and private enterprises are entering to raise foreign

currency resources, Indian counterparts have to depend upon the assistance of foreign

merchant bankers. Indian merchant bankers, therefore, will have to sharpen their skills and

attain the requisite expertise in the field of international merchant banking.

Attention is required to be gathered to the point that the banks and the financial institutions

which re running the Merchant Banking Divisions can think in terms of taking up the activity

of providing acceptance credit and re-discounting facility to certain number of their clients

on experimental basis on the lines of the traditional activity of European merchant bankers.

This will help for creation of secondary market for commercial papers as well.

To tap the latest technology available internationally and procure the transfer of the

technology to India, merchant bankers should frequently make-exploring tours to foreign

countries, organize meetings and conferences with the Chamber of Commerce and Industry

and other commercial, industrial and financial organizations so as to enthuse the foreigners to

take interest in investment activity in India. Merchant bankers, therefore, have to take latest

information about the economic, social and political environment of our country to foreign

countries and apprise the foreigners with the facilities and relaxations in various rules and

regulations of the Government and the policy framework available for their benefit incase

they choose to invest in India or lend their technological expertise to Indian entrepreneur

and/or to collaborate in any other useful manner.

The challenges noted above are only indicative of the expected role of merchant bankers and in

no way be constructed as exhaustive and final. These challenges continue to stand before the

merchant bankers to meet the test of time and shall grow in number with the growing

requirements of financial services for the corporate sector and the community as a whole.

MERCHANT BANKING-FUTURE DEVELOPMENT

Time and again the Merchant banking Industry in India witnessed, experienced and underwent

significant changes. The very purpose for which these firms are commences their services

should be taken care of and they should mould their policy decision and activities to move in

tune with the main objectives of Investor’s protection and to create healthy environment in

capital markets. No doubt, Merchant Banking firms are subject to a host of control measures,

regulations and rules framed and guided by SEBI. To some extent, frequent changes and /or

amendments to policies and control measures, though needed for smooth working of the

securities Industry, proves to be detrimental to the very existence of the Merchant Banking

system in the country. The SEBI’s Act 1992 confers power upon SEBI to supervise and control

the affairs of the Merchant Banking firms in India. It exercises control over the all activities of

the Merchant Banking firms through different measures. Assessment of the Merchant Banking

firms performance is beset with many difficulties on account of the diverse commercial

objectives that influence their performance. Notification of Merchant Banking Regulations and

amendments to it from time to time by SEBI brought the Merchant Banking Industry to anew

dimension.

The various studies which had been undertaken in India for evaluating the performance of

Merchant Banking firms and the implications of these on securities industry. No single study has

been emerged so far pertaining to the evaluation of Merchant Banking firms and in-depth study

on their activities as well as operational and financial performance in the light of changing

regulatory environment. Hence, this book is an attempt in the direction of penetrating into the

subject and to emerge with truth and illuminating comments.

In recent past, the small investor has turned his back on the primary capital market. Issue after

issue as failed to capture his imagination, rekindle his enthusiasm, and reinforce his faith. He

has lost all hopes of appreciation of his investment. And this when all these years millions have

though capital market, ate capital market and dreamt capital market. It needed an extraordinary

effort and skill the drive the small investor away! High premiums, false premiums and gray

market operations. The professed protector of his interests first laid down the dictum of

proportionate allotment, then of minimum subscription, all working against his interests. This

would make an observant student of the stock market infer that there is some game plan afoot to

dethrone the small investor from his prominent; he was believed to be the king. In the primary

sector, he enjoyed tremendous power as ho took his own investment decision.

With the coming to SEBI, an organisation that was ostensibly brought into existence to guard the

interest of the small investor, hopes ran high that the small investor would now have a safe

playing field. But these hopes were soon belied. Far from guarding the interests of the investing

public, SEBI embarked on a course of action, which has positively hurt them. The latest fiat of

EBI bans corporate advertising after the receipt of acknowledgement card by a company wanting

to go public. SEBI’s this action has caused the closure of an information window. Now 50

million potential investors are deprived of official and authentic information given by the Issuer.

It is hard to understand reasons for this drastic and totally uncalled for action. While there has

been no official explanation for this fiat, there is reason to believe that it may be based on a

wrong perception of the role for corporate advertising.

All this has been done perhaps because the corporate and intermediaries is to follow the practices

of Western capital markets here, oblivious of the fact that our capital markets are altogether

different in structure, in systems and in the number of participants. A vibrant capital market has

to be knowledge driven and not regulator driven; it has to be in true with the spirit of a liberal

and progressive economy. Freedom of commercial expression could be exploited by some to

serve their own ends, just a s freedom of speech and expression could be abused but this has not

led our Government to put arbitrary restrictions on our freedom.

Merchant Bankers have reason to believe they will be handicapped without the marketing

support. But the worst sufferer would be the investor, especially the small investor it is this

class, which forms the backbone of the capital market. As a result of the ban, the small investor

would be deprived of the opportunity to study the corporate profile of the Issuer. In the absence

of adequate information, they will have to depend on manipulated facts and information fed by

unreliable sources.

Besides, there are larger issuers arising out of SEBI’s action. From the point of view of

liberalisation of the economy, SEBI has taken a retrograde step. A market economy flourished

through bigger markets, higher sales and lesser profits. To achieve this performance, a company

needs an aggressive marketing plan and advertising effort is the main thrust to such a plan. No

marketing plan can be worthwhile unless it is backed by an effective advertising plan. The ban

imposed by SEBI nips the marketing plan in the bud.

The Indian primary capital market is basically a retail market. It consists of innumerable

investors who take own individual investment decisions. Whatever, the system, it is this market

that will bring in the funds. If these markets destabilised, the investors will look for alternative

avenues to invest their funds. SEBI in its one of the first documents on “SEBI and Investor

Protection, Development and Regulation of Securities Market” clearly specifies significance of

regulating capital market and its future plans for fulfilling the twin objectives viz., Development

of capital market and investor protection are explained in introductory paragraphs. It speak out

that, “The decade of the 1980 witnessed a phenomenal growth and development of the securities

market, demonstrated its potential not only to mobilize the savings of the horseshold sector but

also to allocate it with some degree of efficiency for industrial development. Several factors

contributed to the spectacular growth of the market. The dilution of the holdings of the

multinational companies at affordable prices in the latter part of the 1970s had generated

considerable interest, which was, carries well into the next decade. Several companies’ came in

the early part of the 1980s and successfully raised large resources from the market especially

through debt instruments, which further sustained investor interest. There were several changes

in Government policy, which significantly influenced industry and aided the market. India was

then entering the phase of liberalization and decontrol which was to accelerate and gather

momentum in the 1980s.

By the end of the decade, the securities market in India came to be firmly integrated with the

financial system of the country. With the corporate sector increasingly relying on the securities

market for meeting their long-term requirement of funds, the securities market their long-term

requirement of funds; the securities market competed on equal terms with the Development

Financial Institutions, which were the traditional purveyors of long-term capital. The emergence

of the securities markets into the main stream of the financial system of the country was thus one

of the major economic processes of the 1980s – an inevitable outcome of the maturing process of

the financial system. They brought about notable changes in the capital structure of the

companies across industries, gave birth to new intermediaries and institutions in the securities

market and created a new awareness and interest in investment opportunities in the securities

market among investor. In spite market, its quality lagged far behind and there was absence of

adequate professionalism and fair competition among the various players in the market. Besides,

the regulatory framework then prevailing was fragmented difficult, if not effective.

LEADING MERCHANT BANKER IN INDIA

Canara Bank is one of the leading " Merchant Bankers / Investment Bankers” in India, offering

specialized services related to Capital Market to Banks, PSUs, State owned Corporations, Local

Statutory bodies and Corporate sector.

They are SEBI registered Category I Merchant Banker (holding permanent certificate of

registration) rendering   Issue Management (Public / Rights / Private Placement Issues),

Underwriting, Consultancy and Corporate Advisory Services etc as a Capital Market

Intermediary.’

They also hold SEBI Certificate of Registration to handle “Bankers to an Issue” assignments

with network of exclusive Capital Market Service Branches and Designated Branches to handle

ASBA applications, Collecting (Escrow) / Refund / Paying Banker assignments. 

We do undertake "project appraisals" with linkage to resource raising plans from Capital Market/

Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Investors. 

Our uniqueness is in extending services through single window / “In house” concept in the

following areas: :

1. Merchant Banking

2. Commercial Banking

3. Investments

4. Bankers to Issue - Escrow Bankers / ASBA [SCSB ]

5. Underwriting

6. Loan Syndication

As leading Merchant Bankers in India, we have been associating with issues involving various

types of industries, banks, statutory Bodies etc. and have an edge in handling Private Placement

issues – both retail & HNIs/QIBs.

SPECTRUM OF SERVICES:

Equity Issue Management (Public/Rights)

Debt Issue Management

Structured Placements

Project Appraisals

Monitoring Agency Assignments

IPO Funding

Security Trustee Services

Agriculture Consultancy Services

Corporate Advisory Services

Mergers and Acquisitions

Buy Back Assignments

Share Valuations

Syndication

ESOS Certification

Debenture Trusteeship

Demat Services- DP Cell

Issuing & Paying Agent (IPA) for Commercial Paper Issues

ISSUE MANAGEMENT SERVICES :

Project Appraisal

Capital structuring

DRHP/RHP- Compilation of Offer Document.

Tie Ups (placement)

Formalities with SEBI / Stock Exchange / ROC etc.,

Underwriting

Promotion /Marketing of Issues

Collecting Banker / Banker to an issue

Post Issue Management

Refund Bankers

Debenture Trusteeship

Registrar & Transfer Agency (our Subsidiary)

ASBA-SCSB

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 what

are 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 its 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 predicated on a sound, fair and transparent regulatory framework. To

sustain the growth of the market and crystallize the growing awareness and interest into a

committed, discerning and growing awareness and interest into a essential to remove the trading

malpractice and structural inadequacies prevailing in the market, and provide the investors an

organized, well regulated market place in future.