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INTRODUCTIONFinancial services are an important component of financial system. The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after the implementation of “Liberalization, privatization and globalization”. Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vitalTRANSCRIPT
INTRODUCTION
Financial services are an important component of financial system. The
smooth functioning of financial system depends upon the range of financial
services extended by the providers. Financial services in India have
witnessed remarkable changes in the recent past after the implementation of
“Liberalization, privatization and globalization”.
Funds are tapped from the capital market to finance various mega
industrial projects. In attracting public savings, merchant bankers play a vital
role as specialized agencies. The resource raising functions remains to be
the primary business of a merchant banker. The primary market holds the
key to rapid capital formation, growth in industrial productions and exports.
There has to be accountability to the end use of funds raised from the
market. The increase in the number of issues and amount raised the number
of merchant bankers. Therefore, the field became highly competitive market
where it requires a specialized skill in handling the situation. The merchant
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bankers have a social responsibility to in building an industrial structure in
India.
Merchant bankers assist corporate in raising capital. They assist in
issue of Shares, syndicating loans, public issue of debentures. They do not
provide funds. They only assist. They also actively arrange working capital,
appraisal Projects scrutinize & persuade merger proposals.
In BRITAIN merchant bankers & investment bankers are synonymous.
In the U.S., Merchant bank means as investment bank which is well-
equipped to handle multinational corporations.
In INDIA merchant bankers is a body corporate who carries on any
activity of the issue management, which consist of preparing prospectus &
other information relating to the issue. Merchant banks in India are not
allowed to conduct any business other than that related to securities market.
There is no official category in investment banking
DEFINITION:Page | 2
In banking, a merchant
bank is a financial institution
primarily engaged in offering
financial services and advice to
corporations and wealthy
individuals on how to use their
money. The term can also be
used to describe the private
equity activities of banking.
According to Cox D. merchant banking is defined as, “merchant banks
are the financial institutions providing specialist services which generally
include the acceptance of bills of exchange, corporate finance, portfolio
management and other banking services”.
The Notification of the Ministry of Finance defines a merchant banker
as, “any person who is engaged in the business of issue management either
by making arrangements regarding selling, buying or subscribing to
securities as manager, consultant, advisor or rendering corporate advisory
service in relation to such issue management”. In short, merchant bankers
assist in raising capital and advice on related issues.
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HISTORY AND ORIGIN OF MERCHANT
BANKING
ORIGIN:
Merchant banking originated through the entering of London
merchants in foreign trade through acceptance of bill. Later, the
merchants assisted the Government of under developed countries
in raising long – terms through floatation of bonds in London money
market. Over a period they extended their activities to domestic
business of syndication of long term and short term finance,
underwriting of new issues, acting as registrars and share transfer
agents, debenture trustees, portfolio managers, negotiating agents
for mergers, takeovers etc.
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MERCHANT BANKING IN INDIA-
HISTORICAL PERSPECTIVE:-
Till 18th century moneylenders, moneychangers, village
merchants (maharanis), & saucers performed the function of banks
& merchant banks. They also issued & discounted bills of exchange
(handiest) & bank draft. They gave loans on mutual trust, on
mortgage of lands, ornaments & other property. JAGAT SHETH
(1720-1773AD, BENGAL) HABIB & SONS which is now HABIB BANK
(founded in 1941, now is in PAKISTAN). These were the organized
merchant bankers in recent history of INDIA. Merchant Banking is
an activity that includes corporate finance activities, such as advice
on complex financings, merger and acquisition advice (international
or domestic), and at times direct equity investments in corporations
by the banks. Merchant banks are private financial institution. Their
primary sources of income are PIPE financings and international
trade. Their secondary income sources are consulting, Mergers &
Acquisitions help and financial market speculation. Because they do
not invest against collateral, they take far greater risks than
traditional banks. Because they are private, do not take money
from the public and are international in scope, they are not
regulated. Anyone considering dealing with any merchant bank
should investigate the bank and its managers before seeking their
help.
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The reason that businesses should develop a working
relationship with a merchant bank is that they have more money
than venture capitalists. Their advice tends to be more pragmatic
than venture capitalists. It is rare for a merchant bank to fail. The
last major failure was Barings Bank (1992). It failed because of
unsupervised trading of copper futures contracts and buybacks.
When the Dot Com Bubble burst in 2001, scores of venture capital
firms failed. The greatest merchant bank failure in history was the
Knights Templar. After the Crusades, the Order became immensely
wealthy controlling and funding the trade between the Middle East
and Western Europe. They foolishly loaned money to the French
Government. To avoid repaying the money, King Louie had the
Pope declare the Order heretics. Thousands of monks lost their
lives, but France balanced its budget.
To understand Merchant Banks, you should know something of
their history. Modern merchant banking started in Italy during the
7th Century. The banking practices evolved from the financing
structure of the Silk Road Trading that predates the Roman
Empire.The basic financing structure was the advance payment for
goods by merchant bankers at a great discount to the delivery
value of those goods. In the case of Italy and then Germany, wheat
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was the product. The merchant banks purchased the wheat soon
after planting. They accepted the risk of crop failure.
They profited when they sold the wheat. In most countries
today, the national government accepts the risk through
government crop insurance.
As the British Empire expanded in the 18th and 19th
Centuries, merchant banks prospered in London. For instance,
merchant bankers funded Canada’s Hudson Bay Company. This
period saw the rise of such merchant banks as Schroders,
Warburgs or Rothschilds. Amsterdam benefited from the trade
created by the Dutch East Indian Company. Since the 18th century,
the role of the merchant banker has been considerably broadened
to include a composite of modern day skills. Such skills are
inherently entrepreneurial, managerial, financial and transactional.
Today, North American merchant banks have taken the form of
"boutiques"- whereby, each offers its own specialized services. The
hallmarks of these merchant bank boutiques are that they typically
charge fees payable in cash and/or the client's stock for each
service rendered. You can find a merchant bank that meets any
reasonable set of needs.
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Merchant Banking in India –
Post Independence:
In 1967, RBI issued its first merchant banking license to grind
lays started with management of capital issues, production
planning, system design and also market research. It provides
management consulting services as well. Citibank setup its
merchant banking division in 1970 its scope includes assisting new
entrepreneur, evaluating new projects, rasing funds through
borrowing and issuing equity. Indian banks started banking services
as a part of multiple services they offered to clients from 1972.
State bank of India started the merchant banking division in 1972.
In the initial years the objective was to render corporate advice and
assistance to small and medium entrepreneurs. Merchant banking
activities are organized and undertaken in several forms.
Commercial banks and foreign development finance institutions
have organized them through formation of division; nationalized
banks have formed subsidiaries companies and share brokers and
consultancies constituted themselves into public ltd. Co. or
registered themselves as private ltd. companies. Some of them
have equity stake of foreign merchant bankers.
MERCHANT BANK
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A merchant bank deals with the commercial banking needs of
international finance, long term company loans, and stock
underwriting. A merchant bank does not have retail offices where
one can go and open a savings or checking account. A merchant
bank is sometimes said to be a wholesale bank, or in the business
of wholesale banking. This is because merchant banks tend to deal
primarily with other merchant banks and other large financial
institutions. The most familiar role of the merchant bank is stock
underwriting. A large company that wishes to raise money from
investors through the stock market can hire a merchant bank to
implement and underwrite the process. The merchant bank
determines the number of stocks to be issued, the price at which
the stock will be issued, and the timing of the release of this new
stock. The merchant bank files all the paperwork required with the
various market authorities, and is also frequently responsible for
marketing the new stock, though this may be a joint effort with the
company and managed by the merchant bank. For really large
stock offerings, several merchant banks may work together, with
one being the lead underwriter.
By limiting their scope to the needs of large companies,
merchant banks can focus their knowledge and be of specific use to
such clients. Some merchant banks specialize in a single area, such
as underwriting or international finance. Many of the largest banks
have both a retail division and a merchant bank division. The
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divisions are generally very separate entities, as there is very little
similarity between retail banking and what goes on in a merchant
bank. Although your life is probably affected every day in some way
by decisions made in a merchant bank, most people reading this
article are unlikely ever to visit or deal directly with a merchant
bank. Merchant banks operate behind the scenes and away from
the spotlight.
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MERCHANT BANKS AND COMMERCIAL
BANKS
There are differences in approach, attitude and areas of
operations between commercial banks and merchant banks. The
differences between merchant banks and commercial banks are
summarized below:
Commercial banks basically deal in debt and debt related
finance and their activities are appropriately arrayed around credit
proposals, credit appraisals and loan sanctions. On the other hand,
the area of activity of merchant bankers is ‘equity and equity
related finance’. They deal with mainly funds raised through money
market and capital market.
Commercial Banks are asset oriented and their lending
decisions are based on detailed credit analysis of loan proposals
and value of security offered against loans. They generally avoid
risks. The merchant bankers are management oriented. They are
willing to accept risks of business.
Commercial bankers are merely financiers. The activities of
merchant bankers include project counseling, corporate counseling
in areas of capital restructuring ,amalgamations, mergers, takeover
etc, discounting and rediscounting of short term paper in money
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markets, managing , underwriting and supporting public issues in
new issue market and acting as brokers and advisers on portfolio
management in stock exchange. Merchant banking activities have
impact on growth, stability and liquidity of money markets.
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IMPORTANCE AND NEED OF
MERCHANT BANKING
Important reason for the growth of merchant banking has
been developmental activity throughout the country, exerting
excess demand on the sources of funds for ever expanding industry
and trade, thus, leaving a widening gap under bridged between the
supply and demand of inventible funds. All Indian financial
institutions and experienced resources constraint to meet the ever
increasing demands for funds from the corporate sector
enterprises. In the circumstances corporate sector had the only
alternative to avail of the capital market services for meeting their
long-term financial requirements through capital issues of equity
and debentures. With the growing demand for funds there was
pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field
of merchant banking and share the growing capital markets. With
the result, all the commercial banks in nationalized and public
sector as well as in private sector including the foreign banks in
India have opened their merchant banking windows and are
competing in this field. There has been a mushroom growth of
financial consultancy firms and broker firms doing advisory
functions as well as managing public issues in syndication with
other merchant bankers.
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Notwithstanding the above facts, the need of merchant
banking institutions is felt in the wake of huge public savings lying
still untapped. Merchant banks can play highly significant role in
mobilizing funds of savers to investible channels assuring
promising return on investments and thus can help in meeting the
widening demand for investible funds for economic activity. With
the growth of merchant banking profession corporate enterprises in
both public and private sectors would be able to raise required
amount of funds annually from the capital market to meet the
growing requirements for funds for establishing new enterprises,
undertaking expansion/modernization/diversification of the existing
enterprises. This reinforces the need for a vigorous role to be
played by merchant banks.
Merchant banks have been procuring impressive support from
capital market for the corporate sector for financing their projects.
This is evidenced from the increasing amount raised form the
capital market by the corporate enterprises year after year. In view
of multitude of enactments, rules and regulations, guidelines and
offshoot press release instructions brought out by the government
from time to time imposing statutory obligations upon the
corporate sector to comply with all those requirements prescribed
therein, the need of skilled agency existed which could provide
counseling in these matters in a package form. Merchant bankers,
with their skills, updated information and knowledge, provide this
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service to the corporate units and advise them on such
requirements to be complied with for raising funds from the capital
market under different enactments viz. Companies Act, Income-tax
Act, Foreign Exchange Regulation Act, Securities Contracts
(Regulation) Act and various other corporate laws and regulations.
Merchant bankers advise the investors of the incentives available in
the form of tax relief’s, other statutory relaxations, good return on
investment and capital appreciation in such investment to motivate
them to invest their savings in securities of the corporate sector.
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ROLE OF MERCHANT BANKER
The role of merchant banker is dynamic in the wake of diverse
nature of merchant banking services. Merchant banker’s dynamism
lies in promptly attending to the corporate problems and suggest
ways and means to solve it. The nature of merchant banking
services is development oriented and promotional to help the
industry and trade to grow and survive. Merchant banker is,
therefore, dedicated to achieve this objective through his
dynamism. He is always awake to renew his skills, develop
expertise in new areas so as to equip himself with the knowledge
and techniques to deal with emerging new problems of corporate
business world. He has to keep pace with the changing
environment where government rules, regulations and politics
affecting business conditions frequently change; where science and
technology create new innovations in production processes of
industries envisaging immediate renovations, diversifications,
modernizations or replacements of existing plant and machinery or
other equipments putting new demands for finances and
necessitating overhauling of the capital structure of the firms.
Merchant banker has to think and devise new instruments of
financing industrial projects. He has to assume wider
responsibilities of saving industrial units from going sick and
guiding industries to be setup in industrially backward areas to
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eliminate regional imbalances in industrial development of the
country.
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He has to guide the wider section of the community
possessing surplus money to invest in corporate securities and
other productive investment channels. He has to help the industry
in different forms to ensure that it runs risk free and devoid of
uncertainty by assisting the promoters with his knowledge and
skills to resolve the problems being faced by them. He has to watch
the interest and win over the confidence of the government, its
agencies, along with the entrepreneurs, the investors and the
whole community. He must bridge the communication gap between
different sections and resolve the problem being faced in different
areas concerned with the business world. To discharge the above
role, a merchant banker has to be dynamic.
In the days ahead, merchant bankers have very significant
role to play tuning their activities to the requirements of the growth
pattern of the corporate sector, the industry and the economy as a
whole which is, in it, a challenging task and to meet these
challenges merchant bankers will have to be more vigorous and
strategic in playing their role. They will have also to adopt new
ways and means in discharging their role.
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THE GROWTH OF MERCHANT BANKING
IN INDIA
Formal merchant activity in India was originated in 1969 with
the merchant banking division
setup by the Grindlays Bank, the
largest foreign bank in the
country. The main service
offered at that time to the
corporate enterprises by the
merchant banks included the
management of public issues
and some aspects of financial
consultancy. Following Grindlays
Bank, Citibank set up its
merchant banking division in
1970.The division took up the
task of assisting new
entrepreneurs and existing units
in the evaluation of new projects
and raising funds through
borrowing and equity issues. Management consultancy services
were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. Consequent
to the recommendations of Banking Commission in 1972, that Page | 19
Indian banks should offer merchant banking services as part of the
multiple services they could provide their clients, State Bank of
India started the Merchant Banking Division in 1972. In the initial
years the SBI’s objective was to render corporate advice and
assistance to small and medium entrepreneurs.
The commercial banks that followed State Bank of India were
Central Bank of India, Bank of India and Syndicate Bank in
1977.Bank of Baroda, Standard Chartered Bank and Mercantile
Bank in 1978 and United Bank of India, United Commercial Bank,
Punjab National Bank, Canara Bank and Indian Overseas Bank in
late ‘70s and early ‘80s. Among the development banks, ICICI
started merchant banking activities in 1973 followed by IFCI (1986)
and IDBI (1991).
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ORGANIZATIONAL SETUP OF
MERCHANT BANKERS IN INDIA
In India a common organizational setup of merchant bankers
to operate is in the form of divisions of Indian and foreign banks
and financial institutions, subsidiary companies established by
bankers like SBI, Canara Bank, Punjab National Bank, Bank of India,
etc. Some firms are also organized by financial and technical
consultants and professionals. Securities and Exchange Board of
India has divided the merchant bankers into four categories based
on their capital adequacy. Each category is authorized to perform
certain functions. From the point of organizational setup India’s
merchant banking organizations can be categorized into four
groups on the basis of their linkage with parent activity.
They are:
A) Institutional Base
Where merchant banks function as an independent wing or as
subsidiary of various private/Central Governments/State
Governments financial institutions. Most of the financial institutions
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in India are in public sector and therefore such setup plays a role
on the lines of government priorities and policies.
B) Banker Base
These merchant bankers function as division/subsidiary of
banking organization. The parent banks are either nationalized
commercial bank or the foreign banks operating in India. These
organizations have brought professionalism in merchant banking
sector and they help their parent organization to make a presence
in capital market.
C) Broker Base
In the recent past there has been an inflow of qualified and
professionally skilled brokers in various stock exchanges of India.
These brokers undertake merchant banking related operations also
like providing investment and portfolio management services.
D) Private Base
These merchant banking firms are originated in private sector.
These organizations are the outcome of opportunities and scope in
merchant banking business and they are providing skill-oriented
specialized services to their clients. Some foreign merchant
bankers are also entering either independently or through some
collaboration with their Indian counterparts. Private sector
merchant banking firms have come up either as the sole Page | 22
proprietorship or public limited companies. Many of these firms
were in existence for quite some times before they added a new
activity in the form of merchant banking services by opening new
divisions on the lines of commercial banks and All India Financial
Institutions.
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QUALITIES OF MERCHANT
BANKERS:-
1. Knowledge:
Thorough understanding of technical issues related to
business, understanding of legal and statutory requirements,
appreciation of business acumen; financial expertise is a key thing
a merchant banker must know. Delivery of his services depends on
his basic understanding of these issues.
2. Capital market familiarity:
Merchant banker should be well versed with stock markets,
their movements. He should track imp happenings in the market on
ongoing basis.
3. Liasioning ability:
Merchant bankers are required to liaison with SEBI, RBI, the
stock exchanges, depositories and other government authorities for
public issue related duties. It is imperative that a merchant bank
maintains excellent rapport with all of them and also close relations
even at informal levels. This only can see speedy and favorable
clearances by the authorities.
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4. Innovation:
Corporate may approach with unique requirements. Standard
solutions and products may not solve problems sometimes.
Merchant bankers should do out of box thinking and be able to do
financial engineering. They can device new financial instruments
and get approved from the authorities. Innovation is required even
to address stringent legal requirements.
5. Integrity:
Merchant banker has valuable and confidential information of
its customers. Merchants bankers should take utmost care that the
information is not leaked and also not consumed for the purpose
other than for which it was disclosed to the merchant banker.
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Requirements for setting up a merchant
banking outfit :
1. Formation of the Business Organization:
SEBI act, 1992 does not prescribe any specific form of
business organization to carry on the activities as merchant banker.
However, the types of organizations are listed below:
a. Sole proprietorship
b. Partnership firm
c. Hindu Undivided Family (HUF)
d. Corporate Enterprises
e. Co-operative Society
Generally it is preferred that the Merchant Banking outfit be a
registered company. Merchant Banks are generally setup as
subsidiary companies of banks (Public or Private). For example, SBI
caps, ICICI Securities etc.
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2. Adoption of a viable business plan:
All the basic tests required to find out whether the business to
be undertaken is viable or not are also applicable to a
MerchantBanking setup. Capital adequacy, profitability, growth
opportunities and current market size are some of the factors
which need to be looked into.
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MAIN OBJECTS OF MERCHANT BANKER
Merchant bankers render their specialized assistance in
achieving the main objectives which are presented below:
1. To carry on the business of merchant banking, assist in the
capital formation, manage advice, underwrite, provide standby
assistance, securities and all kinds of investments issued, to be
issued or guaranteed by any company, corporation, society, firm,
trust person, government, municipality, civil body, public authority
established in India.
2. The main object of merchant banker is to create secondary
market for bills and discount or re-discount bills and acts as an
acceptance house.
3. Merchant banker’s another objective is to set up and
provide services for the venture capital technology funds.
4. They also provide services to the finance housing schemes
for the construction of houses and buying of land.
5. They render the services like foreign exchange dealer,
money exchange, and authorized dealer and to buy and sell foreign
exchange in all lawful ways in compliance with the relevant laws of
India.
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6. They will invest in buying and selling of transfers,
hypothecate and deal with dispose of shares, stocks, debentures,
securities and properties of any other company.
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SERVICES PROVIDED BY MERCHANT BANKS:
(in detail)
The development activity
through the country had exerted
excess demand on the sources of
funds by the ever expanding
industry and trade which could not
be met by the All India Financial
Institutions. In these circumstances,
the corporate sector enterprises had
the only alternative to avail
themselves of the capital market
services for meeting the long-term
fund requirements through capital
issues of equity and debentures. The growing demand for funds
from capital market has enthused many organizations to enter into
the field of merchant banking for managing the public issues.
The need of merchant banker is also felt in the wake of huge
untapped public savings as merchant bankers can play a highly
significant role in mobilizing funds from savers to invest in channels
assuring promising return on investments and thus narrow down
the gap between demand for and supply of investible funds.
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Merchant bankers not only provide advisory services to
corporate enterprises but also advise the investors of the
incentives available in the form of tax relief and other statutory
obligations. Thus, the merchant bankers help industry and trade to
raise funds, and the investors to invest their saved money in sound
and healthy concerns with confidence, safety and expectation of
higher yields
Broadly a merchant banker can provide the following services:
• Corporate Counseling
• Project Counseling And Pre-Investment Studies
• Credit Syndication And Project Finance
• Issue Management
•Underwriting
•Bankers
•Portfolio Management
•Venture Capital Financing
•Leasing
•Non-Resident Investment Counseling And Management
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•Acceptance Credit And Bill Discounting
•Advising On Mergers, Amalgamations And Take-Over
•Arranging Offshore Finance
•Fixed Deposit Broking
•Relief to Sick Industries
Let’s take a brief look at each of these
functions:
Corporate Counseling:
It includes a whole range of financial services provided by a
merchant banker to a corporate unit a view to ensure better
performance, maintain steady growth and create a better image
among investors.
It covers the entire field of merchant banking activities i.e.,
project counseling, capital restructuring, portfolio management and
the full range of financial engineering including venture capital,
public issue management, loan syndication, working capital, fixed
deposits, lease financing, acceptance credit, etc. However, the Page | 32
scope of corporate counseling is limited to suggestions and
opinions leaving to the client to take corrective actions for solving
its corporate problems.
A merchant banker finds out the problems of enterprise, which
shall include organizational goals for the enterprise, size of the
organization and operational scales, choice of a product, pricing,
etc, and suggests ways and means to solve those problems.
Project Counseling:
Project counseling is an important merchant banking service
which include preparation of project reports, deciding upon the
financing pattern to finance the cost of the project, appraising the
project report with the financial institutions/banks.
Project reports are prepared to obtain government approval of
the project, for procuring financial assistance from financial
institutions and banks, for ensuring market for the proposed
product, for planning public issues, etc.
Financing the project cost is an important aspect of project
counseling. The two sources of funds available to finance the
project cost are internal sources of funds (or owners' funds) which
includes promoter's contribution and retained earnings; and
external sources of funds which refers to the borrowed funds in the
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form of loans from banks, private investors and financial
institutions and in the form of debentures from the public.
Merchant banker has to decide the financing mix of the
internal and external sources of funds keeping in view the rules,
regulations and norms prescribed by the government or followed
by the term lending financial institutions. While rendering project
counseling services, the merchant banker has to ensure that the
application forms for obtaining the funds from financial institutions
are filled in with relevant and appropriate information and before
submitting the application, the merchant banker has to appraise
the project considering the various aspects as to the type of the
project, location, technical, commercial and financial viability of the
project.
Credit Syndication:
Once the client company has decided about the project
proposed to be undertaken, the next step is looking for the sources
wherefrom the funds could be procured to implement the project.
Merchant banker has to locate the sources of funds and
comply the formalities required to procure the funds. This service
rendered by the merchant banker in arranging and procuring credit
from financial institutions, banks and other lending and investment
organizations for financing the clients' project cost or meeting
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working capital requirement is referred to as loan syndication or
credit syndication.
Credit syndication in case of domestic borrowings is with the
institutional lenders and banks. Long and medium term funds are
obtained from the All India Financial Institutions like IFCI, IDBI etc.,
state level financial bodies like SFC, SIDC etc., commercial banks,
mutual funds etc. Short-term funds are also required by the firm for
purchase of raw materials, payment of wages, salaries etc. Sources
of financing these short term requirements or working capital
needs can be from internal sources like internal accruals from
working or operations and short term loans from friends and
relatives; or from external sources like short term borrowings from
banks etc.
Issue Management and Underwriting:
A fully underwritten public issue spells confidence to the
investing public, which ensures a good response to the issue.
Keeping this in view companies, which float a public issue usually,
desire a full underwriting of the issue. Underwriting is only the
guarantee given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed in
proportion by the underwriter. An underwriter of the issue gets the
following benefits:
• It earns a commission of the commitment given. Page | 35
• It earns the right to be appointed as bankers of that issue.
• It expands its clientele by underwriting more and more
issues.
Bankers to the Issue
The merchant banker can automatically become the banker to
the issue in the following cases:
• The bank is a broker to the company
• It has given underwriting commitments.
• It acts as a manger to the issue
• The function of a banker to the issue is to accept application
forms from the public together with subscription money and
transfer them to the account of the controlling branch.
Portfolio Management
Portfolio refers to investment in different types of marketable
securities or investment papers like shared, debentures and
debenture stocks, bonds etc. from different companies or
institutions held by individuals firm or corporate units.
Portfolio management refers to managing efficiently the
investment in the securities held by professionals to others.
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Merchant bankers take up management of a portfolio of securities
on behalf of their clients, providing special services with a view to
ensure maximum return by such investments with a minimum risk
of loss of return on the money invested in securities.
A merchant banker while performing the services of portfolio
management has to enquire of the investment needs of the client,
the tax bracket, ability to bare risk, liquidity requirements, etc. they
should study the economic environment affecting the capital
market, study the securities market and identify blue chip
companies in which money can be invested. They should keep
record of latest amendment in government guidelines, stock
exchange regulations, RBI regulations, etc.
Advisory Services Relating To Mergers and Takeovers
A merger is defined as a combination of two or more
companies into a single company where one services and other
looses their corporate existence. A merger is also defied as an
amalgamation wherein the shareholders of the combining
companies become substantially the shareholders of the company
formed.
A takeover is referred to as an acquisition, which is the
purchase, by one company of a controlling interest in the share
capital of another existing company. Merchant bankers are the
middlemen settling negotiations between the offered and the Page | 37
offeror. Their role is specific and specialized in handling the
mergers and taker over assignments. Being a professional expert,
the merchant banker is apt to safeguard the interest of the
shareholders in both the companies and as such his assistance is
useful for both the companies, i.e. the acquirer as well as the
acquired company.
Based on the purpose of business objective, the search of the
acquirer company will start for a merger partner company. If the
objective of merger is growth oriented i.e. seeking expansion in
production and market segments, utilization of existing companies
or optimum utilization of resources, then the acquirer company will
select a business related company as a merger partner. If the
objective is diversification in production line or business activities,
then it will select a non-related company as a merger partner. Once
the merger partner is proposed the merchant banker has to
appraise the merger/takeover proposal with respect to financial
viability and technical feasibility. He has to negotiate with the
parties and decide the purchase consideration and mode of
payment. He has to comply with the legal formalities like getting
approval from the Government/ RBI; drafting the scheme of
amalgamation; getting approval of company Board, financial
institution, high court if required; arranging for the meeting etc.
Venture Capital Financing
Page | 38
Financing an emerging high-risk project is called venture
capital financing. Many merchant bankers are entering into this
area by also financing viable upcoming projects. The financing is by
subscription to the equity capital, while repayment is by selling the
equity through stock market when the shares are listed.
Leasing
Is there another lucrative area of financing where merchant
bankers are turning? Leasing is a viable source of financing while
acquiring capital assets. The services include arrangement for
lease finance facilities for leasing companies, legal; documents and
tax consultancy.
Non Resident Investment
To attract NRI investments in the primary and secondary
markets, the merchant bankers provide investment advisory
services to the NRIs in terms of identification of investment
opportunities, selection of securities, portfolio management, etc.
they also take care of operational details like purchase and sale of
securities securing the necessary clearance from RBI under FERA
for repatriation of dividends and interest, etc.
Acceptance Credit and Bill Discounting
Though merchant bankers world over specialize in acceptance
credit and bill discounting, these services are not currently Page | 39
provided by merchant bankers in India the principal reasoning
being the lack of an active market for commercial bills.
Arranging Offshore Finance
The merchant bankers also help their clients in the following
areas involving foreign currency financing:
1. Financing Of Exports And Imports
2. Long Term Foreign Currency Loans
3. Joint Ventures Abroad
4. Foreign Collaboration Arrangements
The assistance rendered as in the case of financial services
covers appraisals, negotiations, compliance with procedural and
legal aspects etc.
Management of Fixed Deposits of Companies
Recently, merchant’s bankers have begun to structure and
mobilize fixed deposits for their corporate clients. They take care of
the procedural and legal aspects, and also mange the collection
and subsequent servicing of the deposits. Advice with regard to the
amount to be raised, interest charges, terms of deposits and other
related issues are also offered to the client.
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Relief to Sick Industries
The services offered by merchant bankers to sick industries
can be summarized as follows:
1. Assessment of capital requirements and counseling on
capital restructuring;
2. Appraisal of technological, environmental, financial and
other factors causing sickness;
3. Preparations of programs and packages for rehabilitation of
sick units;
4. Providing necessary assistance where the rehabilitation
package involves mergers or amalgamation;
5. Obtaining necessary approval for implementation the
rehabilitation package from the statutory authorities;
6. Monitoring the implementation of the scheme of
rehabilitation.
Page | 41
EXAMPLES FOR MERCHANT BANKING
SERVICES
MERCHANT BANKING SERVICES OF CANARA BANK
INTRODUCTION
Canara Bank
is also one of the
leading Merchant
Bankers in India,
offering
specialized
services to Banks,
PSUs, State owned
Corporations, Local
Statutory bodies
and corporate
sector. Its SEBI registered Category I Merchant Banker /
Underwriter to carry on Issue Management (Public / Rights / Private
Placement Issues), Underwriting, Consultancy and Corporate
Advisory Services etc.
Page | 42
They also hold SEBI registration Certificate to act as "Bankers
to an Issue" with network of exclusive Capital Market Service
Branches to handle “Capital Market" related assignments.
They undertake "project appraisals" with resource raising
plans from Capital Market/ Debt Markets and facilitate tie-ups with
Banks / Financial Institutions and Potential Investors.
Their uniqueness is extending services under single window
concept covering the following areas:
1. Merchant Banking
2. Commercial Banking
3. Investments
4. Bankers to Issue - Escrow Bankers
5. Underwriting
6. Loan Syndication
As leading Merchant Bankers in India, they have associated
with issues ranging from Rs.1crore to Rs.1500 crores, involving
various types of industries, banks, statutory Bodies etc. and have
an edge in handling Private Placement issues –both retail & HNIs.
Page | 43
SPECTRUM OF SERVICES:-
1. Issue (Public/Rights) Management
2. Debt Issue Management
3. Private Placements
4. Project Appraisals
5. Monitoring Agency Assignments
6. IPO Funding
7. Security Trustee Services
8. Agriculture Consultancy Services
9. Corporate Advisory Services
10. Mergers and Acquisitions
11. Buy Back Assignments
12. Share Valuations
13. Syndication
Page | 44
Page | 45
Investment Criteria:-
A wide range of later stage opportunities are considered.
Targeted companies include the following characteristics:
1. Having weathered the start-up process and established a
core business model that is sustainable;
2. Proven management team;
3. If not already profitable, visibility to profitability within a 12-
month period;
4. Having established business partnerships that give it a
major position in a market space;
5. Significant barriers to entry; and
6. Technology or business that is scalable with global
applications.
They look for opportunities for synergistic consolidation and/or
companies that are on the verge of extraordinary growth.
Page | 46
GUIDELINES OF SEBI
After the obligations of
the CCI, the place was
occupied by a legal organ
called as “Securities and
Exchange Board of India”.
The issue of capital and
pricing of issues by
companies has become free
of prior approval. The SEBI
has issued guidelines for the
issue of capital by the
companies. The guidelines
broadly covers the
requirement of the first issue
by a new or the first issue of
a new company set up by the
existing company, the first
issue by the existing private
companies and public issues
by the existing listing companies. The SEBI is the most powerful
Page | 47
organization to control and lead both the primary market and
secondary market.
The SEBI has announced the new guidelines for the
disclosures by the Companies leading to the investor protection.
They are presented below:
a) If any Company’s other income exceeds 10 per cent of the
total income, the details should be disclosed.
b)The Company should disclose any adverse situation which
affects the operations of the Company and occurs within one year
prior to the date filing of the offer document with the Registrar of
Companies or Stock Exchange.
c) The Company should also disclose the information
regarding the capacity utilization of the plant for the last 3 years.
d) The Promoters of the Company must maintain their holding
at least at 20 per cent of the expanded capital.
e) The minimum application money payable should not be less
than 25 per cent of the issue price.
f) The company should disclose the time normally taken for
the disposal of various types of investor’s grievances.
Page | 48
g) The Company can make firm allotments in public issues as
follows:
Indian mutual funds (20%),
FIIS (24%),
Regular employees of the company (10%),
Financial institution (20%).
h) The Company should disclose the safety net scheme or buy
back arrangements of the shares proposed in public issue. This
scheme is applicable to a limited number of 500 shares per allottee
and the offer should be valid for a period of at least 6 months from
the date of dispatch of securities.
Page | 49
CODE OF CONDUCT
According to the 13 Regulation of the SEBI of 1992 (Merchant
bankers), every merchant banker should comply with following
codes of conduct. They are:
a) The merchant banker must observe high integrity and
fairness in all his dealings.
b)He shall render at all times high standard of services,
exercise due diligence, exercise independent professional
judgment.
c) If necessary, he must disclose to his clients the possible
source of conflict of duties and interests.
d) The merchant banker should not indulge in unfair practice
or unfair competition with other merchant bankers.
e) He should not make any exaggerated statement about his
capacity or achievement.
f) He should always Endeavour to give the best possible
advice and prompt efficient and cost effective service.
g) He should maintain the secrecy of all the confidential
information received during the course of service to his client.
Page | 50
h) He should not engage in the creation of a false market or
price rigging or manipulation.
Page | 51
MERCHANT BANKERS COMMISSION
SEBI and ministry of finance, ceiling rates on merchant
bankers’ commission:
Project appraisal feeDiscretion and
negotiable(no ceiling)
Public issue
management fees0.5% of total issue
Lead managers
commission0.5% up to Rs.25 crores
Underwriting
commission
On
devolving
amt
On amt
subscribed by
the public
Equity shares 2.5% 2.5%
Pref. Shares and
debentures
Up to Rs.5lakh 2.5% 1.5%
In excess of Rs.5lakh 2% 1%
Page | 52
Registration of Merchant Bankers :
A.Application for grant of certificate
An application for grant of a certificate needs to be made to
SEBI . The application can be made for any one of the following
categories of the merchant banker namely:-
Category I
(i) to carry on any activity of the issue management, which
will inter-alia consist of preparation of prospectus and other
information relating to the issue, determining financial structure,
tie-up of financiers and final allotment and refund of the
subscription; and
(ii) To act as adviser, consultant, manager, underwriter,
portfolio manager.
Category II
To act as adviser, consultant, co- manager, underwriter,
portfolio manager;
Category III
To act as underwriter, adviser, consultant to an issue;
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Category IV
To act only as adviser or consultant to an issue. To carry on
the activity as underwriter or portfolio manager a separate
certificate of registration needs to be obtained from SEBI.
B.Application to conform to the requirements
The application should conform to all the requirements under
the SEBI guidelines, otherwise it may be rejected.
C.Furnishing of information, clarification and personal
representation
The Board may require the applicant to furnish further
information or clarification regarding matters relevant to the
activity of a merchant banker for the purpose of disposal of the
application. The applicant or its principal officer may appear before
the Board for personal representation.
Consideration of application
The Board shall take into account for considering the grant of
a certificate, all matters, which are relevant to the activities
Page | 54
relating to merchant banker and in particular the applicant
complies with the following requirements, namely: -
• The applicant shall be a body corporate other than a non-
banking financial company
• The merchant banker who has been granted registration by
the Reserve Bank of India to act as a Primary or Satellite dealer
may carry on such activity subject to the condition that it shall not
accept or hold public deposit .
• The applicant has the necessary infrastructure like adequate
office space, equipments, and manpower to effectively discharge
his activities
• The applicant has in his employment minimum of two
persons who have the experience to conduct the business of the
merchant banker
• A person directly or indirectly connected with the applicant
has not been granted registration by the Board;
• The applicant fulfils the capital adequacy requirement is as
follows:
The capital adequacy requirement should not be less than the
net worth of the person making the application for grant of
registration. The networth shall be as follows,
Page | 55
Category Minimum Amount
Category I Rs. 5, 00, 00, 000
Category II Rs. 50, 00, 000
Category III Rs. 20, 00, 000
Category IV Nil
The applicant, his partner, director or principal officer is not
involved in any litigation connected with the securities market
which has an adverse bearing on the business of the applicant and
have not at any time been convicted for any offence involving
moral turpitude or has been found guilty of any economic offence
The applicant has the professional qualification from an
institution recognised by the Government in finance, law or
business management
• Grant of certificate to the applicant is in the interest of
investors.
D.Procedure for Registration
Page | 56
The Board on being satisfied that the applicant is eligible shall
grant a certificate. On the grant of a certificate the applicant shall
be liable to pay the fees as prescribed.
E. Payment of fees and the consequences of failure to pay
fees
Every applicant eligible for grant of a certificate shall pay such
fees in such manner and within the period specified. Where a
merchant banker fails to pay the Annual fees as provided in
Schedule II, the Board may suspend the registration certificate,
whereupon the merchant banker shall cease to carry on any
activity as a merchant banker for the period during which the
suspension subsists. The Merchant Bank can commence business
on acquisition of a Certificate of Registration from the SEBI after
completion of the above mentioned formalities.
Page | 57
MERCHANT BANKERS AS LEAD
MANAGERS
As SEBI guidelines it is mandatory that all public issues should
be managed by merchant bankers in the capacity of lead
managers. Only in the case of right issues not exceeding Rs.
50lakhs such an obligation is not necessary. The number of lead
managers to be appointed by a company depends upon the size of
the issue as shown below:
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Size of the issueMaximum number of
lead managers
Less than Rs. 50 crores 2
Rs. 50 crores to Rs. 100
crores3
Rs. 100 crores to Rs.
200 crores4
Rs. 200 crores to Rs.
400 crores5
Above Rs. 400 crores5 or more as prescribed by
SEBI
DUTIES AND RESPONSIBILITIES OF LEAD
MANAGERS
The most important aspect of
merchant banking business is to
function as lead managers to the
issues management. As lead
managers, they have to exercise
reasonable care and diligence in issue
management by paying attention to
the following:
1. AGREEMENT-
It is the duty of every lead manager to enter into an
agreement with the issuing companies stating the details regarding
their responsibilities, liabilities, mutual rights, functions,
disclosures, refund, allotment etc. A copy of this at least one month
before the opening of the issue for subscription.
2. REGISTRATION-
One merchant banker cannot have association with another
merchant banker who does not hold a certificate of registration
with the SEBI.
Page | 59
3. ISSUE MAGNAGEMENT-
Similarly a lead manager cannot undertake the work of issue
management if the issuing company is its associate.
4. RESPONSIBILITIES-
In case there is more than one lead manager to an issue, the
responsibilities of each of them should be clearly defined in the
agreement.
5.MINIMUM UNDERWRITING-
A lead manager is under an obligation to accept a minimum
underwriting obligation of 5 per cent of the total underwriting
commission or Rs. 25 lakhs whichever is less. If he is not able to
comply with the above provision it is his duty to make
managements with another merchant banker associated with that
issue to underwrite the said amount. Of course it must be duly
intimated to the SEBI.
6.CARE & DILIGENCE-
A lead manager has to exercise due care and diligence in the
verification of prospectus or letter of offer.
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7.SUBMISSION OF RATING CERTIFICATE-
He has to submit due diligence certificate rating that the
prospectus or letter of offer is in conformity with the documents
relevant to the issue, the disclosures are true, fair and adequate
and all legal requirements connected with the issue have been duly
complied with.
8.SUBMISSION OF DRAFT PROSPECTUS OR LETTER OF OFFER-
Every lead manager has to submit all the particular of an
issue, draft prospectus or letter of offer etc. to the SEBI at least two
weeks before the date of filing with the Registrar of Companies or
regional stock exchanges or both.
9.ACCEPTANCE OF MODIFICATION-
In case of any suggestions or modifications given by the SEBI,
he has to ensure that they are properly incorporated in the
appropriate areas.
10.COLLECTION OF AMOUNT FROM UNDERWRITERS-
In the case of development, the lead manager has to ensure
the collection of the specification amount from the underwriters.
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OBLIGATIONS AND RESPONSIBILITES
Merchant bankers have the following obligations and
responsibilities:
1. Merchant banker should maintain proper books of accounts,
records and submit half yearly/annual financial statements to the
SEBI within stipulated period of time.
2. No merchant banker should associate with another
merchant banker who is not registered in SEBI.
3. Merchant bankers should not enter into any transactions on
the basis of unpublished information available to them in the
course of their professional assignment.
4. Every merchant banker must submit himself to the
inspection by SEBI when required for and submit all the records.
5. Every merchant banker must disclose information to the
SEBI when it requires any information from them.
6. All merchant bankers must abide by the code of conduct
prescribed for them.
7.Every merchant banker who acts as lead manager must
enter into an agreement with the issuer setting out mutual rights,
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liabilities, obligations, relating to such issues with particular
reference to disclosures allotment, refund etc.
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SCOPE FOR MERCHANT BANKING
IN INDIA
Scope for merchant
banking depends upon size of
the market, restriction-
liberation, banking policies,
corporate culture, and
corporate dynamics.
1.Size and dynamics of
the market : Indian market is
growing. In fact India is one of
the largest emerging markets.
Obviously, public issues, FDI, debt raising are on rise. Lots of new
and green fried projects are happening. Merchant bankers have
lots space to contribute.
2. Restrictions - liberalization: more liberal the market is, more
the things left to be decided by the corporate. Merchant bankers
assist in decision making and hence their scope increases. With
significant market freedom, merchant bankers work has increased
many folds.
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3. Banking policies: RBI prefers that commercial banks do not
indulge in merchant banking business directly. They should setup a
subsidiary for the purpose. This limits scope of commercial banks
and gives space to merchant bankers. This policy also results in fair
business practices. Some countries allow commercial bankers to
get involved in IPO’s, placement of debentures, etc. Indian scenario
is favorable to merchant bankers.
4. Corporate culture: corporate can do project appraisal,
strategic restructuring in house as well. If the corporate prefer
third-party independent assessment, then only they will engage
merchant bankers. Otherwise merchant banker’s role is only
statutory as in issue management. India inc. apparently prefers and
is happy with merchant bankers work.
5. Corporate dynamics: more happening in business gives
more opportunities to merchant bankers. Mergers, takeover
acquisition, new Greenfield projects, fund raising for government
institutions, active money market are all providing better business
prospectus to merchant bankers.
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Problems of Merchant Bankers:
1.ISSUE RELATED ACTIVITIES
SEBI guidelines has authorized merchant bankers to
undertake issue related activities only with an exception of portfolio
management.
2.SCOPE OF ACTIVITIES-
These guidelines have made the merchant bankers either to
restrict their activities or think of separating their activities from
the present ones and float new subsidiary and enlarge the scope of
its activities.
3.NET WORTH-
SEBI guidelines stipulate a minimum net worth of Rs.1 crore
for authorization of Merchant bankers.
4.ELIGIBLITY-
Small but professional and specialized merchant bankers who
do not have a net worth of Rs.1 crore may have to close down their
business. The entry is denied to young, specialized professionals
into merchant banking business. Page | 66
5.RESPONSIBILITIES-
Non- co- operation of the issuing companies in timely
allotment of securities and refund of application money is another
problem of merchant bankers. The guidelines have put the
responsibility on the merchant bankers. They have to seek the co-
operation of the issuing company to shoulder the responsibility.
PROGRESS OF MERCHANT BANKING IN
INDIA
Page | 67
Merchant banker’s
main activity is of
management of public
issue of shares. As
stock markets in the
country progress or
move, merchant
banker’s business
activity grows. Earlier,
stock markets in India
nascent stage.
Controller of capital
issues was the
controlling authority.
Issue pricing was also
dictated by CCI. Later, it
was replaced with
SEBI. Physical shares
were replaced with
demat. BSE got a
strong companion as
NSE. Both are highly automated and sophisticated now. Merchant
banker’s role in CCI era and in restricted freedom was of course not
so significant. As the size of capital market increased, pricing
became a critical issue. Book building and book running is an imp
Page | 68
exercise. With India liberalizing its policies, its presence in
international markets has increased. Number of merchant bankers
is on rise since liberation. Virtually every PSU bank has merchant
banking subsidiary. Indian finance companies dominated merchant
banking in early years. Now giant multinational merchant bankers
are showing presence in India. Market and its scope are growing.
Page | 69
CONCLUSION
The merchant banker plays a vital role in channelizing the
financial surplus of the society into productive investment avenues.
Hence before selecting a merchant banker, one must decide, the
services for which he is being approached. Selecting the right
intermediary who has the necessary skills to meet the
requirements of the client will ensure success.
It can be said that this project helped me to understand every
details about Merchant Banking and in future how it’s going to get
emerged in the Indian economy. Hence, Merchant Banking can be
considered as essential financial body in Indian financial system.
Market development is predicted on a sound, fair and
transparent regulatory framework. To sustain the growth of the
market and crystallize growing awareness and interest into a
committed, discerning and the growing awareness and interest into
an essential to remove the trading malpractice and structural
inadequacies prevailing in the market, and provide the investors an
organized, well regulated market.
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