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8/8/2019 SEBI and Merchant Banking
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SEBI and Merchant Banking:
With the continued developmental activities in the country as well as liberalization of the economy, the
industry and trade requires funds for its expansion which are in excess of that which is available from
institutions. Thus there is a need to collect the funds from capital market and merchant bankers are needed
to help in mobilizing the funds. This factor is contributed to the steady growth of merchant banking in the
country. However till early nineties there was no clear cut definition of the role of merchant bankers and
its responsibility towards the investors. In order to regulate the market and check unfair trade practices on
the Stock Exchange, the Government of India in 1992 passed the Securities and Exchange Board of India
(SEBI) act. SEBI for the first time formally defined merchant banking and farmed rules and regulations
for merchant bankers. SEBI classified merchant bankers into four categories on the capital adequacy.
1. Category-I:
The capital adequacy requirement for category I merchant bankers is that net worth should not be
less than Rs 1 crore. The banker should be allowed to-
(a) Carry on any activity of the issue management which will inter-alia consist of preparation of
prospectus and other information relating to the issue, determining financial structure , tie up of
financiers and final allotment and refund of the subscription, and
(b) Act as advisor, consultant, manager, underwriter, portfolio manager.
2. Category-II :
The minimum capital adequacy requirement is a net worth of Rs.50 lakhs. The category-II
merchant banker is allowed to act only as a advisor, consultant, co-manager, underwriter and
portfolio manager.
3. Category-III:
The merchant banker should have a minimum net worth Rs.20 lakhs to meet the capital adequacy
requirement. The permissible activities or consultant to an issue.
4. Category-IV:
No capital adequacy requirement has been specified for category-IV merchant banker. The
merchant banker is only allowed to act as an advisor or consultant to an issue.
8/8/2019 SEBI and Merchant Banking
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Table 5.9: Capital Adequacy Norms
Category Minimum amount
I
II
III
IV
RS. 1 crore
Rs.50 Lakhs
Rs. 20Lakhs
NIL
It is evident from the above that according to central government, the role of merchant bankers
restricted to activities related to capital market. However merchant banking cannot be restricted to
the above descriptions and cover a wide range of activities which are fund based, non-fund based
financial and investment services encompassing both capital as well as money market activities in
domestic as well as international financial markets.
Qualities of Good Merchant Bankers:
Merchant bankers are individual¶s experts who organize and manage the merchant banks. The
operation of a merchant bank is influenced by the personality traits of its merchant bankers.
1. Leadership: In order to interact with their clients and communicate effectively merchant
bankers should posses all relevant skills and updated knowledge.
2. Aggressive action: Merchant bankers are always looking for new business opportunities. On
locating a business opportunity and after obtaining the assignment from the clients, a merchant
banker has to be prompt in grasping the client¶s problems and to provide a better choice amongst
alternative solutions. A good merchant banker is one who does not allow his clients to think
anything outside expect what has been advised and thus holding the clients interest for the present
as well as for the future.
3. Co- operation and Friendliness: Co-operation and friendliness coupled with persuasiveness
must flow as natural traits in the merchant banker in order to win over the trust of their just like a
Doctor or a lawyer who retains their clients permanently. A good merchant banker has to share
the thoughts of his clients with sympathetic gestures and better suggestions without any greed or
favours.
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Service provided by merchant banking Department:
The merchant Banking Department has a major role to play as mentioned below.
1. Merchant Banking department advise its customers regarding appropriate methods of raising
capital markets in the country.
2. The department helps to raise capital for its clients by issuing prospectus, it buy various types of
securities on behalf of the company and offers them to a public.
3. The Department advises the customer, company (i.e., its borrowing party) in respect of ways of
bringing securities to the capital market and advises the customer company as regarding step to
be taken for getting securities of the customer (borrowing) company listed on the stock
exchanges.
4. The Merchant Banking Department offers mainly financial advice and services for a fee.
5. Merchant Banks deal with selective large industrial clients and not with the general public in
their fund based activities.
The merchant bankers in India have started a voluntary professional association called
³Association of Merchant Bankers in India´ (AMBI). AMBI monitors the activities of
merchant banks through the principle of ³self-regulation´ and keeps a check on errant merchant
Bankers. Also this professional body acts as a connecting link between SEBI and merchant
bankers.
Merchant banks in India are subject to supervision and control by SEBI and RBI. The
Nrashimhan Committee (1991) has the frame work of deregulated industrial economy the
merchant banks be given access to the market for deposits and borrowed resources in the course
of time but subject to certain prudential norms.
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