MERCHANT BANKING

CHAPTER 1 – INTRODUCTION & HISTORY

1.1 INTRODUCTION

The term Merchant Banking has its origin in the trading methods of countries

in the late eighteenth and early nineteenth century when trade-taking place was

financed by bill of exchange drawn by merchanting houses. At that time the

merchants were merely financing their own activities. As international trade

grew and other lesser-known names wanted to import goods from abroad, the

established merchants ‘lent their names’ to the newcomers by agreeing to

accept bills of exchange on their behalf. The acceptance houses would charge

a commission for this service and thus there grew up the business of accepting

bills of finance trade not merely of themselves, but of others. Acceptance

business thus became and to a degree always has been hallmark of true

Merchant Banks.

The second historical of Merchant Banks was the raising of capital for foreign

Government. In many cases, the Merchant Banks have been trading in the

countries concerned and gained the confidence of Governments and other

authorities in those countries. Thus the second principal ingredient of

Merchant Banking became and still is raising of capital through the issue of

stocks and bonds. Therefore, Merchant Banks can be accepting houses or

issuing houses or both. Merchant Banking started in the beginning of 20th

century in UK and USA. More recently, the services offered by Merchant

Banks have entered into the other areas of operations. Their role is wide

ranging and they can now provide most of the financial services required by a

company, touching almost all aspects of establishing and running of industrial

units on sound financial footing.

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MERCHANT BANKING

Dictionary meaning of ‘merchant bank’ refers to an organization that

underwrites corporate securities and advises such clients on issues like

corporate mergers, etc. involved in the ownership of commercial ventures. This

organization may be a bank, corporate body, firm or proprietary concern.

1.2 HISTORY OF MERCHANT BANKING

During the seventeenth and most of the eighteenth century international

finance was centered on Amsterdam. Consequently Amsterdam merchants

became the first masters of the various financial techniques and developments

which, in the course of time, became identified with the emergent profession of

‘Merchant Bankers’.

Commercial Banking and Investment Banking are often confused with

Merchant Banking. In many ways, there may be similarities in their functions.

However, in certain ways, Merchant Banking is distinctly different from

commercial Banking and Investment Banking.

The primary function of a commercial bank is to receive deposits from the

public and lend the same to others. Commercial Banks can undertake some of

the merchant banking activities like Issue Management whereas Merchant

Banking Units can not undertake commercial banking activities. However, the

functions of Merchant Banking may not widely vary from Investment Banking.

The Merchant Banker mainly deals with Issue Management, post issue

services, corporate adviser services etc. the Investment Banker undertaken

trading in securities, Investment advises and Bought out deals which are not

the main activities of Merchant Bankers.

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MERCHANT BANKING

In todays Scenario the Merchant banker and management consultants

undertake advisory services to the corporate sector. The Merchant Banker

advices corporation and firms relating to opening of issues, receiving loans etc,

which the management consultants also do. The management consultant have a

wide area operations like production, Marketing, Personnel Relations, of

finance etc. but they lack statutory recognition to undertake capital market

related activities which has enabled the merchant banker to cater to the needs

of the Corporate Sector.

A merchant bank may be considered as an institution which centres its

operation on all or most of the following activities.

(1) corporate financial advice, on such diverse matters as new share and bond

issues, capital reconstructions, mergers and acquisitions;

(2) The taking of deposits and currency, money market operations including

foreign exchange dealing;

(3) Medium-term lending and syndication of loans;

(4) Acceptance credits and all forms of export finance;

(5) The holding and dealing in quoted and unquoted investment; and

(6) Fund management on behalf of clients, most typically pension funds, unit

trust, investment trusts and wealthy individuals.

1.3 DEFINITION

The first authoritative definition for the term ‘Merchant Banker’ has been

given in the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly,

“A Merchant Banker means any person who is engaged in the business of

Issue Management either by making arrangements regarding selling, buying

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MERCHANT BANKING

or subscribing to Securities as Manager, Consultant, Adviser of rendering

Corporate Advisory Service in relation to such Issue Management”.

Sec/5 (b) of the Banking Regulation Act,1949 defines Banking as “accepting,

for the purpose of lending or investment of deposits of money from the public,

repayable on demand or otherwise and withdrawable by cheque, draft, order

or otherwise”.

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 the securities as

manager, consult, adviser or rendering corporate advisory service in relation

to such issue management”.

1.4 EVOLUTION & EMERGENCE OF MERCHANT BANKING

India has entered the 21st century as one of the Asia’s most dynamic

economies. This is the part of the assessment made by International Financial

and Capital Market Institutions based on India’s economic and financial

reforms initiated in 1991 and brought to fruition in various budget.

The progress of any economy mainly depends on the efficient financial system

of the country. Indian economy is no exception financial system of the

country. The importance of the financial sector reforms affirms an effective

means for solving the problems of economic, financial and social in India and

elsewhere in the developing nations of the world. The progress of the

Securities Industry of any country depends mainly on the flow of funds. In

fact, capital generation is the lifeblood of the capital market without which the

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MERCHANT BANKING

health and soundness of the financial system cannot be geared and for which

well-developed capital market as well as money market is essential.

India’s capital market is among the largest in the developing world. The

market is comprised of 24 stock exchanges transacting long-term debt;

debentures and equity shares both electronic and physical forms. Derivatives

financial instruments are also be added to the market shortly. The number of

firms listed on the Indian Stock Exchange is more than the USA. Market

Capitalisation of listed firms is 1980s was similar to Brazil, Malaysia,

Singapore and Denmark.

The capital market of the country, however, underwent dramatic changes since

the beginning of 1980s basically because of a progressive realization that the

command economy on which the emphasis was placed could not lead to higher

levels of economic development and that a slant towards a market-oriented

economy is necessary.

It is in the context of fast expanding economy and a liberalized and deregulated

atmosphere that the growth of the Indian Stock Market activities has to be

viewed. No wonder that the markets have registered a quantum jump judge by

any standards.

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MERCHANT BANKING

CHAPTER 2 – MERCHANT BANKING IN INDIA

2.1 MERCHANT BANKING IN INDIA

In India prior to the enactment of Indian Companies Act, 1956,managing

agents acted as issue houses for securities, evaluated project reports, planned

capital structure and to some extent provided venture capital for new firms.

Few share broking firms also functioned as merchant bankers.

The need for specialized merchant banking services was felt in India with the

rapid growth in the number and size of the issues made in the primary market.

The merchant banking services were started by foreign banks, namely the

National Grindlays Bank in 1967 and the City Bank in 1970. The Banking

Commission in its report in 1972 recommended the setting up of merchant

banking institutions. This marked the beginning of specialized merchant

banking in India.

To begin with, merchant banking services were offered along with other

traditional banking services. In the mid-Eighties, the Banking Regulation Act

was amended permitting commercial banks to offer a wide range of financial

services through the subsidy rule. The State Bank of India was the first

India Bank to set up merchant Banking division in 1972. Later ICICI set up

its Merchant Banking division followed by Bank of India, Bank of Baroda,

Canada Bank, Punjab National Bank and UCO Bank. The merchant banking

gained prominence during 1983-84 due to new issue boom.

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MERCHANT BANKING

2.2 MERCHANT BANKING: PAST AND PRESENT

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

economies of scope produced when private equity investing is added to other

bank services, particularly commercial lending. As lenders to small and

medium-sized companies, banks become knowledgeable about individual

firms’ products and prospects and consequently are natural providers of direct

private equity investment to these firms. As mentioned above, commercial

banks were the largest providers of venture capital in the 1960s. In the middle

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

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

the LDC (less-developed-country) debt crisis, many banks received private

equity from developing nations in return for their defaulted loans. At that time,

many of these banks set up merchant banking subsidiaries to try to get some

value from this private equity.

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

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

already profitable companies) and, rather than providing seed capital, financed

expansion or changes in capital structure and ownership. Most particularly,

they took equity positions in LBOs, takeovers, or recapitalizations or provided

subordinated debt in the form of bridge loans to facilitate the transaction. Often

they did both. Commercial banks financed much of the LBO activity of the

1980s.Then, in the mid-1990s, major commercial banks began once again

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

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

capital investments have been spectacularly successful. For example, the

Internet search engine Lycos was a 1998 investment of Chase Manhattan’s

venture-capital arm. Commercial banks are permitted to report either realized

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MERCHANT BANKING

or unrealized gains on their merchant-banking portfolios, as long as they are

consistent in the reporting. This option makes it difficult for one to compare

different entities’ financial results and could lead to an overly liberal reporting

of profits.

2.3 NEED & IMPORTANCE IN INDIA

Important reason for the growth of merchant banking is due to exerting

excess demand on the sources of funds forever expanding industry and

trade.

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

consultancy firms to enter into the field of merchant banking and share the

growing capital market.

In India have opened their merchant banking windows and are competing in

this field, and also doing advisory functions as merchant bankers as well as

managing public issues in syndication with other merchant bankers.

Merchant banks can play highly significant role in mobilizing funds of

savers to investible channels assuring promising return on investments.

activity.

With the growth of merchant banking profession corporate enterprises in

both public and private, sectors would be able to meet the growing

requirements for the funds for establishing new enterprises, undertaking

expansion/modernization/diversification of the existing enterprises.

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MERCHANT BANKING

Merchant banks have been procuring impressive support from capital

market for the corporate sector for financing their projects.

In view of multitude of enactments, rules and regulations, guidelines and

offshoot press release instructions brought out by the Government from

time to time imposing statutory obligations upon the corporate sector to

comply with all those requirements prescribed therein, the need of skilled

agency existed which could provide counseling.

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.

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 organizations for higher yields.

2.4 ROLE OF MERCHANT BANKERS

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

merchant banking services. Merchant banker’s dynamism lies in promptly

attending to the corporate problems and suggests ways and means to solve it.

The nature of merchant banking services is development oriented and

promotional to help the industry and trade to grow and survive. Merchant

banker is, therefore, dedicated to achieve this objective through his dynamism.

He is always awake to renew his skills, develop expertise in new areas so as to

equip himself with the knowledge and techniques to deal with emerging new

problems of corporate business world. He has to keep pace with the changing

environment where Government rules, regulations and policies affecting

business conditions frequently change; where science and technology create

new innovations in production processes of industries envisaging immediate

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MERCHANT BANKING

renovations, diversification, modernizations or replacements of existing plant

and machinery or other equipments putting new demands for finances and

necessitating overhauling of the capital structure of the firms.

Merchant banker has to think and devise new instruments of financing

industrial projects. He has to assume wider responsibilities of saving industrial

units from going sick and guiding industries to be set up 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 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 t be dynamic. For this

reason, a merchant banker is sometimes, called M.B i.e. Moving Bottom, i.e.,

one who never sits at one place, always moving- attending meetings and

meeting clients and constituents, doing business and getting business by

attending meetings and conferences, imparting knowledge to others and

acquiring new knowledge to maintain his supremacy in possession of latest

information. His role depicts a personality cult, which is unique and envious to

be followed by others.

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

their activities to the requirements of the growth pattern of corporate sector, the

industry and the economy as a whole, which is, in it, a challenging task and to

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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.

2.5 ROLE IN THE MARKET

The Securities and Exchange Board of India (SEBI) has stated that merchant

bankers must be involved more closely in the market making process as share

brokers do not have the requisite expertise to evaluate the fundamentals of the

scrips before taking over the role of market makers. Further, share brokers

generally being partnership; firms do not have the financial clout which is

necessary for market making activity. Resultantly, the SEBI has suggested that

any member of the stock exchange along with one merchant banker registered

with SEBI could act as a market maker.

The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate

greater movement, which could only be achieved through the institution of

market makers. Market makers would also create a market for the scrips by

offering two way quotes to the investors. A minimum of ten scrips has been

proposed by SEBI for the market makers.

2.6 MERCHANT BANKERS COMMISSION

As determined by the Finance Ministry, Government of India, Merchant

Bankers are eligible to charge commission / fee from their clients as detailed

below :

(i) A Merchant Banker can charge 0.5% as the maximum as commission for

whole of the issue.

(ii) They can charge project appraisal fees.

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MERCHANT BANKING

(iii) A lead manager can claim a commission of 0.5% up to Rs.25 crore and

0.2% in excess of Rs.25 crore.

(iv) Underwriting Commission.

Type of Security

On amount

Devolving on

underwriters

On amount

subscribed by

public

1.Equity shares

2.Preference

share/debentures

(a) Upto Rs. 5 lakh

(b) Excess of Rs. 5

lakh

2.50

2.50

2.00

2.50

1.50

1.00

(v) Brokerage commission 1.5%.

(vi) Other expenses like advertising, printing, Registrar’s expenses, stamp

duty etc., in connection with the issue can be reimbursed from its clients.

2.7 COMMERCIAL BANKS AND MERCHANT BANKS

There are differences in approach, attitude, and areas of operations between commercial banks and merchant banks. The differences between merchant banks and commercial banks are summarized below:

COMMERCIAL BANKS MERCHANT BANKS

Basically deal in debt related

finance and their activities are

appropriately arrayed around credit

Basically they deal with mainly

funds raised through money market

and capital market and the area of

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MERCHANT BANKING

proposals, credit appraisal and loan

sanctions.

Are asset oriented and their lending

decisions are based on detailed

credit analysis of loan proposals

and the value of security offered

against loans. They generally avoid

risks.

They are merely financiers.

activity is ‘equity and equity related

finance’.

Are management oriented. They

generally are willing to accept risks

of business.

There activities include project

counseling, corporate counseling in

areas of capital restructuring,

amalgamations, mergers, takeovers

etc., discounting and rediscounting

of short term paper in money

markets, managing, underwriting

and supporting public issues and

new issue market and acting as

brokers and advisers on portfolio

management in stock exchange. This

activities have impact on growth,

stability and liquidity of money

markets.

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MERCHANT BANKING

2.8 GROWTH OF MERCHANT BANKING IN INDIA

Formal merchant banking activity in India was originated in 1969 with

Merchant Banking Division set up by the Grindlays Bank, the largest foreign

bank in the country. The main service offered at that time to the corporate

enterprises by the merchant banks included the management of public issues

and some aspects of financial consultancy. Other foreign banks like Citi Bank,

Chartered Bank also assumed the merchant banking activity in India. State

Bank of India started merchant banking in 1973 followed by ICICI in 1974.

Both these Indian merchant bankers emerged as leaders in merchant banking

having done significant business during the period of 1974-1987 in comparison

to foreign banks. The early and mid-seventies witnessed a boom in the growth

of merchant banking organizations in the country with various commercial

banks, financial institutions, broker’s firms entering in to the field of merchant

banking.

The early growth of merchant banking in the country is assigned to the Foreign

Exchange Regulation Act, 1973 (FERA) where under large number of foreign

companies operating in India were required to dilute their foreign holdings in

order to continue business in the country. This had caused two-pronged effect

viz. firstly, in the form of spate in ‘Foreign Exchange Regulation Act Issues’

eliciting interest of the investors by creating massive awareness about capital

markets amongst the new class of investing public, secondly, merchant

banking activity became attractive to banks and the firms of consultants and

share brokers who entered into this fields vigorously to reap the advantages of

the expanding capital markets.

CHAPTER 3 – PROBLEMS & SCENARIO

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MERCHANT BANKING

3.1 PROBLEMS OF MERCHANT BANKERS

1. SEBI guidelines have authorized merchant bankers to undertake issue

related

activities only with an exception of portfolio management. These guidelines

have made the merchant bankers either to restrict their activities or think of

separating these activities from the present one and float new subsidiary and

enlarge the scope of its activities.

2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for

authorization of merchant bankers. Small but professional and specialized

merchant bankers who do not have a net worth of Rs.1 crore may have to close

down their business. The entry is denied to young, specialized professionals

into merchant banking business.

3. Non co-operation of the issuing companies in timely allotment of securities

and refund of application money is another problem of merchant bankers. The

guidelines have put the responsibility on the merchant bankers. They have to

seek the co-operation of the issuing company to shoulder the responsibility.

3.2 CURRENT SCENARIO

Merchant banking is an area that we need to build and grow in the years to

come. As India forms part of the global village, it becomes increasingly

necessary for us to look at this business in a more holistic manner.

Obviously, international players with strong domestic partners such as DSP

Merrill Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with

experienced organisations like Enam and institutional backed investment

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MERCHANT BANKING

bankers such as ICICI Securities, etc., are the ones who have expertise, muscle,

and placement power in a greater measure than relatively new entrants.

The red hot economy is the obvious starting point. India is likely to end the

year with GDP growth in excess of 7 percent. Companies and private equity

investors are sitting on large piles of cash. In 2006 deal activity was largely

restricted to the IT and Telecom sectors.

Thus, while there is a steady flow of deals, there is now a shortage of talent to

do the job.

3.3 MERCHANT BANKING: INDIAN SCENARIO

Merchant Banking activity was formally initiated into the Indian capital

markets when Grindlays Bank received the license from Reserve Bank in

1967. Grindlays which started with management of capital issues, recognized

the needs of emerging class of entrepreneurs for diverse financial services

ranging from production planning and system design to market research.

Apart from meeting specially, the needs of small-scale units it provided

management constancy services to large and medium sized companies.

Following Grindlays Bank, Citi Bank set-up its Merchant Banking division in

1970. The division took up the task of assisting new entrepreneur and existing

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

and issue of equity. Management consultant services were also offered.

Consequent to the recommendations of Banking Commission in1972, that

Indian bank should start Merchant Banking Division in 1972. In the initial

years the SBI’s objective was to render corporate advice and assistance to

small and medium entrepreneurs.

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MERCHANT BANKING

The economic reforms initiated by the Government since July 1991 in the files

of industry, trade and financial sector have paved the way for rapid

development of the economy. Several projects have been conceived since then

and almost all the major groups in the country that have announced their

intentions to set-up mega projects in infrastructure sector envisaging

investment of thousands of crores. With several large projects been set-up and

many more on the drawing board, the demand for a complete range of

Merchant Banking services encompassing project advisory services, issue

management and financial advisory services for corporate sector has increased

considerably. This has led to a sharp growth in the Merchant Banking business

in the last 2 years.

3.4 MERCHANT BANKING: INTERNATIONAL SCENARIO

The Merchant Banking scenario in developed countries like USA and UK are

different from Indian Merchant Banking activities. The Merchant banker is

also called as Investment Bankers. A brief outline of Merchant Banking in

USA and UK has shown in the following paragraphs.

Merchant Banks in UK

In United Kingdom, Merchant Banks came on the scene in the late eighteenth

century and early nineteenth century. Industrial revolution made England into

a powerful trading nation. Rich merchant houses that made their fortunes in a

colonial trade diversified into banking. Their principle activity started with the

acceptance of commercial bills pertaining to domestic as well as international

trade. The acceptance of the trade bills and their discounting gave rise to

acceptance houses, discount houses, and issue houses. Merchant Bankers

initially included acceptance houses, discount houses and issue houses. A

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MERCHANT BANKING

Merchant Banker was primarily a merchant rather than his customers entrusted

banker but him with funds. Merchant Banks in UK:

Finance foreign trade,

Issue capital,

Manage individual funds,

Undertake foreign security business, and

Foreign loan business.

They also used to finance sovereign government through grant of long-term

loans. Since the end of Second World War commercial banks in Western

Europe have been offering multiple services including Merchant Banking

services to their individual and corporate clients. British banks set-up division

or subsidiaries to offer their customers Merchant Banking services.

Merchant Banking in USA

Merchant banks make the primary markets in USA, arrange mergers and

acquisitions, undertake global, custody, proprietary trading and market

making, niche business, fund management and advisory services to

governments and firms.

The increased regulation and control of domestic operations gave a fillip to

large US banks to undertake Merchant Banking functions in international

capital markets. The US investments Banks have extended their operations to

the international level. They are largely responsible for the development of the

Euro-dollar market in the securities and globalisation of capital markets. They

have a prominent presence in London and other European financial centers.

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MERCHANT BANKING

Merchant Banks have today a strong parent, a strong balance sheet and a

strong international network to play a global role.

CHAPTER 4 – ORGANISATION & SERVICES

4.1 MERCHANT BANKING ORGANISATIONS

In India, merchant banks operate in the form of Divisions of Indian and

Foreign banks and financial institutions, subsidiary companies established by

banks like SBI Capital Markets Ltd., can Bank Financial Services Ltd., PNB

Capital Services Ltd., Indian Bank Merchant Banking services Ltd., etc., the

firm organized by the stock brokers, stock exchange dealers, the financial and

technical consultants and chartered accountants. Securities and Exchange

Board of India (SEBI) has divided merchant bankers into four categories,

which are as follows: -

CATEGORIES ACTIVITIES NETWORTH

Category I To carry on the activity of issue

management and to act as

adviser, consultant, manager,

underwriter, portfolio manager.

Rs.1crore

Category II To act as adviser, consultant, co-

manager, underwriter, portfolio

manager.

Rs.50 lakhs

Category III To act as underwriter, adviser or

consultant to an issue.

Rs. 20 lakhs

Category IV To act only as adviser or

consultant to an issue

Nil

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MERCHANT BANKING

Merchant Bankers are classified into 4 categories as shown in the above table

having regard to their nature and range of activities and their responsibilities to

SEBI, investors and issuers of securities. The minimum net worth and initial

authorization fee depends on the category. The first category consists of

merchant bankers who carry on any activity of issue management, determining

financial structure, tie-up of financiers, advisor or consultant to an issue,

portfolio manager and underwriter. The second category consists of those

authorized to act in the capacity of co-manager/advisor, consultant, and

underwriter to an issue or portfolio manager. The third category consists of

those authorized to act as underwriter, advisor or consultant to an issue. The

fourth category consists of merchant bankers who act as advisor or consultant

to an issue.

4.2 QUALITIES OF GOOD MERCHANT BANKERS

Merchant bankers are individual experts who organize and manage the

merchant banks. The operations of merchant banks are, therefore, influenced

by the personality trait of these individuals. For the success of merchant

bank’s operations, the qualities which merchant bankers should have are

discussed below:-

LEADERSHIP :– merchant banker should possess all relevant skills, update

knowledge to interact with the clients and effectively communicate.

Leadership is synonymous with followers who follow the one who leads.

AGGRESSIVE ACTION :- aggressiveness is a personality trait of a good

leader but in merchant banking it has a wider connotation. Aggressive

merchant bankers are always looking for new business. Once a business

opportunity has been located, the merchant banker has got to obtain the

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mandate for the merchant banking assignment from the clients at once which

will depend upon his own communication skills, persuasiveness and the

background of the organization to which he belongs. A good merchant banker

is one who does not allow his client to think anything outside except what has

been advised.

COOPERATION AND FRIENDLINESS :- These two characteristics are the

symbols of good leadership but it hardly needs to be stressed that cooperation

and friendliness coupled with persuasiveness are the main instruments with

which a merchant banker mixes with the people, gathers information, obtains

business mandate and renders satisfactory services to the clients. Business of

an honest business merchant banker spreads with geometrical propagation

when he shares the thoughts of his clients with sympathetic gestures and offers

pragmatic suggestions without greed or favours. Very often, rude, intemperate

and indifferent disposition or blunt out burst withdrew fortunate business

opportunities forever. Friendliness and cooperation must flow as natural

traits in the merchant banker to win the trust of the clients.

CONTACTS :– success of merchant banker depends upon his sociable nature

and the richness of wider contacts. A merchant banker is supposed to be

acquainted deeply with all the constituents of merchant banking. The scope of

contact encompasses intimate contiguity and acquaintances within his own

organization, Central and State Government Offices where compliances under

various relevant enactments are to be reported, Indian and foreign banks,

financial institutions at Central and State levels, promoters/directors/owners

and chief executives of the private and public enterprises which would be

prospective beneficiaries of merchant banking services, printers, advertising

agencies, brokers and stock exchange dealers, advocates and solicitors and

members of the press whose services are availed of in executing merchant

banking assignments. Merchant bankers should widen contacts and references

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and continue to maintain them with goodness, honour and humour by meeting

people.

ATTITUDE TOWARDS PROBLEM SOLVING :– The most important

personality trait of a merchant banker is his attitude towards problem solving.

Even client coming to him has got to return fully satisfied having consulted a

merchant banker. Positive approach to understand the view points of others,

their difficulties and their adverse circumstances is possible only when a

person is skilled in human relations particularly the inter-personal and intra-

personal behavior. Effective communication and proper feedback are the pre-

requisite for creating a positive attitude towards problem solving. Many

persons are effective in this trait without any training for reasons of cultivating

a habit from environment in which they have been brought up at home, in

school, college and office. This is so important that it must be treated as a

separate objective quality of a good merchant banker.

INQUISITINESS FOR ACQUIRING NEW SKILLS, INFORMATION

AND KNOLEDGE: – merchant bankers lice on their wits they earn by giving

information to needy clients. Therefore, they should keep abreast with latest

information in the area of the service product, they market. This is possible if

merchant bankers possess the quality of inquisitiveness.

The above qualities of a merchant banker are only illustrative. All good

qualities in merchant bankers are difficult to be defined so elaborately.

Nevertheless, merchant banker should possess super business acumen,

managerial abilities, administrative capacities and salesmanship so as to

understand the problems and sell the service product to the needy clients.

4.3 RESPONSIBILITIES OF MERCHANT BANKER

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To the Investors

Investor protection is fundamental to a healthy growth of the Capital

Maerket. Protection is not to be conceived as that of compensating for the

losses suffered. The responsibility of the Merchant Banker in ensuring the

completeness of the disclosures is of paramount importance in view of the

fact that entire reliance is based on offer Document either Prospectus or

Letter of Offer because an independent agency like a Merchant Banker has

done the scrutiny.

Capital structuring

The Merchant Bankers while designing the capital structure take into

account the various factors such as Leverage effect on earnings per share,

the project cost and the gestation period, cash flow ability of the company,

the cost of capital, the considerations of management control, size of the

company, and general economic factors. These exercise are done mainly in

order to meet the fund requirement of the company taking due cognizance

of the investor’s preference.

Project Evaluation and due Diligence

Due diligence and project evaluation is another major responsibility of the

Merchant Banker. Where the project has already been appraised by a

bank/financial institution, the Merchant Banker relies on the said appraisal

before accepting an assignment. However, where the project has not been

appraised by as bank/financial instituion, the Merchant Bank undertakes a

detailed evaluation of the project before taking up an assignment for issue

management.

Legal aspect

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MERCHANT BANKING

The factors that are looked into in case of the legal aspects are:

Compliance with the SEBI guidelinesand the various guidelines issued by

the Ministry of Finance and Department of CompanyAffairs.

Pending litigation’s towards tax liabilities or any criminal/civil prosecution

any of the directors for any offenses.

Fair and adequate disclosures in the prospectus.

Pricing of the Issue

The Merchant Banker looks into the various factors while pricing the issue.

Some of the factors are past financial performance of the company, Book

value per share, stock market performance of the shares. The Merchant

Banker has a vital role to play in pricing of the instrument.

Marketing of the Issue

Marketing of the issue is a vital responsibility of the Merchant Banker. The

first stage is Pre-issue marketing for placement of the issue with the

financial institutions, banks, mutual funds, FII’s and NRI’s. The second

stage is the marketing of the issue to the general public through various

vehicles such as press, brokers, etc.

Bought out Deals

The concept of wholesale but out of public offerings by the Merchant

Bankers started off with over the Counter Exchange of India where a

Merchant banker acts also as a sponsor and either takes up the entire issue

to be offered wholly of jointly with other co-investors and off-loads the

same to the public at a later date by an offer for sale. Major amendments

were made to the SEBI regulations regarding Merchant Bankers. The

duration of this transaction period has not officially been announced.

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MERCHANT BANKING

4.4 REGISTRATION OF MERCHANT BANKER

The term ‘Merchant Banking’ originated in the 18th and early 19th centuries in

the United Kingdom when trade between countries was financed by bills of

exchange drawn on the principal merchant houses. With the increase in

international trade, the established merchants started the practice of lending

their names to the new comers and accepting the bills of exchange on their

behalf. They would charge a commission for the purpose and thus acceptance

business became the hallmark of Merchant Bankers. Once these banks had

gained the confidence of the government, they also entrusted with the job of

issuing bonds in the London market.

Although Merchant Banking activity ushered in two decades ago, it was only

in 1992, in India, after the formation of SEBI that is defined and a set of rules

and regulations governing it are in place. In fact, the origin of Merchant

Banking is to be traced to Italy in late medieval times and France during the

seventeenth and eighteenth centuries. Merchant Banker invested accumulated

profits in all kinds of promising activities. Since they added banking business

into the profession of Merchant activities and became a Merchant Banker. A

distinction was existed in banking systems between moneychanger and

exchanger. Moneychangers concentrate on the mutual exchange of different

currencies, operated locally and later accepted deposits for security reasons.

Passage of time money changers evolved into public or deposit banks whereas

exchangers, who operated internationally, engaged in bill-broking that raising

foreign exchange and provision of long-term capital for public borrowers. The

exchanges were remitters and Merchant Bankers. In the seventeenth century, a

Merchant Banker was a dealer in bills of exchange who operated with

correspondents abroad and speculated on the rate of exchange. Initially,

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MERCHANT BANKING

Merchant Bankers were not banks at all and a distinction was drawn between

banks, Merchant Banks and other Financial Institutions. Among all these,

Institutions it was only banks that accepted deposits from public. No person s

allowed carrying out any activity as a Merchant Banker unless he or she holds

a certificate grated by SEBI. Registration with SEBI is mandatory to carry out

the business of 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, manpower etc.

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

merchant banking

Any associate company, group company, subsidiary or interconnected

company of the applicant should not have been a registered merchant

banker

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

proved guilt for any offence

The applicant should have a minimum net worth of Rs.5 crores

4.5 MERCHANT BANKING SERVICES: SCOPE

In the present dynamic environment where public money is playing a vital role in financing a large number of projects, both in the public and private sectors, Merchant Banking has a significant role in managing the show and meeting the

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MERCHANT BANKING

growing demands for funds by the corporate sector. Merchant Banking includes a whole gamut of activities which meet the needs of both corporate and individual investors and which range from identification, evaluation, promoting and financing of projects (both domestic and overseas) by raising resources in the equity and long-term loans, to organize and participate in international consortia, to raise foreign currency loans and to offer advisory services on various matters related to finance, investment, capital management, structure, mergers, amalgamation, takeovers and acquisitions. They also play a useful role in the portfolio management, money market operations, venture capital, leasing, etc. Merchant bankers act as a guide for the entrepreneurs who are unaware, or have little knowledge or experience, of the complexities involved in the above spheres.

In addition to the above, the scope of Merchant Banking services has extended to providing advisory services to companies to increase or divest their stakes, public sector undertaking disinvestments, international issues, etc. With the OTCEI being operation now, Merchant Bankers will have a key role to play in terms of appraising the projects and offering two-way quotes for market making in case of entrepreneur going for listing in the above exchange.

Merchant Bankers act as a critical link between the corporate who are intend to raise funds and the investors who are interested to invest in securities Industry. Besides issue management, the Merchant Bankers are also undertake the activities like underwriting connected with the public issue management business, Managing/advising on International offerings of Debt/Equity i.e., GDR, ADR, Bonds and other instruments, Private placement securities, Primary or Satellite dealership of government securities, Corporate Advisory services related to securities market (e.g., Takeovers, acquisitions, disengagement), Stock-Broking, Advisory Services for projects, Syndication of rupee term loans and International Financial Advisory Services. The services can be represented as follows: -

4.6 SERVICES RENDERED BY MERCHANT BANKERS

Among the important financial intermediaries are the merchant bankers. The

services of Merchant bankers have been identified in India with just issue

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MERCHANT BANKING

management. It is quite common to come across reference to merchant banking

and financial services as though they are distinct categories. The services

provided by merchant banks depend on their inclination and resources -

technical and financial. Merchant bankers (Category 1) are mandated by SEBI

to manage public issues (as lead managers) and open offers in take-overs.

These two activities have major implications for the integrity of the market.

They affect investors' interest and, therefore, transparency has to be ensured.

These are also areas where compliance can be monitored and enforced.

Merchant banks are rendering diverse services and functions, which are as

follows:

ISSUE MANAGEMENT:

The public issue of securities is the core of merchant banking function. At

one time it was constructed as the sole function. Merchant bankers were

identified as issue houses. It was later perceived that they provide other

financial services. When companies seek to raise resources for

implementation of a new project or finance expansion or modernization or

diversification of an existing unit or fund long term working capital

requirement, they retain the services of a merchant banker. To a large

extent the type of issue would vary with the purpose for which funds are

raised. Merchant bankers when retained as managers to issue will have to

assist the company in all the stages connected with public issue.

The merchant bankers help corporate to raise money from the markets

through the issue of shares, debentures, bonds etc. They are designated as

managers to the issue. Their main business is to attract public money to

capital issues.

They usually render the following services:

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MERCHANT BANKING

Drafting of prospectus and getting it approves from the stock exchanges.

Obtaining consent/acknowledgement from SEBI.

Appointing bankers, underwriters, brokers, advertisers, printers etc.

Obtaining the consent of all the agencies involved in the public issue.

Holding road shows, to sell the issue. These shows are held for the

analysts, brokers & institutional investors. The purpose of these shows is to

answer queries from these people about the company and the project for

which the funds are being raised.

Deciding the pattern of advertising.

Deciding the branches where application money should be collected.

Deciding the dates of opening and closing of the issue.

Obtaining the daily report of application money collected at various

branches.

Obtaining subscription to the issue.

After the close of the issue, obtaining consent of stock exchange for

deciding basis of allotment etc.

CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE

In India, the pricing of issues is now freely decided by the company, with

valuable inputs from the merchant bankers, who have to sell the issue at the

decided price. The pricing of the issue especially in a public issue is very

important. The pricing has to be such, that the investors will be attracted to

invest in the issue at that price, at the same time the company should get the

premium that it is looking for. After all, the premium can play a very role

in deciding the company’s capital structure, as larger the premium lesser

will be the requirement for borrowed funds.

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MERCHANT BANKING

The promoter also needs to decide whether to go in for a fresh issue or to go

for a rights issue. However this will depend mainly on the quantum of

funds that the company needs to raise. The success of the issue is

dependent on the selection of the right type of security. In this matter, the

expert advice of merchant bankers is of immense importance.

In the issue management the merchant bankers have to coordinate the

various agencies to the issue. The success of the issue depends on the

cooperation of all the agencies involved.

The merchant bankers offer following services during the public issues:

Preparing an action plan and budget for the total expenses for the issue.

Preparation of application to SEBI and assistance in obtaining the consent

from SEBI.

Drafting of the prospectus.

Selection of underwriters, Brokers etc.

Selection of bankers to the issue.

Selection of advertising agency for publicity.

Obtaining approval of the institutional underwriters and stock exchanges for

publication of the prospectus.

Companies are free to appoint one or more agencies as Managers to an

issue. SEBI guidelines insist that all issues should be managed by at least

one authorized merchant banker, functioning either as the sole or lead

manager to the issue. Ordinarily, not more than two merchant bankers

should be associated as lead managers, advisors and consultants to a public

issue. In issues of over Rs. 100 crores, the number could be up to a

maximum of four.

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MERCHANT BANKING

The responsibilities of merchant bankers in management of public issues

are many. Some of these are:

We have seen that many unscrupulous promoters have raised money from

the market. This has hurt the investors a lot and has also made investors

nervous about stock market investments. This in turn affects the

functioning of stock markets both the primary and the secondary markets.

It is therefore necessary that merchant bankers are satisfied with the

viability of the project, which they can then sell to the investors with

confidence. It is therefore important for the reputation of merchant bankers,

to only associate themselves with good issues.

The merchant banker should act as the custodians of the investors money

and this puts a lot of responsibility on them. To discharge this function the

merchant bankers have to exercise due diligence independent by verifying

the contents of the prospectus and the reasonableness of the views

expressed therein.

It is the responsibility of the merchant bankers to get the securities listed on

all the stock exchanges mentioned in the prospectus. With the introduction

of Demat accounts the complaints about allotment have surely gone down.

It is the responsibility of the merchant bankers to ensure timely refunds and

allotment of securities to the investors.

The merchant bankers have to certify that they verified everything and that

they believe it to be true. This assures the investing public about the safety

of their investment. The precautions by the merchant bankers would ensure

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MERCHANT BANKING

that all the fake companies, whose intention is to defraud the investors,

don’t have access to the market.

UNDERWRITING

Underwriting is like insurance against the failure of an issue. It is a

guarantee to the issuing the company, that the money that it requires for its

project will definitely be raised. It means that even if the issue is not fully

subscribed to by the public, the underwriters will make up the short fall.

Underwriting involves the underwriter agreeing to subscribe directly, or to

procure subscription for the unsubscribe portion of the issue, which is not

taken up. For the risk that the underwriter takes, he is paid commission.

New companies entering the markets for the first time, always face number

of problems in raising funds from the market. One of the biggest problems

of course that the company is not well known to the investors and many of

them will be unwilling to invest their money in such ventures. Many a

times even existing companies may find it difficult to raise money, due to

some reasons. Issuing companies therefore approach different underwriters

with a request to underwrite the issue.

Underwriters on their part need to satisfy themselves about the viability of

the project and also about the integrity of the promoters of the company. It

must be noted that when an issue is under subscribed, the underwriters will

pick the shares and only if the project is good enough, then in future they

can sell the shares in the market and get not only their money back, but can

also make a decent profit as well.

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It is obligatory for the merchant bankers to accept a minimum 5%

underwriting in the issue subject to a ceiling. By taking underwriting in an

issue managed by them, they show their full commitment to the issue that

they are managing.

MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) and corporate restructuring are a big part

of the corporate finance world. Every day, Wall Street investment bankers

arrange M&A transactions, which bring separate companies together to

form larger ones. When they're not creating big companies from smaller

ones, corporate finance deals do the reverse and break up companies

through spin-offs, carve-outs or tracking stocks.

Role of Merchant Banker

Mergers & Acquisitions is an area where Merchant Bankers act as

intermediaries in negotiating on one with corporate interested in hiving of

divisions/companies which are not with in the purview of the long-term

business strategy of the group/company, and on the other hand for

Corporate interested in non organic growth by acquiring companies/units

for reason strategic or non strategic in nature. Mergers can be beneficial for

both the entities, as due to competition the companies unable to survive or

prosper on their own may like to merge and face competition and achieve

growth targets. Takeovers may be hostile or friendly in nature, hostile

takeovers are without the consent of the company and company being

takeover may work out an anti takeover strategy to counter the threat.

Merchant Bankers provide following services in M&A: -

Identification of potential takeover targets.

Financial & Technical appraisal of the merger/takeover proposal.

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MERCHANT BANKING

Negotiation with the parties for arriving at the suitable price or

exchange ratio.

Assistance in obtaining necessary approval & addressing procedural &

legal issues.

PROJECT COUNSELLING

Project counseling is very important and lucrative merchant banking

services which only very few merchant bankers having advantages of

knowledge, skills and experience over others are able to render

satisfactorily. The corporate seek advice in respect of identification of

profitable investment opportunities in the related business areas (like

forward/backward integration) or as part of diversification process. The

merchant bankers carry out detailed studies on product demand patterns,

cost structures, etc., to enable the corporate in preparation of feasibility

study may involve arrangement of a foreign collaboration, advice on

technical parameters and also legal issues.

Scope of services

Project counseling services are needed by industrial entrepreneurs in India

in the following areas: -

Preparation of project report

Deciding upon the financing pattern to finance the cost of the project.

Aspects of project appraisal with financial institutions/banks.

Project report

Project report consists of technical process, location, management profile,

means of financing, reports on market surveys and market explorations.

Merchant bankers advise the clients on project preparation. Merchant

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MERCHANT BANKING

bankers, on behalf of their clients, engage technical consultants specialized

in the specific area, and marketing experts to prepare technical feasibility

report and market survey reports. Merchant bankers maintain the list of

such experts approves by financial institutions and assign the work to these

experts.

Project report purpose

Project report about the proposed activity is prepared to obtain government

approvals particularly in the following areas:

Grant of industrial license to undertake specified industrial activity.

Foreign investment and technology tie-up.

Grant import license for importing raw material, plant, machinery and

equipments.

Grant of foreign exchange allocation for import of capital goods or raw

materials, etc.

Grant of subsidies and other concessions from the government at center

or state levels or from government sponsored agencies, etc.

LOAN SYNDICATION

It refers to assistance rendered by merchant banks to get mainly term loans

for projects. Such loans may be obtained from a single development finance

institution or a syndicate or consortium as in the case of large term loans.

Merchant banks can also help corporate clients to raise syndicated loans

from commercial banks.

Scope of service

Once the client company has decided about the project proposed to be

undertaken, the next step is looking for the sources wherefrom funds could

be procured to implement the project. The responsibility of locating the

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MERCHANT BANKING

sources of finance, approaching these sources by putting in requisite

prescribed applications and complying with all the formalities involved in

the sanction and disbursal of loan rests with the merchant bankers who

provide the service of loan/credit syndication.

Loan syndication in the case of domestic borrowing is undertaken with the institutional lenders and the banks. Amongst institutional lenders the following institutions are the main suppliers of the long and medium term funds with which the merchant bankers contact, liaison and arrange loans working for and on behalf of their clients.1. All India financial institutions

i. Industrial Finance Corporation of India (IFCI)

ii. Industrial Development Bank of India (IDBI)

iii. Industrial Credit & Investment Corporation of India Ltd (ICICI)

2. State level financial bodies

i. State Financial Corporations (SFCs)

ii. State Industrial Development Corporations (SIDCs)

iii. State Industrial & Investment Corporations (SIICs)

3. All India level investment institutions

i. Life Insurance Corporation of India (LIC)

ii. Unit Trust of India (UTI)

iii. General Insurance Corporation of India (GIC) & its subsidiary

companies.

4. Commercial banks: Commercial banks join in consortium loan being

provided by the above institutions.

5. Mutual Funds & Venture Capital Funds: these funds generally invest

in equity but mutual funds contribute to the issues of

Debentures/Bonds on private placement basis as well as subscribe to

public issues.

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MERCHANT BANKING

RESTRUCTURING SERVICES

Merchant bankers assist the management of the client company to

successfully restructure various activities, which include mergers and

acquisitions, divestitures, management buyouts, joint venture among others.

To help companies achieve the objectives of these restructuring strategies,

the merchant banker participates in different activities at various stages

which include understanding the objectives behind the strategy (objectives

could be either to obtain financial, marketing, or production benefits), and

help in searching for the right partner in the strategic decision and financial

valuation of the proposal.

CAPITAL ASSISTANCE

In providing financial assistance, merchant banks offer a full understanding

of all facets of the capital markets. This includes all types of debt and equity

financing available from both the domestic and international markets.

It should be understood that interest rates are not the only definition of

capital costs. Restrictions on availability, prepayment terms, and operating

effectiveness can often outweigh what might appear to be inexpensive

capital with low interest rates. Too often, capital includes costs, which force

an entrepreneur or a business to undertake undesirable actions. In the short-

run, some actions might be necessary, but often in the long run are

detrimental. The traditional merchant banker understands these capital

limitations and can structure a transaction, which is beneficial to all sides of

the table -- not just the capital source.

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MERCHANT BANKING

He also knows how to substitute one type of capital for another, sometimes

utilizing internal sources from asset repositioning or cash creation from

improvements in working capital. He understands fully the risk versus

return elements necessary to complete the capital procurement process.

CORPORATE ADVISORY SERVICES

Merchant bankers offer customised solutions to solve the financial

problems of their clients. Advice is sought in areas of financial structuring

(as shown in the Modern Manufacturing case above). Merchant bankers

study the working capital practices that exist within the company and

suggest alternative policies. They also advise the company on rehabilitation

and turnaround strategies, which would help companies to recover from

their current position.

FACTORING SERVICE

Factoring involves the outright sale of account receivable. By such sale a client

(the exporter or manufacturer) transfers his/her ownership of the accounts to a

factor (an organization, firm). The factor buys all the client’s outstanding

invoices and takes over all the subsequent dealings with the

buyer/importer/customer. It is short-term debt financing. Here three parties are

involved

1. The factoring organization /firms

2. The manufacturer/exporter/seller

3. The importer/customer/buyer

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MERCHANT BANKING

Role Of Merchant Banker In Factoring

The merchant banker may act as factor organization with a view to earning a

great amount of commission. The factor provides the following services:

(a) Financing

(b) Advisory services if necessary

(c) Collection of bills/Account Receivable against sales proceeds.

(d) Maintenance of sales ledger

(e) Provide further if necessary

(f) Covering losses if there are any

ASSET SECURITIZATION

It is a process through which some inactive assets (mortgage assets) are

converted into cash/active assets. It is long-term debt financing. Here assets

are converted into long-term bonds. The whole process is done by the

Special Purpose Vehicle (SPV). In this approach, the merchant banker for

issuance of security bonds against the assets with a matching of time and

terms between mortgage property and security bonds. Here the selection of

asset is generally considered on the basis of the following:

(I) Quality of assets

(ii) Certainty of repayment

(iii) Good ranking from the credit rating agency.

The process of asset securitization takes place in the following firms:

Originating Institutions/Firm

Special Purpose Vehicle (SPV)

Merchant Banker (MB)

FOREX SERVICES

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MERCHANT BANKING

This aspect of banking is becoming increasingly important as the forex flow

in the country is increasing and the international markets are funding the

operations of the corporate in India. The success of any business is

measured by the fund management; this makes treasury management as a

very critical finance function. Management of treasury profit center requires

a wide variety of knowledge in the area of global money markets and

financial instruments such as deposit certificates, treasury bills, forecasting,

source evaluation and cost of domestic and foreign currency funds.

Treasury and risk management ensures cost effectiveness in planning

strategies in this era of deregulation.

Role of merchant banker in Forex function

The currency values, interest rates, share index and commodities affect the

financial derivatives like futures, swaps and other tools of risk management.

Corporates therefore employ well-trained professionals to manage treasury

and forex functions so that they can ensure competent management. Thus,

this service is provided to Corporates through merchant bankers. Merchant

bankers assess various markets to advice Corporates or other banks that

needs currency. Merchant bankers constantly update about the policies of

the regulatory bodies, monitors the current prices, makes predictions based

on the analysis of trends etc

HIRE PURCHASE SERVICE

It involves a system under which term loans for purchases of goods and

services are advanced to be liquidated in stages through a contractual

obligation. The goods whose purchases are thus financed may be consumer

goods or producer goods or they may be simply services such as air travel.

Hire-purchase credit may be provided by the seller himself or by any

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MERCHANT BANKING

financial institution. However, unlike in other countries, the emphasis in

India is on the provision of instalment credit for productive goods and

services rather than for purely consumer goods.

Role of Merchant Banker

Merchant Banker undertakes the activity of financing for hire-purchase

activities. The merchant banker looks more to the credit-worthiness and

business morality of the buyer than the value of security

LEASE FINANCE COMPANIES

Lease finance companies provide finance to acquire the use of assets for a

stipulated period of time without owning them. The user of the asset is

known as the lessee, and the owner of the asset is known as the Lessor.

Leasing is medium-term arrangement for finance.

Role of Merchant Banker

Merchant Bankers helps in assessing the credit risk of industrial borrowers.

The merchant bankers provide help in evaluating lease proposals. He

analyse the merits and demerits of lease finance with reference to a given

proposal and leave it to their clients to decide on the appropriate source and

type of finance, thus enlarging their range of choices and the variety of

services available to them.

VENTURE CAPITAL

Venture capital is money provided by professionals who invest alongside

management in young, rapidly growing companies that have the potential to

develop into significant economic contributors. Venture capital is an

important source of equity for start-up companies. Professionally managed

venture capital firms generally are private partnerships or closely-held

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MERCHANT BANKING

corporations funded by private and public pension funds, endowment funds,

foundations, corporations, wealthy individuals, foreign investors, and the

venture capitalists themselves.

Role of Merchant Banker

Merchant Bankers assist ventures proposals of technocrats, with high

technology, which are new, and high risk. To seek assistance from venture

capital funds or companies.

They also provide technical, financial & managerial services & help the

company to set up a track record.

The assistance should mainly be for equity support, through loan support to

supplement this may be extended.

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MERCHANT BANKING

CHAPTER 5 – TRENDS & PLAYERS IN MERCHANT BANKING

5.1 RECENT TRENDS

Merger & Acquisition transaction -- Merchant banks' services not taxable

The Finance Ministry has excluded services provided by merchant banks

and other agencies in a merger and acquisition (M&A) transaction from the

scope of taxable services provided by a `management consultant.'

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MERCHANT BANKING

The rationale accorded is that the role of such agencies is limited to

compliance of any statute or regulation -- such as takeover regulations of the

Securities and Exchange Board of India (SEBI) -- and not governed by any

contractual relationship with the advisee company.

Merchant banks do not provide any consultancy on an M&A transaction, but

merely verify and submit a report to the authorities concerned, according to the

Central Board for Excise and Customs (CBEC).

Barring the services of merchant banks, any service rendered in relation to an

M&A transaction will be covered under the scope of taxable service provided

by the management consultant and will be liable to service tax, the Board has

ruled. Industry representatives held that services provided in respect of M&A

cannot be construed as a management consultancy service, but were in the

nature of financial advisory service.

They further opined that acquisition or divesting of shareholdings was a purely

financial transaction and distinct from the advice or service provided prior to

taking a decision to divest, merge or acquire an organisation.

RAPID RISE IN VALUATION IMPEDES M&As

The surging stock market is creating an unusual problem: Mergers &

Acquisitions (M&A) deals are becoming tougher to close as the two parties to

a deal keep looking over their shoulders to figure out how the market is pricing

their shares. The key to any deal is valuation. And when the market booms,

agreed valuations for proposed M&A are thrown into disarray.

In this scenario, M&A rankings will change depending on who has been able

to close deals faster. In the first nine months of 2005, (ended September),

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MERCHANT BANKING

Kotak Mahindra/Goldman Sachs topped the heap by executing 13 deals valued

at $2.53 billion (about 11,000 crore). This bank was ranked No. 4 last year in

the process, the investment bank has increased its share by 420 basis points

from 13.1% for last year to 17.3% now. Morgan Stanley retained its No 2

position, having sewn up 11 deals worth $2.23 billion so far. Its market share

is up 50 basis points to 15.2%. Stock prices have gone up because of

profitability. Indian companies are also looking at overseas opportunities.

M&A are also getting hit because more & more companies are opting for the

global depository receipts/foreign currency convertible bonds issue to sate their

capital needs. The analyst sees pharmaceuticals, information technology &

engineering specifically auto ancillaries as the areas where an increasing

amount of M&As will take place in India.

Rapid valuation changes do cause some delays, but in the end, the deals go

through if there are benefits to both parties. Infrastructure related business,

airlines and the auto component sectors as being prime for acquisitions.

INDIA’S TOP 10 M&A PLAYERS

PLAYERS Rank ‘05

Rank’04

Mkt share’05

Mkt share’04

Value ($m)

Deals

Kotak/Goldman Sachs 1 4 17.3 13.1 2,534 13

Morgan Stanley 2 2 15.2 14.7 2 ,227

11

Merrill Lynch & Co. 3 3 12.1 14 1,771 12Standard Chartered 4 9 6.7 4.8 981 5Ernst & Young 5 1 6.7 16.9 980 37Citigroup 6 6 6.6 11 962 8

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MERCHANT BANKING

Ambit Corporate Fin 7 8 6.4 4.9 936 21DBS Group 8 - 4.8 - 704 1ICICI Securities 9 5 4.4 12.2 649 10UBS 10- - 3.8 - 550 3

Rankings based on deals in up to 30th September, 2007 .

5.2 PLAYERS IN MERCHANT BANKING

1. ENAM

ENAM was founded in1984 to provide knowledge-driven financial services at

the time when Indian economy investors faced a bewildering array of options.

ENAM is the one of the largest underwriters in India. ENAM offers promising

& exciting companies the opportunity of assessing the public market equity

finances. ENAM’s long-term association with capital markets & primary

markets has provided it with deep insights of the functioning of Indian

financial institutions.

The merchant banking services provided by ENAM are: -

Equity debt/syndication: Raising capital through a private placement of a

company’s securities is an effective & timely offering to a public offering.

ENAM represents the clients in the private placement of debt and equity

with institutional & high net worth investors.

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MERCHANT BANKING

Corporate Restructuring: - ENAM provides client with strategic and

practical solutions to financial challenges. Their restructuring services

includes Mergers & Acquisitions, Takeovers, Debt restructuring, Buyers

services etc.

ENAM also provide the seed stage services, value creation services and

IPO’s advisory services which are represented below:

2. ICICI SECURITIES

ICICI Securities Limited is a leader across the spectrum of Merchant Banking.

We are experienced in every aspect of the business from domestic and

international capital markets advisory, to M&A advisory, Private Equity

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MERCHANT BANKING

syndication, Restructuring and infrastructure advisory. Our investment banking

team, based across key cities in India and New York, London, and Singapore

consists of professionals with expertise across a range of industries.

ICICI SECURITIES provide following services:

Mergers and Acquisitions: - ICICI Securities Limited is amongst the first

Indian investment Banks to form a dedicated M&A practice and continues

to be a leader by providing innovative and unique solutions to achieve

varied objectives of the client. They offer a full range of advisory services,

which include joint ventures, mergers, acquisitions, and divestitures.

Equity Capital Markets: - ICICI Securities Limited is at the forefront of

capital markets advisory having been involved in most major book building

and fixed price offerings over the last decade. It is amongst the leading

underwriters of Indian equity and equity-linked offerings.

Infrastructure Advisory: - ICICI Securities Limited has a dedicated

infrastructure vertical focused on assisting clients in identifying and

capitalising on the opportunities thrown up by the all pervasive boom in the

Indian infrastructure sector.

Dealing with Bulls and Bears: - ICICI Securities Limited assists global

institutional investors to make the right decisions through insightful

research coverage and a client focused Sales and Dealing team. The equity

group leverages research and distribution reach to domestic and foreign

institutional investors in case of public offerings.

Thus the quality of analysis and client servicing standards, are a testimony to

the quality of ICICI SECURITIES team.

3. KOTAK SECURITIES LIMITED

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Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock

broking and distribution arm of the Kotak Mahindra Group. The company was

set up in 1994. Kotak Securities is a corporate member of both The Bombay

Stock Exchange and The National Stock Exchange of India Limited. Its

operations include stock broking and distribution of various financial products

- including private and secondary placement of debt and equity and mutual

funds. Currently, Kotak Securities is one of the largest broking houses in India

with wide geographical reach.

The company has four main areas of business:

Kotak Institutional Equities: - Kotak Institutional Equities, among the top

institutional brokers in India. It mainly covers secondary market broking

and the marketing of equity offerings, including IPOs, to domestic and

foreign institutional investors.

Structured Finance (Project Finance & Advisory Business): -KMCC has

developed expertise in various vertical segments in the infrastructure sector

including power, oil, gas, ports, automobiles, steel & metals and hotels, by

offering structured finance solutions. Some of the transactions executed by

this team include:

Advisor to Ford on financial closure for its Car project in India.

Advisor to one of the largest LNG projects on the Western coast of

India.

Financial advisors and loan syndications to British Gas and GAIL.

Mergers & Acquisitions: -In the area of Mergers & Acquisitions, we

provide our clients expertise and a comprehensive set of services that help

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them achieve their strategic and financial objectives. Our spectrum of

services include:

Divestments

Spin-Offs / Restructuring & Joint Ventures / Strategic Alliances

4. CITIGROUP

Citigroup Corporate and Investment Banking achieve the extraordinary for our

clients around the world. No financial institution is more committed to

advancing the goals of its clients—our diverse and talented staff in more than

100 countries advises companies, governments and institutions on the best

ways to realize their strategic objectives. We create solutions for and provide

the broadest possible capital and market access to thousands of issuer and

investor clients. And no institution better executes the increasingly complex

payment and cash management solutions required in today's global economy.

The features Citigroup are as follows: -

Over the years, Citigroup has established a track record of outstanding

business milestones such as Cash Management, pioneered by Citigroup in

1986 and utilized by over 900 Corporates with through-puts totaling around

$ 35 billion (8% of India's GDP).

It is India's largest foreign bank in the FX (foreign exchange) market with a

14 per cent market share.

As the leading custodian, Citibank has over $22 billion of custody assets

under management.

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5. DSP MERRILL LYNCH LTD.

DSP Merrill Lynch Limited (DSPML), among India's leading investment

banking and brokerage company, is a culmination of a long standing

relationship between DSP Financial Consultants Ltd., and Merrill Lynch &

Co., the leading international capital raising, financial management and

advisory company. DSPML is a full service investment bank and broking

company with leadership position in M&A, Capital

Raising, Securities Research, Equity & Debt Brokering, and Investment

Advisory services. Euro money Magazine has ranked DSPML as the "Best

Domestic Securities firm in India" for the last four consecutive years. This

Transaction heralds DSPML as a key player in the private equity market. The

service features of DSPML are as follows: -

DSPML has consistently been rated as one of India's leaders in origination,

distribution, and trading of equity and debt securities.

DSPML has consistently brought reputable issues to the capital markets.

A diverse client base made up of India's most prestigious private and public

sector corporations and multinational corporations have rendered DSPML a

commanding presence in the Indian capital market.

Through direct market's group, DSPML offers investors access to every

major initial or subsequent public offering.

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DSP Merrill Lynch is the leading underwriter of Indian equity and equity-

linked offerings across domestic and international markets. By leveraging

their extensive knowledge of local markets and global resources, they have

delivered innovative and customized solutions to their clients.

6. UPFC(Uttar Pradesh Financial Corporation)

Scheme for merchant banking & financial services

Decades ago UPFC has taken a humble step for the industrial

development of U.P. by providing term loan assistance to small & medium

scale units. Since then it has acquired a matured professional approach in

Industrial Financing, several small-scale units nurtured by UPFC has groomed

into big enterprises.

In order to meet the challenges of liberalized policy of the Government &

Changed economic Scenario, UPFC has started Merchant Banking & other

financial Services to serve its valued clients. UPFC, a category-I Merchant

Banker with unmatched expertise in project appraisal and term lending offers a

whole gamut of Merchant Banking Services.

1. Issue management : UPFC provides expert services to manage public

issues of the companies successfully; it has already managed Public Issues

as a lead Manager with great success.

2. Underwriting : In order to provide a protective umbrella to the public

issues of its clients, UPFC also underwrites the issue.

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3. Subscription to equity share : UPFC subscribes to the equity shares

reserved under FI quota, to enable the company to market the public issue

effectively.

4. Advisory services: UPFC, with its long experience, advises its clients for

various advisory services such as capital Structuring, loan syndication etc.

5. Project certification : UPFC also certifies the projects going to capital

markets for raising funds. This is a specialized activity of the Corporation.

6. Other financial services : As a part of its commitment to provide

professionalized financial services to its clients, UPFC also offers Bill

Discounting, Equipment Leasing & Hire Purchase Services, Short- term

loan, Brand Equity loan, etc to meet diversified requirements of it's clients

7. JM Morgan Stanley

Investment Banking focuses on capital raising, mergers, acquisitions,

restructuring and financial advisory and private equity for Indian corporates in

the international and domestic capital markets. Through innovation and value-

added services, the firm has contributed immensely to the overall development

of the capital market and mergers and acquisitions in India. It have the

merchant banking and underwriting licenses from the Indian securities market

regulator, the Securities and Exchange Board of India. Some of the recent

transactions of JM Morgan Stanley

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US$ 20MM fund raising for Nipuna Services (a BPO subsidiary of Satyam

Computer Services)

Rs. 3,219 MM preferential allotment of equity shares/ warrants in Bajaj

Auto Finance Limited to financial investors and the promoter, Bajaj Auto

Limited.

The services of JM Morgan Stanley are:

JM Morgan Stanley has a dedicated group that regularly interacts with over

40 financial investors in India as well as overseas.

JM Morgan Stanley offers research-based investment advisory and equity

broking services to corporates, high net-worth individuals and retail

investors across a wide range of financial products.

They are known for lead managing some of the most complex and

innovative and large equity and debt offerings in India and abroad by the

Indian issuers. A robust deal-flow across sectors has allowed them to build

significant traction with the financial investors. This helps in raising private

equity capital for the companies.

5.3 MERCHANT BANKING-FUTURE DEVELOPMENT

Time and again the Merchant banking Industry in India witnessed, experienced

and underwent significant changes. The very purpose for which these firms are

commences their services should be taken care of and they should mould their

policy decision and activities to move in tune with the main objectives of

Investor’s protection and to create healthy environment in capital markets. No

doubt, Merchant Banking firms are subject to a host of control measures,

regulations and rules framed and guided by SEBI. To some extent, frequent

changes and /or amendments to policies and control measures, though needed

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for smooth working of the securities Industry, proves to be detrimental to the

very existence of the Merchant Banking system in the country. The SEBI’s

Act 1992 confers power upon SEBI to supervise and control the affairs of the

Merchant Banking firms in India.

The various studies which had been undertaken in India for evaluating the

performance of Merchant Banking firms and the implications of these on

securities industry. No single study has been emerged so far pertaining to the

evaluation of Merchant Banking firms and in-depth study on their activities as

well as operational and financial performance in the light of changing

regulatory environment.

In recent past, the small investor has turned his back on the primary capital

market. Issue after issue as failed to capture his imagination, rekindle his

enthusiasm, and reinforce his faith. He has lost all hopes of appreciation of his

investment. And this when all these years millions have though capital market,

ate capital market and dreamt capital market. It needed an extraordinary effort

and skill the drive the small investor away! High premiums, false premiums

and gray market operations. The professed protector of his interests first laid

down the dictum of proportionate allotment, then of minimum subscription, all

working against his interests. This would make an observant student of the

stock market infer that there is some game plan afoot to dethrone the small

investor from his prominent; he was believed to be the king.

With the coming to SEBI, an organisation that was ostensibly brought into

existence to guard the interest of the small investor, hopes ran high that the

small investor would now have a safe playing field. But these hopes were soon

belied. Far from guarding the interests of the investing public, SEBI embarked

on a course of action, which has positively hurt them. The latest fiat of EBI

bans corporate advertising after the receipt of acknowledgement card by a

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company wanting to go public. SEBI’s this action has caused the closure of an

information window. Now 50 million potential investors are deprived of

official and authentic information given by the Issuer. It is hard to understand

reasons for this drastic and totally uncalled for action. While there has been no

official explanation for this fiat, there is reason to believe that it may be based

on a wrong perception of the role for corporate advertising.

All this has been done perhaps because the corporate and intermediaries is to

follow the practices of Western capital markets here, oblivious of the fact that

our capital markets are altogether different in structure, in systems and in the

number of participants Freedom of commercial expression could be exploited

by some to serve their own ends, just a s freedom of speech and expression

could be abused but this has not led our Government to put arbitrary

restrictions on our freedom.

Merchant Bankers have reason to believe they will be handicapped without the

marketing support. But the worst sufferer would be the investor, especially the

small investor it is this class, which forms the backbone of the capital market.

As a result of the ban, the small investor would be deprived of the opportunity

to study the corporate profile of the Issuer. In the absence of adequate

information, they will have to depend on manipulated facts and information

fed by unreliable sources.

Besides, there are larger issuers arising out of SEBI’s action. From the point

of view of liberalisation of the economy, SEBI has taken a retrograde step. A

market economy flourished through bigger markets, higher sales and lesser

profits. To achieve this performance, a company needs an aggressive

marketing plan and advertising effort is the main thrust to such a plan. No

marketing plan can be worthwhile unless it is backed by an effective

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advertising plan. The ban imposed by SEBI nips the marketing plan in the

bud.

The Indian primary capital market is basically a retail market. It consists of

innumerable investors who take own individual investment decisions.

Whatever, the system, it is this market that will bring in the funds. If these

markets destabilised, the investors will look for alternative avenues to invest

their funds. SEBI in its one of the first documents on “SEBI and Investor

Protection, Development and Regulation of Securities Market” clearly

specifies significance of regulating capital market and its future plans for

fulfilling the twin objectives viz., Development of capital market and investor

protection are explained in introductory paragraphs. It speak out that, “The

decade of the 1980 witnessed a phenomenal growth and development of the

securities market, demonstrated its potential not only to mobilize the savings of

the horseshold sector but also to allocate it with some degree of efficiency for

industrial development. The dilution of the holdings of the multinational

companies at affordable prices in the latter part of the 1970s had generated

considerable interest, which was, carries well into the next decade. Several

companies’ came in the early part of the 1980s and successfully raised large

resources from the market especially through debt instruments, which further

sustained investor interest. There were several changes in Government policy,

which significantly influenced industry and aided the market. India was then

entering the phase of liberalization and decontrol which was to accelerate and

gather momentum in the 1980s.

By the end of the decade, the securities market in India came to be firmly

integrated with the financial system of the country. With the corporate sector

increasingly relying on the securities market for meeting their long-term

requirement of funds, the securities market their long-term requirement of

funds; the securities market competed on equal terms with the Development

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MERCHANT BANKING

Financial Institutions, which were the traditional purveyors of long-term

capital. The emergence of the securities markets into the main stream of the

financial system of the country was thus one of the major economic processes

of the 1980s – an inevitable outcome of the maturing process of the financial

system. They brought about notable changes in the capital structure of the

companies across industries, gave birth to new intermediaries and institutions

in the securities market and created a new awareness and interest in investment

opportunities in the securities market among investor. In spite market, its

quality lagged far behind and there was absence of adequate professionalism

and fair competition among the various players in the market. Besides, the

regulatory framework then prevailing was fragmented difficult, if not effective.

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6 - CONCLUSION

The merchant banker plays a vital role in channelizing the financial surplus of the society into productive investment avenues. Hence before selecting a merchant banker, one must decide what are the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the client will ensure success.

It can be said that this project helped me to understand every details about Merchant Banking and in future how it’s going to get emerged in the Indian economy. Hence, Merchant Banking can be considered as essential financial body in Indian financial system.

Market development is predicated on a sound, fair and transparent regulatory framework. To sustain the growth of the market and crystallize the growing awareness and interest into a committed, discerning and growing awareness and interest into a essential to remove the trading malpractice and structural inadequacies prevailing in the market, and provide the investors an organized, well regulated market place in future.

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7 - BIBLIOGRAPHY

BOOKS REFFERED

Merchant Banker – H.R. SUNEJA

Merchant Banking Principles & Practices-

H.R.MACHIRAJU

Merchant Banking in India- B.C. LAKSHMANNA & C.N.

KRISHNA NAIK

Merchant Banking – J.C.VERMA (3rd & 4th Edition)

WEBSITES

www.google.co.in www.yahoo.com www.economictimes.com www.jmmorgansranley.com www.dspml.com www.sebi.com

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