What Is Merchant Banking ? Merchant Banking may be defined as an

institution which covers a wide range of activities

such as underwriting of shares, portfolio management,

Project counselling, insurance etc. They all render

these service for a fee.

Both commercial and investment banks may

engage in merchant banking activities. The original

purpose of merchant banks was to facilitate and/or

finance production and trade of commodities and hence

the name "merchant“.

Who Is A Merchant Banker? 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 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.

Functions Of Merchant Banks

Promotional Activities – Merchant Banks helps the entrepreuner in conceiving an idea, identification of projects, preparing feasibility reports, obtaining Government approvals and incentives etc.

Issue Management - Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it.

Credit Syndication - Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans from commercials bank.

Project Counseling- It includes preparation of projects reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institution.

Issue Management - Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it.

Portfolio Management - It refers to the effective management of Securities i.e., the merchant banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account while advising on investment in different securities. The merchant banker also undertakes the function of buying and selling of securities on behalf of their client companies. Investments are done in such a way that it ensures maximum returns and minimum risk.

Leasing and Finance – Many merchant bankers provide leasing and finance facilities. Some of them even maintain venture capital funds to assist the entrepreneurs. They also help companies in raising finance by way of public deposits.

Servicing Issues – Merchant Bankers helps in servicing the shareholders and debenture holders in distributing dividends, debenture interest.

Other Specialised Services – Merchant Banks also provide corporate advisory services on issues like mergers and amalgamations, tax matters, recruitment of executives and cost and management audit etc.

Merchant Banking Functions

Corporate Project Capital Portfolio

Counselling Counselling Structuring Management

Issue Credit Working Venture Lease Fixed

Management Syndication Capital Capital Finance Deposit

Bill Discounting

Accepting Credit

Merchant Banking In India

Need for merchant banking was felt with rapid growth in number and size of issues made in primary issue.

Merchant Banking services started by foreign banks, namely National Grindlays in 1967 followed by Citi Bank in 1970.

Merchant Banking services was offered along with other traditional banking services.

SBI was first Indian bank to set up merchant banking division in 1972.

Later, the ICICI set up its merchant banking division in 1973.

It was followed by other commercial banks like Canara Bank, Bank of Baroda, Bank Of India, Syndicate Bank, Central Bank Of India, PNB, UCO Bank etc.

Merchant Banking Regulations

According to Securities and Exchange Board of India (Merchant Bankers)

Rules, 1992, it is mandatory for a merchant banker to hold a certificate of registration granted by the Securities and Exchange Board of India,

no person can act as a merchant banker.

If a person/organisation wants to carry or undertake any of the authorised activities, has to get registered under the regulations.

To obtain the certificate of registration, one has to apply in the prescribed form and fulfill two set of norms (a) operational capabilities and (b)

capital adequacy norms.

Classification Of Merchant Banker • Category I – to carry on the activity of issue management

and to act as adviser, consultant, manager, underwriter, portfolio manager.

• Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager.

• Category III - to act as underwriter, adviser or consultant only.

• Category IV – to act only as adviser or consultant to an issue of capital.

The minimum net worth requirement for acting as merchant banker is given below:

• Category I – Rs. 5 crores

• Category II – Rs, 50 lakhs

• Category III – Rs. 20 lakhs

• Category IV – Nil

Code Of Conduct

Should make all efforts to protect the interest of investors. Should maintain high standards of integrity, dignity and

fairness in conduct of business. Should fulfill all obligations in a professional and ethical

manner. Should not discriminate among the clients. Should ensure that prospectus/letter of offer is available to

investors at the time of issue. Should render best possible advice to its clients. Any penal action taken by SEBI should be informed to its

clients. Should inform the Board about legal proceedings intiated

against it. Should abide by the rules of SEBI, 2003. Should ensure that any person it employs should have the

capacity to be a merchant banker. Should not create false market.

Obligations And Responsibilities o Merchant banker not to associate with any business other than that of the

securities market.

o Maintenance of book of accounts, records, etc. Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:

a. a copy of balance sheet at the end of each accounting period

b. A copy of profit and loss account for that period

c. A copy of auditor’s report on the accounts of that period

d. a statement of financial position

o Submission of half-yearly results.

o Report on steps taken on auditor’s report.

o Acquisition of shares prohibited.

o Information to the Board.

o Disclosure to the Board.

Pre- Issue Obligation 1.Documents to be submitted- The lead manager shall submit following

documents to SEBI:

i. MOU between merchant banker and issuer company.

ii. Due diligence certificate by lead merchant banker.

iii. Certificate signed by the company secretary or company accountant in case of listed companies making further issue of capital.

iv. A list of persons who constitute the promoters group and their individual shareholdings.

v. Draft prospectus in computer floppy in prescribed format.

vi. Ten copies of draft offer document.

vii. The issuer shall submit an undertaking to the Board within 24 hours of the transaction.

2. Appointment of Intermediaries- In case a public or rights issue is managed by more than one merchant banker, the rights obligations and responsibilities of each merchant banker shall be demarcated as specified in Schedule II. Other intermediaries such as advisor, bankers to the issue, registrar, underwriters etc. shall be appointed in consultation with lead merchant banker.

3. Underwriting- Underwriting of public issue is not mandatory. However, if an issue is underwritten, the unsubscribed portion has to purchased by the underwriters.

4. Offer documents to be made public- The draft offer document filed with the Board shall be made public for a period of 21 days from the date of filing the offer document. The lead merchant banker shall also fill the draft offer document with the stock exchange where the securities are proposed to be listed and make it available to the public.

5. Appoinment of compliance officer- An issuer company shall appoint a compliance officer who have direct link with the Board with regard to compliance with various laws, rules, regulations and other directives issued by the Board.

6. Mandatory Collection centres- The minimum number of collection centres for issue of capital shall be (a) four metropolitan cities situated at Mumbai, Delhi, Calcutta and Chennai; (b) all such centres where the stock exchanges are located in the region in which registered office of the company is situated.

7. Final offer document- The lead manager shall certify that all amendments, suggestions or observation made by SEBI have been carried out. He has to furnish a new due diligence certificate. Final prospectus is to be submitted with Registrar of Companies and the offer document with regional stock exchange. A computer floppy of final prospectus offer shall be submitted to SEBI.

8. Application forms- Application form must be accompanied by abridged prospectus. Disclaimer clause of SEBI should be printed in bold. Highlights and risk factor should be given same prominence. The form shall contain provision for mentioning name and address of bank and account number of the applicant.

9. Minimum application amount- Minimum application money to be paid along with application shall not be less than 25% of issue price. Application for shares or debentures should be for such a number that the total amount payable is not less than Rs.2000.

10. Listing of securities- The securities offered to public shall be listed in a stock exchange. In case these are not listed, entire application money becomes refundable.

11. Period of subscription- Subscription for public issues shall be kept open atleast 3 working days and not more than 10 working days. In case of an infrastructure company, it may be kept open for 21 working days. Rights issue shall be kept open for atleast30 days and not more than 60 days.

12. Oversubscription- The quantum of issue trough a rights or a public issue, shall not exceed the amount specified in the prospectus of offer, however an oversubscription to the extent of 10% of the net offer to public is permissible.

Post-issue Obligation Redressal of Investor – The post-issue lead merchant banker shall actively associate himself with

post-issue activities namely allotment, refund and despatch and shall regularly monitor redressal of investor.

Co-ordination with intermediaries- The post-issue lead merchant banker shall maintain close co-ordination with the Registrars to the Issue. Any act of omission or commission on the part of intermediaries shall be reported to the Board.

Stock Invest- The lead merchant banker shall ensure compliance with the instruction issued by the RBI on handling of stock invest by any person including registrar.

Underwriters

1. the lead merchant banker shall satisfy himself that the issue is fully subscribed before announcing closure of the issue

2. the lead merchant banker shall ensure that the underwriters honour their commitment within 60 days from the date of closure of the issue.

3. The lead merchant banker shall furnish informationin respect of underwriters who failed to meet their underwriting devolvements.

Bankers to an issue- The post-issue lead merchant banker shall ensure that moneys received pursuant to the issue are kept in a separate bank (i.e Bankers to an Issue)

Post-issue Advertisement- Post- issue lead merchant banker shall ensure that in all issues, advertisement giving details relating to oversubscription, basis on allotment, number, value and percentage of application received etc. is released within 10 days.

Basis of Allotment- The lead merchant banker and the registrar to an issue, shall ensure that allotments are made in prescribed manner.

Compliance with Guidelines on Advertisement- The lead merchant banker shall ensure compliance with guidelines on advertisement by the issuer company.