manish sinha_merchant banking dissertation

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PROJECT REPORT

ON

“MERCHANT BANKING”

Under the Guidance of: Prof. Paul Chelladuai

(MENTOR)

Submitted to : Submitted by:

MR. PAUL CHELLADURAI VIKASH KUMAR SHARMA

(MENTOR) (PGPBM 2007-09)

Roll No. : 3096

Submitted in Partial fulfillment of PGPBM Course to

International School of Business & Media, Bangalore

ACKNOWLEDGEMENT

First of all I would like to thank GOD without whose blessings and help I would not have

been able to complete this project. I wish to express my gratitude to Mr. Paul Chelladurai

who helped me to understand the concept of this project. I am also thankful to our librarian who provided me important inputs related to my project.

I also thank my friends who provided me the help from their experience. Last, but not the

least, I would like to thank from my heart deep to my college who gave me this opportunity

to work on this project.

VIKASH KUMAR SHARMA



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DECLARATION

I, VIKASH KUMAR SHARMA, hereby declare that this dissertation titled,

”MERCHANT BANKING” is my original work under the guidance of Mr. Paul

Chelladurai towards partial fulfillment of the requirements for the PGPBM course of

International School of Business & Media. This report has not been submitted earlier for

the award of Degree/Diploma/Programme by any other University/B-school.

Date: 7th March 2009

Place: Bangalore



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EXECUTIVE SUMMARY

Topic : Merchant Banking

Student Name : Vikash Kumar Sharma

Project Guide : Mr. Paul Chelladurai

Mission of Project: - This report deals with the findings and recommendations regarding

the Changing Trends of Merchant banking in the last decade or so and to know how my

suggestions, if implemented can be more fruitful to the industry.

Methodology: - The research methodology, which has been done for this project, consist

of the following order.

Data Collection: - The sources from which I have collected the data are as follows: -

Secondary Data: - Secondary Data was collected from the various sites of Internet,

books, magazines, journals and so on.



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PREFACE

The research started with understanding the concept of Merchant Banking and then

knowing how the related companies make use of it to carry out their businesses in a more

efficient manner and seek information through secondary data in order to make a

knowledgeable report and getting to know the crux of the industry. In the process I faced a

lot of queries regarding the subject. To overcome this problem my I did a deep study on

the subject to big extent so that I can make a meaningful report.

This research was carried down during my mandatory curriculum part of PGPBM to

make a dissertation report and the area of research was whole industry of Merchant

Banking. During the course of research, an attempt was made to study the pattern for

Merchant Banking and know how the industry can move to next level.

The conclusions drawn are based on the observations and facts collected from the various

sources of secondary data. As a whole, my efforts were to give a consolidated picture for

the study. I expect my work would at least act as a further scope to the industry. With this I

whole-heartedly hand over my project hours to you.



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Index

Chapters Particulars Page No:

1 Introduction 8

2 Scope of work 16

3 Methodology of research 23

4 Empirical study 29

5 Findings & Interpretation 36

6 Recommendation 40

7 Limitations of the research 42

8 Bibliography 43



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Introduction

History

Modern Practices

Services Private equity market

Scope of work

Use of private equity

Forms taken by investments

Commercial bank involvement

Evolution Recent track record

Factors responsible for changes

Methodology of research

Management of debt/equity offering

Placement & Distribution

Corporate advisory services

Project advisory services

Loan syndication

Venture capital financing

Empirical study

Banking & related finance

Arrangement of finance

Investment management

Loan arrangement

Conflict of interest

Confidentiality of information

Dealing



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Findings & Interpretation

Activities

1. Front office

2. Middle office

3. Back office

Recommendation

Future Developments

Conclusion

Limitations of the research

Bibliography



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1. INTRODUCTION

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

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.

http://www.wisegeek.com/what-is-the-stock-market.htm

http://www.wisegeek.com/what-is-paperwork.htm

http://www.wisegeek.com/what-is-an-underwriter.htm

http://www.wisegeek.com/what-is-an-underwriter.htm

http://www.wisegeek.com/what-is-paperwork.htm

http://www.wisegeek.com/what-is-the-stock-market.htm



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1.1 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. 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 did not bind the Jews. 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 discountagainst 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.

It was a short step from financing trade on their own behalf to settling trades for others,

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

were still brokering the actual grain. And so the merchant's "benches" (bank is a corruptionof the Italian for bench, as in a counter) in the great grain markets became centres for

holding money against a bill (billette, a note, a letter of formal exchange, later a bill of

exchange, 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.



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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.

1.2 Modern practices

The definition of merchant banking has changed greatly since the days of the Rothschilds.

The 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. The modern merchant banks, however, tend to advise corporations

and wealthy individuals on how to use their money. The advice varies from counsel on

Mergers and acquisitions to recommendation on the type of credit needed. The job of

generating loans and initiating other complex financial transactions has been taken over by

investment banks and private equity firms.

Today there are many different classes of merchant banks. One of the most commonforms is primarily utilized in America. This type initiates loans and then sells them to

investors. Even though these companies call themselves "Merchant banks," they have few

if any of the characteristics of former Merchant banks.

(A bank that deals mostly in (but is not limited to) international finance, long-term loans for

companies and underwriting. Merchant banks do not provide regular banking services to

the general public.)

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



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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.

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 Dotcom 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 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.

In the 1920s, American merchant banks began to become involved in investor relations

and financing public companies. The Kennedy fortune comes in part from JosephKennedy’s involvement as a merchant banker to the pre-Crash Stock Market. By the

1960s, the cost of going public in the States began to increase. Many American brokerage

house clients lacked the resources to pay these costs. Major brokerage firms responded

by creating merchant banking departments. These departments became known as

Investment Banks. Their role was to loan the parent brokerage firm’s client companies the

money to go public. They recovered the loan from the proceeds of the Initial Public

Offering (IPO). For their service, they received a large bloc of shares in the new public

company. Their secondary job was to arrange acquisitions that made the client company a

more attractive IPO candidate. Successful M&A work is very rewarding.



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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.

1.3 American merchant banks offer many of the following services :

Consulting advice on going public and international business.

Advice and help in taking your company public. If they are unwilling to supply

Investment Banking bridge loans, they have a low cost strategy for taking your company

public.

The do PIPE (Private Investment in Public Equities) financings.

They can advise or help with a company’s M&A strategy.

They are essential advisors for companies seeking to become multinational corporations.

They off pragmatic general business advice for real world situations.

In providing advice and assistance, merchant bankers must possess a complete

understanding of all facets of capital markets.

This includes every type of debt and equity financing both domestically and internationally.

Merchant bankers cognizant of capital costs, seek optimum sources of capital. It is

fundamental to acknowledge that interest rates are not the only standard relating to capital

costs. Restrictions on funding availability, repayment terms, and operating effectiveness

often outweigh what might appear to be inexpensive capital. Too frequently capital costs

compel a growing business to take undesirable actions. Some action might be necessary

or advantageous but in the long run - inordinate capital costs can be detrimental. The

traditional merchant banker understands capital limitations and is able to structure

transactions which are beneficial to all parties not just the capital source. A knowledgeable

merchant banker knows how to substitute one kind of capital for another - sometimes

utilizing internal sources by way of either asset or corporate repositioning or equity

creation. Above all, a merchant banker fully comprehends the "risk" versus "return"

element necessary to complete the capital procurement process.



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Merchant banking has been a very lucrative and risky endeavor for the small number of

bank holding companies and banks that have engaged in it under existing law. Recent

legislation has expanded the merchant-banking activity that is permissible to commercial

banks and is therefore likely to spur interest in this lucrative specialty on the part of a

greater number of such institutions. Although for much of the past half-century commercial

banks have been permitted (subject to certain restrictions) to engage in merchant-banking

activities, the term merchant banking itself is undefined in U.S. banking and securities laws

and its exact meaning is not always clearly understood.

1.3.1 Ranking of Merchant Banking in India:

Merchant

Banker

OE FSS QPS QM INN

ICICI

Securities

4.0 4.0 4.2 3.8 4.3

IDBI 4.2 3.2 4.5 4.0 4.8

SBI Caps 4.4. 3.9 4.6. 6.7 5.2

DPS 6.1 5.7 6.0 6.0 5.3

IFCI 6.1 5.7 6.0 6.0 6.3

Bank of

Baroda

6.7 6.5 6.7 6.6 6.8

Jardine

Fleming

5.8 6.2 5.9 5.0 5.5

JM

Finance

6.0 6.5 5.5 5.9 5.4

ENAM 6.3 6.8 6.4 6.3 6.2

PNB

Caps

6.8 6.8 6.7 6.8 6.8

Note: OE: Overall Excellence; FSS: Financial Soundness; QPS: Quality Product/Service; QM:

Quality Management; INN: Innovativeness.



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1.3.2 Objectives of Merchant Banking in Prevailing Economy:

To study the significance of Merchant Banking towards the development of securities

industry.

To analyze issue management regulations.

To analyze the functions of Merchant Banking in relation to rules and regulations of SEBI.

To evaluate the performance of Merchant Bankers, both activity performance and

operational and financial performance.

To draw a conclusion and suggestions based on the analysis and experiences.

Definition and Early History of Merchant Banking

Although not defined in U.S. federal banking and securities laws, the term merchant

banking is generally understood to mean negotiated private equity investment by financial

institutions in the unregistered securities of either privately or publicly held companies .

Both investment banks and commercial banks engage in merchant banking, and the type

of security in which they most commonly invest is common stock. They also invest in

securities with an equity participation feature; these may be convertible preferred stock or

subordinated debt with conversion privileges or warrants. Other investment bank services

raising capital from outside sources, advising on mergers and acquisitions, and providing



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bridge loans while bond financing is being raised in a leveraged buyout (LBO)-are also

typically offered by financial institutions engaged in merchant banking.

Merchant banks first arose in the Italian states in the Middle Ages, when Italian merchant

houses-generally small, family-owned import-export and commodity trading businesses-

began to use their excess capital to finance foreign trade in return for a share of the profits.

This trade generally consisted of lengthy sea voyages. Thus, the investments were very

high risk: war, bad weather, and piracy were constant threats, and by their nature the

voyages were long-term and illiquid.

Later, the center for merchant banking shifted from the Italian states to Amsterdam and

then, in the eighteenth century, to London, where immigrants from Prussia, France,

Ireland, Russia, and the Italian states formed the core of early British merchant banking.

Like the Italian and Dutch houses before them, these British houses were generally small,

family-owned partnerships, and most of them continued both to trade for their own

businesses and to finance the trading by others. By the end of the eighteenth century,

however, the British merchant houses had increased in size and sophistication and began

specializing in trade, marketing, or finance. As the nineteenth century opened, virtually no

mercantile houses remained focused on both trade and finance.

1.4 The Private Equity Market in the United States

The private equity market in the United States has evolved over the years, with financial

institution involvement only becoming significant in the 1960s and 1970s. Where these

funds are invested also has changed over time. Currently, most private equity funding is

used to fund start-up or early-stage companies or to bring large public companies private.

Private equity investments can be made through limited partnerships or they can be direct

investments. Subsidiaries of banking organizations are probably the largest direct

investors in this market.

1.4.1 Evolution of the Private Equity Market

Given its history, merchant banking is often thought of as a European, and especially

British, financial specialty, and British institutions continue to maintain a major presence in

this area. Since the 1800s and even earlier, however, U.S. firms (such as J.P. Morgan)

also have been active in merchant banking. However, although both investment banks and

commercial banks, as well as other types of businesses, have been authorized to engage



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in private equity investment in the United States, financial institutions have not been major

providers of private equity.

Until the 1950s, U.S. investors in private equity were primarily wealthy individuals and

families. In the 1960s and 1970s, corporations and financial institutions joined them in this

type of investment. (In the 1960s, commercial banks were the major providers of one kind

of private equity investing, venture-capital financing.) Through the late 1970s, wealthy

families, industrial corporations, and financial institutions, for the most part investing

directly in the issuing firms, constituted the bulk of private equity investors.

2. SCOPE OF WORK

2.1 Typical Uses of Private Equity

Private equity financing is an alternative to raising public equity, issuing public debt, or

arranging a private placement of debt or bank loan. The reasons companies seek private

equity financing are varied. For example, other forms of financing may be unavailable or

too expensive because the company's track record is either nonexistent or poor (that is,

the company is in financial distress). Or a private company may want to expand or change

its ownership but not go public. Or a firm may not want to take on the fixed cost of debt

financing.

Public firms may seek private equity financing when their capital needs are very limited

and do not warrant the expense, time, and regulatory paperwork required for a public

issue. They also may seek private equity to keep a planned acquisition confidential or to

avoid other public disclosures. They may use the private equity market because the public

market for new issues in general is bad or because the public equity market is temporarilyunimpressed with their industry's prospects. Finally, very often in recent years,

managements of large public firms have felt their firms will benefit from a change in capital



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structure and ownership and will choose to go private by means of a leveraged buyout

(LBO). Before the mid-1980s, two-thirds of private equity investments were used to finance

venture-capital investments.

2.2 Forms Taken by Investments

Currently, more than 80 percent of private equity investments are made by limited

partnerships, with professional private equity managers acting on behalf of institutional

investors. In a limited partnership, the professional equity managers serve as general

partners, and the institutional investors serve as limited partners. The general partners

manage the investment and contribute an insignificant part of the investment, generally

approximately 1 percent. These limited partnerships have a contractually fixed life, usually

ten years. The investments are highly illiquid over the partnership's life, with a return not

expected until the partnership's later years, when the business is sold through a public

offering or a private sale, or the shares are repurchased by the company. Banks (through

subsidiaries) often act as limited partners in private equity limited partnerships, and

infrequently as general partners.

Direct investments in private equity are made also. Through subsidiaries, bank holding

companies and banks are probably the largest direct investors in the private equity market.



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2.3 Commercial Bank Involvement in Merchant Banking

Commercial banks have historically utilized Small Business Investment Corporations

(SBICs) or "5 percent subs" (defined below) for their domestic private equity investments,

and Edge Act Corporations or foreign subsidiaries to make their foreign private equity

investments. Several very large bank holding companies have come to dominate merchant

banking, directing as much as 10 percent of their capital to these activities. For the most

part, reported earnings from these merchant-banking activities have been very good.

Small Business Investment Corporations.

SBICs were authorized by the Small Business Investment Act of 1958 to promote small-

business equity funding. This act authorized BHCs and banks to provide equity capital to

small companies through SBICs, which can be subsidiaries of either BHCs or banks. A

very significant percentage of the largest SBICs are subsidiaries of banks rather than of

BHCs.

Investments in SBICs are direct and subject to certain limits. Banks are allowed to invest

only 5 percent of their capital and surplus in their SBICs; bank holding company

investments are capped at 5 percent of the BHC's interest in the capital and surplus of itssubsidiary banks. The investments of the SBICs also are limited. Investments can be

made only in companies with pre-investment net worth of no more than $18 million, and

each investment is capped at 50 percent of the recipient's outstanding shares of stock.



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5 Percent Subs. The Bank Holding Company Act of 1956 permitted bank holding

companies to make passive equity investments in non financial companies. Specifically,

the legislation allowed bank holding companies to own a maximum of 5 percent of the

voting shares (hence the "5 percent sub" designation) and a maximum of 25 percent of the

total equity of companies engaged in any activity. There is no limit on the total amount of

equity that a BHC can invest through all of its 5 percent subs.

Foreign Subsidiaries or Edge Act Corporations.

As mentioned above, banks have made private equity investments in foreign firms

through foreign subsidiaries of bank holding companies or through Edge Act Corporations,

which are generally organized as bank subsidiaries. Edge Act Corporations are permitted

to own up to 20 percent of the voting shares or 40 percent of the total equity of a foreign

company.

2.4 Evolution

A few very large BHCs dominate merchant banking, directing as much as 10 percent of

their capital to these activities. Citigroup, Chase, Bank of America, FleetBoston, and Wells

Fargo have the largest presence in this area. In 1999, Chase, FleetBoston, Wells Fargo,

J.P. Morgan, and First Union reported an aggregate investment of over $5 billion in

venture-capital investments, and they expect to continue to expand this area of their

business.

Many banks entered merchant banking in the 1960s to take advantage of the economies

of scope produced when private equity investing is added to other bank services,particularly commercial lending. As lenders to small and medium-sized companies, banks

become knowledgeable about individual firms' products and prospects and consequently

are natural providers of direct private equity investment to these firms. As mentioned

above, commercial banks were the largest providers of venture capital in the 1960s.

In the middle to late 1980s, the decision to enter merchant banking was thrust on other

banks and bank holding companies by unforeseen events. In those years, as a result of

the LDC (less-developed-country) debt crisis, many banks received private equity fromdeveloping nations in return for their defaulted loans. At that time, many of these banks set

up merchant-banking subsidiaries to try to get some value from this private equity.



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Also at about that time, most commercial banks began refocusing their private equity

investments to middle-market and public companies (often low-tech, already profitable

companies) and, rather than providing seed capital, financed expansion or changes in

capital structure and ownership. Most particularly, they took equity positions in LBOs,

takeovers, or recapitalizations or provided subordinated debt in the form of bridge loans to

facilitate the transaction. Often they did both. Commercial banks financed much of the

LBO activity of the 1980s. Then, in the mid-1990s, major commercial banks began once

again focusing on venture capital, where they had substantial expertise from their previous

exposure to this kind of investment. Some of these recent venture-capital investments

have been spectacularly successful. For example, the Internet search engine Lycos was a

1998 investment of Chase Manhattan's venture-capital arm.

2.5 Recent Track Record

Commercial banks are permitted to report either realized or unrealized gains on their

merchant-banking portfolios, as long as they are consistent in the reporting.This option

makes it difficult for one to compare different entities' financial results and could lead to an

overly liberal reporting of profits. However, the Federal Reserve Board (FRB) generally

considers bank holding companies that are engaged in merchant banking to have reportedtheir earnings conservatively on these equity investments.

The merchant banker are those financial intermediary involved with the activity of

transferring capital funds to those borrowers who are interested in borrowing.

The activities of the merchant banking in India is very vast in nature of which

includes the following

The management of the customers securities

The management of the portfolio,

The management of projects and counseling as well as appraisal

The management of underwriting of shares and debentures

The circumvention of the syndication of loans

Management of the interest and dividend etc



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2.6 Factors responsible for the Changes:

Globalization of Indian Economy has made the whole economy open, which has more

multinational player in the era of the financial services? This has resulted in to the

emergence of the global investment in financial sector. Government has now open up the

doors of investments especially in the area of banks and insurance, which leads to

competitive environment for the present players. Now they have to bring something new

which is efficient and best services to live in the competitive environment.

Competition arising out of Private Company Participation is due to the liberalization of the

economy. Now along with the public/government players, private players are also offering

financial services and instruments, which are more innovative and different than the earlier

offering. Financial markets are being redefined, reinvented and reconfigured on a

persistent basis.

Changing Customer Demographics:

If we look at the all-growing economies like China, Germany and Brazil, India has 35% ofthe population in the age group of 15years to 34 years. It is estimated that by 130mn plus

people get added to working population by 2009 with 55 million families (320 million

people) will be added in the middle-income group (0.1 to 0.3 Million Rs). The demographic

change leads to the change in the need of the customer.

Changing Customer Needs customers have larger segment in corporate decision-making

they are the final judges of the every single activity offered by the marketer. Banks in Indiahave traditionally offered mass banking products. Financial market has turned into a

buyer's market. Market focus is shifting from mass banking products to class banking with

introduction of value added products. Today, financial institutions are co-designing the

products/services with their customers and striving to provide them with global solutions

Government Reforms Government is major decision player in the financial market. It

decides the proportion of the investment limits as well as the regulation and control. In last

ten years government is designing its policy with more liberal and competitive content.

Which it are welcome trends for the emerging financial services.



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Revolution in Banking Sector:

Banking in India originated in the first decade of 18th century with the General Bank

coming into existence in 1786. Bank of Hindustan followed this. Both these banks are now

defunct. The oldest bank in existence in India is the State Bank of India being established

as the Bank of Calcutta in Calcutta in June 1806.

In the early 1990s the then Narasimha Rao government embarked on the policy of

liberalization and gave license to small number of private banks, which came to be known

as new generation tech-savvy banks such as ICICI Bank and HDFC Bank. Currently in

2005, banking in India is considered fairly matured in terms of supply, product range and

reach-even though reach in rural India still remains a challenge for the private sector and

foreign banks. With the growth of Indian economy expected to be strong for quite some

time especially in its service sector, the demand for banking services specially retail

banking, mortgage and investment services are expected to be strong.



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3. METHODOLOGY OF RESEARCH

Merchant banking implies investment management. Companies raise capital by issuing

securities in the market. Merchant bankers act as intermediaries between the issuers of

capital and the investors who purchase these securities. Merchant banking is the financial

intermediation that matches the entities that need capital and those that have capital for

investment. Services of merchant bankers The services provided by merchant bankers

includes management of mutual funds, public issues, trusts, securities and international

funds. It involves dealing with the corporate clients and advising them on various issues

like- mergers, acquisitions, public issues, etc. Functions of merchant bankers include:

3.1 Management of debt and equity offerings. This forms the main function of the merchant

banker. He assists the companies in raising funds from the market. The undergoing tasks

include instrument designing, pricing the issue, registration of the offer document,

underwriting support, marketing of the issue, allotment and refund and listing on stock

exchanges.

3.2 Placement and Distribution. The merchant banker helps in distributing various securities

like equity shares, debt instruments, mutual funds, insurance products, and commercial

paper, to name a few. The distribution network of the merchant banker can be classified as

institutional and retail in nature. The institutional network consists of mutual funds, foreign

institutional investors, private equity funds pension funds, financial institutions, etc.

3.3 Corporate advisory services. Merchant bankers offer customized solutions to their

clients' financial problems. Financial structuring includes determining the right debt-equity

ratio and the framing of appropriate capital structure theory.

3.4 Project advisory services. Merchant bankers help their clients in various stages of the

project undertaken by the clients. They assist them in conceptualizing the project idea in

the initial stage. Once the idea is formed, they conduct feasibility studies to examine the

viability of the proposed project.

3.5 Loan Syndication. Merchant bankers arrange to tie up loans for their clients. This takes

place in a series of steps. Firstly, they analyze the pattern of the client's cash flows, based



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on which the terms of the borrowings can be defined. The banks then negotiate the terms

of lending on the basis of which the final allocation is done.

3.6 Providing venture capital financing. Merchant bankers help companies in obtaining

venture capital financing for financing their new and innovative strategies. Regulatory

framework. An applicant should comply with the following norms:

The applicant should be a corporate body.

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

securities market.

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

manpower, etc.

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

banking.

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

applicant should not have been a registered merchant banker.

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

offence.

3.7 Leasing Services:

The Indian company investors must be acknowledged that lease is that agreement under

which the company or Indian firm acquire the exact right and make use of certain capital

asset on the consideration of payment of rental charges. The Indian corporate company

must equally known that it cannot equally know that it cannot acquire any kind of

ownership to such an asset apart from making use of it. The user comparatively pays all

the expected operating costs and also the maintenance expenses.

The main corporate companies must equally take into the consideration that developed

countries like America, United Kingdom the companies of such a countries are commonly

depending on the leasing factor. In India since the era of liberalization, many of the Indian

companies have equally been involved in the leasing transactions. On the other side,

many financial institutions and even the commercial banks in the Indian financial sector

have comparatively been accepted over the same transactions.

3.8 Mutual Funds Services



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The Indian corporate companies must equally be informed that the mutual funds

comprises of the exact funds gained by pooling all the public savings. The mutual funds

are comparatively invested in those portfolios, which are commonly diversified in nature

with the main objectives of sharing the risk. The Indian small-scale investors cannot be

able to get their funds from the comparative big corporate companies can equally gain

there working funds from the mutual funds.

However, the modern concept of the mutual funds was developed in1968 in London by the

foreign and colonial government trust of London. By which it gained its invention in India in

early 1980, even if it was exactly started in 1964 by the unit trust of India.

In addition to the above, the mutual funds can be grouped into

[A] Close ended funds & [B] Open ended funds.

The Indian corporate companies can only benefits from the mutual funds on gaining

savings for investment, better yield low cost on investment, tax benefits, flexible on

investment, promoting industrial development reducing the cost of new issue and many

more other advantages.

On the other side, Indian corporate companies must be informed on the kind of risks

involved with the mutual funds like market risks, scheme risks, business risk, investment

risks and even the political nature of risks. While the investors are selecting the funds must

take into account the objectives of the fund, consistency of performance of the funds.

Historical background of the funds, cost of operation, capacity for innovation, the investors

servicing, market trends, and even the transparence of the fund management. For theIndian mutual funds to have good future there must be full support of SEBI better control of

capital issue, better interest rate, good PE ratio, investors must have good choice, tax

concessions, and many more.

3.9 Hire Purchase Services



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In the hire purchase kind of transaction is that method of selling by which goods are left

out on hiring by the Indian corporate company to the purchaser by which the hirer is

comparatively required to the payment on an agreed sum of amount in the system of

periodical installments. In the hire purchase the Indian corporate companies must know

that the ownership of such kind of the property exactly remain under the control of the

creditor who normally passes the right to hirer on the condition of payment of the last

agreed sum of money in installment.

The Indian corporate company must know that legally, payment is made in installment

over the agreed specified period, possession of the same right is delivered to the

purchaser during the time of agreement, the property passes to the exact purchaser on the

agreed last installment, and the hirer has a right to return the property without further

installment. In addition to the above, the Indian corporate company must know that the

agreement must comparatively contain the nature of the goods as described in manner so

that to identify them easily, the nature of the hire purchase price, the date of

commencement and finally the extend or number of installments.

3.10 Venture Capital Services

The venture capital is that investment in the new Indian enterprises without stability in

growth. It's that environment of capital, shareholding and even the setting up of small

firms, which are comparatively specializing, in same new technological ideas in the

commercial sectors.

The venture capital is equity participation, it's of high risk in nature, it's also available only

for commercialization of new technologies and it's the exact promoter of the projects, andit's continuous in nature and input of the firm. The Indian corporate companies must

equally know that venture capital involves the development of project idea,

implementation, fledging or additional financing, and establishment stage.

The main importance of venture capital to Indian, corporate companies are the reduction

of risk, easy to analyze the business prospects and to assume the investors on affairs of

the business. The Indian methods of venture financing are equity participation, income

notes, the conventional loans and even the conditional loans. In order to promote the

venture capital growth in India, there must be tax concessions for capital gains, high level



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development of capital market, giving of fiscal incentives to Indian corporate companies,

high level participation of the private sectors the improving and reviewing of the existing

laws and limited partnership and many more.

3.11 Discounting, factoring and forfeiting services

Due to the exact trade transaction the trade bill comparatively arises, the Indian corporate

companies must take into consideration that the supplier of the exact goods draws bill

which is based on the purchase for the invoice price of goods sold on credit method of

which is drawn on the short period of time. The buyer pays the amount on the exact date

by which the supplier of goods has to await until the expiry of the exact bill. However, the

banks provides the cash discounting based on the exact trade bills by which they deduct

certain charges as discount based on the amount of the bill and credit balance of the

customers account.

Factoring

Factoring is to get thing being done. The ward factor means to mark or to do according to

R.W. Johnson factoring is a service involving the purchase by financial organization, calleda factor of receivables owned by manufacturers and distributors by the customers with the

factor assuming full credit and collection responsibilities.

The main conditions of factoring that the Indian corporate companies must know are these

must be assignment of debt that has to be in favour of the factor. The selling limits for the

client, the factor must have recourse to the client in the case of non-payment by the

customer; the factor will equally have recourse in case of non-payment, details onpayment for the services, interest and limit of any overdraft facility charged. The Indian

corporate companies must be well informed about the types of factoring as full service,

recourse factoring, maturity, bulk, invoice, agency and also international factoring. At the

same time the exact cost of factoring like the pricing, fee, discount, accounting system

must be taken into consideration.



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Forfeiting

Forfeiting is the French term means "to give something" or "give one's right". Generally the

term forfeit is non-recourse purchase by the commercial bank or any other financial

intermediaries or institutions receivables that equally arises from the export of the goods.

3.12 Securitization of Debt Services

The securitization is that process by which the liquidating of the liquid and the long term

assets of the Indian corporate companies like the loans and receivables by the issuing

marketable securities against the same. However, the Indian corporate companies must

know that securitization is that technique by which the exact long term, non-negotiable

instruments are equally converted into securities of such kind of small value in nature

which can be easily transacted in the commercial capital market.

In India, apart from the above, there is low and unpopularity of securitization due to

introduction of it as it's a new idea or concept to India, heavy stamp duty and comparative

registration fees imposed by the Indian government, complicated and also legal transfer

procedure the difficulty in the assignment of debts. Also there is poor standard of loan

documentation, problem of inadequate credit rating system, poor accounting procedureand lack of comprehensive guidance.

3.13 Derivatives

The derivatives are those instruments, which are commonly used to derive therein-exact

value of underlying asset of the financial institutional corporate companies. The derivatives

comparatively may involve the payment or receipt of the value or income created by theunderlying assets. The main factors that are responsible for the slow growth of derivatives

in India and high level of misconception of the derivatives, the derivatives lends

themselves to leveraging, the nature of the off balance sheet, items, poor accounting

system, speculative mechanism and finally poor infrastructure system.



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3.14 Credit Rating Services

According to Moody's Rating are designed exclusively for the purpose of grading bonds

according to their investments qualities". Also according to the Australian Ratings "A

corporate credit rating provides lenders with a simple system of gradation by which the

relative capacity of companies to make timely repayment of interest and principal on a

particular type of debt can be noted".

The main credit ratings in India are credit rating information service ltd (CRISIL),

investment information and credit rating agency of India (ICRA), Credit Analysis and

Research (CARE), and Duff Phelps Credit Rating Pvt. Ltd (DCR India).

The applicant should have a minimum net worth Rs50 million. Scope of merchant banking

in India Merchant banking activities help in channelizing the financial surplus of the general

public into productive investment avenues. They help to coordinate the activities of various

intermediaries to the share issue such as the registrar, bankers, advertising agency,

printers,

Underwriters, brokers, etc. and to ensure the compliance with rules and regulations

governing the securities market. This being the era where mergers and acquisitions are

hot, the scope of merchant banking has grown to a large extent.

4. EMPIRICAL STUDY

The origins of merchant banks go back to the early nineteenth century when a number of

trading houses largely of non-British background and ownership were founded in the City

of London to trade, and facilitate the trade, with the Empire in the East and with the North

and South American continent. From trading it was only a short step to financing the trade

at both ends of the line, the exporter from the United Kingdom and the importer in the

developing country. The importer tended to be a government or semi government body

which apart from a requirement for the more sophisticated goods of the Old World required

financing of infrastructure projects such as railways, roads and dams, as well as what

might today be called balance of payment financing. This was difficult and adventurous (or

entrepreneurial) financing which suited particularly the merchant banks of the time. The

risks were perceived by others to be great, but so were the rewards to the merchant

banks. The merchant banks who engaged in this business were singularly well placed in



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the City of London to benefit from the outpourings of goods and energy and the prestige of

Britain and would undoubtedly not have been able to develop as they did had they been

located, as their founding families were, in say Hamburg, Bremen, Frankfurt, Copenhagen

or Paris. They were at the centre of things and the financial centre at that time was and

indeed even now is London.

The merchant banks had one place of business and that was in the City of London. They

were thus the forerunners of wholesale banking. Since they did not choose to branch out

in the truest sense of that word in banking terms and relied for their deposits on a

relatively small but wealthy private clientele and a few corporate customers they were

able, and indeed had, to give a superior kind of personal banking service which inevitably

led to the provision of services additional to those of banking.

Additional services

These services developed over a period of time into financial advisory services to

corporations, governments and semi-governmental bodies, the raising of finance through

all varieties of instruments both equity, semi-equity and debt as well as the provision of

investment services to those of their clients who had accumulated sufficient wealth to wish

to safeguard what they had got rather than to multiply it manifold through their own efforts.

In this way the merchant the Banking Ordinance, banks started their investmentmanagement activities which have continued to this day, the only major change being that

there are very few individual or family fortunes remaining to be managed (other than

perhaps in the Middle East, South East Asia and South America where there are transfer

difficulties) and the emphasis now is on corporate funds with pension and retirement

schemes forming the bulk of these funds.

4.1 Banking and related finance

As I have already indicated one of the main areas indeed the most important area of

recurring earnings - of merchant banks is that of providing loans to customers. Linked with

this activity is the provision of other banking services such as are carried out by retail

banks for their customers. The banking services provided by merchant banks for their

customers are no different to the services provided by the retail banks for their corporate

customers. Merchant banking in the banking sense is banking for corporate customers or

wholesale banking. The other areas of a merchant bank's activity provide little opportunity

for growth in Hong Kong due to the rather restricted market for these kinds of services.



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This in turn has meant that the very large majority of, indeed almost all, merchant banks

have primarily concentrated on the provision of banking services.

4.2 Corporate finance advisory services

While banking services provide the bread and butter income of any merchant bank, the

corporate finance advisory services provide the prestige, excitement, the occasional large

fee and the bulk of any publicity. The most prestigeous and most immediately profitable

part of these advisory services is undoubtedly the merger and acquisition field. However

this is work which takes a merchant bank a long time to develop. Yet once it is developed

it looks to an outsider relatively easy. This adversary relationship does exist in contested

takeovers of which in Hong Kong there are very few. Hong Kong is a pragmatic place

which realizes that contested takeovers seldomly bring short or medium-term benefits and

even long-term benefits are hard to come by. It is partly this lack of emotional involvement

which causes boards to seek financial advice to help them recommend to their

shareholders the appropriate but perhaps unwelcome course of action. Mergers and

acquisitions are the most exciting part of the corporate finance side of a merchant bank's

activities but since there are in Hong Kong less than twenty such transactions in any one

year it is obvious that only three or four of the many merchant banks in Hong Kong can

keep their hands in by acting in at least half-a-dozen of those transactions every year.However a more continuing involvement is that achieved through general corporate

finance advice on the structuring of the finances of a company and helping it to raise

medium and long-term finance as well as equity finance through underwriting issues of

debt and equity, a major example of which is 'going public.' This can be highly profitable or

unprofitable if the issue fails and is left with the underwriter.

4.3 The arrangement of finance

As I have mentioned before the most common activity of most merchant banks in Hong

Kong and elsewhere is the arrangement of finance. This is particularly the area, on which

the merchant banks of the multi-national banks have concentrated, none more so than the

subsidiaries of the American merchant banks, the so-called 'Yankee' merchant banks. This

activity fits in well with their parent banks' large balance sheets and ability to lend. What

happens is that the merchant bank obtains the mandate to raise a large loan,

governmental, semi-governmental, or project related, by putting forward to a borrower its

ability of tapping the substantial resources of its parent bank. For such benefits a merchant



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bank is paid a fee which, although small in comparison to the management fee paid to the

managing syndicate, can be large in absolute terms given the size of some of the

transactions involved. Also merchant banks act as lead managers or co-managers in bond

issues, both in local and foreign currencies and, given the enormous appetite of large-

scale projects in the area for funds, arrange for preferential export credits, both buyer and

supplier credits.

4.4 Investment management

The managing of clients' funds has for a long time been a peculiarly suitable area for a

merchant bank's skill, heritage and personal service. The credibility of the largest merchant

banks in this field is considerable since their clients believe that having survived however

many wars and inflationary periods, a merchant bank should be well-suited to protecting

his funds against the vicissitudes of an economically uncertain world and perhaps in

favorable stock market circumstances to increasing the funds. A number of British

merchant banks are managers of very sizeable funds, a few managing on a world-wide

basis more than US$5,000 million, and some over US $3,000 million each. A number of

the British merchant banks as well as some other institutions are active in the investment

management field from Hong Kong, managing international funds on behalf of their parent

companies as well as funds in the South East Asian area and of course in Hong Kong.Although this activity is not nearly as profitable some would say that on its own it is not

profitable since investment management fees do not cover the costs of an investment

division of a merchant bank it provides a steady source of income Nevertheless British

institutions and British merchant banks have long been convinced that the investment of

funds on an international basis is a means of participating in economies which at any one

time show better growth prospects and a useful weapon of combating the weakness of

Sterling, and thereby achieving in Sterling terms, an above-average return. Recently amodest retirement funds industry has developed in Hong Kong.



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Such funds are steady in their contribution rates unlike most funds placed in the care of

merchant banks by individuals or institutions. The unit trust industry too has expanded,

mostly through the realization that Hong Kong is an ideal fund management centre served

extremely well by brokers and situated in the centre of a very significant potential market

for unit trusts and mutual funds. It has been helped, not unnaturally, in its growth by the

excellent performance shown by a number of fund managers operating from Hong Kongover a number of years.

4.5 Loan agreements

While there are no legal or voluntary guidelines that must be followed with loan

agreements, the law has extended its encompassing grasp considerably into this area of

merchant banking. It is the practice of the market place and the relative bargainingstrength of the two parties - the borrower and the group of syndicating banks which

determines the form of the contract that is entered into between the two of them. Contrary

to practice even as little as ten years ago, loan agreements now are lengthy, highly

complicated and peppered with such a large amount of legal jargon that few borrowers,

unless they are skilled and often in the market place, can understand them without legal

assistance. The growth of the legal complexity of loan agreements can be traced quite

clearly to the beginning of multiple syndications. The reason is easy to explain: when a

loan was given by a single bank to a borrower, it was usually in circumstances where the

lender had an intimate knowledge of the borrower, its strengths and its weaknesses and



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had usually done business with it for a considerable length of time. As loan requirements

rose and as the financial assistance which could be offered by a single bank was either

inadequate for the borrower or unduly large for the bank, other banks had to be brought in.

Often these did not have a well-developed knowledge of the borrower and they considered

that, in order to protect themselves, they should restrict the borrower's activities or define

what it could and could not do. In any case the presence of a large number of banks (and

in particular American banks) has meant that simple one or two-page loan agreements are

now no longer sufficient for syndication purposes. The over-complex documentation

adopted nowadays reflects the practice in the Euro-dollar market. Lawyers blame leading

syndicating banks and they in turn blame lenders' lawyers. However if the problem is

looked at objectively there is simply no justification for blaming the lawyers since they only

give the protection they believe the client wants or ought to have. All the same everybody

admits that the protection given in loan agreements to both sides is often highly esoteric.

In the growth of Hong Kong as a syndication centre for international transactions to a

position second only to that of London, the merchant banks have obviously been assisted

by working in a fertile environment with considerable demand

for funds South East Asia. The very fact that syndications have been done from Hong

Kong and have grown at an extremely rapid rate has led to a number of law firms skilled in

loan syndication work to move to Hong Kong. This has benefitted their clients who have on

the whole been the lenders, but indirectly also the borrowers whose local legal advisershave picked up the most modern practices in the field and have used them to protect the

borrower.

While the bulk of syndication work in Hong Kong is done for non-Hong Kong borrowers the

increasing size of projects undertaken in Hong Kong has meant that a number of Hong

Kong borrowers themselves have undertaken or are planning jumbo-sized loans the equal

of those raised for non-Hong Kong borrowers. These loans are a feature of capital

investments of a size hitherto unknown in Hong Kong. More recently there has been muchdiscussion of lending to China. In the context of talking about loan agreements it must be

mentioned how difficult it is likely to be, initially at least, to persuade the Chinese to comply

with some of the 'standard' terms of international loan agreements agreed to by other

sovereign borrowers such as jurisdiction, governing law, cross-default and the more

esoteric interest cost clauses. Only time will tell when the first standard syndicated loan

document involving China is going to see the light of day.



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4.6 Conflicts of interest

It is an axiom that information about clients operating in the same industry should not be

divulged to other clients. Obviously the specialized knowledge gained by a merchant bank

in assisting clients operating in the same industry is in general available to all those clients

and, I suspect, clients are happy to benefit from this specialized knowledge. It makes the

merchant bank that has a number of clients in the same industry that much more of an

'insider' in the traditional rather than stock exchange meaning of that word, and thus it is

likely to be able to provide a solution precisely tailored to that client and the industry in

which it is active. By this means very substantial business can and has been lost, but this

is part of the system by which merchant banks choose to operate.

4.7 Confidentiality of information

Apart from its professional knowledge and skills the most important aspect of a merchant

bank's reputation is its professional ethics. Similarly to other professions the question of

confidentiality is always uppermost in the minds of directors and executives and since

information can be, and very often is, highly price-sensitive, enormous care has to betaken that it is not divulged. To me it is a matter of considerable concern and some

surprise that there are so many leaks of takeovers or rights issues, both of which are

usually highly price-sensitive. Concern because such price movements should not occur

and surprise because they do. If a merchant banker or a director of a company really

wished to use price-sensitive information to his best advantage he should divulge it to no-

one but deal on his own account.

Thus while merchant banks and their clients use code names, lock their files and do notmention the names of transactions to others, even their colleagues, leaks still occur, That

they occur largely involuntarily has been proved in the majority of cases where The Stock

Exchange in London has made enquiries into price movements. The fact that the takeover

code acknowledges that price movements occur which do not originate from insider

dealing, also gives some evidence to my belief that most leaks occur involuntarily.



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4.8 Dealings

One of the more difficult and potentially troublesome aspects of a merchant bank's

activities is the dealing in shares of companies in respect of which it has price-sensitive

information. Such information should of course be kept entirely separate and within the

confines of one or two people only in the corporate finance division. Nevertheless if the

investment division of a merchant bank, entirely without this information or the knowledge

that it exists within the corporate finance division, deals in the shares of a company and

achieves, for itself or for its clients, large profits the suggestion is that this information has

crossed what is called in America 'the Chinese Wall.' It might be considered unfair to stop

the investment division purchasing or selling on information which it has acquired through

the market or research purely because confidential information has also been received by

another part of the house. The individual client or pension fund would certainly feel

aggrieved if his investment adviser was unable to deal under such circumstances. But

dealings on behalf of the house or executives of the house are a different matter. In

summary I believe that good judgment and the almost obsessive desire by the larger firms

to maintain their integrity built up over so many years is still the best determinant of

whether to deal or not.

5. FINDINGS & INTERPRETATION

Organizational structure of an investment bank

5.1 Main activities and units

On behalf of the bank and its clients, the primary function of the bank is buying and selling

products. Banks undertake risk through proprietary trading, done by a special set of

traders who do not interface with clients and through "principal risk", risk undertaken by a

trader after he buys or sells a product to a client and does not hedge his total exposure.

Banks seek to maximize profitability for a given amount of risk on their balance sheet. An

investment bank is split into the so-called front office, middle office, and back office.

http://en.wikipedia.org/wiki/Proprietary_trading

http://en.wikipedia.org/wiki/Front_office

http://en.wikipedia.org/wiki/Middle_office

http://en.wikipedia.org/wiki/Back_office




http://en.wikipedia.org/wiki/Proprietary_trading



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5.1.1 Front office

Investment banking is the traditional aspect of the investment banks which also involves

helping customers raise funds in the capital markets and advise on mergers and

acquisitions. These jobs pay well, so are often extremely competitive and difficult to land.

On a similar note, they are extremely stressful and degrading. Investment banking may

involve subscribing investors to a security issuance, coordinating with bidders, or

negotiating with a merger target. Other terms for the investment banking division include

mergers and acquisitions (M&A) and corporate finance. Industry coverage groups focus on

a specific industry such as healthcare, industrials, or technology, and maintain

relationships with corporations within the industry to bring in business for a bank. Product

coverage groups focus on financial products, such as mergers and acquisitions, leveraged

finance, equity, and high-grade debt.

Investment management is the professional management of various securities (shares,

bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the

benefit of the investors. Investors may be institutions (insurance companies, pension

funds, corporations etc.) or private investors (both directly via investment contracts and

more commonly via collective investment schemes eg. mutual funds). Asset Management

market making, traders will buy and sell financial products with the goal of making an

incremental amount of money on each trade. Sales is the term for the investment banks

sales force, whose primary job is to call on institutional and high-net-worth investors to

suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then

communicate their clients' orders to the appropriate trading desks, who can price and

execute trades, or structure new products that fit a specific need.

Structuring has been a relatively recent division as derivatives have come into play, with

highly technical and numerate employees working on creating complex structured

products which typically offer much greater margins and returns than underlying cash

securities. The necessity for numerical ability has created jobs for physics and math

Ph.D.s who act as quantitative analysts.



http://en.wikipedia.org/wiki/Investment_banks

http://en.wikipedia.org/wiki/Funds

http://en.wikipedia.org/wiki/Capital_markets

http://en.wikipedia.org/wiki/Mergers

http://en.wikipedia.org/wiki/Acquisitions

http://en.wikipedia.org/wiki/Mergers_and_acquisitions

http://en.wikipedia.org/wiki/Corporate_finance

http://en.wikipedia.org/wiki/Investment_management


http://en.wikipedia.org/wiki/Shares

http://en.wikipedia.org/wiki/Bonds

http://en.wikipedia.org/wiki/Real_estate

http://en.wikipedia.org/wiki/Insurance_companies

http://en.wikipedia.org/wiki/Pension_funds


http://en.wikipedia.org/wiki/Corporations

http://en.wikipedia.org/wiki/Private_investors

http://en.wikipedia.org/wiki/Mutual_funds

http://en.wikipedia.org/wiki/Market_maker

http://en.wikipedia.org/wiki/Caveat_emptor

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Ph.D.

http://en.wikipedia.org/wiki/Quantitative_analyst

http://en.wikipedia.org/wiki/Quantitative_analyst

http://en.wikipedia.org/wiki/Ph.D.

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Caveat_emptor

http://en.wikipedia.org/wiki/Market_maker

http://en.wikipedia.org/wiki/Mutual_funds

http://en.wikipedia.org/wiki/Private_investors

http://en.wikipedia.org/wiki/Corporations



http://en.wikipedia.org/wiki/Insurance_companies

http://en.wikipedia.org/wiki/Real_estate

http://en.wikipedia.org/wiki/Bonds

http://en.wikipedia.org/wiki/Shares


http://en.wikipedia.org/wiki/Corporate_finance

http://en.wikipedia.org/wiki/Mergers_and_acquisitions

http://en.wikipedia.org/wiki/Acquisitions

http://en.wikipedia.org/wiki/Mergers

http://en.wikipedia.org/wiki/Capital_markets

http://en.wikipedia.org/wiki/Funds

http://en.wikipedia.org/wiki/Investment_banks




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Merchant banking is a private equity activity of investment banks. Current examples

include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally,

"merchant bank" was the British English term for an investment bank.)

Research is the division which reviews companies and writes reports about their

prospects, often with "buy" or "sell" ratings. While the research division generates no

revenue, its resources are used to assist traders in trading, the sales force in suggesting

ideas to customers, and investment bankers by covering their clients. There is a potential

conflict of interest between the investment bank and its analysis in that published analysis

can affect the profits of the bank. Therefore in recent years the relationship between

investment banking and research has become highly regulated requiring a Chinese wall

between public and private functions.

Strategy is the division which advises external as well as internal clients on the strategies

that can be adopted in various markets. Ranging from derivatives to specific industries,

strategists place companies and industries in a quantitative framework with full

consideration of the macroeconomic scene. This strategy often affects the way the firm will

operate in the market, the direction it would like to take in terms of its proprietary and flow

positions, the suggestions salespersons give to clients, as well as the way structurers

create new products.

5.1.2 Middle office

Risk management involves analyzing the market and credit risk that traders are taking

onto the balance sheet in conducting their daily trades, and setting limits on the amount of

capital that they are able to trade in order to prevent 'bad' trades having a detrimental

effect to a desk overall. Another key Middle Office role is to ensure that the abovementioned economic risks are captured accurately (as per agreement of commercial terms

with the counterparty), correctly (as per standardized booking models in the most

appropriate systems) and on time (typically within 30 minutes of trade execution). In recent

years the risk of errors has become known as "operational risk" and the assurance Middle

Offices provide now includes measures to address this risk. When this assurance is not in

place, market and credit risk analysis can be unreliable and open to deliberate

manipulation.

http://en.wikipedia.org/wiki/Merchant_banking


http://en.wikipedia.org/wiki/Private_equity

http://en.wikipedia.org/wiki/Goldman_Sachs_Capital_Partners

http://en.wikipedia.org/wiki/One_Equity_Partners

http://en.wikipedia.org/wiki/Sell-side_analyst


http://en.wikipedia.org/wiki/Chinese_wall

http://en.wikipedia.org/wiki/Strategy




http://en.wikipedia.org/wiki/Risk_management


http://en.wikipedia.org/wiki/Market_risk

http://en.wikipedia.org/wiki/Credit_risk

http://en.wikipedia.org/wiki/Counterparty

http://en.wikipedia.org/wiki/Operational_risk

http://en.wikipedia.org/wiki/Operational_risk

http://en.wikipedia.org/wiki/Counterparty

http://en.wikipedia.org/wiki/Credit_risk

http://en.wikipedia.org/wiki/Market_risk




http://en.wikipedia.org/wiki/Chinese_wall


http://en.wikipedia.org/wiki/One_Equity_Partners

http://en.wikipedia.org/wiki/Goldman_Sachs_Capital_Partners





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Finance areas are responsible for an investment bank's capital management and risk

monitoring. By tracking and analyzing the capital flows of the firm, the Finance division is

the principal adviser to senior management on essential areas such as controlling the

firm's global risk exposure and the profitability and structure of the firm's various

businesses. In the United States and United Kingdom, a Financial Controller is a senior

position, often reporting to the Chief Financial Officer.

Compliance areas are responsible for an investment bank's daily operations' compliance

with government regulations and internal regulations. Often also considered a back-office

division.

5.1.3 Back office

Operations involve data-checking trades that have been conducted, ensuring that they

are not erroneous, and transacting the required transfers. While some believe that

operations provides the greatest job security and the bleakest career prospects of any

division within an investment bank, many banks have outsourced operations. It is,

however, a critical part of the bank. A finance degree has proved significant in

understanding the depth of the deals and transactions that occur across all the divisions of

the bank.

Technology refers to the information technology department. Every major investment

bank has considerable amounts of in-house software, created by the technology team,

who are also responsible for technical support. Technology has changed considerably in

the last few years as more sales and trading desks are using electronic trading. Some

trades are initiated by complex algorithms for hedging purposes.

http://en.wikipedia.org/wiki/Finance


http://en.wikipedia.org/wiki/Comptroller

http://en.wikipedia.org/wiki/Compliance_(regulation)




http://en.wikipedia.org/wiki/Information_technology

http://en.wikipedia.org/wiki/Software

http://en.wikipedia.org/wiki/Technical_support

http://en.wikipedia.org/wiki/Electronic_trading

http://en.wikipedia.org/wiki/Algorithms

http://en.wikipedia.org/wiki/Hedge_(finance)

http://en.wikipedia.org/wiki/Hedge_(finance)

http://en.wikipedia.org/wiki/Algorithms

http://en.wikipedia.org/wiki/Electronic_trading

http://en.wikipedia.org/wiki/Technical_support

http://en.wikipedia.org/wiki/Software

http://en.wikipedia.org/wiki/Information_technology



http://en.wikipedia.org/wiki/Comptroller




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5.1.4 Vertical integration

In the U.S., the Glass-Steagall Act, initially created in the wake of the Stock Market Crash

of 1929, prohibited banks from both accepting deposits and underwriting securities which

led to segregation of investment banks from commercial banks. Glass-Steagall was

effectively repealed for many large financial institutions by the Gramm-Leach-Bliley Act in

1999.

Another development in recent years has been the vertical integration of debt

securitization. Previously, investment banks had assisted lenders in raising more lending

funds and having the ability to offer longer term fixed interest rates by converting the

lenders' outstanding loans into bonds. For example, a mortgage lender would make a

house loan, and then use the investment bank to sell bonds to fund the debt, the money

from the sale of the bonds can be used to make new loans, while the lender accepts loan

payments and passes the payments on to the bondholders. This process is called

securitization. However, lenders have begun to securitize loans themselves, especially in

the areas of mortgage loans. Securitized house loans may have exacerbated the subprime

mortgage crisis beginning in 2007, by making risky loans less apparent to investors.

6. RECOMMENDATION

6.1 Significant recommendations of the study:

Regulation requiring all issues to be managed and certified by a Merchant Banker could be

relaxed in case of rights offerings.

The set of issues, which are placed through a public offering, will include all high and low

quality issues, will be placed through a rights offering.

For the set of issues, which are placed through a public offering, further screening can be

achieved by making underwriting optional.

For the screening mechanism in the preceding recommendation to be effective, the

current 90% subscription rule should be strengthened.

SEBI's objectives of improving disclosure of private information and investor protection can

be achieved.

http://en.wikipedia.org/wiki/Glass-Steagall_Act

http://en.wikipedia.org/wiki/Wall_Street_Crash_1929


http://en.wikipedia.org/wiki/Commercial_bank

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

http://en.wikipedia.org/wiki/Vertical_integration

http://en.wikipedia.org/w/index.php?title=Debt_securitization&action=edit&redlink=1


http://en.wikipedia.org/wiki/Subprime_mortgage_crisis






http://en.wikipedia.org/wiki/Vertical_integration

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

http://en.wikipedia.org/wiki/Commercial_bank



http://en.wikipedia.org/wiki/Glass-Steagall_Act



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6.2 FUTURE DEVELOPMENTS

The larger merchant banks, now in the fourth quarter o the second century of their

existence, obviously feel that they will have a continuing role to play. They have come far

and are unlikely to stop here. I suspect that in an age where personal service is less

frequent and the concept of universal shopping more prevalent though not necessarily with

the agreement or at the wish of the customer an institution developing its relationships with

a relatively small number of clients on a highly professional and individual basis will

continue to be sought after. The merchant banks' importance in raising funds for their

clients may be diminishing but their advisory role relating to raising funds is increasing.

Merchant banks, similar to Hong Kong entrepreneurs, are highly flexible and even the

larger ones move often quickly into new areas which they believe will be profitable.

Lastly there is a certain mystique and prestige which attaches to their trade and these

attributes are now also marketed by the retail banks, to the ultimate benefit of both types of

institutions.

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.

http://en.wikipedia.org/wiki/Bank



http://en.wikipedia.org/wiki/Bank



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Conclusion of the study:

A new competition has started among Merchant Banking outfits in approving higher and

higher premium to attract the business. In many cases their pricing emphasis is one

qualitative actors like promoters experience, marketing network, brand name and export

potential and performance.

Finally, it has been concluded that, there is no uniform pricing methodology and no Lead

Manager is following the same methodology for all the issues handled.

Merchant banking has been a very lucrative-and risky-endeavor for the small number of

bank holding companies and banks that have engaged in it under existing law. Recent

legislation has expanded the merchant-banking activity that is permissible to commercial

banks and is therefore likely to spur interest in this lucrative specialty on the part of a

greater number of such institutions. Although for much of the past half-century commercial

banks have been permitted (subject to certain restrictions) to engage in merchant-banking

activities, the term merchant banking itself is undefined in U.S. banking and securities laws

and its exact meaning is not always clearly understood.

7. LIMITATIONS OF THE RESEARCH

No industry can run without any flaws. Same is the case with Merchant banking. Following

are some of the limitations of Merchant Banking:

Sometimes, they may face the problem of sufficient capital to deal in securities which

stops them from getting proper returns.

Lack of proper skilled labour.

Problem in managing right kind of Merger & Acquisition.

Choosing the right kind of Capital Mix.

Giving proper knowledge to its clients about future strategies.



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8. BIBLIOGRAPHY

Swizz Bank Institute Report

Investment Banking-I (ICFAI Journal)

Investment Banking: Past and Present

Merchant banking and financial services

www.guardian.co.uk

Banking City Business Series

http://www.guardian.co.uk/



manish sinha_merchant banking dissertation

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