Nikhil Project

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PROJECT REPORT

ON

MERCHANT BANKING IN INDIA

NIKHIL S NAIR

DPGD/JL10/0823

SPECIALIZATION: - FINANCE

WELINGKAR INSTITUTE OF

MANAGEMENT DEVELOPEMNT & RESEARCH

MAY, 2012


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INDEX

SR NO. TITLE PAGE NO.

1 INTRODUCTION 3

2 RESEARCH OBJECTIVE 11

3 RESEARCH DESIGN / METHODOLOGY 15

4 RECOMMENDATIONS 45

5 FINDINGS AND OBSERVATIONS 48

6 CONCLUSION 58

7 REFERENCES 60


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INTRODUCTION


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INTRODUCTION

MERCHANT BANKING HISTORY

In late 17th and early 18th century Europe, the largest companies of the world were

merchant adventurers. Supported by wealthy groups of people and a network of overseas

trading posts, the collected large amounts of money to finance trade across parts of the

world. For example, The East India Trading Company secured a Royal Warrant from

England, providing the firm with official rights to lucrative trading activities in India.

This company was the forerunner in developing the crown jewel of the English Empire.

The English colony was started by what we would today call merchant bankers, because

of the firm's involvement in financing, negotiating, and implementing trade transactions.

The colonies of other European countries were started in the same manner. For example,

the Dutch merchant adventurers were active in what is now Indonesia; the French and

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

represent the product of merchant banking, as evidenced by the activities of the famous

Hudson Bay Company. One does not typically look at these countries' economic

development as having been fueled by merchant bank adventurers. However, the colonies

and their progress stem from the business of merchant banks, according to today's

accepted sense of the word.


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THE HISTORICAL MERCHANT BANK

Merchant banking, as the term has evolved in Europe from the 18th century to today,

pertained to an individual or a banking house whose primary function was to facilitate the

business process between a product and the financial requirements for its development.

Merchant banking services span from the earliest negotiations from a transaction to its

actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity was

directed towards a commodity trader/cargo owner who was involved in the buying,

selling, and shipping of goods. The role of the merchant banker, who had the expertise to

understand a particular transaction, was to arrange the necessary capital and ensure that

the transaction would ultimately produce "collectable" profits. Often, the merchant

banker also became involved in the actual negotiations between a buyer and seller in a

transaction.

THE MODERN MERCHANT BANK

During the 20th century, however, European merchant banks expanded their services.

They became increasingly involved in the actual running of the business for which the

transaction was conducted. Today, merchant banks actually own and run businesses for

their own account, and that of others. Since the 18th century, the term merchant banker

has, therefore, been considerably broadened to include a composite of modern day skills.

These skills include those inherent in an entrepreneur, a management advisor, a

commercial and/or investment banker plus that of a transaction broker. Today a merchant


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banker is who has the ability to merchandise -- that is, create or expand a need -- and

fulfill capital requirements. The modern European merchant bank, in many ways, reflects

the early activities and breadth of services of the colonial trading companies.

Most companies that come to a U.S. merchant bank are looking to increase

their financial stability or satisfy a particular, immediate capital need.

Professional merchant bankers must have: 1) an understanding of the product, its industry

and operational management; 2) an ability to raise capital which might or might not be

one's own (originally merchant bankers supplied their own capital and thereby took an

equity interest in the transaction); 3) and most importantly, effective skills in concluding

a transaction - the actual sale of the product and the collection of profit. Some people

might question whether or not there are many individuals or organizations who have the

abilities to fulfill all three areas of expertise.

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. A merchant banker, cognizant of capital

costs, looks for the best sources of capital, including its restrictions and dollar limitations.

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


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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.

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.

FINANCIAL MARKETS

Financial Markets provides services to institutions and large and medium-sized

enterprises. Its customer-based activities are organized into specialized businesses

operating in money markets, fixed-income securities and derivatives. Services are

provided through three front offices: trading, sales and research. A new trading system,

Click and Deal, was introduced in 2000, giving customers direct access to the trading

room. Financial Markets also acts as an adviser and executor of Asset & Liability

Management for Fortis. Together with Information Banking, Financial Markets provides

sophisticated services to institutional investors. Its sharper focus on risk-adjusted returns

is supplemented by a high quality of information, advice and customized solutions.

Merchant Banking Fortis supports institutional and professional customers through its

Merchant Banking business. Financial Markets, Investment Banking and Information

Banking services are provided under a one-stop concept. Customers are increasingly

demanding interrelated concepts, and Merchant Banking responds to this demand by


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offering cutting-edge, high-quality, dedicated services.

Fixed-income trading made an impressive contribution to overall profit, and issues

triggered a resounding growth in sales. Foreign exchange trading performance recovered

during the year, compensating for the earlier disappearance of intra-European exchange

markets. The volatile exchange rate between the US dollar and the euro generated

increased capital movements and restored volume. Money market results, however, were

depressed by the rise of short-term interest rates. In the year under review, Financial

Markets strengthened its reputation as a firstrate trading partner for primary bonds and

became one of the leading banks on the Eurobond market. In cooperation with Moodys

rating agency, Merchant Banking is currently developing a European benchmark credit

default model for unlisted companies. In 2001 a rating advisory desk was launched to

help corporate customers negotiate with rating agencies, thus enabling these companies

to attract new sources of finance. Advanced rating instruments will also benefit

institutional investors by expanding their investment alternatives


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Investment Banking

Investment Banking serves top institutional investors and large enterprises by handling

all market transactions in equity products. This business line capitalized on the increased

size and position of all Fortis activities, and thus managed to boost volume on its Benelux

home market. Primary market activity in Europe jumped remarkably from its 1999 level,

particularly in the first half of the year. Investment Banking aspires to a top five ranking

in all relevant European markets. To that end, it expanded its activities in Spain and

France, and Greenfield operations will be set up in Germany and Italy in 2001. In 2000

Investment Banking launched the Globe project to ensure simple and straight-through

processing of all stock exchange transactions. Corporate Finance & Capital Markets

specializes in mergers and acquisitions, initial public offerings and secondary offerings,

structuring and financial advice on capital markets. The banks activities in mergers and

acquisitions again showed vigorous growth in 2000. The current trend towards

concentration in industry and services is likely to continue in 2001, inspired by market

harmonization in the euro-zone.


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Information Banking

Information Banking performs clearing, custody, securities lending and financing,

offshore fund services and related activities. The business line has become a recognized

specialist in the investor services industry, offering services to third-party professional

players in the financial markets. Interest, fees and commissions have shown strong

growth, benefiting from volume growth of both new and existing customers in the

financial markets. Clearing activity in Europe increased its market share substantially.

The acquisition of a US-based clearing company has intensified the ambition to serve

market operators and financial institutions globally. This goal is supported by the strong

position in Europe in stock lending, repo/swap and securities financing markets.

Information Banking has gained undisputed recognition for the quality of its services as a

custodian. The business line holds in custody approximately EUR 500 billion in assets,

focusing on medium-sized institutions in Europe that require tailor-made service. The

business line also acts as a depository for Fortis group assets. Through state-of-the-art

information systems, based on a unique integrated platform, Information Banking is

permanently linked to various trading, clearing and settlement systems and to the main

financial markets. Likewise, customers can connect their systems in a variety of ways.

The communication and delivery systems are in the process of being web-enabled. In

2000 Information Banking received several awards for its custody and offshore services.


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RESEARCH OBJECTIVE


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OBJECTIVE AND SCOPE OF THE STUDY

STRUCTURE OF MERCHANT BANKING IN INDIA

RABO India Securities, a wholly owned subsidiary of Rabo India Finance, started its

merchant banking activities with an initial capital investment of Rs 5.5 crore, a press

release. Rabo India Securities (RIS) will offer investment banking products such as

advice on transactions ranging from capital structure to maximization of shareholder

value and protection against takeovers.

The licence also allows RIS to execute open offers on behalf of clients and to participate

in the capital raising. It also plans to introduce products relating to mergers and

acquisitions, initial public offers and bond offerings, in addition to expanding services

such as underwriting of securities. Mr Sanjiv Bhasin, Managing Director and Chief

Executive Officer for RIF, was quoted as saying, "Obtaining the merchant banking

licence enhances our ability to provide a comprehensive customised range of products

and services to prospective and existing wholesale clients."

New HR Initiatives

SEBI okays gold exchange funds

No more extension to Clause 49 deadline

Market regulator Securities and Exchange Board of India (Sebi that there will be no


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extension to the Clause 49 deadline There will be no extension to the Clause 49 deadline

Clause 49, which is popularly known as Corporate Governance clause, makes it

mandatory for all companies that there should be at least 50 per cent independent

directors on its Board.

The Sebi Board has approved insertion of a provision for launch of gold exchange trade

funds, besides introducing refund of payments through the electronic clearing system, Mr

Damodaran . The Board has also decided after Jagdish Kapoor Committee report that

transaction in access of Rs 5 lakh would require biometric identification system and those

below five lakh will require PAN Card.

Mr Damodaran all investors would be brought into the biometric identification system

over a period of time in a phased manner.

The Board has also approved to introduce the grading of initial public offering on an

optional basis, he added. On the eve of the deadline set by Sebi for appointment of

independent directors on boards of listed companies, as many as 13,000 professionals

have posted their resume on a website acting as a meeting platform for director aspirants

and companies. Demolishing the myth created by listed companies that there are not

enough professionals in the country, about 13,000 have enrolled in the website

(primedirectors.com ) created by Prime Database, its Managing Director Prithvi Haldea.

Of these, profiles of 7,732 professionals have already been hosted on the website while

the profiles of about 5,200 professionals were under processing. An analysis of the

profiles revealed the candidates were highly experienced. For example, there are 279 who

already hold 448 independent directorships on listed companies, 390 are IIM graduates,

178 are/were professors at IITs/IIMs/IISc, 700 are graduates from foreign universities


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like Harvard, Wharton, Kellog and Stanford. Meanwhile, Sebi has warned four brokers

for irregularities in maintaining and delay in delivery of contract notes, failure in

collecting upfront margins and non-maintenance of unique client code.

Two of the brokers are members of the National Stock Exchange, while one each is

registered with Calcutta Stock Exchange and Uttar Pradesh Stock Exchange, a SEBI

press note today .

Sykes & Ray Equities (I) Ltd was pulled up for delay in delivery of contract, while Nirpan

Securities was reprimanded for irregularities in maintaining the contract notes, failure to

collect upfront margins and for non-maintenance of unique client code. Both brokers are

members of NSE. CSE member Kanodia Stock Broking (Pvt) Ltd was warned for not

maintaining client registration forms and for failing to make payments to clients within

the statutory 48 hours.

UPSE member Atmaram Kejriwal & Co was upbraided by Sebi for not maintaining

margin deposit book and order book and failing to appoint compliance officer and direct

money transactions between members.


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RESEARCH DESIGN

&

METHODOLOGY


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RESEARCH DESIGN AND METHODOLOGY

Issue of Prospectus: Merchant banker is the intermediary appointed by companies in

the primary market issue. It has to look at the entire issue management and work as the

manager to the Public Issue. The merchant banker has to be registered with SEBI.

Principal steps in the issue of prospectus are as follows:

Design and vetting of prospectus: The prospectus is a document to communicate

information about the company and the proposed security issue to the investing public.

The draft prospectus containing the disclosures has to be vetted first by the merchant

banker before a public issue is made.

Nature of Instrument: The merchant banker has to advise the company on the choice

of instrument, equity, preference share, convertible debenture or non-convertible

debentures. The amount of capital to be raised is mentioned in detail in the prospectus. It

should also show the uses of funds raised by the issue.

Financial Results: Prospectus has to give past financial results of the company as well

as the projections of the companys operations in future. It must mention the details of the

companys business and outlook for the future.


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Risk factors: The most important aspect of contents of the Prospectus is the risk factors

of the companys business that must be clearly spelt out. Prospectus should give factual

position and list out the risks in business it is operating. It should not draw unrealistic or

unduly rosy picture.

Pricing of the Issue: The merchant bankers in consultation with the company

decide the pricing of the issue. If it is equity, the issue price, in debentures, the rate of

interest has to be decided. In case of convertible debentures, the terms of conversion into

equity have to be clearly spelt out. Since the pricing of equity is not regulated to formula,

and is governed by free pricing mechanism, realistic pricing has to be decided and

mentioned in the prospectus.

Appointment of Bankers: The bankers to the issue collect money on behalf of the

company from the applicants.

Appointment of Registrars: The registrars to the issue perform a series of tasks from

the time the subscription is closed to the time the allotment is made.

Appointment of Brokers and principal Brokers: The brokers to the issue facilitate

its subscription.

Filing of the Prospectus with the Registrar of companies .

Printing and despatch of prospectus and application form: After the prospectus


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is filed with the Registrar of Companies, the company should print the prospectus and the

application form.

Filing of Initial Listing Application: Within 10 days of filing the prospectus, the

initial listing application must be made to the concerned stock exchanges, along with the

initial listing fees.

Promotion of the Issue: The Promotional campaign typically commences with the

filing of the prospectus with the Registrar of Companies and ends with the release of the

statutory announcement of the issue.

Statutory Announcement: The statutory announcement of the issue must be made

after seeking the approval of the lead stock exchange. The must be published at least 10

days before the opening of the subscription list.

Collection of Applications: The statutory announcement (as well as the prospectus)

specifies when the subscription would open, when it would close, and the banks where

the applications can be made.

Processing of Applications: The application forms received by the bankers are

transmitted to the registrars to the issue for processing.

Establishing the Liability of Underwriters: If the issue is under subscribed, the

liability of the underwriters has to be established.

Allotment of Shares: If the issue is under subscribed or just fully subscribed, the

company may allot shares applied for by the applicants after securing the formal approval

of the concerned stock exchange(s).


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Listing of the Issue: The detailed listing application should be submitted to the

concerned stock exchanges along with the listing agreement and the listing fee.

Cost of Public Issue: The cost of public issue is normally between 8 to 12 per cent

depending on the size of the issue and the level of marketing effort. The important

expenses incurred for a public issue are Underwriting expenses, Brokerage, fees to the

managers to the issue, fees for registrars to the issue, printing expenses, postage expenses,

advertising and publicity expenses, listing fees, stamp duty.


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INVESTMENT & MERCHANT BANKING

Its track record, portfolio and information of its Trustee Company and Asset Management

Co. SEBI has also prescribed investment limits and norms, limits on expenses, spread

between sale and repurchase prices, time period for despatch of statements and payments.

All these regulations go in protecting small investors interest. SEBI also requires NAVs

of schemes and their entire portfolio to be disclosed periodically. There has been

substantial improvement in the disclosure of quality of information and its periodicity.

Transparency in disclosure of mutual fund schemes information has gone a long way in

improving investor confidence. SEBI also deals with investors complaints and their

redressal quickly by following up with companies, stock exchanges, mutual fund and

other intermediaries. In its effort to protect small investors interest, SEBI continually

reviews operations of all capital market functionaries and adopts suitable changes.

Quality of Management

The management of the company has become one of the prime considerations in

valuation of equity shares. Some of the factors giving indication of good quality

management indication can be professional managers running the day to day

management, capability of management to innovate and ability to face competition,

transparency in management policies, high level of corporate and accounting disclosures,

unblemished track record in project implementation, arms length distance in dealing with

group companies, protecting of minority shareholders etc. With greater emphasis being


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placed on corporate governance the investors have started shunning companies which are

not so good quality and thus these companies even though may be declaring good EPS

numbers do not get a fair PE multiple ratings.

Dividend Payout Ratio

On studying the cross section data of a sample of large number of companies it has been

found that the

Dividend payout ratios and Per multiples have a direct relationship. This basically implies

that companies which declare high rates of dividends from the earnings they generate are

appreciated by the investors.

The investor thus attach high PE multiples to these companies.

Size of the company

Size of a company becomes equally important in a rating a stock in the terms of PE

multiples. Generally, The leading players in the industry are able to sustain bad times

even though the profitability is affected.

On the other hand, small players are able to grow in the industry when the outlook is

good, but in rough times the possibilities of these units becoming unviable is quite high.

Quality of Earnings

For the financial analyst besides the earnings being important, equally important is the

quality of earning. By quality we imply that the source of earnings is from core business


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operation and not due to financial engineering, change in accounting policy, one time

provision write back, tax deferment/planning income from trading in commodities,

treasury operation or income from other sources like sale of financial asset or real estate.

One of these acts of management of the company may boost the bottom line or EPS of the

company but these are not sustainable sources of revenue stream.

Stability of Revenue

Broadly, the companies can be divided into two categories the cyclical stocks and the non

cyclical. Cyclical industries are the ones which gain the most in periods of economic slow

down or recession. Whereas non cyclical industries are defensive in nature these

companies are unaffected by the economic slow down.

The companies which have stable revenue stream generally tend to get higher valuations

in terms of PE multiples.

Nature of Business

The size of revenue may be the same for two different companies but their valuations may

grossly differ. As the valuation depend also on the nature of business, in case the revenue

of the company is being generated from commodity based business then the ratings are

much lower than the companies which have brand based business. As the entry barriers in

brand based business are much stronger than in commodity based business.


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Extent of Institutional ownership

The extent of institutional ownership gives general 2U general investor level on comfort

about the credibility of the management and operations of the company. The companies

in which financial institutions have large stakes also have nominees on the board who are

supposed to ensure that the general investors interest are protected. In the Indian context,

companies having a high Foreign Institutional Investor holding are valued higher by the

market.

Dematerialisation & Stock

The National Securities Depository Limited (NSDL) is an organisation promoted by

IDBI, UTI and National Stock Exchange of India to provide electronic depository

facilities for securities traded in the equity and debt market.

The National Securities Depository Limited has been registered by SEBI as Indias first

depository to facilitate trading and settlement of securities in dematerialisation form.

Dematerialisation is a process by which the physical certificates of an investor are taken

back by the company/register and actually destroyed and an equivalent number of

securities are credited in the electronic holdings of that investor. This is done at the

request of the investor. An investor will have to first open an account with a depository

participant and then request for the dematerialisation of his certificates through the

depository participant so that the dematerialised holdings can be credited into that

account.


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BANKERS FOR MERCHANT BANKING

AN INTRODUCTION: Corporation Bank is also one of the leading Merchant

Bankers in India, offering specialised services to Banks, PSUs, State owned

Corporations, Local Statutory bodies and corporate sector.

They are Category I Merchant Banker authorised by Securities and Exchange Board of

India for Issue Management (Public / Rights / Private Placement Issues), Underwriting of

Issues, Consultantcy / Advisory Services to an issue including Corporate Advisory

Services etc.

They are also SEBI registered Bankers to an Issue with network of dedicated Capital

Market Service Branches to handle "Capital Market related assignments".

It Undertakes project appraisals connected with resource raising plans from Capital

Market/ Debt Markets and facilitate tie-ups with Banks / Financial Institutions and

Potential Investors.

Their uniqueness is extending services under single window concept covering the

following areas:

Merchant Banking Commercial Banking Investments Bankers to Issue - Escrow Bankers Underwriting Loan Syndication


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They are one of the leading Merchant Bankers in India, having handled issues ranging

from Rs.1 crore to Rs.1500 crores, involving various types of industries, banks, statutory

Bodies etc. and have an edge in handling

SPECTRUM OF SERVICES :

Equity Issue (Public/Rights) Management

Debt Issue Management

Private Placement

Project Appraisal

Corporate Advisory Services

Mergers and Acquisitions

Buy Back Assignments

Share Valuations

ISSUE MANAGEMENT SERVICES :

Project Appraisal

Capital structuring

Preparation of offer document

Tie Ups (placement)

Formalities with SEBI / Stock Exchange / ROC

Underwriting


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Promotion /Marketing of Issues

Collecting Banker / Banker to an issue

Post Issue Management

Refund Bankers

PROJECT APPRAISAL CAPABILITY:

Corporation Bank have a separate INDUSTRIAL ADVISORY DIVISION / PROJECT

FINANCE DIVISION consisting of experienced and technically qualified personnel for

appraisal of all industrial projects and an exclusive AGRICULTURAL

CONSULTANCY SERVICES SECTION for appraising agro based projects.

MARKETING EDGE / PRODUCTS TO RETAIL INVESTORS:

Keeps the list of Potential Investors - Institutions, Provident, Pension & Gratuity Funds,

High Net Worth Individuals and others updated and continuously assess their investment

appetites and help issuers in effective marketing of the products.

Stock Exchanges

An effective monitoring and surveillance mechanism is an important element

contributing to the efficiency and integrity of stock exchanges. The automation process

initiated at the BSE, NSE, OTCEI and other exchanges has made it possible to put such a

monitoring mechanism in place. The reach of the capital market is also increasing

significantly through the same process of automation. SEBI allowed expansion of the


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trading terminals of screen based trading systems of stock exchanges to cities having no

stock exchange. Expansion to cities with stock exchanges has also been permitted,

subject to an understanding with the local exchange allowing the installation of outside

terminals within its jurisdiction. The participating exchange would keep its membership

open to the brokers of the other local exchanges. It will ensure an adequate arrangement

for resolving investor grievances and for timely settlement of arbitration cases arising out

of trades executed on the extended terminals. The expansion of Bombay On Line Trading

(BOLT) system of the stock exchange, Mumbai to the trading systems of other exchanges

will be subject to general conditions. These include ensuring adequate monitoring and

surveillance mechanism, stipulation of usual margins, capital adequacy, intra-day trading

limits fixed for the broker stock exchange and the introduction of trade guarantees. The

expansion of trading networks will lead to healthy competition between various stock

exchanges and increase their efficiency.

SEBI has directed all stock exchanges to set up clearing houses or clearing corporations

and to provide trade guarantees. This would reduce counterparty risks and enable

investors trading through the exchanges to take advantage of settlement of transactions

through a depository. Uniform norms and procedures for timely resolution of bad

deliveries have been prescribed and are soon expected to become operational with the

setting up of Bad Delivery Cells in the exchanges. The National Securities Clearing

Corporation Limited (NSCCL) is entrusted with the task of guaranteeing settlement of

trades in the capital market segment of the NSE. It has made considerable progress in

enhancing clearing facilities in other regions by establishing regional clearing facilities.

The setting up of Delhi Regional Clearing House and other regional clearing facilities of


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the NSCCL, will enable the regional relocation of the settlement facilities. This will

increase the efficiency of the system and lead to timely settlement of transactions on the

NSE.

Stock Exchanges have been disallowed from renewing contracts in cash group of shares

from one settlement to another. They have to institute a buy-in or auction procedure on

the lines of that being followed by the National Stock Exchange. A time limit of four

months has also been prescribed for the disposal of arbitration cases by the exchanges. In

view of the falling delivery percentages, exchanges have been asked to collect daily

margins on the notional loss of a broker for every scrip. Quarterly margins have been

imposed on the basis of concentration ratios.

The expansion of the NSE trading network, and the trading networks of the Mumbai and

other stock exchanges, the expansion of the clearing facilities of the NSCCL to centres

outside Mumbai, the setting up of clearing corporations or clearing houses by the other

exchanges, and the expansion of the network of depository participants is expected to

generate healthy competition between the stock exchanges, stock brokers and other

market participants. This is expected to provide transparent and efficient services to

investors, as well as bring investors in diverse parts of the country within a nation-wide

trading and settlement framework.


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Venture Capital Funds

The SEBI Act requires SEBI to regulate venture capital activity. This area is of particular

importance to our markets and needs to be nurtured. Hence, the regulations (November

1996) provide for a lot of flexibility. The regulations allow investments only from

"institutional investors" and "high net worth" individuals who are in a position to assess

and evaluate the investment risk in such funds. Regulations allow venture capital funds to

make equity investments, invest in unlisted companies, finance turnaround companies

and permit them to provide loans and other forms of assistance. There is no restriction on

the period within which the funds raised should be utilised. The same could be listed on a

stock exchange after a period of 3 years from the date of initial setting up subject to listing

agreements and appropriate regulations. Venture capital funds may be set up as

companies or trusts. The entry of institutional investors and high net worth individuals

through venture capital activities is expected to provide an important source of

institutional funds to fledgling firms.


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Merchant banking- an overview

Companies raise capital by issuing securities in the market. Merchant bankers act as

intermediaries between the issuers of capital and the ultimate investors who purchase

these securities.

Merchant banking is the financial intermediation that matches the entities that need

capital and those that have capital. It is a function that facilitates the low of capital in the

market


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SCOPE OF MERCHANT BANKING ACTIVITIES

Merchant banking activity helps:

In channelising the financial surplus of the general public into productive investment

avenues.

To coordinate the activities of various intermediaries to the share issue such as the

registrar, bankers, advertising agency, printers, underwriters, brokers etc.

To ensure the compliance with rules and regulations governing the securities market

Functions of a merchant banker

The following comprise the main functions of a merchant banker:

Management of debt and equity offerings- This forms the main function of the

merchant banker. He assists the companies in raising funds from the market. The main

areas of work in this regard include: instrument designing, pricing the issue, registration

of the offer document, underwriting support, marketing of the issue, allotment and

refund, listing on stock exchanges.

Placement and distribution- The merchant banker helps in distributing various

securities like equity shares, debt instruments, mutual fund products, fixed deposits,

insurance products, commercial paper to name a few. The distribution network of the

merchant banker can be classified as institutional and retail in nature. The institutional

network consists of mutual funds, foreign institutional investors, private equity funds,

pension funds, financial institutions etc. The size of such a network represents the

wholesale reach of the merchant banker. The retail network depends on networking with

investors.


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Corporate advisory services-Merchant bankers offer customised solutions to their

clients financial problems. The following are the main areas in which their advice is

sought:

Financial structuring includes determining the right debt-equity ratio and gearing

ratio for the client, the appropriate capital structure theory is also framed. Merchant

bankers also explore the refinancing alternatives of the client, and evaluate cheaper

sources of funds. Another area of advice is rehabilitation and turnaround management.

In case of sick units, merchant bankers may design a revival package in coordination with

banks and financial institutions. Risk managementis another area where advice from a

merchant banker is sought. He advises the client on different hedging strategies and

suggests the appropriate strategy.

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

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

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

viability of the proposed project. They also assist the client in preparing different

documents like the detailed project report.

Loan syndication-Merchant bankers arrange to tie up loans for their clients. This takes

place in a series of steps. Firstly they analyse the pattern of the clients cash flows, based

on which the terms of borrowings can be defined. Then the merchant banker prepares a

detailed loan memorandum, which is circulated to various banks and financial institutions

and they are invited to participate in the syndicate.


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The banks then negotiate the terms of lending on the basis of which the final allocation is

done.

Providing venture capital and mezzanine financing- Merchant bankers help

companies in obtaining venture capital financing for financing their new and innovative

strategies.

India

Reserve Bank of India (Central bank)

State Bank of India & 7 Associates

State Bank of India

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala

State Bank of Saurashtra

State Bank of Travancore

Nationalized banks

Bank of India

Bank of Baroda

Canara Bank

Corporation Bank

Indian Bank

Indian Overseas Bank
http://en.wikipedia.org/wiki/India%20/%20Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_India%20/%20Reserve%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Central_bank%20/%20Central%20bankhttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Bikaner_%26_Jaipur%20/%20State%20Bank%20of%20Bikaner%20&%20Jaipurhttp://en.wikipedia.org/wiki/State_Bank_of_Hyderabad%20/%20State%20Bank%20of%20Hyderabadhttp://en.wikipedia.org/wiki/State_Bank_of_Indore%20/%20State%20Bank%20of%20Indorehttp://en.wikipedia.org/wiki/State_Bank_of_Mysore%20/%20State%20Bank%20of%20Mysorehttp://en.wikipedia.org/wiki/State_Bank_of_Patiala%20/%20State%20Bank%20of%20Patialahttp://en.wikipedia.org/wiki/State_Bank_of_Saurashtra%20/%20State%20Bank%20of%20Saurashtrahttp://en.wikipedia.org/wiki/State_Bank_of_Travancore%20/%20State%20Bank%20of%20Travancorehttp://en.wikipedia.org/wiki/Bank_of_India%20/%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Bank_of_Baroda%20/%20Bank%20of%20Barodahttp://en.wikipedia.org/wiki/Canara_Bank%20/%20Canara%20Bankhttp://en.wikipedia.org/wiki/Corporation_Bank%20/%20Corporation%20Bankhttp://en.wikipedia.org/wiki/Indian_Bank%20/%20Indian%20Bankhttp://en.wikipedia.org/wiki/Indian_Overseas_Bank%20/%20Indian%20Overseas%20Bankhttp://en.wikipedia.org/wiki/Indian_Overseas_Bank%20/%20Indian%20Overseas%20Bankhttp://en.wikipedia.org/wiki/Indian_Bank%20/%20Indian%20Bankhttp://en.wikipedia.org/wiki/Corporation_Bank%20/%20Corporation%20Bankhttp://en.wikipedia.org/wiki/Canara_Bank%20/%20Canara%20Bankhttp://en.wikipedia.org/wiki/Bank_of_Baroda%20/%20Bank%20of%20Barodahttp://en.wikipedia.org/wiki/Bank_of_India%20/%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Travancore%20/%20State%20Bank%20of%20Travancorehttp://en.wikipedia.org/wiki/State_Bank_of_Saurashtra%20/%20State%20Bank%20of%20Saurashtrahttp://en.wikipedia.org/wiki/State_Bank_of_Patiala%20/%20State%20Bank%20of%20Patialahttp://en.wikipedia.org/wiki/State_Bank_of_Mysore%20/%20State%20Bank%20of%20Mysorehttp://en.wikipedia.org/wiki/State_Bank_of_Indore%20/%20State%20Bank%20of%20Indorehttp://en.wikipedia.org/wiki/State_Bank_of_Hyderabad%20/%20State%20Bank%20of%20Hyderabadhttp://en.wikipedia.org/wiki/State_Bank_of_Bikaner_%26_Jaipur%20/%20State%20Bank%20of%20Bikaner%20&%20Jaipurhttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Central_bank%20/%20Central%20bankhttp://en.wikipedia.org/wiki/Reserve_Bank_of_India%20/%20Reserve%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/India%20/%20India


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Punjab & Sind Bank

Punjab National Bank

Vijaya Bank

Central Bank of India

Union Bank of India

Allahabad Bank

United Bank of India

Bank of Maharashtra

Andhra Bank

Dena Bank

Oriental Bank of Commerce

UCO Bank

Vysya Bank

Karur Vysya Bank

Lakshmi Vilas Bank

Major private banks

HDFC Bank

ICICI Bank

IDBI Bank

UTI Bank

IndusInd Bank

Kotak Mahindra Bank

Yes Bank
http://en.wikipedia.org/wiki/Punjab_%26_Sind_Bank%20/%20Punjab%20&%20Sind%20Bankhttp://en.wikipedia.org/wiki/Punjab_National_Bank%20/%20Punjab%20National%20Bankhttp://en.wikipedia.org/wiki/Vijaya_Bank%20/%20Vijaya%20Bankhttp://en.wikipedia.org/wiki/Central_Bank_of_India%20/%20Central%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Union_Bank_of_India%20/%20Union%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Allahabad_Bank%20/%20Allahabad%20Bankhttp://en.wikipedia.org/wiki/United_Bank_of_India%20/%20United%20Bank%20of%20Indiahttp://en.wikipedia.org/w/index.php?title=Bank_of_Maharashtra&action=edit%20/%20Bank%20of%20Maharashtrahttp://en.wikipedia.org/wiki/Andhra_Bank%20/%20Andhra%20Bankhttp://en.wikipedia.org/wiki/Dena_Bank%20/%20Dena%20Bankhttp://en.wikipedia.org/w/index.php?title=Oriental_Bank_of_Commerce&action=edit%20/%20Oriental%20Bank%20of%20Commercehttp://en.wikipedia.org/wiki/UCO_Bank%20/%20UCO%20Bankhttp://en.wikipedia.org/wiki/Vysya_Bank%20/%20Vysya%20Bankhttp://en.wikipedia.org/wiki/Karur_Vysya_Bank%20/%20Karur%20Vysya%20Bankhttp://en.wikipedia.org/w/index.php?title=Lakshmi_Vilas_Bank&action=edit%20/%20Lakshmi%20Vilas%20Bankhttp://en.wikipedia.org/wiki/HDFC_Bank%20/%20HDFC%20Bankhttp://en.wikipedia.org/wiki/ICICI_Bank%20/%20ICICI%20Bankhttp://en.wikipedia.org/wiki/IDBI_Bank%20/%20IDBI%20Bankhttp://en.wikipedia.org/w/index.php?title=UTI_Bank&action=edit%20/%20UTI%20Bankhttp://en.wikipedia.org/w/index.php?title=IndusInd_Bank&action=edit%20/%20IndusInd%20Bankhttp://en.wikipedia.org/wiki/Kotak_Mahindra_Bank%20/%20Kotak%20Mahindra%20Bankhttp://en.wikipedia.org/w/index.php?title=Yes_Bank&action=edit%20/%20Yes%20Bankhttp://en.wikipedia.org/w/index.php?title=Yes_Bank&action=edit%20/%20Yes%20Bankhttp://en.wikipedia.org/wiki/Kotak_Mahindra_Bank%20/%20Kotak%20Mahindra%20Bankhttp://en.wikipedia.org/w/index.php?title=IndusInd_Bank&action=edit%20/%20IndusInd%20Bankhttp://en.wikipedia.org/w/index.php?title=UTI_Bank&action=edit%20/%20UTI%20Bankhttp://en.wikipedia.org/wiki/IDBI_Bank%20/%20IDBI%20Bankhttp://en.wikipedia.org/wiki/ICICI_Bank%20/%20ICICI%20Bankhttp://en.wikipedia.org/wiki/HDFC_Bank%20/%20HDFC%20Bankhttp://en.wikipedia.org/w/index.php?title=Lakshmi_Vilas_Bank&action=edit%20/%20Lakshmi%20Vilas%20Bankhttp://en.wikipedia.org/wiki/Karur_Vysya_Bank%20/%20Karur%20Vysya%20Bankhttp://en.wikipedia.org/wiki/Vysya_Bank%20/%20Vysya%20Bankhttp://en.wikipedia.org/wiki/UCO_Bank%20/%20UCO%20Bankhttp://en.wikipedia.org/w/index.php?title=Oriental_Bank_of_Commerce&action=edit%20/%20Oriental%20Bank%20of%20Commercehttp://en.wikipedia.org/wiki/Dena_Bank%20/%20Dena%20Bankhttp://en.wikipedia.org/wiki/Andhra_Bank%20/%20Andhra%20Bankhttp://en.wikipedia.org/w/index.php?title=Bank_of_Maharashtra&action=edit%20/%20Bank%20of%20Maharashtrahttp://en.wikipedia.org/wiki/United_Bank_of_India%20/%20United%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Allahabad_Bank%20/%20Allahabad%20Bankhttp://en.wikipedia.org/wiki/Union_Bank_of_India%20/%20Union%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Central_Bank_of_India%20/%20Central%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Vijaya_Bank%20/%20Vijaya%20Bankhttp://en.wikipedia.org/wiki/Punjab_National_Bank%20/%20Punjab%20National%20Bankhttp://en.wikipedia.org/wiki/Punjab_%26_Sind_Bank%20/%20Punjab%20&%20Sind%20Bank


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Federal Bank

Catholic Syrian Bank

HSBC

ABN AMRO

Standard Chartered

CITI
http://en.wikipedia.org/wiki/Federal_Bank%20/%20Federal%20Bankhttp://en.wikipedia.org/w/index.php?title=Catholic_Syrian_Bank&action=edit%20/%20Catholic%20Syrian%20Bankhttp://en.wikipedia.org/wiki/Hongkong_and_Shanghai_Banking_Corporation%20/%20Hongkong%20and%20Shanghai%20Banking%20Corporationhttp://en.wikipedia.org/wiki/ABN_AMRO%20/%20ABN%20AMROhttp://en.wikipedia.org/wiki/Standard_Chartered%20/%20Standard%20Charteredhttp://en.wikipedia.org/wiki/CITI%20/%20CITIhttp://en.wikipedia.org/wiki/CITI%20/%20CITIhttp://en.wikipedia.org/wiki/Standard_Chartered%20/%20Standard%20Charteredhttp://en.wikipedia.org/wiki/ABN_AMRO%20/%20ABN%20AMROhttp://en.wikipedia.org/wiki/Hongkong_and_Shanghai_Banking_Corporation%20/%20Hongkong%20and%20Shanghai%20Banking%20Corporationhttp://en.wikipedia.org/w/index.php?title=Catholic_Syrian_Bank&action=edit%20/%20Catholic%20Syrian%20Bankhttp://en.wikipedia.org/wiki/Federal_Bank%20/%20Federal%20Bank


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Merged or Defunct banks in India

Arbuthnot & Co

Bank of Bombay (now part of the State Bank of India)

Bank of Calcutta (now part of the State Bank of India)

Bank of Chettinad

Bank of Madras (now part of the State Bank of India)

Binny & Co

NEW LAUNCHES OF MERCHANT BANKERS

RHB Merchant Bank Runs Windows Server 2003 Directory Services RHB

Sakura Merchant Bankers Berhad (RHB Sakura) is one of Malaysia's leading merchant

banks. It is principally involved in the provision of corporate finance and advisory,

corporate banking, debt capital markets, treasury services and Islamic finance. The

principal activities of its subsidiaries are stock broking, asset management, unit trust

management and nominee services.

RHB Sakura has been awarded Malaysias Best Domestic Equity House 2003 by

Asiamoney magazine.

The merchant bank, was adviser and joint lead manager and underwriter to two of the

countrys largest initial public offerings (IPOs) in recent times, Maxis Communications

Berhads RM3.1 billion offering and PLUS Expressways Berhads RM2.3 billion

offering. RHB Sakura managed IPOs totaling RM5.41 billion in value which accounted

for about 75% of the total value of IPOs during the year.
http://en.wikipedia.org/wiki/Arbuthnot_%26_Co%20/%20Arbuthnot%20&%20Cohttp://en.wikipedia.org/w/index.php?title=Bank_of_Bombay&action=edit%20/%20Bank%20of%20Bombayhttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/w/index.php?title=Bank_of_Calcutta&action=edit%20/%20Bank%20of%20Calcuttahttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Bank_of_Chettinad%20/%20Bank%20of%20Chettinadhttp://en.wikipedia.org/wiki/Bank_of_Madras%20/%20Bank%20of%20Madrashttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/w/index.php?title=Binny_%26_Co&action=edit%20/%20Binny%20&%20Cohttp://en.wikipedia.org/w/index.php?title=Binny_%26_Co&action=edit%20/%20Binny%20&%20Cohttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/wiki/Bank_of_Madras%20/%20Bank%20of%20Madrashttp://en.wikipedia.org/wiki/Bank_of_Chettinad%20/%20Bank%20of%20Chettinadhttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/w/index.php?title=Bank_of_Calcutta&action=edit%20/%20Bank%20of%20Calcuttahttp://en.wikipedia.org/wiki/State_Bank_of_India%20/%20State%20Bank%20of%20Indiahttp://en.wikipedia.org/w/index.php?title=Bank_of_Bombay&action=edit%20/%20Bank%20of%20Bombayhttp://en.wikipedia.org/wiki/Arbuthnot_%26_Co%20/%20Arbuthnot%20&%20Co


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THE SITUATION

Treasury services is one of the core businesses of RHB Sakura but by last year, its legacy

treasury management system which it had been using since 1994 was due for an upgrade.

The mission critical treasury management system is one of the bank's key systems and it

handles money market transactions, as well as its corporate banking business. It is also

linked to its accounting system.

In September 2002, RHB Sakura decided to upgrade its existing treasury management

system to one that runs on the Microsoft platform, says Mahathir Dato' Mohd Ismail,

RHB Sakura's General Manager, Finance & General Services.

The new system which is designed to run on Windows 2000 requires Directory Services.

Microsoft proposed a solution which will co-exist the important Directory Services on

Windows Server 2003 with the Treasury Management System on Windows 2000.

After internal discussions, RHB Sakura took up the offer to participate in Microsoft's

Early Adopters Programme (EAP) for Windows Server 2003, which was then in beta

testing stage.

According to Mahathir, RHB Sakura took a calculated decision to go for a relatively new

operating system. If the solution did not work smoothly on Windows Server 2003, it

would have delayed our upgrading programme, he adds.

Mahathir however Microsoft's reputation for world-class software and Microsoft

Malaysia's assurance of technical support for RHB Sakura's implementation swung the

pendulum in Windows Server 2003's favour.


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We decided it was something seriously worth considering, Mahathir says.

RHB Sakura had other options on the table as it evaluated the platform for the new

treasury system in the earlier months, including UNIX. The front-end of the upgraded

treasury system was designed to run on Windows. But we had the option of choosing

either Windows or UNIX for the back end, says Mahathir.

Economically, its not a good thing to have two systems running and managing both

would also be a problem. So, choosing the Microsoft platform for both the front and back

ends was the right decision, says Mahathir.

Solution

Computer Systems Advisers (M) Berhad together with Microsoft Consulting Services

(MCS) provided the technical assistance to RHB Sakura to evaluate, test and deploy two

units of Windows Server 2003 as Domain Controllers for the bank's upgraded treasury

management system. This include testing the functionality and stability of the new

treasury system on the Windows Server 2003 Active Directory structure.

The implementation has gone relatively smoothly. We have not encountered any major

problems with Windows Server 2003, says Mahathir.

RHB Sakura currently has about 200 users running on a mix of Windows 2000

Professional and Win9X operating systems, accessing various applications in a single

Active Directory Service which offers File & Print services as well. In the case of the old

treasury management system, it was running on a proprietary Hewlett-Packard system

comprising the HP MPE/iX operating system and HP 3000 hardware.

Currently, 50 users will have access to the new system and RHB Sakura is planning to


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migrate another 100 users from Novell Netware to Windows Server 2003.

We are also pleased that Microsoft kept to its assurance in providing full support for the

project. We have had very good support and back-up from MCS and CSA. Everything is

progressing smoothly, we have no complaints.

Benefits

Automating business processes

The new solution running on Windows Server 2003 will help RHB Sakura achieve

greater efficiency gains, particularly in the area of fully automating several of its business

processes, management reporting and statutory reporting to the relevant authorities.

It makes our work much easier as we have to capture data and generate numerous reports

on a daily, weekly, fortnightly, monthly, semi-annual and annual basis, he adds.

Enhanced Security

A highly secured IT system is a prime concern for banks. RHB Sakura is no different.

Security will always top the list of our concerns. The last thing we want is for someone

to mess up our systems. The first thing we looked at in this system was security, Mahathir

says.

Windows Server 2003 offered a number of significant security enhancements over

Windows 2000. That is a major plus for us.

Windows Server 2003 is the first operating system since Microsoft launched its

Trustworthy Computing initiative pledging to make all its software secure by design,


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secure by default and secure in deployment.

Flexibility in administration

Windows Server 2003 offers a flexibility, without compromising on security, which

RHB Sakura appreciates. For example, Windows Server 2003 provides the option to

rename an active directorya feature which is absent in Windows 2000, says Mahathir.

Mahathir does not anticipate having to add more IT staff to handle the Windows Server

2003 platform. We run a lean IT section supporting about 200 users. System

administration is easier with Windows Server 2003, he concludes.

Solid Foundation for growth

For RHB Sakura, the treasury management system is mission critical as it handles

voluminous transactions with very little room for the system to fail.

For us, it is vital that our IT infrastructure be on a reliable platform and Windows 2003

gives us that confidence, says Mahathir.

He this confidence in Microsoft's most advanced operating is further reflected in RHB

Sakura's plan to migrate another 100 users from Novell Netware to Windows Server

2003. That tells you about the system that we have put in place the features that we

need are all there.


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Common agency for share registry

Instead of taking action against those very few companies which would have been guilty

of having adopted unfair practices, knowingly or otherwise, causing inconvenience or

loss to investors, SEBI has chosen to direct all the companies to appoint a single agency

the company itself or a Registrar and Transfer (R&T) agentto handle the registry

work relating to both physical and demat holding. The practice followed by almost all the

listed companies before the issue of the circular was:

Appoint R&T agents only for the shareholding in dematerialised form

Handle requests from investors for conversion of their holding in physical form into

electronic holding, which covered entire processreceipt of the request for conversion

along with the original share certificates; Verify the documents so received and prepare

the advice to the R&T agents (RTAs) to inform the depository concerned for

confirmation of the conversion into demat form; and Handle the transfer/transmission of

shares held in physical form inhouse.

In this arrangement, companies were better able to monitor the work done by the RTA

the requests from shareholders being processed by companies to be forwarded to RTA on

a fortnightly/weekly basis, the RTA simply communicated electronically to the

depository (NSDL/CDSL as the case may be) for updating of the holding in demat form

at the depository's end. Every week, an updated list of shareholders in demat from was

electronically would be obtained by the RTA and forwarded to the company concerned.

This list would be reviewed by the companies to ensure that all the confirmation given by


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them were included in the list as also to scan through the list to have an idea of the

shareholding as of a date. The RTA in such an arrangement was only a `courier' who

would interact between the company and the depository.

All the work related to any corporate action such as payment of dividend, allotment of

bonus/rights shares, even in respect of shareholdings in demat form, was done under the

supervision of the companyit was the RTA who was officially the nominated agency

for share registry work for electronic holding too. The number of complaints from

shareholders during this period was much less compared to the earlier period when share

transfers were mostly in physical form.

Further, one cannot equate the role of an RTA for shares in physical form to its

responsibilities for shares in demat form. The track record of the RTAs in handling the

public/rights issue/bonus issue/share transfers in physical form is well-known.

However, the number of shares transfers taking place in physical form are far less today;

most of the investors have opted for dematerialised holding to avail of the benefits

accruing to them as a result of converting their physical holding into holding in electronic

mode and trading in demat form. In the current context, there is little inclination on RTAs'

part to provide better investor service; on the other hand, the damage that may be caused

by these RTAs are manifold for the following reasons:

The business of RTA as such is not remunerative and they cannot afford to pay attractive

wages for their employees, with the result that they employ deficient people and the

quality of the services suffer.

Terms of employment not being conducive, high rate of labour turnover is a common

feature with all RTAs. This leads to emergence of fresh batch of employees who are


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novice in the field. For RTAs, this factor merits the least importance and they are more

concerned about the increased volume of business/new clients rather than improving the

infrastructure efficiency.

Cumulative effect of the above two factors results in very poor management of the

day-to-day affairs of the RTAs, affecting the level of service and defeating the very

purpose for which the RTAs are engaged by companies.

With cut-throat competition in this line of business, many RTAs are closing down

business and, in these circumstances, it is only the investors who are affected the most.

However, renowned groups of companies have set up their own RTAs to cater to the

requirement of all the companies in the group; some big companies have obtained the

SEBI recognition as a RTA for their inhouse share registry But all firms cannot afford to

get RTA registration for their inhouse share registry since the connectivity with each of

the depository requires huge capital outlay, while the effective utilisation of the facilities

for their captive purpose will be negligible.

Thus, barring a few companies/groups of firms, that have their own RTAs, all listed

companies are forced to surrender their inhouse share registry that are equipped to handle

shares in physical form only, in favour of the RTAs.

The complaints from investors that may be received by companies/referred to SEBI in the

near future would certainly increase manifold, thanks to the level of services provided by

the RTAs. This at least should make SEBI review its indiscreet decision, forcing

companies to appoint RTAs, but it is only the investors who would have to bear the brunt

for no fault of theirs.


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Powers of SEBI

It is surprising that while SEBI has quoted sections 11(1) and 11B of the SEBI Act 1992

while directing stock exchanges for amending the clause 24 of the listing agreement

compelling companies to file the draft scheme for the approval of the stock exchanges, it

has chosen to merely issue a circular to stock exchanges, depositories and custodians for

appointment of common agency for share registry work by companies.

No amendment to the Listing Agreement is sought by SEBI. It is surprising that

corporates have surrendered to the whips of SEBI, without even examining whether the

directions are within SEBI's powers.


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RECOMMENDATIONS


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RECOMMENDATIONS

FUTURE OF SEBI

THE Securities and Exchange Board of India (SEBI) wants to increase by another 500 the

list of companies that would be required to file their annual reports in electronic format

with it.

It has recently sent out a communication to the stock exchanges with a list of companies.

But as it happens, SEBI still has some distance to go in enforcing compliance with regard

to the initial list of companies announced by it in July this year.

Of the 200 companies identified by SEBI for electronic filing of documents under the

Electronic Data Information Filing and Retrieval (Edifar) system, annual reports of 122

companies are still not available on its Web site. Market participants attribute this to a

lack of proper disclosure norms. They argue that it is as yet unclear how the norms are to

be applied and compliance enforced. Should it apply to companies whose accounting year

ended on a date after the new stipulations came into force?

Alternatively, should it apply to documents where physical copies have to be filed with

stock exchanges on any date after the new regulations came into force? There are no clear

answers from either the stock exchanges or the market regulator.

Some companies have claimed that the requirement of electronic disclosure of annual

reports would apply to finalisation and distribution of annual reports that are made after

the new rules came into existence. A case in point is that of HDFC Bank. An official of

the bank that in their case the AGM was held on May 30, 2002 while the electronic filing


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came into effect in June. Since all legislations were prospective, they are not required to

file the annual report for 2001-02 in electronic format, the official claimed.

If HDFC Bank's argument is to be accepted quite a few others could easily claim the

privilege of such exemption. Companies such as HLL, Nestle, Glaxo have closed their

accounts as of December 2001 and consequently have had their AGMs held much before

the new stipulation came into effect.

SEBI officials who spoke on condition of anonymity that monitoring of the electronic

filing was the responsibility of the stock exchanges and action would have also to be

taken by them.

Filing of the information in electronic format was made compulsory by the market

regulator by amending the listing norms of the exchange by inserting clause 51 to the

Listing Agreement. So technically, a company failing to file its documents in electronic

form is in violation of the listing agreement and hence it is the responsibility of the stock

exchange.

But officials with the stock exchanges on their part contend that it is difficult for them to

find out whether a company had filed the documents in the manner required. They say

that the fact that companies have to directly upload these documents onto the SEBI Web

site maintained with technical support from National Informatics Centre (NIC) means

that they will not be able to identify errant companies in this regard.

Call it non-compliance of the regulatory norms or merely a technical problem as some

have contended it is, the Edifar set up with much fanfare in June this year, on the lines of

`EDGAR' a creation of the Securities and Exchange Commission of the US, has still some

distance to go before it can claim to rank on par with its US counterpart.


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FINDINGS

&

OBSERVATIONS


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Merchant bankers to form panel to review public issue process

MERCHANT bankers are forming a "core committee" to review the process of public

issues and fix definitive responsibilities for each of the intermediaries involved.

This was decided in a meeting between the chief executive officers of merchant banking

companies and Mr. G.N. Bajpai, Chairman and Mr. A.K. Batra, Whole-time member,

Securities and Exchange Board of India. According to sources, the meeting was not about

"finger pointing and placing blame" for what happened during the ONGC deal, and the

focus was entirely on "what needs to be done in the future."

Two of the prime suggestions raised by the merchant bankers were for the processes to be

simplified and for responsibilities to be fixed between the intermediaries.

The committee would revisit each of the processes involved in the offer. They would

specially view it from "possible points of inflection" and proactively seek to plug holes

before they morph into areas of concern, stated a participant.

Further, it was clarified to SEBI that for various processes the merchant banker strictly

plays only a coordination role. They felt it would not be possible for merchant bankers to

be held responsible for each of these processes.

"The merchant banker functions as a coordinator for a lot of the processes during the issue

and is not in a direct position to prevent mishaps, if any. In view of this, the responsibility

should also be restricted to what can be directly controlled by the merchant banker," a

source.

The core committee would also put in place various compliance and reporting

requirements to ensure that "human error" is nipped in the bud.

The constituents of the core committee are expected to be announced within the next few


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days, according to merchant banking sources.

Concerns were also raised about the quality of infrastructure among intermediaries,

especially registrars. The merchant bankers and SEBI conceded that with issue sizes

increasing substantially and the manifold increase in the number of retail applications,

there has to be an upgradation of the infrastructure that the intermediaries employ. This

not only includes computer hardware and software, but also the level of staffing in

intermediaries, stated a source.

The Association of Merchant Bankers of India (AMBI), which has been dormant during

the last few years is being called to take an active part in the industry and in interacting

with regulators and other intermediaries, claimed sources.


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SOURCE OF FUNDS

An enterprise in India has access to various types of short-term and long term financing.

Short-term financing, mainly for working capital purposes, is usually provided by the

commercial banks as a mix of cash credit and bills discounting facilities.

There is also an active short-term money market for intercorporate specific-period

borrowings.

The RBI has permitted issuance of commercial paper by later corporations fulfilling

certain conditions. The maximum maturity period for commercial paper is six months.

Such paper is sold at a discount and redeemed at face value.

Commercial paper rates of interest are below the bank prime lending rate.

Certificates of Deposits (CD) can be issued by scheduled commercial banks at a discount

from face value,with a maturity period ranging from 3 months to 1 years.

Commercial working capital finance for exports is provided by the commercial banks

which are in turn refinanced for this activity by the Export Import Bank of India (EXIM

Bank). Long-term financing is available through various equity and debt instruments.

Equity instruments include common and preferred stock and may be used to raise finance

by public issue upon obtaining requisite approvals.

The guidelines issued by the Securities and Exchanges Board of India for disclosures and

investor protection must be complied with.

The main sources of long-term debt are development finance by the all-India and state

financial institutions, who lend mainly for investment in priority sector, and debentures

(cumulative and non cumulative), which is a capital market instrument. A debt-equity

norm of 1.5:1 is generally acceptable. A minimum level of promoter's contribution is also


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required, which is non-transferable during a lock-in period of 5 years. Medium-term

finance for non-priority sectors is also provided by commercial banks, who also

participate with the financial institutions in financing priority sector projects. Foreign

currency loans may also be accessed through lines of credit available to banks and

financial institutions. Direct access to overseas lenders is regulated under foreign

exchange controls. Foreign currency requirements are often met through supplier's credit

or through loans from the foreign collaborator. Venture capital finance is not available

extensively. A few units, mostly in the public sector, have been set up which provide

equity/loan support to companies entering high-technology/high-risk areas. The total

amount of capital available through this route is to date insignificant. The Government of

India has issued guidelines for venture capital companies.

All local sources of financing are available to foreign participation companies

incorporated in India, regardless of the extent of foreign participation.

Under Foreign Exchange Regulations, foreigners or non-residents, including foreign

companies, require the permission of the Reserve Bank of India for borrowing from a

person or company resident in India.


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INDUSTRIAL FINANCE IN INDIA

The major post-independence institutional innovations of relevance to long and medium

term finance for the industry can be grouped as below :

National Level Industrial Development Banks

Industrial Development Bank of India (IDBI)

Industrial Finance Corporation of India (IFCI)

Industrial Credit and Investment Corpn. of India (ICICI)

Small Industries Development Bank of India (SIDBI)

Industrial Reconstruction Bank of India ( IRBI)

Shipping Credit and Investment Company of India (SCICI)

Specialised Financial Institutions

Technology Development & Information Company of India Limited (TDICI)

Risk Capital & Technology Finance Corporation Limited (RCTC)

Tourism Finance Corporation of India (TFCI)


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Investment Institutions:

Unit Trust of India (UTI)

General Insurance Corporation of India (GIC)

Life Insurance Corporation of India (LIC)

State Corporations:

State Industrial Development Corporations

State Finance Corporations

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

IDBI initially having confined itself to medium and long- term credit to industry, now has

expanded its services to include anything a corporate customer would ask for. Already

into a wide range of activities in the financial sector, it is soon to start a commercial bank.

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

Major activities are lending money with or without security, guarantees, leasing and hire

purchase, ware housing, consultancy and merchant banking in and outside India, bill

marketing, factoring, custodial services, dealing in foreign exchange and mutual funds.


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INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA

(ICICI)

ICICI, established in 1955 has spun off the largest number of subsidiaries of all the

financial institutions in India, including some famous names like SCICI, TDICI, Crisil,

I-SEC and ICICI Asset Management Company.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

Small Industries Development Bank of India (SIDBI) established as a wholly owned

subsidiary of Industrial Development Bank of India (IDBI) is the principal financial

institution for promotion, financing and development of industry in the small scale sector.

SCICI - SHIPPING CREDIT & INVESTMENT COMPANY OF INDIA

The SCICI is a special financial institution catering particularly to the deep sea fishing

sector providing term loans in rupees and foreign currencies for such purposes. Besides

this, SCICI also provides financial guarantees, buyers / sellers lines of credit, leasing

finance and merchant banking services for raising funds in the capital market. In selected

cases, it also offers participation in equity. The rates of interest charged by SCICI are 18

to 20% per annum on rupee loans. On foreign currency loans the rates are 11 to 12% per

annum on fixed rate loans and 2.5% to 3.5% over LABOR on floating rate loans. The

promoters' contribution is expected to be 20% of project cost and the debt/equity ratio

required is 2:1. SCICI takes up financing of larger projects in the range of over Rs.5

million. The projects are assessed based on the background/experience of the promoters,


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past track record, quality of management, technical financial and economic viability and

a host of other factors. Where corrective measures are required to improve the viability

prospects, the promoters are advised suitably.

STATE CORPORATIONS

State Financial Corporations (SFCs)

State Financial Corporations (SFCs), operating at the state-level, form an integral part of

the development financing system in the country. They function with the objective of

financing and promoting small and medium enterprises for achieving balanced regional

socio- economic growth, catalysing higher investment, generating greater employment

opportunities and widening the ownership base of industry.

At present, there are 18 SFCs in the country.

SFCs extend financial assistance to industrial units by way of term loans, direct

subscription to equity / debenture, guarantees and discounting of bills of exchange.


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BANKING IN INDIA

Banking in India is controlled by the Reserve Bank of India (RBI). Commercial Banks

and Co-operative Banks are the two main categories of banks in the country. Commercial

Banks fall into four classes Public sector banks, Private sector banks, Foreign Banks and

Regional rural banks. There are 28 banks in the public sector, comprising the State Bank

of India and its 7 associate banks and the rest are nationalised banks. There are 18 large

private sector banks. There are 38 Private sector banks in total and 196 Regional rural

banks. The foreign banks number 24. The public sector banks account for 90 per cent of

the total banking business in India. Foreign banks numbering 24 with a total of 141

branches specialise in foreign trade and international banking. Co-operative banks serve

mainly the needs of agriculture and allied activities, rural based industries and to a lesser

extent, trade and industry in urban centres. The National Bank for Agriculture and Rural

Development (NABARD). The National Bank for Agriculture and Rural Development

(NABARD), in keeping with its role as an apex institution in the organised rural credit

structure provides refinance facilities to various financial intermediaries. NABARD

devises suitable policies and operational arrangements, from time to time, in order to

vitalise the rural credit delivery system and to augment the flow of credit for rural

development. NABARD provides finance for seasonal agricultural operations. Refinance

assistance to Regional Rural Bank for enabling them to conduct their various activities

including assistance under minor irrigation, grant of loans under IRDP, dairy

development, farm mechanisation, etc. In so far as commercial banks are concerned,

NABARD provides only refinance against the term loans issued by them under schematic

landing for agriculture.


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CONCLUSION


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CONCLUSION

Merchant banking play a very important role of an encouraging and supporting force to

the entrepreneur,corporate sector and the investors,. With this study we have find out that

New issue market is growing with the fast pace.Now many Foreign investors are entering

into the market.Foreign investors are putting a lot of money in this sector, There is a

need of lot of merchant bankers who can manage all these operations.Now many

financial institutions are changing their policies .The policy of decentralization and

encouragement of small and medium enterprise will further increase the demand for

technical and financial services which can be provided by merchant bankers.. We can

see the development of debt market.The development of debt market will offer

tremendous opportunities to merchant bankers.This has further extended the role of

merchant bankers to extended the role of merchant bankers as market makers for these

instruments.

As a result of liberalization and globalization the competition in the corporate sector is

becoming intense . To survive in the competition, company are reviewing their strategy,

structure and functioning .This offer good opportunities to merchant bankers.

Therefore we can say that that the scope of merchant banking is vast and there lies

immense opportunities ahead of merchant bankers. They should develop adequate

infrastructure including expertise in order to provide full range of merchant banking

services to corporate sector.


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REFERENCES


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REFERENCES

Books

1. Khan, M.Y., (1998) Financ ial Services, Tata McGraw

Hill, New Delhi.

2. Mishra, (1996) Venture Capital Financing, Shipra

Publication, New Delhi.

3. Pandey, I.M., (1999) Venture Capital - The Indian Experience, Pub.:

PHI, New Delhi.

Research Articles & Journals

1. Aggarwal, Vipin. SEBI Venture Capital Guidelines: An

Appraisal, Charted Secretary, March 1998, pp. 227 -228.

2. Anandram, Sanjay, Venture Capital: The Writing on the

Wall, ICFAI Reader, Jan. 2004.

3. B. Ratna Ravishankar, Risk Finance: Venture Capital and

Private Equity Finance, The Chartered Accountant, Feb. 2005,

pp. 1022-1029.

6. Chary. T. Satyan arayana, Working of Venture Capital

Funds, Udyog Pragati, Jan -March 2004.


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7. Gompers, P. and Lerner, J. An Analysi s ofcompensation in

the Venture Capital Partnership, Journal of Financial Economics,

51, 1999.

9. Subhash, K.B. & Govindakutty Nair, T. Globalisation and

venture Capital System, Udyog Pragati, July -Sept. 2004. pp.1-2.

10. Lerner, J. Venture Capitalists and the Decision to go

Public, Journal of Financial Economics, 35, pp. 294 -316.

Internet

1. www.goolesearch.com

2. www.goole.com

3. www.indiainfoline.com

4. www.sebi.com

5. www.vcline.com

6. www.financemedia.com


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