Merchant Banking New

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Project

On

Merchant Banking in India

Submitted By

Swati Dornala

Roll no. 04

PGDM-Banking & Finance

Academic year: - 2011-2013

Guided By,

Prof. Priyanka Chatta

Mahatma education society

Pillais Institute Of Management Studies And Research

New Panvel


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DECLARATION

I Swathi Dornala, a student of PGDM (BFM) declare that the work done on the project entitled

Merchant Banking in India is original. Any references used in this report have been duly

acknowledged.

The study of the project is thereby the copyright of the author. This report shall not be published

without the prior permission of the author.

To the best of my knowledge and being the subject matter presented here is original and has not be

submitted to any other authority or university till date.

Mrs. Priyanka Chatta Swati Dornala


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ACKNOWLEDGEMT

The most pleasant part of my project is to express gratitude and bestow honor towards all those who

directly or in directly contributed to the smooth flow of the project work and this being the good

opportunity, I dont want to miss it.

I am grateful to the All India Council for Technical Education to have introduced the project on

curriculum. Sincere acknowledgement are due foremost to Pillais Institute of Management Studies

and Research, which endowed me with the valuable opportunity to explore so interesting and a

critical topic as in the subject of the present report.

I am thankful to the Director of Pillais Institute of Management Studies and Research Dr.

Vijayragavan for giving me an opportunity to do this project and invaluable encouragement.

I would like to thank Prof. Priyanka Chatta, my project guide, who gave her valuable time and

helped me to complete the project.

Last and not the least, thanks to the library and computer lab staff of Pillais Institute of Management

Studies and Research, for timely available of internet facility and books, which have been an

important input into completion of this project.

Swathi Dornala

PGDM-BFM


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EXECUTIVE SUMMARY


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CHAPTER 1

INTRODUCTION TO THE STUDY

Financial services are an important component of financial system. The smooth functioning of

financial system depends upon the range of financial Services extended by the providers. Financial

services in India have witnessed remarkable changes in the recent past after the implementation

ofLiberalization, privatization and globalization.

Funds are tapped from the capital market to finance various mega industrial projects. In attracting

public savings, merchant Bankers play vital role as specialized agencies. The resources raising

functions remain to be 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 compet itive

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.

They only assist. They also actively arrange working capital, appraisal Projects scrutinize &persuade merger proposals.

In BRITAIN Merchant bankers & investment bankers are synonymous.

I n t h e U . S Merchant bank means as investment bank which is well-equipped to

handle multinational corporations.

In INDIA

A merchant banker is a body corporate who carries on any activity of the issue management,

which consists 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.


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DEFINITION:

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 beused to describe the private equity activities of banking.

According to Cox, D. Merchant banking is defined as, merchant banks are the financial institutions

providing specialist services which generally include the acceptance of bills of exchange, corporate

finance, portfolio and management and other banking services.

The Notification of the Ministry of Finance defines a merchant banker as, any person who is

engaged in the business of issue management Either by making arrangements regarding selling,

buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory

service in relation to such issue management.

In short merchant bankers assist in raising capital and advice on related issues.
http://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equity


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History and Origin of merchant banking in India:

ORIGIN

Origin of merchant banking in India National Grind lays bank in India initiated merchant banking

services in1969. The Citibank followed it in 9170. The state bank of India was the first Indian

commercial bank to set up a separate merchant banking division in 1973. ICICI followed it in 1974.

Both these Indian merchant bankers emerged as leader in merchant banking having done significant

business during the period 1974-85 in comparison to foreign banks. A number of commercial bank

financial institution and other organization are now engaged in providing merchant banking services.

The merchant banks in Indian operate as issue houses rather than full-fledged merchant banks.

MERCHANT BANKING HISTORY


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In late 17th and early 18th century Europe, the largest companies of the world were merchantadventurers Supported by wealthy groups of people and a network of overseas trading posts,

the collected large amounts of money to finance trade across parts of the world. For example,

The East India Trading Company secured a Royal Warrant from England, providing the firm

with official rights to lucrative trading activities in India. This company was the forerunner in

developing the crown jewel of the English Empire. The English colony was started by what

we would today call merchant bankers, because of the firm's involvement in financing,

negotiating, and implementing trade transactions

The colonies of other European countries were started in the same manner. For example, theDutch merchant adventurers were active in what is now Indonesia; the French and

Portuguese acted similarly in their respective colonies. The American colonies also represent

the product of merchant banking, as evidenced by the activities of the famous Hudson Bay

Company. One does not typically look at these countries' economic development as having

been fueled by merchant bank adventurers. However, the colonies and their progress stem

from the business of merchant banks, according to today's accepted sense of the word.

The colonies of other European countries were started in the same manner. For example, theDutch merchant adventurers were active in what is now Indonesia; the French and

Portuguese acted similarly in their respective colonies. The American colonies also represent

the product of merchant banking, as evidenced by the activities of the famous Hudson Bay

Company. One does not typically look at these countries' economic development as having

been fueled by merchant bank adventurers. However, the colonies and their progress stem

from the business of merchant banks, according to today's accepted sense of the word.

Merchant Banking in IndiaPost Independence:

In 1967, RBI issued its first merchant banking license to grind lays started with management of

capital issues, production planning, system design and also market research. It also provides


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management consulting service as well Citibank setup its merchant banking division in 1970. Its

scope includes assisting new entrepreneur, evaluating new projects, raising new funds through

borrowing and issuing equity. Indian banks started banking services as a part of multiple services

they offered to clients from 1972. State Bank of India started the merchant banking division in 1972.

In the initial year the objective was to render corporate advice and assistance to small and medium

entrepreneurs. Merchant Banking activities are organized and undertaken in several forms.

Commercial banks and foreign development finance institutions have organized them through

formation of division; nationalized banks have formed subsidiaries companies and share brokers and

consultancies themselves into public ltd co. or registered themselves as private ltd. Companies.

Some of them have equity stake of foreign merchant bankers.

Merchant Bank

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


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go and open a savings or checking account. A merchant bank is sometimes said to be a wholesale

bank, or in business of wholesale banking. This is because merchant bank tend to deal primarily with

other merchant banks and other large financial institutions.

The most familiar role of merchant bank is stock underwriting.

The large company that whishes to raise money from investor 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 and the timing of the release of this new stock. The merchant bank files all the

paper work required with the various market authorities and is also frequently responsible for

marketing the new stock, through this may be a joint effort with the company and managed by the

merchant bank. For really large stock offering, several merchant banks may together, with on being

the lead underwriter.

By limiting the 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 large banks have both a retail division and a merchant bank division. The divisions aregenerally 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 divisions made in a merchant

bank, most people reading this article are unlikely ever visit or deal directly with a merchant bank.

Merchant banks operate behind the scenes and away from the spotlight.

Importance and need of merchant banking in India

Important reasons for the growth of merchant banks has been development activities throughout the

country, exerting excess demand on the sources of fund for ever expanding industries and trade, thus


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leaving a widening gap unabridged between the supply and demand of invisible funds. All financial

institutions had experienced constrain of resources to meet ever increasing demands for demands for

funds frame corporate sector enterprises. In such circumstances corporate sector had the only

alternative to avail of the capital market service for meeting their long term financial requirement

through capital issue of equity shares and debentures. Growing demand for funds put pressure on

capital market that enthused commercial banks, share brokers and financial consultancy firms to

enter into the field of merchant banking and share the growing capital market. As a result all the

commercial banks in nationalized and public sector as well as in private sector including foreign

banks in India have opened their merchant banking windows and competing in this field.

Need of Merchant banking

Need for merchant banking is felt in the wake of huge public saving lying untapped. Merchant

banker can play highly significant role in mobilizing funds of savers to invisible channels assuring

promising returns on investment and thus can assist in meeting the widening demand for invisible

funds for economic activity. With growth of merchant banking profession corporate enterprises in

both private sectors would be able to raise required amount of funds annually from the capital

market to meet the growing requirement for funds for establishing new enterprises, undertaking

expansion, modernization and diversification of the existing enterprises. This reinforces the need for

a vigorous role to be played by merchant banking.

In view of multitude of enactment, rules and regulation, gridlines and offshoot press release

instructions brought out the government from time to time imposing statutory obligations upon the

corporate sector to comply with those entire requirement prescribed there in the need of a skilled

agency existed which could provide counseling in these matters in a package form. A merchant

banker with their skills updated information and knowledge provide this service to the corporate

units and advice them on such requirement to be complied with for raising funds from the capital

market under different enactment viz. companies act, income tax act, foreign exchange regulation

act, securities contracts corporate laws and regulations. Merchant bank advice the investors of the

incentives available in the form of tax relief, other statutory relaxation, good return on investment

and capital appreciation in such investment to motivate them to invest their savings securities of the

corporate sector. Thus merchant banks help industries and trade to rise and the investors to invest
http://www.mbaknol.com/tag/indian-financial-system/http://www.mbaknol.com/tag/indian-financial-system/http://www.mbaknol.com/business-finance/introduction-to-merchant-banking/http://www.mbaknol.com/business-finance/introduction-to-merchant-banking/http://www.mbaknol.com/tag/indian-financial-system/http://www.mbaknol.com/tag/indian-financial-system/


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their saved money in sound and healthy concern with confidence, safety and expectation for higher

yields. Finance is the backbone of business activities. Merchant banker make available finance for

business enterprises acting as intermediaries between them raising demand for funds and the

supplies of funds besides rendering various other services

The following are some of the reasons why specialist merchant bank have a crucial role to play in

India.

Growing complexity in rules and procedures of the government. Growing industrialization and increase of technologically advanced industries. Need for encouragement of small and medium industrialists, who require specialist services. Need to develop backward areas and states which require different criteria. Exploring the possibility of joint ventures abroad and foreign market. Promoting the role of new issue market in mobilizing saving from.

Merchant banks function as an independent wing or as subsidiary of various private/central

governments/ state government financial institution. Most of the financial institution in India

is in public sector and therefore such setup plays a role on the lines of governmental priorities

and policies.

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 suggests

ways and means to solve it. The nature of merchant banking services is development oriented and


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promotional to help the industry and trade to grow and survive. Merchant banker is , therefore,

dedicated to achieve this objective through his dynamism. He is always awake to renew his

skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to

deal with emerging new problems of corporate business world. He has to keep pace with

the changing environment where government rules, regulations and politics affecting

business conditions frequently change; where science and technology create new innovations in

production processes of industries envisaging immediate renovations, diversifications,

modernizations or replacements of existing plant and machinery or other equipments putting new

demands for finances and necessitating overhauling of the capital structure of the firms.

Merchant has to think and devise new instruments of financing industrial projects. He has to assume

wider responsibility 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. He has to guide the wider section of the community possessing surplus money to invest in

corporate securities and other productive investment channels. He has to help the industry in

different forms to ensure that it runs risk free and devoid of uncertainty by assisting the promoters

with his knowledge and skills to resolve the problems being faced by them. He has to watch the

interest and win over the confidence of the government, its agencies, along with the entrepreneurs,

the investors and the whole community. He must bridge the communication gap between different

sections and resolve the problem being faced in different areas concerned with the business

world. To discharge the above role, a merchant banker has to be dynamic.

In the days ahead, merchant bankers have very significant role to play tuning their activities to the

requirements of the growth pattern of the corporate sector, the industry and the economy as a whole

which is, init, 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

Organizational setup of merchant bankers in India

In India a common organizational setup of merchant bankers to operate is in the form of divisions of

Indian and foreign banks and financial institutions. Subsidiary companies established by bankers like

SEBI, Canara Bank, Punjab National Bank, Bank of India etc. some firms are also organized by


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financial and technical consultants and professionals. Securities and Exchange Board of India has

divided the merchant bankers into four categories based on their capital adequacy. Each category is

authorized to perform certain functions. From the point of organizational setup Indias merchant

banking organizations can be categorized into four groups on the basis of their linkage with parent

activity. They are:

(A)Institutional base

Where merchant banks function as an independent wing or as subsidiary of various private/ Central

Governments / State Governments financial institutions. Most of the financial institutions in India

are in public sector and therefore such setup plays a role on the lines of government priorities and

policies.

(B)Bankers Base

These merchant bankers functions as division/ subsidiary of banking organization. The parent banks

are either national ized commercial bank or the foreign banks operating in India. These

organizations have brought professionalism in merchant banking sector and they help their parent

organization to make a presence in capital market.

(C) Broker BaseIn the recent past there has been an inflow of qualified and professionally skilled brokers

in various stock exchanges of India. These brokers undertake merchant banking related operations

also providing investment and portfolio management services.

(C)Private BaseThese merchant banking firms are originated in private sector. These organizations are the outcome

of opportunities and scope in merchant banking business and they are providing skill-oriented

specialized services to their clients. Some foreign merchant bankers are also entering either

independently or through some coloration with their Indian counterparts. Private sector merchant


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banking firms have come up either as the sole proprietorship or public limited companies. Many of

these firms were inexistence for quite some times before they added a new activity in the form of

merchant banking services by opening new divisions on the lines of commercial banks and All India

Financial Institutions.

Main objectives of merchant banking

Merchant bankers render their specialized assistance in achieving the main objectives which are

presented below:


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1. To carry on the business of merchant banking, assist in the capital formation, manage advice,underwrite, provide standby assistance, securities and all kinds of investments issued to be

issued or guaranteed by any company, corporation, society, firm, trust person, government,

municipality, civil body, public authority established in India

2. The main objective of merchant banker is to create secondary market for bills and discount orre-discount bills and acts as an acceptance house

3. Merchants bankers another objective is to set up and provide services for venture capitaltechnology fund.

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


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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.

The areas of great scope could be,

Growth of primary market:

If the primary market grows and number of issues increases, the scope of merchant banking will be

enhanced

Entry of foreign Investors:

Now India capital marketdirectly taps foreigncapital through euro issues.FDI is increase in capitalmarket. So merchant bankers are required to advice them for their investment in India. The

increasing number of joint ventures also requires expert services of Merchant bankers. If more and

more NRIs participate in capital market there will be great demand for merchant banker services.

Changing policy of Financial Institutions:

Now the leading policies of financial institutions are based on project orientation, so the merchant

banker services will be needed by corporate enterprise to provide expert guidance.

Development of debt market:

If the debt market is enhanced, there will be tremendous scope for merchant bankers. Now NSE and

OTCEI are planned to raise their funds through debt instruments.

Corporate restructuring:

Due to liberalization and globalization companies are facing lot of competition. In order to compete,

they have to go for restructuring, merger, acquisitions or disinvestments. They may offer good

opportunities to merchant bankers.

SIGNIFICANCE OF THE STUDY

It would help us to develop the ability to study the functioning of Merchant Banking in India &learn & apply multi disciplinary concepts, tools & techniques to solve vital problems.


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It familiarizes with the various services provided by Merchant Bankers. They would help us to draw comparison between public & private sector companies engaged in

Merchant Banking activities. Based upon the comparison, it would help us to determine which

sector has more growth potential &where should one invest his/her funds to maximize the

return at minimum risk.

Nature of merchant banking

Merchant banking is skill based activities and involves serving every financial need of every client.

It requires focused skill-base to provide for the requirements of the client. SEBI has made the quality


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of man-power as one of the criteria for registration as merchant banker. These skills should not be

concentrated in issue management and underwriting alone, which may have an adverse impact on

business. Merchant bankers can turn to any of the activities mentioned above depending upon

resources, such as capital, foreign tie-ups for overseas activities and skills. The depth and

sophistication in merchant banking business are improving since the avenues for participating in

capital market activities have widened from issue management and underwriting to private

placement, bought out deals (BODS), buy-back of shares, merges and takeovers.

The services of merchant bank cover project counseling, pre investment activities, feasibility studies,

project reports, design of capital structure, issue management, underwriting, loan syndication,

mobilization of funds from Non-Resident Indians, foreign currency finance, mergers, amalgamation,

takeover, venture capital, buy back and public deposits. A Category-1 merchant banker canundertake issue management only. Separate registration is not necessary to carry on the activity as

underwriter.

Characteristics of Merchant Banking

High proportion of decision makers as a percentage of total staff.


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Quick decision process. High density of information. Intense contact with the environment. Loose organizational structure. Concentration of short and medium term engagements. Emphasis on fee and commission income. Innovative instead of repetitive operations. Sophisticated services on a national and international level. Low rate of profit distribution. High liquidity ratio.

Qualities of a Merchant Banker:

Ability to analyse

Abundant knowledge

Ability to built up relationship Innovative approach Integrity

Functions of Merchant Banks


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Promotional Activities - Merchant Banks helps the entrepreneur in conceiving an idea,

identification of projects, preparing feasibility reports, obtaining Government approvals and

incentives etc. Issue Management - Management of issues refers to effective marketing of corporate

securities viz., equity shares, preference shares and debentures or bonds by offering them to public.

Merchant banks act as intermediary whose main job is to transfer capital from those who own it to

those who need it.

Credit Syndication - Credit Syndication refers to obtaining of loans from single development

finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise

syndicated loans from commercials bank.

Project Counseling - It includes preparation of projects reports, deciding upon the financing pattern,

appraising the project relating to its technical, commercial and financial viability. It includes filling

up of application forms for obtaining funds from financial institution.

Issue Management - Management of issues refers to effective marketing of corporate securities

viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant

banks act as intermediary whose main job is to transfer capital from those who own it to those who

need it.

Portfolio Management - It refers to the effective management of Securities i.e., the merchant

banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are

taken into account while advising on investment in different securities. The merchant banker also

undertakes the function of buying and selling of securities on behalf of their client companies.

Investments are done in such a way that it ensures maximum returns and minimum risk.

Leasing and Finance - Many merchant bankers provide leasing and finance facilities. Some of them

even maintain venture capital funds to assist the entrepreneurs. They also help companies in raising

finance by way of public deposits.

Servicing Issues - Merchant Bankers helps in Servicing the shareholders and debenture holders in

distributing dividends, debenture interest.


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Other Specialized Services - Merchant Banks also provide corporate advisory services on issues

like mergers and amalgamations, tax matters, recruitment of executives and cost and management

audit etc.

Merchant Banking Functions

Corporate project Capital Portfolio

Counseling Counseling Structuring Management

Issue Credit working capital Venture lease Fixed

Management Syndication Bill discounting Capital Finance Deposit

Accepting Credit


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The growth of Merchant banking in India

A formal Merchant activity in India was originated in 1969 with the Merchant banking division

setup by the Grind lays bank, the largest foreign bank in the country. The main service offered at that

time to the corporate enterprises by the merchant banks included the management of public issuesand some aspects of financial consultancy. Following Grind lays Bank, Citibank set up its merchant

banking division in 1970. The division took up the task of assisting new entrepreneurs and the

existing units in the evaluation of new projects and raising funds through borrowing and equity

issues. Management consultancy services were also offered. Merchant bankers are permitted to carry

on activities of primary dealers in government securities. Consequent to the recommendations of

Banking Commission in 1972, that Indian bank should offer merchant banking services as part of the

multiple services they could provide their clients, state Bank of India started the Merchant Banking

Division in 1972. In the initial years the SBIs objective was to render corporate advice and

assistance to small and medium entrepreneurs.

The commercial bank that followed State Bank of India were Central Bank of India, Bank of India

syndicate Bank in 1977. Bank of Baroda , standard Chartered Bank and Mercantile Bank in 1978

and united Bank of India, United Commercial Bank , Punjab National Bank, Canara Bank and Indian

oversea Bank in late 70s and early s 80s. Among development banks, ICICI started merchant

banking activities in 1973 followed by IFCI (1986) and (IDBI) 1991).


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Developments inMerchant bankingEstablishments in India

Settingup of banksSubsidiaries:

In order to meet the growing demand for broad-based financial services from the corporate sector more

effectively, the merchant banking division of the nationalize banks have stated forming

independent subsidiaries. These subsidiaries offer more specialized services with proffec inal

expertise & skills. SBI capital market ltd. was incorporated as the first such subsidiary of sbi on 2 July,

1986. Then CAN BANK financial services ltd was setup as wholly owned subsidiary of canara bank in

1987. PNB Capital Market was promoted by PNB during Mid 1988.Many more subsidiaries are

being setup by another nationalize banks.

Reorganization of private Firms:

Expecting tough Competition from growing number of merchant banking subsidiary of nationalized

Banks, private merchant bankers have also started reorganizing their activities e.g., J.M financial &

Investment consultancy ltd., 20thcentury finance corporation ltd., LKP merchant financing ltd are

some of the private sector firms of merchant bankers who have taken steps to reorganize their activities.

Establishment of SUA:

In order to educate and protect the interest of investor , to provide information about new issues ofcapital market, to evolve a code of conduct for under writers & to render legal &other services to

members & public, the STOCK BROKERUNDER WRITERASSOCIATION (SUA) was establishedin 1984


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Discount& FinanceHouse of India (DFHI)

DFHI was incorporated as a company under the companyact1956with an authorized& paid up capital

of rs 100cr ore. Out of these rs 51cr ores has been contributed by RBI, rs 16crores but financial

institutions & 33 crores by public sector banks. IT would also have line of credit from publicsector banks; refinance facility from the RBI In order to meet the working capital requirement. DFHI

aims at providing liquidity in money market as it deals mainly in commercial bills.

Credit Rating Information Services of India Ltd. (CRISL)

CRISIL has been set up in 1987 to provide help to investors, merchant bankers, underwriters,

brokers, banks & financial institutions etc. CRISIL rates various types of instruments such as debt,

equity & fixed return security offered to the public. It help the investor in taking investment

decisions.

Stock -HoldingCorporation of India Ltd. (SHC)SHC was set up in 1986 by the all Indians financial institutions to take care of safe custody, delivery

of shares & collection of sale proceeds of the securities. The setting up of SHC is bound to affect the

capital market in future.


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Registration of merchant bankers in India

Registration with SEBI is mandatory to carry out the business on merchant banking in India. An

applicant should comply with the following norms:

The applicant should be a body corporate 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, manpoweretc.

The applicant must have a least two employees with prior experience in merchant bankingAny associate company not have been a registered merchant banker

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

SEBI HAS DIVIDED MERCHANT BANKERS IN FOUR CATEGORIES, WHICH

ARE AS FOLLOWS:

CATEGORIES ACTIVITIES NETWORTH

Category I To carry on the activities of issue management

& act as advisor, consultant, manager,

underwriter, portfolio management

RS 1 Crore

Category II To act as advisor, consultant, co-manager, RS 50 lakh


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underwriter, portfolio management

Category III To act as advisor, underwriter or consultant to

an issue

RS 20 lakh

Category IV To act only as advisor & consultant to an issue Nil

Procedure for getting registration:

An application shouldbe submittedtoSEBIinForm aof theSEBI (Merchant Bankers) regulation,1992. SEBI shall consider the application and on being satisfied, issues a certificate of registration in

form B of the SEBI (Merchant Bankers) Regulations, 1992.

Leading merchant banker in India

In public sector: SBI Capital Market Ltd., Merchant Banking Divisions of IDBI & IFCI, PNB

Capital Services Ltd, Bank of Maharashtra.

In private sector: ABN, AMRO, ICICI Bank, Axis Bank Ltd, Kotak Mahindra Capital co., Bajaj

Capital, Reliance securities Ltd, Yes Bank Ltd, Tata Capital Market, JM financial co. DCM financial

services Ltd etc.

Foreign players: GoldmanSACH (India) Security Pvt. Ltd., Morgan, Stanley Indian co. Pvt Ltd.,Barclays security Indian Pvt Ltd, Bank of America, Deutsche Bank, Citi Group Global Market

Indian Pvt Ltd., Fordex security ltd


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ROLE IN INDIA

The merchantbanker are those financial intermediaryinvolvedwith the activityof transferringcapitalf unds tothoseborrowerswhoareinterestedinborrowing. The activitiesof the merchantbankinginIndia areveryvast innature of whichincludes the following

FINANCING

Private Placements

PIPE financing

Late stage venture

financing

M&A financing

SPIN OUTS

create a new

company or mergeinto an established

Entity

Newco financing for

pharma and biotect

Potential scope

of merchant

Banking Client

Relationship

STRATEGIC PARTNERING

Early stage Research to

product Development and

commercialization

Out- license, co-

development, co-promotion

Preclinical through marketed

products

Representing pharma and

biotect

M&A TRANSACTIONS

Transactions Across life

sciences for public and

private clients

Sellside

Buy- side

Divestitures

Reverse mergers


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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 The managementof the interest and dividend etc

THE FACTORS ON WHICH GROWTH OF MERCHNANT BANKING

DEPENDS:

Planning and industrial policy of the country i.e. India in this case Prevailing Economic condition of the country. Regulatory system of the market and economy prevailing in India Confidence of the people, traders, buyers, marketers, business houses, financial institutions

etc.

The economic environment of the outside world. Competition among the existing and the upcoming entrants.


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Problems of merchant banking

Restriction of merchant banking activities:

SEBI guidelines have authorized merchant bankers to undertake issue related activities and made

them restrict their activities or think of separating these activities from present one and float new

subsidiary and enlarge the scope of its activities.

Minimum net worth of Rs. 1crore:

SEBI guidelines stipulate that a minimum net worth of Rs 1 crore for authorization of merchant

bankers.

Non co-operation of issuing companies:

Non co-operation of issuing companies in timely allotment of securities and refund of application

money is another problem faced by merchant bankers.

Merchant bankers commission:

Maximum: - 0.5% Project appraisal fees Lead Manager: -

- 0.5% up to Rs.25 crores

- 0.2% more in excess of Rs.25 crores

Underwriting fees


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Brokerage commission: - 1.5% Other expenses:-

Advertising Printing Registrars expenses Stamp duty

In spite of problems popping up, merchant banking in India has vast scope to develop because of lot

of domestic as well as foreign businesses booming here. Indian economy provides an amicable

environment for these firms to set up, flourish and expand here.

Difference between Commercial Banking & Merchant Banking:

COMMERCIAL BANKING

Deals with Equity & Equity related finance. Management oriented Willing to accept risks.

Different between Investment Banking & Merchant Banking:

INVESTMENT BANKING:

Both fee-based and fund based Commit their own funds

MERCHANT BANKING:

Purely fee -based Impossible to stay aloof from international trends


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GUIDELINES FOR MERCHANT BANKERS

SEBIs authorization is a must to act as merchant bankers. Authorization criteria include

Professional qualification in finance, law or business management Infrastructure like office space,

equipment and man power Capital adequacy Past track of record, experience, general reputation and

fairness in all transactions Every merchant banker should maintain copies of balance sheet, Profit

and loss account, statement of financial position Half-yearly unaudited result should be submitted to

SEBI Merchant bankers are prohibited from buying securities based on the unpublished price

sensitive information of their clients

SEBI has been vested with the power to suspend or cancel the authorization in case of violation of

the guidelines Every merchant banker shall appoint a Compliance Officer to monitor compliance

of the Act SEBI has the right to send inspecting authority to inspect books of accounts, records etc

of merchant bankers Inspections will be conducted by SEBI to ensure that provisions of the

regulations are properly complied An initial authorization fee, an annual fee and renewal fee may be

collected by SEBI A lead manager holding a certificate under category I shall accept a minimum

underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less.


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CODE OF CONDUCT

Should make all efforts to protect the interest of investors Should maintain high standards ofintegrity, dignity and fairness in conduct of business Should fulfill all obligations in a

professional and ethical manner Should not discriminate among the clients Should ensure

that prospectus, letter of offer etc.. is available to investors at the time of issue Should render

best possible advice to its clients Any penal action taken by SEBI should be informed to its

clients

Should inform the board about any legal proceedings initiated against it Should abide by therules of Securities and Exchange Board of India Regulations,2003 Shall develop its owninternal code of conduct for governing its internal operations Should ensure that any person it

employs should have the capacity to be a merchant banker It is responsible for the act of its

employees and agents Should not create false market


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CONCLUSION

The Merchant business has increased over a short period of time and with continued economic

reforms. However, a stiff competition exists in this line and survival will depend upon the financial

skills and spectrum

of financial services and instruments offered by the Merchant Banker. Hence, Merchant Banking

Service is taking shape for turbulent times. Merchant banking is an activity initially undertaken by a

few large commercial banks in India, and it is now being adopted or undertaken by a few large

commercial banks in India, and it is now being adopted or undertaken

by practically every commercial bank through its Merchant Banking Department. The range of activi

ties covered under merchant banking very wide indeed. The merchant banks

offer a package of financial services. Unlike in the past, their activities are now primarily non-fund

based. Therefore, they donot require much capital. One of the basic requirements of merchant

banking is a highly professional staff and

worldwidecontacts. Merchant banking is usually international incharacter

Merchant Banking New

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