ORIGIN OF MERCHANT BANKING ORIGIN OF MERCHANT BANKING (EVOLUTION(EVOLUTION))

In banking a merchant bank is a traditional term for an In banking a merchant bank is a traditional term for an investment bank. The so called merchant banks, were in fact investment bank. The so called merchant banks, were in fact the original ‘banks’.the original ‘banks’.

These were invented in the middle ages by Italian grain These were invented in the middle ages by Italian grain merchants.merchants.

Merchant bankers were individuals or banking houses whose Merchant bankers were individuals or banking houses whose major objective was to provide capital for commodity traders, major objective was to provide capital for commodity traders, cargo owners, and buying, selling and shipping of goods. They cargo owners, and buying, selling and shipping of goods. They carried out their lending operations from a bench, which in carried out their lending operations from a bench, which in Italian term was known as ‘banco’. Thus the merchant banking Italian term was known as ‘banco’. Thus the merchant banking came into existence. Later on, the centre of merchant banking came into existence. Later on, the centre of merchant banking operations was shifted from Italy to Amsterdam and thereafter operations was shifted from Italy to Amsterdam and thereafter to London.to London.

INTRODUCTIONINTRODUCTIONSection 2(e) of SEBI Act, 1992 defines Section 2(e) of SEBI Act, 1992 defines merchant banker as ‘any person who is merchant banker as ‘any person who is engaged in the business of issue management engaged in the business of issue management either by making arrangements regarding either by making arrangements regarding selling, buying, or subscribing to securities as selling, buying, or subscribing to securities as manager, consultant, adviser or rendering manager, consultant, adviser or rendering corporate advisory service in relation to such corporate advisory service in relation to such issue management’.issue management’.

Merchant Banks - ConceptMerchant Banks - Concept There is no statutory or any authoritative definition for the There is no statutory or any authoritative definition for the

term Merchant Banking. For many, it just means term Merchant Banking. For many, it just means management of capital issues of companies. Some confuse management of capital issues of companies. Some confuse this with investment banking and an issue house. Yet this with investment banking and an issue house. Yet another group of persons mean it to what a merchant banker another group of persons mean it to what a merchant banker does. In this situation, let us try to settle for a workable does. In this situation, let us try to settle for a workable definition of this term. definition of this term.

Merchant banking…Merchant banking… is the financial intermediation that is the financial intermediation that matches the entities that need capital and those that have matches the entities that need capital and those that have capital. It is a function that facilitates the low of capital in capital. It is a function that facilitates the low of capital in the market. the market.

CharacteristicsCharacteristicsA merchant bank should contain the following eleven A merchant bank should contain the following eleven

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

Banking and Finance - OverviewBanking and Finance - Overview

Financial Services

Commercial Bank

Investment Services

InsuranceAdvisory Services

• Asset Management

• Hedge Fund Managers

• Custody services

• Private banking

• Investment Banks

• Bank cards

• Credit card machine services and networks

• Insurance Brokerage

• Insurance Underwriting

• Reinsurance

• Stock brokers (private client services) and discount brokers

MERCHANT BANKING Vs COMMERCIAL BANKINGMERCHANT BANKING Vs COMMERCIAL BANKINGCommercial banking and merchant banking both involve Commercial banking and merchant banking both involve

the provision of financial services and advice. Merchant the provision of financial services and advice. Merchant banking, however, often focuses on investing a banking, however, often focuses on investing a depositor’s assets in a depositor’s assets in a finance portfoliofinance portfolio and managing and managing these investments. Merchant banks are commonly called these investments. Merchant banks are commonly called investment banksinvestment banks in the United States. Apart from in the United States. Apart from investing and managing the assets of wealthy clients, investing and managing the assets of wealthy clients, merchant banks also offer counsel and advice to large merchant banks also offer counsel and advice to large corporationscorporations

Commercial banking is also sometimes defined as the Commercial banking is also sometimes defined as the provision of banking services such as checking and loans provision of banking services such as checking and loans to large businesses, as distinguished from individual to large businesses, as distinguished from individual citizens. In this case, banking provided to individuals is citizens. In this case, banking provided to individuals is referred to as retail bankingreferred to as retail banking

Merchant Banking Vs Investment BankingMerchant Banking Vs Investment Banking

There is a thin difference between these twoThere is a thin difference between these two An investment banker does the followingAn investment banker does the following

Selling issues of securities of companiesSelling issues of securities of companies Underwriting functionsUnderwriting functions Helps in mergers and acquisitionsHelps in mergers and acquisitions Investment advisesInvestment advises Finding buyers for private placementFinding buyers for private placement Dealing in securitiesDealing in securities

Hence, similarities between MB and IB. Generally, Hence, similarities between MB and IB. Generally, investment advises and dealing in securities are not investment advises and dealing in securities are not performed by MBperformed by MB

Merchant Banking in IndiaMerchant Banking in India

Grindlays Banks-1967Grindlays Banks-1967 Management of capital issueManagement of capital issue Production planning, system design to market researchProduction planning, system design to market research Management consultancyManagement consultancy

Citibank-1970Citibank-1970

SBI-1972SBI-1972

SEBI Merchant Banking RegulationsSEBI Merchant Banking Regulations

CategorizationCategorization Category I to act as lead manager and carry on any activity Category I to act as lead manager and carry on any activity

of the issue management, including preparation of of the issue management, including preparation of prospectus and other information relating to the issue, prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final determining financial structure, tie up of financiers and final allotment and refund and refund of the subscription and to allotment and refund and refund of the subscription and to act as a adviser ,consultant, manager, underwriter, portfolio act as a adviser ,consultant, manager, underwriter, portfolio managermanager

Category II : to act as adviser ,consultant, co-manager, Category II : to act as adviser ,consultant, co-manager, underwriter, portfolio managerunderwriter, portfolio manager

Category III : to act as underwriter , adviser and consultant Category III : to act as underwriter , adviser and consultant to an issueto an issue

Category IV : to act only as advisor or consultant to an issueCategory IV : to act only as advisor or consultant to an issue

Ranking of Merchant Banking in IndiaRanking of Merchant Banking in India::

Merchant BankerMerchant Banker OEOE FSSFSS QPSQPS QMQM INNINN

ICICI  SecuritiesICICI  Securities 4.04.0 4.04.0 4.24.2 3.83.8 4.34.3

IDBIIDBI 4.24.2 3.23.2 4.54.5 4.04.0 4.84.8

SBI CapsSBI Caps 4.4.4.4. 3.93.9 4.6.4.6. 6.76.7 5.25.2

DPSDPS 6.16.1 5.75.7 6.06.0 6.06.0 5.35.3

IFCIIFCI 6.16.1 5.75.7 6.06.0 6.06.0 6.36.3

Bank of BarodaBank of Baroda 6.76.7 6.56.5 6.76.7 6.66.6 6.86.8

Jardine FlemingJardine Fleming 5.85.8 6.26.2 5.95.9 5.05.0 5.55.5

JM FinanceJM Finance 6.06.0 6.56.5 5.55.5 5.95.9 5.45.4

ENAMENAM 6.36.3 6.86.8 6.46.4 6.36.3 6.26.2

PNB CapsPNB Caps 6.86.8 6.86.8 6.76.7 6.86.8 6.86.8

Note: OE: Overall Excellence; FSS: Financial Soundness ; QPS: Quality Product/Service; QM: Quality Management; INN: Innovativeness.

Capital Adequacy RequirementCapital Adequacy Requirement SEBI has prescribed the following net worth SEBI has prescribed the following net worth

requirements for merchant bankers. The total paid requirements for merchant bankers. The total paid up capital and free reserves is considered as net up capital and free reserves is considered as net worthworth

Category Category Minimum Amount of Net WorthMinimum Amount of Net Worth

I I Rs 5,00,00,000Rs 5,00,00,000

IIII Rs 5,00,000Rs 5,00,000

IIIIII Rs 20,00,000Rs 20,00,000

IV Rs NilIV Rs Nil

REGULATORY FRAMEWORKREGULATORY FRAMEWORK The merchant banking activity in India is governed by SEBI (Merchant Bankers) The merchant banking activity in India is governed by SEBI (Merchant Bankers)

Regulations, 1992. Registration with SEBI is mandatory to carry out the business of Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:merchant banking in India. An applicant should comply with the following norms:

i) The applicant should be a corporate body.i) The applicant should be a corporate body.

ii) The applicant should not carry on any business other than those connected with ii) The applicant should not carry on any business other than those connected with the securities market.the securities market.

iii) The applicant should have necessary infrastructure like office space, equipment, iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc.manpower, etc.

iv) The applicant must have at least two employees with prior experience in iv) The applicant must have at least two employees with prior experience in merchant banking.merchant banking.

v) Any associate company, group company, subsidiary or interconnected company v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker.of the applicant should not have been a registered merchant banker.

vi) The applicant should not have been involved in any securities scam or proved vi) The applicant should not have been involved in any securities scam or proved guilt for any offence.guilt for any offence.

vii) The applicant should have a minimum net worth Rs50 million.vii) The applicant should have a minimum net worth Rs50 million.

FAQFAQ Q. Is it mandatory for a merchant banker to register with Q. Is it mandatory for a merchant banker to register with

the SEBI?the SEBI? Q. Who is eligible to obtain registration as a merchant Q. Who is eligible to obtain registration as a merchant

banker? banker? AA Q. What are the various categories for which registration Q. What are the various categories for which registration

can be obtained? Q. What is the capital requirement for can be obtained? Q. What is the capital requirement for carrying on activity as merchant banker? carrying on activity as merchant banker?

Q. What is the procedure for getting registration? Q. What is the procedure for getting registration? Q. What is the registration fee payable to SEBI? Q. What is the registration fee payable to SEBI? Q. What is the validity period of certificate of registration?Q. What is the validity period of certificate of registration? Q. How to renew the certificate? Q. How to renew the certificate? Q. What is the renewal fee payable to SEBI? Q. What is the renewal fee payable to SEBI? Q. What is the consequence of non-registration or failure Q. What is the consequence of non-registration or failure

to renew registration? to renew registration?

Services of merchant bankersServices of merchant bankers

The services provided by merchant bankers The services provided by merchant bankers includes management of mutual funds, public includes management of mutual funds, public issues, trusts, securities and international issues, trusts, securities and international funds. It involves dealing with the corporate funds. It involves dealing with the corporate clients and advising them on various issues clients and advising them on various issues like- mergers, acquisitions, public issues, etc.like- mergers, acquisitions, public issues, etc.

Functions of merchant bankers include: Functions of merchant bankers include: i) Management of debt and equity offerings. This forms the main function i) Management of debt and equity offerings. This forms the main function

of the merchant banker. He assists the companies in raising funds from of the merchant banker. He assists the companies in raising funds from the market. The undergoing tasks include instrument designing, pricing the market. The undergoing tasks include instrument designing, pricing the issue, registration of the offer document, underwriting support, the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund and listing on stock marketing of the issue, allotment and refund and listing on stock exchanges.exchanges.

ii) Placement and Distribution. The merchant banker helps in distributing ii) Placement and Distribution. The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual funds, various securities like equity shares, debt instruments, mutual funds, insurance products, and commercial paper, to name a few. The insurance products, and commercial paper, to name a few. The distribution network of the merchant banker can be classified as distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds pension mutual funds, foreign institutional investors, private equity funds pension funds, financial institutions, etc.funds, financial institutions, etc.

iii) Corporate advisory services. Merchant bankers offer customized iii) Corporate advisory services. Merchant bankers offer customized solutions to their clients' financial problems. Financial structuring solutions to their clients' financial problems. Financial structuring includes determining the right debt-equity ratio and the framing of includes determining the right debt-equity ratio and the framing of appropriate capital structure theory.appropriate capital structure theory.

iv) Project advisory services. Merchant bankers help their clients in iv) Project advisory services. Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist various stages of the project undertaken by the clients. They assist them in conceptualizing the project idea in the initial stage. Once the them in conceptualizing the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the idea is formed, they conduct feasibility studies to examine the viability of the proposed project.viability of the proposed project.

v) Loan Syndication. Merchant bankers arrange to tie up loans for v) Loan Syndication. Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the client's cash flows, based on which the terms of the the pattern of the client's cash flows, based on which the terms of the borrowings can be defined. Then the merchant banker prepares a borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending on the basis syndicate. The banks then negotiate the terms of lending on the basis of which the final allocation is done.of which the final allocation is done.

vi) Providing venture capital financing. Merchant bankers help vi) Providing venture capital financing. Merchant bankers help companies in obtaining venture capital financing for financing their companies in obtaining venture capital financing for financing their new and innovative strategies new and innovative strategies

Scope of merchant banking in IndiaScope of merchant banking in India

Merchant banking activities help in channelizing the Merchant banking activities help in channelizing the financial surplus of the general public into productive financial surplus of the general public into productive investment avenues. They help to coordinate the activities investment avenues. They help to coordinate the activities of various intermediaries to the share issue such as the of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, registrar, bankers, advertising agency, printers, underwriters, brokers, etc. and to ensure the compliance underwriters, brokers, etc. and to ensure the compliance with rules and regulations governing the securities market. with rules and regulations governing the securities market. This being the era where mergers and acquisitions are hot, This being the era where mergers and acquisitions are hot, the scope of merchant banking has grown to a large extent.the scope of merchant banking has grown to a large extent.

OUTLOOK MONEY NEWSOUTLOOK MONEY NEWS Best Merchant BankerWinner SBI Capital MarketsBest Merchant BankerWinner SBI Capital Markets The The

investment banking subsidiary of State Bank of India, SBI investment banking subsidiary of State Bank of India, SBI Caps is an old player in the capital market, going back to the Caps is an old player in the capital market, going back to the pre-liberalisation days of 1986. Starting off with merchant pre-liberalisation days of 1986. Starting off with merchant banking and project appraisals, it soon expanded its range of banking and project appraisals, it soon expanded its range of activities. It got a boost in 1997 when Asian Development activities. It got a boost in 1997 when Asian Development Bank acquired a 13.8 per cent stake. SBI Caps offers services Bank acquired a 13.8 per cent stake. SBI Caps offers services in the broad areas of mergers and acquisitions, project in the broad areas of mergers and acquisitions, project advisory, structural finance, and capital markets. In M&A, for advisory, structural finance, and capital markets. In M&A, for instance, it offers advice on privatisation, business valuation, instance, it offers advice on privatisation, business valuation, and restructuring. In the capital markets, it handles public and and restructuring. In the capital markets, it handles public and rights offers, private placements and buybacks, while ‘project rights offers, private placements and buybacks, while ‘project advisory’ involves handling core sectors such as power and advisory’ involves handling core sectors such as power and telecom. It has also been exploring new avenues like telecom. It has also been exploring new avenues like securitisation. securitisation.

We evaluated SBI Caps purely on the performance of its merchant We evaluated SBI Caps purely on the performance of its merchant banking division, restricted to the public offerings it handled between banking division, restricted to the public offerings it handled between July 2003 and June 2004. SBI Caps has not disgraced its lineage, July 2003 and June 2004. SBI Caps has not disgraced its lineage, beating the likes of ICICI Securities and Kotak Mahindra to the top beating the likes of ICICI Securities and Kotak Mahindra to the top spot.Merchant banks were ranked on parameters like number and spot.Merchant banks were ranked on parameters like number and quality of issues handled, and post-IPO returns to investors. Another quality of issues handled, and post-IPO returns to investors. Another factor was the number of IPOs whose stock prices dipped below offer factor was the number of IPOs whose stock prices dipped below offer price vis-a-vis the number of IPOs the merchant bank handled: the price vis-a-vis the number of IPOs the merchant bank handled: the lesser this percentage, the higher the score. lesser this percentage, the higher the score.

Runner-up Kotak Mahindra CapitalRunner-up Kotak Mahindra CapitalIt may have lost out to SBI It may have lost out to SBI Caps in the awards stakes but it’s not without reason that Kotak Caps in the awards stakes but it’s not without reason that Kotak Mahindra Capital had the mandate to manage 13 equity issues Mahindra Capital had the mandate to manage 13 equity issues (against SBI Caps’ 8) in the year to 30 June 2004–among them (against SBI Caps’ 8) in the year to 30 June 2004–among them several high-profile ones too, such as the ONGC, Biocon, and Infosys several high-profile ones too, such as the ONGC, Biocon, and Infosys ADR offerings. It garnered Rs 19,643 crore from 20 issues between ADR offerings. It garnered Rs 19,643 crore from 20 issues between July 2001 and June 2004, which is a measure of its pedigree. July 2001 and June 2004, which is a measure of its pedigree. However, one of the critical counts on which Kotak lost out to SBI However, one of the critical counts on which Kotak lost out to SBI Caps was the average post-listing returns from the issues it had Caps was the average post-listing returns from the issues it had managed.  managed.  

CANARA BANKCANARA BANK Canara Bank is also one of the leading Merchant Bankers in India, offering Canara Bank is also one of the leading Merchant Bankers in India, offering

specialised services to Banks, PSUs, State owned Corporations, Local Statutory specialised services to Banks, PSUs, State owned Corporations, Local Statutory bodies and corporate sector.bodies and corporate sector.

We are SEBI registered Category I Merchant Banker / Underwriter to carry on Issue We are SEBI registered Category I Merchant Banker / Underwriter to carry on Issue Management (Public / Rights / Private Placement Issues), Underwriting, Management (Public / Rights / Private Placement Issues), Underwriting, Consultancy and Corporate Advisory Services etc. Consultancy and Corporate Advisory Services etc.

We also hold SEBI registration Certificate to act as "Bankers to an Issue" with We also hold SEBI registration Certificate to act as "Bankers to an Issue" with network of exclusive Capital Market Service Branches to handle "Capital Market" network of exclusive Capital Market Service Branches to handle "Capital Market" related assignments. related assignments.

We undertake "project appraisals" with resource raising plans from Capital Market/ We undertake "project appraisals" with resource raising plans from Capital Market/ Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Investors. Investors.

Our uniqueness is extending services under single window concept covering the Our uniqueness is extending services under single window concept covering the following areas: following areas:

Merchant BankingMerchant Banking

As leading Merchant Bankers in India, we have associated with issues As leading Merchant Bankers in India, we have associated with issues ranging from Rs.1 crore to Rs.1500 crores, involving various types of ranging from Rs.1 crore to Rs.1500 crores, involving various types of industries, banks, statutory Bodies etc. and have an edge in handling industries, banks, statutory Bodies etc. and have an edge in handling Private Placement issues – both retail & HNIs. Private Placement issues – both retail & HNIs.

SPECTRUM OF SERVICES : SPECTRUM OF SERVICES :

Equity Issue (Public/Rights) ManagementEquity Issue (Public/Rights) Management

Debt Issue ManagementDebt Issue Management

Private PlacementsPrivate Placements

Project AppraisalsProject Appraisals

Monitoring Agency AssignmentsMonitoring Agency Assignments

IPO FundingIPO Funding

Security Trustee ServicesSecurity Trustee Services

Agriculture Consultancy ServicesAgriculture Consultancy Services

Corporate Advisory ServicesCorporate Advisory Services

Mergers and AcquisitionsMergers and Acquisitions Buy Back AssignmentsBuy Back Assignments

Share ValuationsShare Valuations

ISSUE MANAGEMENT SERVICES : ISSUE MANAGEMENT SERVICES :

Project AppraisalProject Appraisal Capital structuringCapital structuring

Preparation of offer documentPreparation of offer document Formalities with SEBI / Stock Formalities with SEBI / Stock Exchange / ROC etc.,Exchange / ROC etc.,

UnderwritingUnderwriting Promotion /Marketing of IssuesPromotion /Marketing of Issues

Collecting Banker / Banker to an issueCollecting Banker / Banker to an issue Post Issue Post Issue ManagementManagement

Refund BankersRefund Bankers Handling of Dividend Warrant/Interest Warrant Handling of Dividend Warrant/Interest Warrant PaymentsPayments

Debenture TrusteeshipDebenture Trusteeship