1.1. INTRODUCTION

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

financial system depends upon the range of financial services extended by the providers.

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

implementation of “Liberalization, privatization and globalization".

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

attracting public savings, merchant bankers play a vital role as specialized agencies.

The resources raising functions are primary business of a merchant banker. The primary market

holds the key to rapid capital formation, growth in industrial productions and exports. There has

to be accountability to the end use of funds raised from the market. The increase in the number

of issues and amount raised the number of merchant bankers. Therefore, the field became

highly competitive market where it requires a specialized skill in handling the situation.

The merchant bankers have a social responsibility to in building an industrial structure in India.

Merchant bankers assist corporate in raising capital. They assist in issue of Shares,

syndicating loans, public issue of debentures. They do not provide funds. They only

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

merger proposals.

In India, Merchant banker is a body corporate who carries on any activity of the issue

management, which consists of preparing prospectus & other  information relating to the

issue. Merchant banks in India are not allowed to conduct any business other than that related

to securities market.

1.2. MERCHANT BANK

A Merchant bank is a financial institution primarily engaged in internal finance and long term

loans for multinational corporations and governments. It can also be used to describe the private

equity activities of banking. Merchant banks tend to advise corporations and wealthy individuals

on how to use their money. The advice varies from counsel on mergers and acquisitions to

recommendation on the type of credit needed. The job of generating loans and initiating other

complex financial transactions has been taken over by investment banks and private equity firms.

A merchant bank deals with the commercial banking needs of finance, long term company loans,

and stock underwriting. A merchant bank does not have retail offices where one can go and open

a savings or checking account. A merchant bank sometimes said to be a wholesale bank, or in the

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

merchant banks and other large financial institutions.

The most familiar role of the merchant bank is stock underwriting.

A large company that wishes to raise money from investors through the stock market can hire a

merchant bank to implement and underwrite the process. The merchant bank determines the

number of stocks to be issued, the price at which the stock will be issued, and the timing of the

release of this new stock. The merchant bank files all the paperwork required with the various

market authorities, and is also frequently responsible for marketing the new stock, though this

may be a joint effort with the company and managed by the merchant bank. For really large

stock offerings, several merchant banks may work together, with one being the lead underwriter.

By limiting their scope to the needs of large companies, merchant banks can focus their

knowledge and be specific use to such clients. Some merchant banks specialize in a single area,

such as underwriting or international finance.

Many of the largest banks have both a retail division and a merchant bank division. The divisions

are generally very separate entities, as there is very little similarity between retail banking and

what goes on in a merchant bank.

1.3. Securities and Exchange Board of India (Merchant Bankers) Rules, 1992

A merchant banker has been defined as any person who is engaged in the business of issue

management either by making arrangements regarding selling, buying or subscribing to

securities or acting as manager, consultant, adviser or rendering corporate advisory services in

relation to such issue management.

Random House Dictionary ―Merchant banker is an organization that underwrites securities for

corporations, advices such clients on mergers and is involved in the ownership of commercial

ventures. These organizations are sometime banks which are not merchants and sometimes

merchants who are not banks and sometimes houses which are neither merchants nor banks.

Charles P. Kindleberger ―Merchant banking is the development of banking from commerce

which frequently encountered a prolonged intermediate stage known in England originally as

merchant banking.

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, consultant, adviser or rendering corporate

advisory service in relation to such issue management.

• A merchant banker is one who is a critical link between a company raising fund and the

investors.

• Merchant banker is one who underwrites corporate securities and advices clients on issues like

corporate mergers.

• The merchant banker may be in the form of a bank, a company, firm or even a proprietary

concern.

• Merchant Banker understands the requirements of the business concern and arranges finance

with the help of financial institutions, banks, stock exchanges and money market.

1.4. Importance and need of merchant banking

Important reason for the growth of merchant banking has been developmental activity

throughout the country, exerting excess demand on the sources of funds for ever expanding

industry and trade, thus, leaving a widening gap under bridged between the supply and demand

of inevitable funds.

All Indian financial institutions and experienced resources constraint to meet the ever increasing

demands for funds from the corporate sector enterprises. In the circumstances corporate sector

had the only alternative to avail of the capital market services for meeting their long term

financial requirements through capital issues of equity and debentures. With the growing

demands for funds there was pressure on capital market that enthused the commercial banks,

share brokers and financial consultant firms to enter into the field of merchant banking and share

the growing capital markets. With the result, all the commercial banks in nationalized and public

sector as well as in private sector including the foreign banks in India have opened their

merchant banking window and are competing in the field. There has been a mushroom growth of

financial consultancy firms and broker firms doing advisory functions as well as managing

public issues in syndication with other merchant bankers.

Notwithstanding the above facts, the need of merchant banking institutions is felt in the wake of

huge public savings lying still untapped. Merchant banks can play highly significant role in

mobilizing funds of savers to investible channels assuring promising return on investments thus

can help in meeting the widening demand for investible funds for economic activity.

With the growth of merchant banking profession corporate enterprises in both public and private

sectors would be able to raise required amount of funds for establishing new enterprises,

undertaking expansion / modernization / diversification of the existing enterprises. This

reinforces the need for a vigorous role to be played by merchant banks.

Merchant banks have been procuring impressive support from capital market for the

corporate sector for financial their projects.

This is evidenced from the increasing amount raised from the capital market by the corporate

enterprises year after year.

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 in these matters in a package form.

Merchant bankers, with their skills, updates information and knowledge, provide this service to

the corporate units and advise them on such requirements to be complied with for raising funds

from the capital market under different enactments viz. Companies Act, Income-tax Act, Foreign

Exchange Regulation Act, Securities Contracts (Regulation) Act and various other corporate

laws and regulations. Merchant bankers advise the investors of the incentives available in the

form of tax relief’s, other statutory relaxations, good return on investment and capital

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

corporate sector.

1.5. Role of Merchant Banker

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 suggest

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

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

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

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

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

with the changing environment where government rules, regulations and politics affecting

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

production processes of industries envisaging immediate innovations, diversifications,

modernizations or replacements of existing plant and machinery or other equipment 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 setup in industrially backward areas to eliminate regional imbalances in

industrial development of the country.

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

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

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

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

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

entrepreneurs, the investors and the whole community. He must bridge the communication gap

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

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

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

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

whole which is, in it, a challenging task and to meet these challenges merchant

bankers will have to be more vigorous and strategic in playing their role. They will have also to

adopt new ways and means in discharging their role.

1.6. Functions of merchant bankers in India

• Channelizing the financial surplus of the general public into productive investments avenues

Co-coordinating the activities of various intermediaries like the registrar, bankers, advertising

agency, printers, underwriters, brokers, etc., to the share issue

• Ensuring the compliance with rules and regulations governing the securities market.

The following are the functions of merchant bankers in India.

1) Corporate counseling

Corporate counseling covers counseling in the form of project counseling, capital

restructuring, project management, public issue management, loan syndication, working

capital fixed deposit, lease financing, acceptance credit etc., The scope of corporate

counseling is limited to giving suggestions and opinions to the client and help taking actions

to solve their problems. It is provided to a corporate unit with a view to ensure better

performance, maintain steady growth and create better image among investors.

2) Project Counseling

Project counseling is a part of corporate counseling and relates to project finance. It broadly

covers the study of the project, offering advisory assistance on the viability and procedural

steps for its implementation.

a. Identification of potential investment avenues.

b. A general view of the project ideas or project profiles.

c. Advising on procedural aspects of project implementation

d. Reviewing the technical feasibility of the project

e. Assisting in the selection of TCO‘s (Technical Consultancy Organizations) for preparing

project reports

f. Assisting in the preparation of project report

g. Assisting in obtaining approvals, licenses, grants, foreign collaboration etc., from

government

h. Capital structuring

i. Arranging and negotiating foreign collaborations, amalgamations, mergers and takeovers.

j. Assisting clients in preparing applications for financial assistance to various national and

state level institutions banks etc.,

k. Providing assistance to entrepreneurs coming to India in seeking approvals from the

Government of India.

3) Capital structuring

Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debt-

equity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc.,

4) Portfolio Management

It refers to the effective management of Securities i.e., the merchant banker helps the investor

in matters pertaining to investment decisions. Taxation and inflation are taken into account

while advising on investment in different securities. The merchant banker also undertakes the

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

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

5) Issue Management

Management of issues refers to effective marketing of corporate securities viz., equity shares,

preference shares and debentures or bonds by offering them to public. Merchant banks act as

intermediary whose main job is to transfer capital from those who own it to those who need

it. The issue function may be broadly divided in to pre issue and post issue management.

a. Issue through prospectus, offer for sale and private placement.

b. Marketing and underwriting

c. Pricing of issues

6) Credit Syndication

Credit Syndication refers to obtaining of loans from single development finance institution or

a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans

from commercials banks. Merchant banks helps in identifying which financial institution

should be approached for term loans. The merchant bankers follow certain steps before

assisting the clients approach the appropriate financial institutions.

a. Merchant banker first makes an appraisal of the project to satisfy that it is viable.

b. He ensures that the project adheres to the guidelines for financing industrial projects.

c. It helps in designing capital structure, determining the promoter‘s contribution and

arriving at a figure of approximate amount of term loan to be raised.

d. After verifications of the project, the Merchant Banker arranges for a preliminary

meeting with financial institution.

e. If the financial institution agrees to consider the proposal, the application is filled and

submitted along with other documents.

7) Working capital

The Companies are given Working Capital finance, depending upon their earning

capacities in relation to the interest rate prevailing in the market.

8) Venture Capital

Venture Capital is a kind of capital requirement which carries more risks and hence only

few institutions come forward to finance. The merchant banker looks in to the technical

competency of the entrepreneur for venture capital finance.

9) Lease Finance

A specialized area of finance dealing with renting property owned by a lender, financing

the leases of a company engaged in rentals, financing the purchase of an item to be leased

out by a borrower.

10) Fixed Deposits

Merchant bankers assist the companies to raise finance by way of fixed deposits from the

public. However such companies should fulfill credit rating requirements.

11) Other Functions

Treasury Management- Management of short term fund requirements by client

companies.

Stock broking- helping the investors through a network of service units

Servicing of issues- servicing the shareholders and debenture holders in distributing

dividends, debenture interest.

Small Scale industry counseling- counseling SSI units on marketing and finance

Equity research and investment counseling – merchant banker plays an important

role in providing equity research and investment counseling because the investor is

not in a position to take appropriate investment decision.

Assistance to NRI investors - the NRI investors are brought to the notice of the

various investment opportunities in the country.

Foreign Collaboration: Foreign collaboration arrangements are made by the

Merchant bankers.

1.7. Merchant Banking in India

The first merchant bank was set up in 1969 by Grind lays Bank. Initially they were issue

mangers looking after the issue of shares and raising capital for the company. But subsequently

they expanded their activities such as working capital management; syndication of project

finance, global loans, mergers, capital restructuring, etc., initially the merchant banker in India

was in the form of management of public issue and providing financial consultancy for foreign

banks. In 1973, SBI started the merchant banking and it was followed by ICICI. SBI capital

market was set up in August 1986 as a full-fledged merchant banker. Between 1974 and 1985,

the merchant banker has promoted lot of companies. However they were brought under the

control of SEBI in 1992.

Recent Developments in Merchant Banking and Challenges Ahead:

The recent developments in Merchant banking are due to certain contributory factors in India.

They are

- The Merchant Banking was at its best during 1985-1992 being when there were many new

issues. It is expected that 2010 that it is going to be party time for merchant banks, as many

new issue are coming up.

- The foreign investors – both in the form of portfolio investment and through foreign direct

investments are venturing in Indian Economy. It is increasing the scope of merchant bankers

in many ways.

- Disinvestment in the government sector in the country gives a big scope to the merchant

banks to function as consultants.

- New financial instruments are introduced in the market time and again. This basically

provides more and more opportunity to the merchant banks.

- The mergers and corporate restructuring along with MOU and MOA are giving immense

opportunity to the merchant bankers for consultancy jobs.

Challenges:

However the challenges faced by merchant bankers in India are

1. SEBI guideline has restricted their operations to Issue Management and Portfolio

Management to some extent. So, the scope of work is limited.

2. In efficiency of the clients are often blamed on to the merchant banks, so they are into trouble

without any fault of their own.

3. The net worth requirement is very high in categories I and II specially, so many

professionally experienced person/ organizations cannot come into the picture.

4. Poor New issues market in India is drying up the business of the merchant bankers. Thus the

merchant bankers are those financial intermediary involved with the activity of transferring

capital funds to those borrowers who are interested in borrowing. The activities of the

merchant banking in India is very vast in the nature of

- The management of the customers securities

- The management of the portfolio

- The management of projects and counseling as well as appraisal

- The management of underwriting of shares and debentures

- The circumvention of the syndication of loans

- Management of the interest and dividend etc

2.1. INITIAL PUBLIC OFFER

Initial Public Offer is the first sale of stock by a private company to the public. For owners of a

successful and growing private business an initial public offering (“IPO”) provides an

opportunity to further advance the growth of the business through the injection of public funds.

The term initial public offering (IPO) refers to a company's first issuance of stock on the open

market. In most cases, the IPO makes the company's stock accessible to a large group of public

investors for the first time. If a brand new company or a company already in existence, but with

no shares listed on the stock exchange, decides to invite the public to buy shares, it is called an

Initial Public Offering or an IPO. Since it is the first time it is approaching the public for money,

it is also referred to as 'going public'.

2.2. PARTICIPANTS IN AN INITIAL PUBLIC OFFER

Issuing Firm

Merchant Bankers, Book Running Lead Manager

Registrars

Investing Public

Retail investors

Institutional investors

Bankers to an issue

Depositories

Intermediaries- printers, advertising agencies, mailing agencies, etc.

Underwriters

SEBI – Securities an Exchange Board of India

2.3.IPO PROCEDURE

Corporates may raise capital in the primary market by way of an initial public offer, rights issue

or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the

primary market. This Initial Public Offering can be made through the fixed price method, book

building method or a combination of both the fixed price and book building method.

In case the issuer chooses to issue securities through the book building route then as per SEBI

guidelines, an issuer company can issue securities in the following manner:

a) 100% of the net offer to the public through the book building route.

b) 75% of the net offer to the public through the book building process and 25% through the

fixed price portion.

c) Under the 90% scheme, this percentage would be 90 and 10 respectively.

Difference between shares offered through book building and offer of shares through

normal public issue:

Features Fixed Price process Book Building process

Pricing Price at which the securities

are offered / allotted is known

in advance to the investor.

Price at which securities will

be offered / allotted is not

known in advance to the

investor. Only an indicative

price range is known.

Demand Demand for the securities

offered is known only after the

closure of the issue.

Demand for the securities

offered can be known

everyday as the book is built.

Payment Payment if made at the time of

subscription wherein refund is

given after allocation.

Payment only after allocation

2.4. BOOKBUILDING

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which

aids price and demand discovery. It is a process used for marketing a public offer of equity

shares of a company. It is a mechanism where, during the period for which the book for the IPO

is open, bids are collected from investors at various prices, which are above or equal to the floor

price. The process aims at tapping both wholesale and retail investors. The offer/issue price is

then determined after the bid closing date based on certain evaluation criteria.

The Process:

The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.

The Issuer specifies the number of securities to be issued and the price band for orders.

The Issuer also appoints syndicate members with whom orders can be placed by the

investors.

Investors place their order with a syndicate member who inputs the orders into the

'electronic book'. This process is called 'bidding' and is similar to open auction.

A Book should remain open for a minimum of 5 days.

Bids cannot be entered less than the floor price.

Bids can be revised by the bidder before the issue closes.

On the close of the book building period the 'book runner evaluates the bids on the basis

of the evaluation criteria which may include –

Price Aggression

Investor quality

Earliness of bids, etc.

The book runner and the company conclude the final price at which it is willing to issue

the stock and allocation of securities.

Generally, the numbers of shares are fixed; the issue size gets frozen based on the price

per share discovered through the book building process.

Allocation of securities is made to the successful bidders.

Book Building is a good concept and represents a capital market which is in the process

of maturing.

As per SEBI, only electronically linked transparent facility is allowed to be used in case

of book building. An open outcry system cannot be used.

BOOK BUILDING AT NSE

The NSE has set up nation-wide network for trading whereby members can trade remotely

from their offices located all over the country. NSE decided to offer this infrastructure for

conducting online IPOs through the Book Building process. NSE operates a fully automated

screen based bidding system called NEAT IPO that enables trading members to enter bids

directly from their offices through a sophisticated telecommunication network.

Book Building through the NSE system offers several advantages:

The NSE system offers a nationwide bidding facility in securities

It provide a fair, efficient & transparent method for collecting bids using latest electronic

trading systems

Costs involved in the issue are far less than those in a normal IPO

The IPO market timings are from 10.00 a.m. to 3.00 p.m. On the last day of the IPO, the

session timings can be further extended on specific request by the Book Running Lead

Manager.

Procedures

Issuers

Issuers desirous of using NSE's online IPO system are required to comply with the following

procedures:

1. Submit a written request as per prescribed format (Letter1, Letter2, BRLM) for usage of

electronic facilities and software of NSE

2. Give details regarding Book Running Lead Manager, Co Book Running Lead Managers and

Syndicate Members.

Trading Members

The Book Running Lead Manager will give the list of trading members who are eligible to

participate in the Book Building process to the Exchange. Members have to submit a one-time

undertaking to the Exchange. Eligible trading members have to give in the prescribed format

details of the user IDs that they would like to use.

Subscribers

Subscribers can approach any of the approved trading members for submitting bids in the NEAT

IPO system. On line transaction registration slip are generated automatically after entering the

bids in to the system which acts as proof of the registration of each Bid option.

BOOKBUILDING AT BSE

- BSE offers the book building services through the Book Building software that runs on the

BSE Private network.

- This system is one of the largest electronic book building networks anywhere spanning over

350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs and

Campus LANS.

- The software is operated through book-runners of the issue and by the syndicate member

brokers. Through this book, the syndicate member brokers on behalf of themselves or their

clients' place orders.

- Bids are placed electronically through syndicate members and the information is collected on

line real-time until the bid date ends.

- In order to maintain transparency, the software gives visual graphs displaying price v/s

quantity on the terminals.

2.5. ELIGIBILITY NORMS FOR COMPANIES ISSUING SECURITIES

No company shall make any issue of a public issue of securities, unless a draft prospectus has

been filed with the Securities and Exchange Board of India (SEBI), through an eligible Merchant

Banker, at least 21 days prior to the filing of Prospectus with the Registrar of Companies

(ROCs).

Public Issue by Unlisted Companies

Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines for

Capital Issues 2000 chapter 2 states the following in this respect.

Clause 2.2:

2.2.1 No unlisted company shall make a public issue of any equity share or any security

convertible at a later date into equity share unless the company has;-

i. a track record of distributable profits in terms of section 205 of Companies Act, for at least

three out of immediately preceding five years; and

ii. a pre-issue net worth of not less than Rupees One crore in three out of preceding five years,

with the minimum net worth to be met during immediately preceding two years.

2.2.2 An unlisted company which does not satisfy the requirement specified in Clause 2.2.1

above, can make a public issue of equity share capital or any security convertible at later date

into equity share capital, provided a public financial institution or a scheduled commercial bank:-

a. has appraised the project to be financed through the proposed offer to the public; and;

b. not less than 10% of the project cost is financed by the said appraising bank or institution by

way of loan, equity, participation in the issue of security in the proposed issue or combination of

any of them.

c. the appraising bank or institution shall bring in the minimum specified contribution at least

one day before the opening of the public issue.

Public Issue by Listed Companies

Clause 2.3:

2.3.1 A listed company shall be eligible to make a public issue of equity shares or any security

convertible at later date into equity share.

Provided that, if as a result of the proposed issue, net worth of the company becomes more than

five times the net worth prior to the issue, the company shall satisfy either the provisions of

Clause 2.2.1 or Clause 2.2.2, before it can make the proposed public issue.

2.3.2 Public issue by listed companies which has changed its name to indicate as if it was

engaged in the business / activities in information technology sector during a period of three

years prior to filing of offer document with the Board, shall be eligible to make a public issue of

equity share or securities convertible at a later date into equity share, if;

a. it has a track record of distributable profits in terms of Section 205 of Companies Act, for at

least three (3) out of immediately preceding five (5) years from the information technology

business / activities, and (ii) it has a pre-issue net worth of not less than Rs. One Crore in three

(3) out of preceding five (5) years, with the minimum net worth to be met during immediately

preceding two (2) years.

b. if the company does not satisfy the requirements specified in clause (a) above, it can make a

public issue provided that it satisfies the requirements laid down in sub-clauses (a), (b) and (c )

of clause 2.2.2.

2.6. PRE- ISSUE OBLIGATIONS

- Memorandum of Understanding (MOU) has been entered into between a lead merchant

banker and the issuer company specifying their mutual rights, liabilities and obligations

relating to the issue.

- Inter-se Allocation of Responsibilities of each merchant banker shall be demarcated as

specified in Schedule II of Securities and Exchange

Board of India (Disclosure and Investor Protection) Guidelines for Capital Issues 2000.

- Due Diligence Certificate should be furnished to the Board by the Lead Merchant

Bankers.

- The Lead Merchant Banker should furnish Certificates Signed by the Company Secretary

or Chartered Accountant, in Case of Listed Companies Making Further Issue of Capital.

- The issuer shall submit an undertaking to the Board to the effect that transactions in

securities by the `promoter' the 'promoter group' and the immediate relatives of the

`promoters during the period between the date of filing the offer documents with the

Registrar of Companies or Stock Exchange as the case may be and the date of closure of

the issue shall be reported to the Stock exchanges concerned within 24 hours of the

transaction(s).

- Appointment of Intermediaries

- Appointment of Merchant Bankers

- Appointment of Co-managers

- Appointment of Other Intermediaries

- The Lead Merchant Banker should ensure that Bankers to the Issue are appointed in all

the mandatory collection centers.

- Underwriting: The Lead merchant banker shall satisfy themselves about the ability of the

underwriters to discharge their underwriting obligations.

- Dispatch of Issue Material

- The issuer company can also appoint authorized collection agents in consultation with the

Lead Merchant Banker subject to necessary disclosures including the names and

addresses of such agents made in the offer document.

- The investors from the places other than from the places where the mandatory collection

centers and authorized collection agents are located, can forward their applications along

with stock invests to the Registrars to the Issue directly by Registered Post with

Acknowledgement Due.

2.7. POST- ISSUE OBLIGATIONS

- Lead Merchant Banker shall ensure the submission of the post-issue monitoring reports as

per formats specified in Schedule XVI.

- The Post -issue Lead Merchant Banker shall actively associate himself with post-issue

activities namely, allotment, refund and dispatch and shall regularly monitor redressal of

investor grievances arising therefrom.

- Co-ordination with Intermediaries

- The lead merchant banker shall ensure compliance with the instructions issued by the RBI on

handling of stock invest by any person including Registrars.

- If the issue is proposed to be closed at the earliest closing date, the lead Merchant Banker

shall satisfy himself that the issue is fully subscribed before announcing closure of the issue.

- In case there is a devolvement on underwriters, the lead Merchant Banker shall ensure that

the underwriters honor their commitments within 60 days from the date of closure of the

issue.

- In a public issue of securities, the Executive Director/Managing Director of the Regional

Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the

Issue shall be responsible to ensure that the basis of allotment is finalized in a fair and proper

manner in accordance with the guidelines.

- The Post -Issue Lead Merchant Banker shall submit within two weeks from the date of

allotment, a Certificate to the Board certifying that the stock invests on the basis of which

allotment was finalized, have been realized.

2.8. BENEFITS OF PUBLIC EQUITY ISSUE

1. Lowers the cost of capital for the firm: one of the main lessons from portfolio theory is that

risk reduction due to diversification lowers the risk (and required return) for stocks. This won't

work if owner-manager has a large undiversified stake in the firm

2. A "wealth constraint" prevents current owner-managers from financing the project. Equity is

often used to pump in fresh finance.

3. Provides liquidity for current stockholders (for consumption or diversification).

2.9. COSTS OF INITIAL PUBLIC EQUITY OFFERING

- Agency costs

- Costs of reporting/filing with the S.E.C., SEBI and other regulatory bodies

- Costs of corporate control outside stockholders can impose costs on managers if they feel

that the firm isn't being managed in the stockholders' interests, even if they only represent

a minority position.

- Disclosure of proprietary information may be helpful to competitors, other contracting

parties. An IPO require a company to divulge information such as expected profitability,

capital structure, new business opportunities etc. Some such information which serves as

a competitive advantage by the issuing company can now be used by the competitors. As

such, the cost of IPO is risk of losing competitive edge due to disclosure of information.

- Under pricing: An IPO issues capital and underpricing is a substantial cost of the issued

capital. Information asymmetry creates greater uncertainty about the value of the firm

and makes it more difficult to value and it is costly for investors to attain information. By

issuing capital at a discount results in fewer proceeds and hence a higher cost of raising

capital.

Role of a merchant banker in IPO

The company has to appoint a merchant banker. They advise the firm in drawing up the capital

structure of the company. It has now become mandatory for all companies who are bringing out

new issues to appoint merchant bankers.

The role of the Merchant bankers was considered complementary to the IPO as they carry out all

the activities relating to issue of shares. They draft prospectus, appoint registrars for share

application and transfers, provide arrangements for underwriting, select brokers, bankers to the

issue and handle past issue problems. SEBI has made it manadatory for all firms issuing shares

to appoint merchant bankers. Merchant bankers must be regulated with the SEBI and is granted

recognition on the basis of its capital adequacy norms in terms of its net worth. A merchant

banker has to pay a registration fee annually. There are four categories of merchant bankers:

Category I to carry out activities relating to issue management have to pay fees of Rs. 2.5 lakhs

for the first two years and 1.50 for the third year. Category II merchant bankers were to pay Rs.

1,50,000 for the first two years and 50,000 for the 3rd year. Merchant bankers in this category

were to act as advisor, consultant, portfolio manager, underwriter or manager. Those in Category

III were to act as advisor, underwriter and consultant. Category IV acts only as advisors or

consultants to the issue. Therefore, merchant bankers in category I are the lead managers to an

issue.

A merchant banker has to abide by the code of conduct laid down by SEBI. They have to submit

documents and records and other legal papers under the guidelines of the SEBI. A lead manager

has to prepare prospectus and submit it to the SEBI at least two weeks before the issue. The

numbers of lead managers are related to the size of the issue. Two lead managers are appointed

for an issue of less than Rs. 50 crores. Rs. 50-100 crores issue requires 3 lead managers and for

Rs. 100-200 crores 4 lead managers may be appointed.