final merchant banking

8/7/2019 final merchant banking

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INTRODUCTION

Financial services are an important component offinancial 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

ofLiberalization,privatization andglobalization.

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

resources 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 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.

Projects scrutinize & persuade merger proposals.They only assist. They also actively

arrange working capital, appraisal. 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


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business of wholesale banking. This is because merchant banks tend to deal primarily with

other merchant banks and other large financial institutions.

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

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 arrangementsregarding

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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Merchant banking in India

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.Merchant banks are

private financial institution. 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, raising 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 bankingdivision in 1972. In the initial years the objective was to rendercorporate adviceand

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.


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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 inthis field.

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.

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


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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 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 reliefs, 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.

Role of Merchant Banker

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

services. Merchant bankers 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. He has to assume wider responsibilities

of saving industrial units from going sick and guiding

industries to be setup in industrially backward areas to

eliminate regional imbalances in industrial

development of the country. 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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Main Objectives Of Merchant Bankers

Merchant bankers render their specialized assistance in achieving the main objectives

which are presented below:

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.

The main object of merchant banker is to create secondary market for bills anddiscount or re-discount bills and acts as an

acceptance house.

Merchant bankers another objective is to setup and provide services for the venture capital

technology funds.

They also provide services to the financehousing schemes for the construction of houses and

buying of land.

They will invest in buying and selling oftransfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and

properties of any other company.

They render the services like foreign exchange dealer, money exchange, andauthorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with

the relevant laws of India.

Obligations and Responsibilities


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Merchant bankers have the following obligations and responsibilities.

Merchant banker should maintain proper books of accounts, records and submit halfyearly/annual financial statements to the SEBI within stipulated period of time. No merchant banker should associate with another merchant banker who is notregistered in SEBI.

Merchant bankers should not enter into anytransactions on the basis of unpublished information

available to them in the course of their professional

assignment.

Every merchant banker who acts as leadmanager must enter into an agreement with the

issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular

reference to disclosures allotment, refund etc.

Every merchant banker must disclose information to the SEBI when it requires anyinformation from them.

All merchant bankers must abide by the code of conduct prescribed for them. Every merchant banker must submit himself to the inspection by SEBI when requiredfor and submit all the records.

SERVICES PROVIDED BY MERCHANT BANKS


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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 Issue Management Underwriting Bankers Portfolio Management Venture Capital Financing Leasing Acceptance Credit And Bill Discounting

Lets take a brief look at each of these functions:

Corporate Counseling


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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 scope of

corporate counseling is limited to suggestions and opinions leaving to the client to take

corrective actions for solving its corporate problems.

Project CounselingProject counseling is an important merchant banking service which includes 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.

LeasingIs 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.

Issue Management and Underwriting


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Management of capital issues is a professional service rendered by the skilled and

experienced merchant bankers. Previously, the managing

agents for a particular corporate used to manage public

issues. The abolition of the managing agency system, the

growth in the public limited companies in number and size,

the imposition of new rules and regulations regarding the

public issue of securities made it necessary for merchant

bankers to play a definite role in the management of public

issues.

Public issue management involves marketing of corporate securities by offering the

securities to the public, procuring private subscription to the securities and offering

securities to existing shareholders of the company.

As a manager to the public issue, the merchant banker, before the public issue has to

obtain the consent of the stock exchanges to the memorandum and articles of association,

appoint other managers, bankers, underwriters, brokers etc. ,advice the company to appoint

auditors, solicitors and board of directors, draft the prospectus and obtain consent from the

companies legal advisors, board of directors and other concerned parties, file the

prospectus with registrar, make an application for enlistment with stock exchanges and

finally advertise for the issue.

Under writing of public issueUnderwriting 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:


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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.

Bankers to the IssueThe 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 toaccept application forms from the public together

with subscription money and transfer them to the

account of the controlling branch.

Portfolio ManagementPortfolio 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.

Merchant bankers take up management of a portfolio of securities on behalf of theirclients, providing special services with a view to ensure maximum return by such


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investments with a minimum risk of loss of return on the money invested in

securities.

Portfolio management refers to managing efficiently the investment in the securitiesheld by professionals to others.

Venture Capital Financing

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.

Acceptance Credit and Bill Discounting

Though merchant bankers world over specialize in acceptance credit and bill discounting,

these services are not currently provided by merchant bankers in India the principal

reasoning being the lack of an active market for commercial bills.


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Qualities of merchant bankers:-

To be a successful merchant banker, following qualities are necessary:

Knowledge: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.

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. 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.

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.

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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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.

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.

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 marketfreedom, merchant bankers work has increased many folds.

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 IPOs, placement of debentures, etc.

Indian scenario is favorable to merchant bankers.

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 bankers role is only statutory as in issue management. India inc.

apparently prefers and is happy with merchant bankers work.

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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PUNJAB NATIONAL BANK

Indias one of the Leading Nationalized Bank established in 1895, serving over 3.5crore

customers through 4520 branches and 439 extension counters is the largest amongst

Nationalized Banks. The Bank has recently been ranked 21st among top 500 companies

and 9th among top 50 brands by the Economic Times. All the Branches of the Bank have

been computerized. The Bank has a concept of "Any Time, Any Where Banking" through

the introduction of Centralized Banking Solution (CBS) and over 2511 offices have already

been brought under its ambit.

The Bank is registered with SEBI as Category I Merchant Banker for providing all the

major Merchant Banking services. Our gamut of Merchant Banking services includes:

Issue Management Services to act as Book Running Lead Manager/Lead Managerfor the IPOs /FPOs/Right issues/Debt issues

Project appraisal Corporate Advisory Services Underwriting of equity issues Banker to the Issue/Paying Banker

Refund Banker Monitoring Agency Debenture Trustee


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Marketing of the issue through a strong network ofQIBs/HNIEs/Corporates andRetail investor. The Bank itself is one of the major investor in the market having a

treasury of 45000 crores.

The Bank has an exclusive and specialized Capital Market Service Branch at New Delhi for

providing Merchant Banking Services to the Corporate

Their Software for handling the Refund Banker is one of the best systems in the industry. Its

unique features provides online payment of the instrument by our 2470 branches in 733

centers, online status of paid instruments, 100% reconciliation at any point of time etc.

Conclusion

The merchant banker plays a vital role in channelising 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 its going to get emerged in the Indian economy. Hence,

Merchant Banking can be considered as essential financial body in Indian financial system.

final merchant banking

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