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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 structu re , 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.

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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.

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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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