AMRAPALI INSTITUTE

(HALDAWANI)

PROJECT

OF

FINANCIAL INSTITUTIONS AND MARKETS

ON

TOPIC: MERCHANT BANKING

SUBMITTED TO: SUBMITTED BY:

Ms. SAFIA KHAN KULTAR SINGH

(MBA 3rd SEM)

PREFACE

It gives an immense pleasure to present on the topic of merchant banking”. I have selected this

topic because I was very keen to know about the Merchant banking. A distinct feature of this

project is that it provides a penetrating and comprehensive analysis of this concept & theories. A

project is involving a lot of extensive study and research give me a great deal of exposure. I hope

this project would prove useful to its reader if it deserves.

ACKNOWLEDGEMENT

I express my deep sense of gratitude to Ms.SAFIA KHAN (Lecturer of management Dept.). For

his valuable support given to me throughout the project. I consider myself lucky to have worked

under her. This project provided me a platform to increase my knowledge and empowered me

with a better understanding of concepts in the banking scenario.

With regards

KULTAR SINGH

\

INDEX

PREFACE ACKNOWLEDGEMENT

PART -A (1-1)

INTRODUCTION

PART-B (2-6)

HISTORY OF MERCHANT BANKING

NATURE OF MERCHANT BANKING

CHARACTERISTICS OF MERCHANT BANKING

QUALITIES OF MERCHANT BANKING

FUNCTION OF MERCHANT BANKING

PART –C (7-11)

MERCHANT BANKING IN INDIA

ROLE OF MERCHANT BANKING

IMPORTANCES &NEEDS OF MERCHANT BANKING

MERCHANT BANKING SERVICES

ADVANTAGES & DISADVANTAGES OF MERCHANT BANKING

PART -D

CONLUSION

BIBLIOGRAPHY

INTRODUCTION

Financial institution that specializes in services such as acceptance of bills of exchange,

hire purchase or installment buying, international trade financing, long-term loans, and

management of investment portfolios. Merchant banks also advise on (and invest own

funds in) acquisitions, mergers, and takeovers. In the US, a merchant account provider is

sometimes called a merchant bank. The Notification of the Ministry of Finance defines

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 services in relation to such

issue management. In the words of Skully “A Merchant Bank could be best defined as a

financial institution conducting money market activities and lending, underwriting and

financial advice, and investment services whose organization is characterized by a high

proportion of professional staff able to able to approach problems in an innovative

manner and to make and implement decisions rapidly. A merchant bank differs from a

regular investment bank as it generally deals in the commercial banking requirements of

international finance as well as stock underwriting and long-term corporate loans. A

merchant bank is known as a wholesale bank and isn't used by the general public. Most

merchant banks deal with large corporations as well as with other merchant banks, large

financial institutions and, sometimes, various governments around the world. Merchant

banks are not like ordinary bank where individuals can open up accounts by making

deposits. It is also known as a

PART –B :

HISTORY:

Merchant banks, now so called, are in fact the original "banks". These were invented in the

middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature

based on the strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish

persecution were attracted to the trade. They brought with them ancient practices from the

Middle and Far East silk routes. Originally intended for the finance of long trading journeys,

these methods were now utilized to finance the production of grain.

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

Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one

great advantage over the locals. Christians were strictly forbidden the sin of usury, defined as

lending at interest. The Jewish newcomers, on the other hand, could lend to farmers against crops

in the field, a high-risk loan at what would have been considered usurious rates by the Church;

but the Jews were not subject to the Church. In this way they could secure the grain-sale rights

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

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

price. This two-handed trade was time-consuming and soon there arose a class of merchants who

were trading grain debt instead of grain.

The Jewish trader performed both financing (credit) and underwriting (insurance) functions.

Financing took the form of a crop loan at the beginning of the growing season, which allowed a

farmer to develop and manufacture (through seeding, growing, weeding, and harvesting) his

annual crop. Underwriting in the form of a crop, or commodity, insurance guaranteed the

delivery of the crop to its buyer, typically a merchant wholesaler. In addition, traders performed

the merchant function by made arrangements to supply the buyer of the crop through alternative

sources --- grain stores or alternate markets, for instance --- in the event of crop failure. He could

also keep the farmer (or other commodity producer) in business during a drought or other crop

failure, through the issuance of a crop (or commodity) insurance against the hazard of failure of

his crop.

Merchant banking progressed from financing trade on one's own behalf to settling trades for

others and then to holding deposits for settlement of "billette" or notes written by the people who

were still brokering the actual grain. And so the merchant's "benches" (bank is derived from the

Italian for bench, a banca, as in a counter) in the great grain markets became centers for holding

money against a bill (billeted, a note, a letter of formal exchange, later a bill of exchange and

later still a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but often were

used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian

banca rotta, or broken bench, which is what, happened when someone lost his traders' deposits.

Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned by

employing their money in the trade of the bench soon developed; in short, selling an "interest" to

them in a specific trade, thus overcoming the usury objection. Once again this merely developed

what was an ancient method of financing long-distance transport of goods.

Islam makes similar condemnations of usury as Christianity.

The medieval Italian markets were disrupted by wars and in any case were limited by the

fractured nature of the Italian states. And so the next generation of bankers arose from migrant

Jewish merchants in the great wheat-growing areas of Germany and Poland. Many of these

merchants were from the same families who had been part of the development of the banking

process in Italy. They also had links with family members who had, centuries before, fled Spain

for both Italy and England.

This course of events set the stage for the rise of banking names which still resonate today:

Schroder, War burgs, Rothschild, even the ill-fated Barings, were all the product of the

continental grain trade, and indirectly, the early Iberian persecution of Jews. These and other

great merchant-banking families dealt in everything from underwriting bonds to originating

foreign loans. Bullion trading and bond issuing were some of the specialties of the Rothschild

family.

NATURE OF MERCHANT BANKING:

Merchant banking is skill based activities and involves serving every financial need of every

client. It requires focused skill-base to provide for the requirements of the client. SEBI has made

the quality of man-power as one of the criteria for registration as merchant banker. These skills

should not be concentrated in issue management and underwriting alone, which may have an

adverse impact on business. Merchant bankers can turn to any of the activities mentioned above

depending upon resources, such as capital, foreign tie-ups for overseas activities and skills. The

depth and sophistication in merchant banking business are improving since the avenues for

participating in capital market activities have widened from issue management and underwriting

to private placement, bought out deals (BODS), buy-back of shares, mergers and takeovers.

The services of merchant bank cover project counseling, pre investment activities, feasibility

studies, project reports, design of capital structure, issue management, underwriting, loan

syndication, mobilization of funds from Non-Resident Indians, foreign currency finance,

mergers, amalgamation, takeover, venture capital, buy back and public deposits. A Category-1

merchant banker can undertake issue management only. Separate registration is not necessary to

carry on the activity as underwriter.

CHARACTERISTICS OF MERCHANT BANKING:

High proportion of decision makers as a percentage of total staff.

Quick decision process.

High density of information.

Intense contact with the environment.

Loose organizational structure.

Concentration of short and medium term engagements.

Emphasis on fee and commission income.

Innovative instead of repetitive operations.

Sophisticated services on a national and international level.

Low rate of profit distribution.

High liquidity ratio.

QUALITIES OF MERCHANT BANKING:

Ability to analyses

Abundant knowledge

Ability to built up relationship

Innovative approach

Integrity

FUNCTION OF MERCHANT BANKING:

Stock Underwriting :

This is one of the most common functions of a merchant bank. When owners of a large company

want to raise capital through investors on the stock market, they can acquire the services of a

merchant bank to take care of the job. The bank will determine the amount of stocks that are to

be issued as well as their price, and when to issue the new stock. The merchant bank will file all

of the necessary paperwork with the proper market division and may also market the stock. If

there's a large stock offering, a few merchant banks might work on the project together.

However, one of the banks will typically act as the head underwriter on the job.

Issue Management :

In the function of issue management, a merchant Bank will help the capital market to increase

the supply of securities. The bank will help a private limited company convert into a public

limited company. The bank will do this by dealing with the proper authorities and by preparing a

prospectus for the public issue of debentures and shares. The bank will help collect the

application money, scrutinize the applications, as well as arrange for the allotment of the

debentures and shares.

Portfolio Services :

Another important function of a merchant bank is to supply a variety of portfolio management

services to their customers. Most merchant banks can also provide various other services to their

clients. These often include actions such as project counseling, mergers and acquisitions, and

pre-investment studies. Some of the other functions may be asset securitization, factoring, and

Capital restructuring.

PART –C:

MERCHANT BANKING IN INDIA

Merchant banking activity was formally initiated into the Indian capital Markets when Grind lays

bank received the license from Reserve Bank in 1967. Grind lays started with management of

capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial

services ranging from production planning and system design to market research. Even it

provides management consulting services to meet the requirements of small and medium sector

rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks

performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising

funds through borrowing and issuing equity. Indian banks Started banking Services as a part of

multiple services they offer to their clients from 1972. 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. Merchant banking activities is OF course

organized and undertaken in several forms. Commercial banks and foreign development finance

institutions have organized them through formation divisions, nationalized banks have formed

subsidiaries companies and share brokers and consultancies constituted themselves into public

limited companies or registered themselves as private limited companies. Some merchant

banking outfits have entered into collaboration with merchant bankers abroad with several

branches.

ROLE OF MERCHANT BANKER IN INDIA :

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking

services. Merchant banker’s dynamism lies in promptly attending to the corporate problems and

suggests ways and means to solve it. The nature of merchant banking services is development

oriented and promotional to help the industry and trade to grow and survive. Merchant banker is,

therefore, dedicated to achieve this objective through his dynamism. He is always awake to

renew his skills, develop expertise in new areas so as to equip himself with the knowledge and

techniques to deal with emerging new problems of corporate business world. 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 eliminate regional imbalances in industrial

development of the country Merchant Banking in India

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.

IMPORTANCES AND NEEDS OF MERCHANT BANKING IN INDIA:

Important reasons for the growth of merchant banks has been development activities throughout

the country, exerting excess demand on the sources of fund for ever expanding industries and

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

funds. All financial institutions had experienced constrain of resources to meet ever increasing

demands for demands for funds frame corporate sector enterprises. In such circumstances

corporate sector had the only alternative to avail of the capital market service for meeting their

long term financial requirement through capital issue of equity shares and debentures. Growing

demand for funds put pressure on capital market that enthused commercial banks, share brokers

and financial consultancy firms to enter into the field of merchant banking and share the growing

capital market. As a result all the commercial banks in nationalized and public sector as well as

in private sector including foreign banks in India have opened their merchant banking windows

and competing in this field.

Need for merchant banking is felt in the wake of huge public saving lying untapped. Merchant

banker can play highly significant role in mobilizing funds of savers to invisible channels

assuring promising returns on investment and thus can assist in meeting the widening demand for

invisible funds for economic activity. With growth of merchant banking profession corporate

enterprises in both private sectors would be able to raise required amount of funds annually from

the capital market to meet the growing requirement for funds for establishing new enterprises,

undertaking expansion, modernization and diversification of the existing enterprises. This

reinforces the need for a vigorous role to be played by merchant banking.

In view of multitude of enactment, rules and regulation, gridlines and offshoot press release

instructions brought out the government from time to time imposing statutory obligations upon

the corporate sector to comply with those entire requirement prescribed there in the need of a

skilled agency existed which could provide counseling in these matters in a package form. A

merchant banker with their skills updated information and knowledge provide this service to the

corporate units and advice them on such requirement to be complied with for raising funds from

the capital market under different enactment viz. companies act, income tax act, foreign

exchange regulation act, securities contracts corporate laws and regulations. Merchant bank

advice the investors of the incentives available in the form of tax relief, other statutory

relaxation, good return on investment and capital appreciation in such investment to motivate

them to invest their savings securities of the corporate sector. Thus merchant banks help

industries and trade to rise and the investors to invest their saved money in sound and healthy

concern with confidence, safety and expectation for higher yields. Finance is the backbone of

business activities. Merchant banker make available finance for business enterprises acting as

intermediaries between them raising demand for funds and the supplies of funds besides

rendering various other services.

The following are some of the reasons why specialist merchant bank have a crucial role to play

in India.

Growing complexity in rules and procedures of the government.

Growing industrialization and increase of technologically advanced industries.

Need for encouragement of small and medium industrialists, who require specialist

services.

Need to develop backward areas and states which require different criteria.

Exploring the possibility of joint ventures abroad and foreign market.

Promoting the role of new issue market in mobilizing saving from.

Where merchant banks function as an independent wing or as subsidiary of various

private/central governments/ state government financial institution. Most of the financial

institution in India is in public sector and therefore such setup plays a role on the lines of

governmental priorities and policies.

SERVICES OF MERCHANT BANKING:

Portfolio management

Leasing

Loan syndication

Project finance

Issue management

ADVANTAGE OF MERCHANT BANKING:

Merchant banks perform functions that cannot be carried out by businesses on their own.

Merchant banks have access to traders, financial institutions, and markets that companies

or individuals could not possibly reach.

By using their skills and contacts, merchant banks can get the best possible deals for their

clients.

DISADVANTAGE OF MERCHANT BANKING :

Merchant banks are really only for large corporate customers, or extremely wealthy

smaller businesses owned by individual clients.

Not all deals carried out by merchant banks meet with unqualified success

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

the growing awareness and interest into a committed, discerning and 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.

BIBLIOGRAPHY

Text Book:

Grewals, T.S, Financial Analysis, publisher – S. Chand Sons ltd.

Gupta S. P. “Financial Management,” 2003, Sahitya Bhawan Publications, New Delhi.

Journals & Magazines:

Business Today

Company’s annual report

Web Sites:

www.centurypaperindia.com

www.google .com