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MERCHANT BANKER

MERCHANT BANKING

BACHELOR OF COMMERCE BANKING & INSURANCE

SEMESTER V

ACADEMIC YEAR - 2011-2012

SUBMITTED BY

SURAJ RANBIR SINGH THAKUR

ROLL NO. – 54

MAHARSHI DAYANAND COLLEGE OF

ARTS, SCIENCE & COMMERCE

PAREL, MUMBAI – 400 012.

1

MERCHANT BANKER

MERCHANT

BANKING”

Bachelor of Commerce

BANKING & INSURANCE

Semester V

Submitted

In Partial Fulfillment of the requirement For the Award of Degree of Bachelor of Commerce BANKING & INSURANCE

By

SURAJ RANBIR SINGH THAKUR.

Roll No. – 54

MAHARSHI DAYANAND COLLEGE

OF ARTS, SCIENCE & COMMERCE

Parel, Mumbai – 400 012.

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MERCHANT BANKER

MAHARSHI DAYANAND COLLEGE OF ARTS, SCIENCE & COMMERCE PAREL, MUMBAI – 400 012.

__________________________________

CERTIFICATE

This is to certify that SURAJ RANBIR SINGH THAKUR of T.Y. B.Com BANKING & INSURANCE Semester V (2011-12) has successfully completed the project on MERCHANT BANKING under the guidance of PROF. KUNAL SONI

Course Co-ordinator

Principal

Project Guide / Internal Examiner

External Examiner

DECLARATION

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MERCHANT BANKER

I SURAJ RANBIR SINGH THAKUR the student of T.Y.B.Com. BANKING & INSURANCE Semester V (2010-11) hereby declares that have completed the Project on MERCHANT

BANKING.

The information submitted is true and original to the best of my knowledge.

Signature of Student SURAJ R .SINGH

ROLL NO - 54

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MERCHANT BANKER

ACKNOWLEDGEMENTS

The

college,

the

faculty,

the

classmates

and

the

atmosphere in the college were all the favorable contributory factors right from the point when the topic for the report was to be selected till the final copy was prepared.

It was a very enriching experience throughout and the contributions from the following individuals in particular made sure that, this project report took its shape in the form in which it appear today. IO feels privileged to take this opportunity to put on record my gratitude towards them.

Dr. Mrs. T. P. Ghule, Principal of our college has always been an inspiring and driving force.

Prof. Mr. Kunal Soni Co-ordinator for Banking and Insurance & BANKING & INSURANCE was always available for immediate advice and guidance.

I am thankful to Mr. Santosh Shinde associated with the administration department of Banking and Insurance & BANKING & INSURANCE section that has been very helpful in making the infrastructure available for data entry.

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MERCHANT BANKER

EXECUTIVE SUMMARY

Although merchant banking activity was ushered in two decades ago, it was only in 1992 after the formation of Securities and Exchange Board of India that it is

defined and a set of rules and regulations in place. Today a merchant banker is who has the ability to merchandise that is, create or expand a need and fulfill capital requirements. I have given an overview about the BANKING & INSURANCEs and the role of merchant bankers in the growth of these markets. My project covers how the merchant banks works, rules & regulations laid by SEBI &

its impact on the merchant banking activities.

Their

importance in the economy is expected to grow even

further in the coming years with an increasing proportion of household savings getting invested in corporate &

other securities. Hence, my project covers the challenges and advantages, which India will get and is getting by merchant banking activities. I have covered several

services provided by Merchant

Bankers

&

the

role

of

Merchant bankers in providing those services to the business world.

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MERCHANT BANKER

INDEX

   

PAGE

SR.NO

CONTENTS

NO

01

INTRODUCTION

08

02

ROLE IN MARKET

22

03

COMMERCIAL BANK S & MERCHANT BANKS

24

04

CURRENT SCENARIO

28

05

MERCHANT BANKING ORGANISATION

33

06

REGISTRATION OF MERCHANT BANKER

42

07

PLAYER IN MERCHANT BANKER

57

08

MERCHANT BANKING – FUTURE DEVELOPMENT

64

09

CASE STUDY

69

11

CONCLUSION

70

10

RECOMMENDATION & SUGGESTION

72

12

BIBLOGRAPHY

73

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MERCHANT BANKER

INTRODUCTION

The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses. At that time the merchants were merely financing their own activities. As international trade grew and other lesser-known names wanted to import goods from abroad, the established merchants ‘lent their names’ to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses would charge a commission for this service and thus there grew up the business of accepting bills of finance trade not merely of themselves, but of others.

The second historical of Merchant Banks was the raising of capital for foreign Government. In many cases, the Merchant Banks have been trading in the countries concerned and gained the confidence of Governments and other authorities in those countries. Thus the second principal ingredient of Merchant Banking became and still is rising of capital through the issue of stocks and bonds. Therefore, Merchant Banks can be accepting houses or issuing houses or both. Merchant Banking started in the beginning of 20 th century in UK and USA. More recently, the services offered by Merchant Banks have entered into the other areas of operations. Their role is wide ranging and they can now provide most of the financial services required by a

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MERCHANT BANKER

company, touching almost all aspects of establishing and running of industrial units on sound financial footing.

Dictionary meaning of ‘merchant bank’ refers to an organization that underwrites corporate securities and advises such clients on issues like corporate mergers, etc. involved in the ownership of commercial ventures.

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MERCHANT BANKER

HISTORY OF MERCHANT BANKING

During the seventeenth

and

most of the eighteenth

century international finance was centered on Amsterdam.

Consequently Amsterdam

merchants

became

the

first

masters

of

the

various

financial

techniques

and

developments

which,

in

the

course

of

time,

became

identified

with

the

emergent

profession

of

‘Merchant

Bankers’.

Commercial Banking and Investment Banking are often confused with Merchant Banking. In many ways, there may be similarities in their functions. However, in certain ways, Merchant Banking is distinctly different from commercial Banking and Investment Banking.

The primary function of a commercial bank is to receive deposits from the public and lend the same to others. Commercial Banks can undertake some of the merchant banking activities like Issue Management whereas Merchant Banking Units can not undertake commercial banking activities. However, the functions of Merchant Banking may not widely vary from Investment Banking. The Merchant Banker mainly deals with Issue Management, post issue services, corporate adviser services etc. the Investment Banker undertaken trading in securities, Investment advises and Bought out deals which are not the main activities of Merchant Bankers.

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MERCHANT BANKER

In today’s Scenario the Merchant banker and management consultants undertake advisory services to the corporate sector. The Merchant Banker advices corporation and firms relating to opening of issues, receiving loans etc, which the management consultants also do. The management consultant have a wide area operations like production, Marketing, Personnel Relations, of finance etc. but they lack statutory recognition to undertake capital market related activities which has enabled the merchant banker to cater to the needs of the Corporate Sector.

A merchant bank may be considered as an institution

which centers its operation on all or most of the following activities.

(1)

Corporate financial advice, on such diverse

matters as new share and bond

issues, capital

(2)

reconstructions, mergers and acquisitions; The taking of deposits and currency, money

(3)

market operations including foreign exchange dealing; Medium-term lending and syndication of loans;

(4) Acceptance credits and all forms of export finance (5)The holding and dealing in quoted and unquoted investment; and (6) Fund management on behalf of clients, most typically pension funds, unit trust, investment trusts and wealthy individuals.

DEFINITION

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MERCHANT BANKER

The first authoritative

definition for the term ‘Merchant

Banker’ has been given in the Rule 2 (e) of SEBI (Merchant

Bankers) Rules, 1922. Accordingly, A Merchant Banker means any person who is engaged in the business of Issue Management either by making arrangements regarding selling, buying or subscribing to Securities as Manager, Consultant, Adviser of rendering Corporate Advisory Service in relation to such Issue Management”.

Sec/5 (b) of the Banking Regulation Act, 1949 defines Banking as Accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and order or otherwise ”.

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MERCHANT BANKER

EVOLUTION & EMERGENCE OF MERCHANT BANKING

India has entered the 21 st century as one of the Asia’s most dynamic economies. This is the part of the assessment made by International Financial and Capital Market Institutions based on India’s economic and financial reforms initiated in 1991 and brought to fruition in various budget.

The progress of any economy mainly depends on the efficient financial system of the country. Indian economy is no exception financial system of the country. The importance of the financial sector reforms affirms an effective means for solving the problems of economic, financial and social in India and elsewhere in the developing nations of the world. The progress of the Securities Industry of any country depends mainly on the flow of funds. In fact, capital generation is the lifeblood of the capital market without which the health and soundness of the financial system cannot be geared and for which well-developed capital market as well as money market is essential.

India’s

capital

market

is

among

the

largest

in

the

developing world. The market

is comprised

of

24

stock

exchanges

transacting

long-term

debt;

debentures

and

equity shares

both

electronic

and

physical

 

forms.

Derivatives financial instruments are also be added to the

market shortly.

The number

of firms listed

on the Indian

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MERCHANT BANKER

Stock Exchange is more than the USA. Market Capitalization of listed firms is 1980s was similar to Brazil, Malaysia, Singapore and Denmark. The capital market of the country, however, underwent dramatic changes since the beginning of 1980s basically because of a progressive realization that the command economy on which the emphasis was placed could not lead to higher levels of economic development and that a slant towards a market-oriented economy is necessary.

It

is

in

the

context

of fast expanding

economy and a

liberalized and deregulated atmosphere that the growth of the Indian Stock Market activities has to be viewed. No wonder that the markets have registered a quantum jump judge by any standards.

14

MERCHANT BANKER

MERCHANT BANKING IN INDIA

In India prior to the enactment of Indian Companies Act, 1956,managing agents acted as issue houses for securities, evaluated project reports, planned capital structure and to some extent provided venture capital for new firms. Few share broking firms also functioned as merchant bankers. The need for specialized merchant banking services was felt in India with the rapid growth in the number and size of the issues made in the primary market. The merchant banking services were started by foreign banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in its report in 1972 recommended the setting up of merchant banking institutions. This marked the beginning of specialized merchant banking in India. To begin with, merchant banking services were offered along with other traditional banking services. In the mid- Eighties, the Banking Regulation Act was amended permitting commercial banks to offer a wide range of financial services through the subsidy rule. The State Bank of India was the first India Bank to set up merchant Banking division in 1972. Later ICICI set up its Merchant Banking division followed by Bank of India, Bank of Baroda, Canada Bank, Punjab National Bank and UCO Bank. The merchant banking gained prominence during 1983-84 due to new issue boom.

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MERCHANT BANKER

MERCHANT BANKING: PAST AND PRESENT

Many banks entered merchant banking in the 1960s to take advantage of the economies of scope produced when private equity investing is added to other bank services, particularly commercial lending. As lenders to small and medium-sized companies, banks become knowledgeable about individual firms’ products and prospects and consequently are natural providers of direct private equity investment to these firms. As mentioned above, commercial banks were the largest providers of venture capital in the 1960s. In the middle to late 1980s, the decision to enter merchant banking was thrust on other banks and bank holding companies by unforeseen events. In those years, as a result of the LDC (less-developed-country) debt crisis, many banks received private equity from developing nations in return for their defaulted loans. At that time, many of these banks set up merchant banking subsidiaries to try to get some value from this private equity.

Also at about that time, most commercial banks began refocusing their private equity investments to middle-market and public companies (often low-tech, already profitable companies) and, rather than providing seed capital, financed expansion or changes in capital structure and ownership. Most particularly, they took equity positions in LBOs, takeovers, or recapitalizations or provided subordinated debt in the form of bridge loans to facilitate the transaction. Often

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MERCHANT BANKER

they did both. Commercial banks financed much of the LBO activity of the 1980s.Then, in the mid-1990s; major commercial banks began once again focusing on venture capital, where they had substantial expertise from their previous exposure to this kind of investment. Some of these recent venture-capital investments have been spectacularly successful. For example, the Internet search engine Lycos was a 1998 investment of Chase Manhattan’s venture- capital arm. Commercial banks are permitted to report either realized or unrealized gains on their merchant-banking portfolios, as long as they are consistent in the reporting. This option makes it difficult for one to compare different entities’ financial results and could lead to an overly liberal reporting of profits.

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MERCHANT BANKER

NEED & IMPORTANCE IN INDIA

Important reason for the growth of merchant banking is due to exerting excess demand on the sources of funds forever expanding industry and trade. Corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures. With the growing demand for funds there was pressure on capital market that enthused the commercial banks, share brokers and financial consultancy firms to enter into the field of merchant banking and share the growing capital market. In India have opened their merchant banking windows and are competing in this field, and also doing advisory functions as merchant bankers as well as managing public issues in syndication with other merchant bankers. Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments activity. With the growth of merchant banking profession corporate enterprises in both public and private, sectors would be able to meet the growing requirements for the funds for establishing new enterprises, undertaking expansion/modernization/diversification of the existing enterprises.

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MERCHANT BANKER

Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects.

In

view

of

multitude

of enactments, rules and

regulations, guidelines and offshoot press release instructions brought out by the Government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the need of skilled agency existed which could provide counseling. Merchant bankers advise the investors of the incentives available in the form of tax relief’s, other statutory relaxations, good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities. Thus, the merchant bankers help industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence, safety and organizations for higher yields.

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MERCHANT BANKER

ROLE OF MERCHANT BANKERS

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant banker’s dynamism lies in promptly attending to the corporate problems and suggests ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where Government rules, regulations and policies affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversification, modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be set up industrially backward areas to eliminate regional imbalances in industrial development of the country. He has to guide the

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MERCHANT BANKER

wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the has to watch the interest and win over the confidence of the Government, its agencies, along with the entrepreneurs, the investors and the whole community. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has t be dynamic. For this reason, a merchant banker is sometimes,

called M.B i.e. Moving Bottom, i.e., one who never sits at one place, always moving- attending meetings and meeting clients and constituents, doing business and getting business by attending meetings and conferences, imparting knowledge to others and acquiring new knowledge to maintain his supremacy in possession of latest information. His role depicts a personality cult, which is unique and envious to be followed by others.

In

the

days

ahead,

merchant

bankers

have

very

significant role to play tuning their activities to the requirements of the growth pattern of corporate sector, the industry and the economy as a whole, which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in

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MERCHANT BANKER

playing their role. They will have also to adopt new ways and means in discharging their role.

ROLE IN THE MARKET

The Securities and Exchange Board of India (SEBI) has stated that merchant bankers must be involved more closely in the market making process as share brokers do not have the requisite expertise to evaluate the fundamentals of the scrips before taking over the role of market makers. Further, share brokers generally being partnership; firms do not have the financial clout which is necessary for market making activity. Resultantly, the SEBI has suggested that any member of the stock exchange along with one merchant banker registered with SEBI could act as a market maker. The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate greater movement, which could only be achieved through the institution of market makers. Market makers would also create a market for the scrip’s by offering two way quotes to the investors. A minimum of ten scrip’s has been proposed by SEBI for the market makers.

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MERCHANT BANKER

MERCHANT BANKERS COMMISSION

As determined by the Finance Ministry, Government of

India, Merchant Bankers are eligible to charge commission / fee from their clients as detailed below:

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

commission for whole of the issue. (ii) They can charge project appraisal fees. (iii) A lead manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in excess of Rs.25 crore.

(iv)

Underwriting Commission.

Type of Security

On amount Devolving on underwriter s

On amount subscribed by public

1.Equity shares

   

2.Preference

2.50

2.50

share/debentures (a) Upto Rs. 5 lakh

2.50

1.50

(b) Excess of Rs. 5 lakh

2.00

1.00

  • (v) Brokerage commission 1.5%.

(vi) Other expenses like advertising, printing, Registrar’s expenses, stamp duty etc., in connection with the issue can be reimbursed from its clients.

COMMERCIAL BANKS AND MERCHANT BANKS

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MERCHANT BANKER

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

COMMERCIAL BANKS

MERCHANT BANKS

Basically deal

in

debt

Basically they deal with

related finance and their

mainly

funds

raised

activities are appropriately

through

money

market

arrayed around credit

and

capital market and

proposals, credit appraisal

the

area

of

activity

is

and loan sanctions.

‘equity

and

equity

related finance’.

Are asset oriented and

Are

management

their lending decisions are based on detailed credit analysis of loan proposals and the value of security offered against loans.

oriented

 

They generally avoid risks.

They

generally

are

willing to accept risks of business.

They

are

merely

There

activities

include

financiers.

project

counseling,

corporate

counseling

in

areas

of

capital

restructuring,

amalgamations,

mergers, takeovers etc.,

discounting

and

rediscounting

of short

term

paper

in money

markets,

managing,

underwriting

and

supporting public issues

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MERCHANT BANKER

 

and

new issue market

and

acting

as

brokers

and advisers on portfolio

management in stock

exchange.

This

activity

has

impact

on growth,

stability and liquidity of

money markets.

 

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MERCHANT BANKER

GROWTH OF MERCHANT BANKING IN INDIA

Formal merchant banking activity in India was originated in 1969 with Merchant Banking Division set up by the Grindlays Bank, the largest foreign bank in the country. The main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial consultancy. Other foreign banks like City Bank, Chartered Bank also assumed the merchant banking activity in India. State Bank of India started merchant banking in 1973 followed by ICICI in 1974. Both these Indian merchant bankers emerged as leaders in merchant banking having done significant business during the period of 1974-1987 in comparison to foreign banks. The early and mid-seventies witnessed a boom in the growth of merchant banking organizations in the country with various commercial banks, financial institutions, and broker’s firms entering in to the field of merchant banking.

The early growth of merchant banking in the country is assigned to the Foreign Exchange Regulation Act, 1973 (FERA) where under large number of foreign companies operating in India were required to dilute their foreign holdings in order to continue business in the country. This had caused two-pronged effect viz. firstly, in the form of spate in ‘Foreign Exchange Regulation Act Issues’ eliciting interest of the investors by creating massive awareness about capital markets amongst the new class of investing public, secondly, merchant banking activity became attractive to banks and the firms of consultants and share brokers who entered into this fields vigorously to reap the advantages of the expanding capital markets.

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MERCHANT BANKER

PROBLEMS OF MERCHANT BANKERS

1. SEBI guidelines have authorized merchant bankers to undertake issue related activities only with an exception of portfolio management. These guidelines have made the merchant bankers either to restrict their activities or think of separating these activities from the present one and float new subsidiary and enlarge the scope of its activities.

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

crore for authorization of merchant bankers. Small but professional and specialized merchant bankers who do not have a net worth of Rs.1 crore may have to close down their business. The entry is denied to young, specialized professionals into merchant banking business.

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

allotment of securities and refund of application money is another problem of merchant bankers. The guidelines have put the responsibility on the merchant bankers. They have to seek the co-operation of the issuing company to shoulder the responsibility.

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MERCHANT BANKER

CURRENT SCENARIO

Merchant banking is an area that we need to build and grow in the years to come. As India forms part of the global village, it becomes increasingly necessary for us to look at this business in a more holistic manner.

Obviously, international players with strong domestic partners such as DSP Merrill Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with experienced organizations like Enam and institutional backed investment bankers such as ICICI Securities, etc., are the ones who have expertise, muscle, and placement power in a greater measure than relatively new entrants.

The red hot economy is the obvious starting point. India is likely to end the year with GDP growth in excess of 7 percent. Companies and private equity investors are sitting on large piles of cash. In 2006 deal activity was largely restricted to the IT and Telecom sectors.

Thus, while there is a steady flow of deals, there is now a shortage of talent to do the job.

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MERCHANT BANKER

MERCHANT BANKING: INDIAN SCENARIO

Merchant Banking activity was formally initiated into the Indian capital markets when Grindlays Bank received the license from Reserve Bank in 1967. Grindlays which started

with management of capital issues recognized the needs of

emerging

class

of

entrepreneurs

for

diverse

financial

services ranging from production planning and system design to market research. Apart from meeting specially, the needs of small-scale units it provided management constancy services to large and medium sized companies. Following Grindlays Bank, Citi Bank set-up its Merchant Banking division in 1970. The division took up the task of assisting new entrepreneur and existing units in the evaluation of new projects and raising funds through borrowing and issue of equity. Management consultant services were also offered. Consequent to the recommendations of Banking Commission in1972, that Indian bank should start Merchant Banking Division in 1972.

The economic reforms initiated by the Government since July 1991 in the files of industry, trade and financial sector have paved the way for rapid development of the economy. Several projects have been conceived since then and almost all the major groups in the country that have announced their intentions to set-up mega projects in infrastructure sector envisaging investment of thousands of crores. With several large projects been set-up and many more on the

29

MERCHANT BANKER

drawing board, the demand for a complete range of Merchant Banking services encompassing project advisory services, issue management and financial advisory services for corporate sector has increased considerably. This has led to a sharp growth in the Merchant Banking business in the last 2 years.

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MERCHANT BANKER

MERCHANT BANKING: INTERNATIONAL SCENARIO

The Merchant Banking scenario in developed countries like USA and UK are different from Indian Merchant Banking activities. The Merchant banker is also called as Investment Bankers. A brief outline of Merchant Banking in USA and UK has shown in the following paragraphs.

Merchant Banks in UK

In United Kingdom, Merchant Banks came on the scene in the late eighteenth century and early nineteenth century. Industrial revolution made England into a powerful trading nation. Rich merchant houses that made their fortunes in a colonial trade diversified into banking. Their principle activity started with the acceptance of commercial bills pertaining to domestic as well as international trade. The acceptance of the trade bills and their discounting gave rise to acceptance houses, discount houses, and issue houses. Merchant Bankers initially included acceptance houses, discount houses and issue houses. A Merchant Banker was primarily a merchant rather than his customers entrusted banker but him with funds. Merchant Banks in UK:

Finance foreign trade, Issue capital, Manage individual funds,

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MERCHANT BANKER

Undertake foreign security business, and Foreign loan business.

They also used to finance sovereign government through grant of long-term loans. Since the end of Second World War commercial banks in Western Europe have been offering multiple services including Merchant Banking services to their individual and corporate clients. British banks set-up division or subsidiaries to offer their customers Merchant Banking services.

Merchant Banking in USA

Merchant

banks

make the primary

markets

in

USA,

arrange mergers and acquisitions, undertake global, custody, proprietary trading and market making, niche business, fund management and advisory services to governments and firms.

The increased regulation and control of domestic operations gave a fillip to large US banks to undertake Merchant Banking functions in international capital markets. The US investments Banks have extended their operations to the international level. They are largely responsible for the development of the Euro-dollar market in the securities and globalization of capital markets. They have a prominent presence in London and other European financial centers. Merchant Banks have today a strong parent, a strong

32

MERCHANT BANKER

balance sheet and a strong international network to play a global role.

MERCHANT BANKING ORGANISATIONS

In India, merchant banks operate in the form of Divisions of Indian and Foreign banks and financial institutions, subsidiary companies established by banks like SBI Capital Markets Ltd., can Bank Financial Services Ltd., PNB Capital Services Ltd., Indian Bank Merchant Banking services Ltd., etc., the firm organized by the stock brokers, stock exchange dealers, the financial and technical consultants and chartered accountants. Securities and Exchange Board of India (SEBI) has divided merchant bankers into four categories, which are as follows: -

CATEGORIES

ACTIVITIES

NETWORTH

Category I

To carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager.

Rs.1crore

Category II

To act as adviser, consultant, co-manager, underwriter, portfolio manager.

Rs.50 lakhs

Category III

To act as underwriter, adviser or consultant to an issue.

Rs. 20 lakhs

Category IV

To act only as adviser or consultant to an issue

Nil

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MERCHANT BANKER

Merchant Bankers are classified into 4 categories as shown in the above table having regard to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities. The minimum net worth and initial authorization fee depends on the category. The first category consists of merchant bankers who carry on any activity of issue management, determining financial structure, tie-up of financiers, advisor or consultant to an issue, portfolio manager and underwriter. The second category consists of those authorized to act in the capacity of co-manager/advisor, consultant, and underwriter to an issue or portfolio manager. The third category consists of those authorized to act as underwriter, advisor or consultant to an issue. The fourth category consists of merchant bankers who act as advisor or consultant to an issue.

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MERCHANT BANKER

QUALITIES OF GOOD MERCHANT BANKERS

Merchant bankers are individual experts who organize and manage the merchant banks. The operations of merchant banks are, therefore, influenced by the personality trait of these individuals. For the success of merchant bank’s operations, the qualities which merchant bankers should have are discussed below:-

LEADERSHIP :– Merchant banker should possess all relevant skills, update knowledge to interact with the clients and effectively communicate. Leadership is synonymous with followers who follow the one who leads.

AGGRESSIVE ACTION : - Aggressiveness is a personality trait of a good leader but in merchant banking it has a wider connotation. Aggressive merchant bankers are always looking for new business. Once a business opportunity has been located, the merchant banker has got to obtain the mandate for the merchant banking assignment from the clients at once which will depend upon his own communication skills, persuasiveness and the background of the organization to which he belongs. A good merchant banker is one who does not allow his client to think anything outside except what has been advised.

COOPERATION AND FRIENDLINESS :-

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MERCHANT BANKER

These two characteristics are the symbols of good leadership but it hardly needs to be stressed that cooperation and friendliness coupled with persuasiveness are the main instruments with which a merchant banker mixes with the people, gathers information, obtains business mandate and renders satisfactory services to the clients. Business of an honest business merchant banker spreads with geometrical propagation when he shares the thoughts of his clients with sympathetic gestures and offers pragmatic suggestions without greed or favours. Very often, rude, intemperate and indifferent disposition or blunt out burst withdrew fortunate business opportunities forever. Friendliness and cooperation must flow as natural traits in the merchant banker to win the trust of the clients.

CONTACTS :–

Success of merchant banker depends upon his sociable

nature and the richness of wider contacts.

A merchant

banker

is supposed

to be acquainted

deeply with

all

the

constituents of merchant banking.

The scope of contact

encompasses intimate contiguity and acquaintances within his own organization, Central and State Government Offices

where compliances under various relevant enactments are to be reported, Indian and foreign banks, financial institutions at Central and State levels,

promoters/directors/owners

and

chief

executives

of

the

private and public enterprises which would be prospective

beneficiaries

of

merchant

banking

services,

printers,

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MERCHANT BANKER

advertising agencies, brokers and stock exchange dealers, advocates and solicitors and members of the press whose services are availed of in executing merchant banking assignments. Merchant bankers should widen contacts and references and continue to maintain them with goodness, honour and humor by meeting people.

ATTITUDE TOWARDS PROBLEM SOLVING : – The most important personality trait of a merchant banker is his attitude towards problem solving. Even client coming to him has got to return fully satisfied having consulted a merchant banker. Positive approach to understand the view points of others, their difficulties and their adverse circumstances is possible only when a person is skilled in human relations particularly the inter-personal and intra- personal behavior. Effective communication and proper feedback are the pre-requisite for creating a positive attitude towards problem solving. Many persons are effective in this trait without any training for reasons of cultivating a habit from environment in which they have been brought up at home, in school, college and office. This is so important that it must be treated as a separate objective quality of a good merchant banker.

INQUISITINESS

FOR

ACQUIRING

NEW

SKILLS,

INFORMATION AND KNOLEDGE: –

37

MERCHANT BANKER

Merchant banker’s lice on their wits they earn by giving information to needy clients. Therefore, they should keep abreast with latest information in the area of the service product, they market. This is possible if merchant bankers possess the quality of inquisitiveness.

The above qualities

of

a

merchant

banker

are

only

illustrative.

All good qualities

in merchant

bankers are

difficult to be defined so elaborately. Nevertheless, merchant banker should possess super business acumen,

managerial

abilities,

administrative

capacities

and

salesmanship so as to understand the problems and sell the

service product to the needy clients.

38

MERCHANT BANKER

RESPONSIBILITIES OF MERCHANT BANKER

To the Investors

Investor protection is fundamental to a healthy growth of the Capital Market. Protection is not to be conceived as that of compensating for the losses suffered. The responsibility of the Merchant Banker in ensuring the completeness of the disclosures is of paramount importance in view of the fact that entire reliance is based on offer Document either Prospectus or Letter of Offer because an independent agency like a Merchant Banker has done the scrutiny.

Capital structuring

The Merchant Bankers while designing the capital structure take into account the various factors such as Leverage effect on earnings per share, the project cost and the gestation period, cash flow ability of the company, the cost of capital, the considerations of management control, size of the company, and general economic factors. These exercise are done mainly in order to meet the fund requirement of the company taking due cognizance of the investor’s preference.

Project Evaluation and due Diligence

Due diligence and project evaluation is another major responsibility of the Merchant Banker. Where the project has already been appraised by a bank/financial institution,

39

MERCHANT BANKER

the Merchant Banker relies on the said appraisal before accepting an assignment. However, where the project has not been appraised by as bank/financial institution, the Merchant Bank undertakes a detailed evaluation of the project before taking up an assignment for issue management.

 

Legal aspect The factors aspects are:

that are looked

into

in

case

of

the

legal

Compliance

with

the SEBI

guidelines

and

the various

guidelines issued by the Ministry of Finance and

Department of Company Affairs.

Pending

litigation’s

towards

tax

liabilities

or

any

criminal/civil

prosecution

any

of the directors

for

any

offenses. Fair and adequate disclosures in the prospectus.

 

Pricing of the Issue

The Merchant Banker looks into the various factors while pricing the issue. Some of the factors are past financial performance of the company, Book value per share, stock market performance of the shares. The Merchant Banker has a vital role to play in pricing of the instrument.

Marketing of the Issue

40

MERCHANT BANKER

Marketing of the issue is a vital responsibility of the Merchant Banker. The first stage is Pre-issue marketing for placement of the issue with the financial institutions, banks, mutual funds, FII’s and NRI’s. The second stage is the marketing of the issue to the general public through various vehicles such as press, brokers, etc.

Bought out Deals

The concept of wholesale but out of public offerings by the Merchant Bankers started off with over the Counter Exchange of India where a Merchant banker acts also as a sponsor and either takes up the entire issue to be offered wholly of jointly with other co-investors and off-loads the same to the public at a later date by an offer for sale. Major amendments were made to the SEBI regulations regarding Merchant Bankers. The duration of this transaction period has not officially been announced.

41

MERCHANT BANKER

REGISTRATION OF MERCHANT BANKER

The term ‘Merchant Banking’ originated in the 18 th and early 19 th centuries in the United Kingdom when trade between countries was financed by bills of exchange drawn on the principal merchant houses. With the increase in international trade, the established merchants started the practice of lending their names to the new comers and accepting the bills of exchange on their behalf. They would charge a commission for the purpose and thus acceptance business became the hallmark of Merchant Bankers. Once these banks had gained the confidence of the government, they also entrusted with the job of issuing bonds in the London market.

Although Merchant Banking activity ushered in two decades ago, it was only in 1992, in India, after the

formation of SEBI that is defined and a set of rules and regulations governing it are in place. In fact, the origin of Merchant Banking is to be traced to Italy in late medieval times and France during the seventeenth and eighteenth centuries. Merchant Banker invested accumulated profits in

all kinds of promising activities.

Since they added banking

business into the profession of Merchant activities and became a Merchant Banker. A distinction was existed in banking systems between moneychanger and exchanger. Moneychangers concentrate on the mutual exchange of different currencies, operated locally and later accepted

42

MERCHANT BANKER

deposits for security reasons. Passage of time money changers evolved into public or deposit banks whereas exchangers, who operated internationally, engaged in bill- broking that raising foreign exchange and provision of long- term capital for public borrowers. The exchanges were remitters and Merchant Bankers. In the seventeenth century, a Merchant Banker was a dealer in bills of exchange who operated with correspondents abroad and speculated on the rate of exchange. Initially, Merchant Bankers were not banks at all and a distinction was drawn between banks, Merchant Banks and other Financial Institutions. Among all these, Institutions it was only banks that accepted deposits

from public. No person s allowed carrying out any activity as a Merchant Banker unless he or she holds a certificate grated by SEBI. Registration with SEBI is mandatory to carry out the business of merchant banking in India.

An applicant should comply with the following norms:

The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space, equipment, manpower etc. The applicant must have at least two employees with prior experience in merchant banking

43

MERCHANT BANKER

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

The applicant

should not have

been involved in any

securities scam or proved guilt for any offence The applicant should have a minimum net worth of Rs.5 crores

SERVICES RENDERED BY MERCHANT BANKERS

44

MERCHANT BANKER

Among the important financial intermediaries are the merchant bankers. The services of Merchant bankers have

been identified in India with just issue management. It is quite common to come across reference to merchant banking and financial services as though they are distinct categories. The services provided by merchant banks depend on their inclination and resources - technical and financial. Merchant bankers (Category 1) are mandated by SEBI to manage public issues (as lead managers) and open offers in take- over. These two activities have major implications for the integrity of the market. They affect investors' interest and, therefore, transparency has to be ensured. These are also areas where compliance can be monitored and enforced.

Merchant

banks

are

rendering

functions, which are as follows:

diverse

services

and

ISSUE MANAGEMENT:

The public issue of securities is the core of merchant banking function. At one time it was constructed as the sole function. Merchant bankers were identified as issue houses. It was later perceived that they provide other financial services. When companies seek to raise resources for implementation of a new project or finance expansion or modernization or diversification of an existing unit or fund long term working capital requirement, they retain the services of a merchant banker. To a large extent the type of issue would vary

45

MERCHANT BANKER

with the purpose for which funds are raised. Merchant bankers when retained as managers to issue will have to assist the company in all the stages connected with public issue.

The merchant bankers help corporate to raise money from the markets through the issue of shares, debentures, bonds etc. They are designated as managers to the issue. Their main business is to attract public money to capital issues. They usually render the following services:

Obtaining consent/acknowledgement from SEBI. Appointing bankers, underwriters, brokers, advertisers, printers etc. Obtaining the consent of all the agencies involved in the public issue. Deciding the pattern of advertising. Deciding the branches where application money should be collected. Deciding the dates of opening and closing of the issue.

CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE

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

the company, with valuable inputs from the merchant

46

MERCHANT BANKER

bankers, who have to sell the issue at the decided price. The pricing of the issue especially in a public issue is very important. The pricing has to be such that the investors will be attracted to invest in the issue at that price, at the same time the company should get the premium that it is looking for. After all, the premium can play a very role in deciding the company’s capital structure, as larger the premium lesser will be the requirement for borrowed funds. The promoter also needs to decide whether to go in for a fresh issue or to go for a rights issue. However this will depend mainly on the quantum of funds that the company needs to raise. The success of the issue is dependent on the selection of the right type of security. In this matter, the expert advice of merchant bankers is of immense importance. In the issue management the merchant bankers have to coordinate the various agencies to the issue. The success of the issue depends on the cooperation of all the agencies involved. The merchant bankers offer following services during the public issues:

Preparing an action plan and budget for the total expenses for the issue. Preparation of application to SEBI and assistance in obtaining the consent from SEBI. Drafting of the prospectus. Selection of underwriters, Brokers etc.

47

MERCHANT BANKER

Selection of bankers to the issue. Selection of advertising agency for publicity. Companies are free to appoint one or more agencies as Managers to an issue. SEBI guidelines insist that all issues should be managed by at least one authorized merchant banker, functioning either as the sole or lead manager to the issue. Ordinarily, not more than two merchant bankers should be associated as lead managers, advisors and consultants to a public issue. In issues of over Rs. 100 crores, the number could be up to a maximum of four.

UNDERWRITING

Underwriting is like insurance against the failure of an issue. It is a guarantee to the issuing the company, that the money that it requires for its project will definitely be raised. It means that even if the issue is not fully subscribed to by the public, the underwriters will make up the short fall. Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription for the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter takes, he is paid commission. New companies entering the markets for the first time, always face number of problems in raising funds from the market. One of the biggest problems of course that the company is not well known to the investors and many of them will be unwilling to invest

48

MERCHANT BANKER

their money in such ventures. Many a time’s even existing companies may find it difficult to raise money, due to some reasons. Issuing companies therefore approach different underwriters with a request to underwrite the issue. Underwriters on their part need to satisfy themselves about the viability of the project and also about the integrity of the promoters of the company. It must be noted that when an issue is under subscribed, the underwriters will pick the shares and only if the project is good enough, then in future they can sell the shares in the market and get not only their money back, but can also make a decent profit as well. It is obligatory for the merchant bankers to accept a minimum 5% underwriting in the issue subject to a ceiling. By taking underwriting in an issue managed by them, they show their full commitment to the issue that they are managing.

MERGERS AND ACQUISITIONS Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies

49

MERCHANT BANKER

together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin-offs, carve-outs or tracking stocks.

Role of Merchant Banker

Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in negotiating on one with corporate interested in hiring of divisions/companies which are not within the purview of the long-term business strategy of the group/company, and on the other hand for Corporate interested in non organic growth by acquiring companies/units for reason strategic or non strategic in nature. Mergers can be beneficial for both the entities, as due to competition the companies unable to survive or prosper on their own may like to merge and face competition and achieve growth targets. Takeovers may be hostile or friendly in nature, hostile takeovers are without the consent of the company and company being takeover may work out an anti takeover strategy to counter the threat. Merchant Bankers provide following services in M&A: -

Identification of potential takeover targets. Financial & Technical appraisal of the merger/takeover proposal. Negotiation with the parties for arriving at the suitable price or exchange ratio.

50

MERCHANT BANKER

Assistance in obtaining necessary approval & addressing procedural & legal issues.

PROJECT COUNSELLING Project counseling is very important and lucrative merchant banking services which only very few merchant bankers having advantages of knowledge, skills and experience over others are able to render satisfactorily. The corporate seek advice in respect of identification of profitable investment opportunities in the related business areas (like forward/backward integration) or as part of diversification process. The merchant bankers carry out detailed studies on product demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study may involve arrangement of a foreign collaboration, advice on technical parameters and also legal issues. Scope of services Project counseling services are needed by industrial entrepreneurs in India in the following areas: - Preparation of project report Deciding upon the financing pattern to finance the cost of the project. Aspects of project appraisal with financial institutions/banks. Project report Project report purpose

51

MERCHANT BANKER

Grant of industrial license to undertake specified industrial activity. Foreign investment and technology tie-up.

Grant import license for importing raw material, plant, machinery and equipments. Grant of foreign exchange allocation for import of capital goods or raw materials, etc.

LOAN SYNDICATION

It refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium as in the case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans from commercial banks.

RECENT TRENDS

Merger

& Acquisition

services not taxable

transaction

-- Merchant

banks'

The Finance Ministry has excluded services provided by merchant banks and other agencies in a merger and acquisition (M&A) transaction from the scope of taxable services provided by a `management consultant.'

52

MERCHANT BANKER

The rationale accorded is that the role of such agencies is limited to compliance of any statute or regulation -- such as takeover regulations of the Securities and Exchange Board of India (SEBI) -- and not governed by any contractual relationship with the advisee company.

Merchant banks do not provide any consultancy on an M&A transaction, but merely verify and submit a report to the authorities concerned, according to the Central Board for Excise and Customs (CBEC).

Barring the services of merchant banks, any service rendered in relation to an M&A transaction will be covered under the scope of taxable service provided by the management consultant and will be liable to service tax, the Board has ruled. Industry representatives held that services provided in respect of M&A cannot be construed as a management consultancy service, but were in the nature of financial advisory service.

They further opined that acquisition or divesting of shareholdings was a purely financial transaction and distinct from the advice or service provided prior to taking a decision to divest, merge or acquire an organisation.

53

MERCHANT BANKER

54

MERCHANT BANKER

RAPID RISE IN VALUATION IMPEDES M&As

The

surging

stock

market

is

creating

an unusual

problem: Mergers & Acquisitions (M&A) deals are becoming tougher to close as the two parties to a deal keep looking over their shoulders to figure out how the market is pricing their shares. The key to any deal is valuation. And when the market booms, agreed valuations for proposed M&A are thrown into disarray.

In this scenario, M&A rankings will change depending on who has been able to close deals faster. In the first nine months of 2005, (ended September), Kotak Mahindra/Goldman Sachs topped the heap by executing 13 deals valued at $2.53 billion (about 11,000 crore). This bank was ranked No. 4 last year in the process; the investment bank has increased its share by 420 basis points from 13.1% for last year to 17.3% now. Morgan Stanley retained its No 2 position, having sewn up 11 deals worth $2.23 billion so far. Its market share is up 50 basis points to 15.2%. Stock prices have gone up because of profitability. Indian companies are also looking at overseas opportunities. M&A are also getting hit because more & more companies are opting for the global depository receipts/foreign currency convertible bonds issue to sate their capital needs. The analyst sees pharmaceuticals, information technology & engineering specifically auto ancillaries as the areas where an increasing amount of M&as will take place in India.

55

MERCHANT BANKER

Rapid valuation changes do cause some delays, but in the end, the deals go through if there are benefits to both parties. Infrastructure related business, airlines and the auto component sectors as being prime for acquisitions.

INDIA’S TOP 10 M&A PLAYERS

PLAYERS

Ran

Ran

Mkt

Mkt

Val

Dea

k

k

sha

sha

ue

ls

‘05

’04

re’0

re’0

($m

5

4

)

Kotak/Goldman

1

4

 
  • 17.3 2,53

13.1

 

13

Sachs

4

Morgan Stanley

2

2

  • 15.2 14.7

 

2

,

11

227

Merrill Lynch & Co.

3

3

 
  • 12.1 1,77

14

1

12

Standard

4

9

6.7

4.8

981

5

Chartered

Ernst & Young

5

1

6.7

16.9

980

37

Citigroup

6

6

6.6

11

962

8

Ambit

Corporate

7

8

6.4

4.9

936

21

Fin

DBS Group

8

-

4.8

-

704

1

ICICI Securities

9

5

4.4

12.2

649

10

UBS

10-

-

3.8

-

550

3

Rankings based on deals in up to 30 th September, 2008.

56

MERCHANT BANKER

PLAYERS IN MERCHANT BANKING

1. ENAM

MERCHANT BANKER PLAYERS IN MERCHANT BANKING 1. ENAM ENAM was founded in1984 to provide knowledge-driven financial

ENAM was founded in1984 to provide knowledge-driven financial services at the time when Indian economy investors faced a bewildering array of options. ENAM is the one of the largest underwriters in India. ENAM offers promising & exciting companies the opportunity of assessing the public market equity finances. ENAM’s long-term association with capital markets & primary markets has provided it with deep insights of the functioning of Indian financial institutions.

The merchant banking services provided by ENAM are: -

Equity

debt/syndication: Raising capital through a

private placement of a company’s securities is an effective & timely offering to a public offering. ENAM

represents the clients in the private placement of debt and equity with institutional & high net worth investors. Corporate Restructuring: - ENAM provides client with strategic and practical solutions to financial challenges.

Their restructuring services includes

Mergers

&

Acquisitions, Takeovers, Debt restructuring, Buyers

services etc.

ENAM also provide the seed stage services, value creation

services

and

IPO’s

represented below:

advisory

services

which

are

57

MERCHANT BANKER

MERCHANT BANKER 2. ICICI SECURITIES ICICI Securities Limited is a leader across the spectrum of Merchant

2. ICICI SECURITIES

MERCHANT BANKER 2. ICICI SECURITIES ICICI Securities Limited is a leader across the spectrum of Merchant

ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are experienced in every aspect of

the business from domestic

and international capital

markets advisory, to M&A advisory, Private Equity syndication, Restructuring and infrastructure advisory. Our investment banking team, based across key cities in India and New York, London, and Singapore consists of professionals with expertise across a range of industries.

ICICI SECURITIES provide following services:

Mergers and Acquisitions: - ICICI Securities Limited is amongst the first Indian investment Banks to form a dedicated M&A practice and continues to be a leader by providing innovative and unique solutions to achieve varied objectives of the client. They offer a full range of

58

MERCHANT BANKER

advisory services, which include joint ventures, mergers, acquisitions, and divestitures. Equity Capital Markets: - ICICI Securities Limited is at the forefront of capital markets advisory having been involved in most major book building and fixed price offerings over the last decade. It is amongst the leading underwriters of Indian equity and equity-linked offerings. Infrastructure Advisory: - ICICI Securities Limited has a dedicated infrastructure vertical focused on assisting clients in identifying and capitalising on the opportunities thrown up by the all pervasive boom in the Indian infrastructure sector. Dealing with Bulls and Bears: - ICICI Securities Limited assists global institutional investors to make the right decisions through insightful research coverage and a client focused Sales and Dealing team. The equity group leverages research and distribution reach to domestic and foreign institutional investors in case of public offerings. Thus the quality of analysis and client servicing standards, are a testimony to the quality of ICICI SECURITIES team.

3. KOTAK SECURITIES LIMITED

MERCHANT BANKER advisory services, which include joint ventures, mergers, acquisitions, and divestitures.  Equity Capital Markets:

Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock broking and distribution arm of the Kotak

59

MERCHANT BANKER

Mahindra Group. The company was set up in 1994. Kotak Securities is a corporate member of both The Bombay Stock Exchange and the National Stock Exchange of India Limited. Its operations include stock broking and distribution of various financial products - including private and secondary placement of debt and equity and mutual funds. Currently,

Kotak Securities is one of the largest broking houses in India with wide geographical reach. The company has four main areas of business:

Kotak Institutional Equities: - Kotak Institutional Equities, among the top institutional brokers in India. It mainly covers secondary market broking and the marketing of equity offerings, including IPOs, to domestic and foreign institutional investors. Structured Finance (Project Finance & Advisory Business): -KMCC has developed expertise in various vertical segments in the infrastructure sector including power, oil, gas, ports, automobiles, steel & metals and hotels, by offering structured finance solutions. Some of the transactions executed by this team include:

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

Advisor

to

one

of

the

largest

LNG projects on the

Western coast of India. Financial advisors and loan syndications to British Gas and GAIL.

Mergers & Acquisitions: -In the area of Mergers &

Acquisitions,

we provide

our clients

expertise and

a

60

MERCHANT BANKER

comprehensive set of services that help them achieve their strategic and financial objectives. Our spectrum of services include:

Divestments

Spin-Offs / Restructuring & Joint Ventures / Strategic Alliances

4. CITIGROUP

MERCHANT BANKER comprehensive set of services that help them achieve their strategic and financial objectives. Our

Citigroup Corporate and Investment Banking achieve the extraordinary for our clients around the world. No financial institution is more committed to advancing the goals of its clients—our diverse and talented staff in more than 100 countries advises companies, governments and institutions on the best ways to realize their strategic objectives. We create solutions for and provide the broadest possible capital and market access to thousands of issuer and investor clients. And no institution better executes the increasingly complex payment and cash management solutions required in today's global economy. The features Citigroup are as follows: -

Over the years, Citigroup has established a track record of outstanding business milestones such as Cash Management, pioneered by Citigroup in 1986 and utilized by over 900 Corporates with through-puts totaling around $ 35 billion (8% of India's GDP).

61

MERCHANT BANKER

It

is

India's

largest

foreign

bank

in

the

FX

(foreign

exchange) market with a 14 per cent market share. As the leading custodian, Citibank has over $22 billion of custody assets under management.

DSP MERRILL LYNCH LTD.

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

DSP Merrill Lynch Limited (DSPML), among India's leading investment banking and Brokerage Company, is a culmination of a long standing relationship between DSP Financial Consultants Ltd., and Merrill Lynch & Co., the leading international capital raising, financial management and advisory company. DSPML is a full service investment bank and broking company with leadership position in M&A, Capital

Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory services. Euro money Magazine has ranked DSPML as the "Best Domestic Securities firm in India" for the last four consecutive years. This Transaction heralds DSPML as a key player in the private equity market. The service features of DSPML are as follows: -

DSPML

has

consistently

been

rated

as

one

of India's

leaders in origination, distribution, and trading of equity and debt securities. A diverse client base made up of India's most prestigious private and public sector corporations and multinational

62

MERCHANT BANKER

corporations have rendered DSPML a commanding presence in the Indian capital market. Through direct market's group, DSPML offers investors access to every major initial or subsequent public offering. DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked offerings across domestic and international markets. By leveraging their extensive knowledge of local markets and global resources, they have delivered innovative and customized solutions to their clients.

63

MERCHANT BANKER

MERCHANT BANKING-FUTURE DEVELOPMENT

Time and again the Merchant banking Industry in India witnessed experienced and underwent significant changes. The very purpose for which these firms are commences their services should be taken care of and they should mould their policy decision and activities to move in tune with the main objectives of Investor’s protection and to create healthy environment in capital markets. No doubt, Merchant Banking firms are subject to a host of control measures, regulations and rules framed and guided by SEBI. To some extent, frequent changes and /or amendments to policies and control measures, though needed for smooth working of the securities Industry, proves to be detrimental to the very existence of the Merchant Banking system in the country. The SEBI’s Act 1992 confers power upon SEBI to supervise and control the affairs of the Merchant Banking firms in India.

The various studies which had been undertaken in India for evaluating the performance of Merchant Banking firms

and the implications

of these on securities industry.

No

single study has been emerged so far pertaining to the evaluation of Merchant Banking firms and in-depth study on

their activities

as

well

as

operational

and financial

performance in the light of changing regulatory

environment.

64

MERCHANT BANKER

In recent past, the small investor has turned his back on the primary capital market. Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and reinforce his faith. He has lost all hopes of appreciation of his investment. And this when all these years millions have though capital market, ate capital market and dreamt capital market. It needed an extraordinary effort and skill the drive the small investor away! High premiums, false premiums and gray market operations. The professed protector of his interests first laid down the dictum of proportionate allotment, then of minimum subscription, all working against his interests. This would make an observant student of the stock market infer that there is some game plan afoot to dethrone the small investor from his prominent; he was believed to be the king.

With

the coming

to

SEBI,

an organisation that was

ostensibly brought into existence to guard the interest of the small investor, hopes ran high that the small investor would now have a safe playing field. But these hopes were soon belied. Far from guarding the interests of the investing

public, SEBI embarked on a course of action, which has positively hurt them. The latest fiat of EBI bans corporate advertising after the receipt of acknowledgement card by a company wanting to go public. SEBI’s this action has caused the closure of an information window. Now 50 million potential investors are deprived of official and authentic information given by the Issuer. It is hard to understand

65

MERCHANT BANKER

reasons for this drastic and totally uncalled for action. While there has been no official explanation for this fiat, there is reason to believe that it may be based on a wrong perception of the role for corporate advertising.

All this has been done perhaps because the corporate and intermediaries is to follow the practices of Western capital markets here, oblivious of the fact that our capital markets are altogether different in structure, in systems and in the number of participants Freedom of commercial expression could be exploited by some to serve their own ends, just a s freedom of speech and expression could be abused but this has not led our Government to put arbitrary restrictions on our freedom.

Merchant Bankers have reason to believe they will be handicapped without the marketing support. But the worst sufferer would be the investor, especially the small investor it is this class, which forms the backbone of the capital market. As a result of the ban, the small investor would be deprived of the opportunity to study the corporate profile of the Issuer. In the absence of adequate information, they will have to depend on manipulated facts and information fed by unreliable sources.

Besides,

there are larger

issuers arising out of SEBI’s

action.

From

the point

of view

of liberalisation

of

the

economy,

SEBI has

taken a retrograde step.

A market

economy flourished through bigger markets, higher sales

66

MERCHANT BANKER

and lesser profits. To achieve this performance, a company needs an aggressive marketing plan and advertising effort is the main thrust to such a plan. No marketing plan can be worthwhile unless it is backed by an effective advertising plan. The ban imposed by SEBI nips the marketing plan in the bud.

The Indian primary capital market is basically a retail market. It consists of innumerable investors who take own individual investment decisions. Whatever, the system, it is this market that will bring in the funds. If these markets destabilized, the investors will look for alternative avenues to invest their funds. SEBI in its one of the first documents on “SEBI and Investor Protection, Development and Regulation of Securities Market” clearly specifies significance of regulating capital market and its future plans for fulfilling the twin objectives viz., Development of capital market and investor protection are explained in introductory paragraphs. It speak out that, “The decade of the 1980 witnessed a phenomenal growth and development of the securities market, demonstrated its potential not only to mobilize the savings of the horses hold sector but also to allocate it with some degree of efficiency for industrial development. The dilution of the holdings of the multinational companies at affordable prices in the latter part of the 1970s had generated considerable interest, which was, carries well into the next decade. Several companies’ came in the early part of the 1980s and successfully raised large resources from

67

MERCHANT BANKER

the market especially through debt instruments, which further sustained investor interest. There were several changes in Government policy, which significantly influenced industry and aided the market. India was then entering the phase of liberalization and decontrol which was to accelerate and gather momentum in the 1980s.

By the end of the decade, the securities market in India came to be firmly integrated with the financial system of the country. With the corporate sector increasingly relying on the securities market for meeting their long-term requirement of funds, the securities market their long-term requirement of funds; the securities market competed on equal terms with the Development Financial Institutions, which were the traditional purveyors of long-term capital. The emergence of the securities markets into the main stream of the financial system of the country was thus one of the major economic processes of the 1980s – an inevitable outcome of the maturing process of the financial system. They brought about notable changes in the capital structure of the companies across industries, gave birth to new intermediaries and institutions in the securities market and created a new awareness and interest in investment opportunities in the securities market among investor. In spite market, its quality lagged far behind and there was absence of adequate professionalism and fair competition among the various players in the market. Besides, the regulatory framework then prevailing was fragmented difficult, if not effective.

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CASE STUDY

The Security and Exchange Board of India (Sebi) has rejected the suggestion of Suzuki for ‘hard underwriting’ of Maruti’s public offer by a merchant banker.

According to a senior official in the Ministry of Disinvestment, ‘the suggestions that Suzuki had given for hard-underwriting of the issue has been rejected by the market regulator’.

Now, we will go ahead as per our original agreement with Suzuki signed in May this year, he added.

Under the hard underwriting model, the merchant banker was supposed to underwrite the share at a price of Rs 3,200 — if the price fell below this on the day the share got listed, the merchant banker would have to pay for this.

Suzuki’s argument was that hard underwriting would instill confidence among the investing public.

The Disinvestment Ministry has also appointed Kotak Mahindra Finance and ICICI Securities as book runner and co-book runner to start the process of offer for sale of 36 lakh shares of Maruti Udyog Ltd. The appointments have been approved by the Disinvestment Minister on Thursday, the official said.

Disinvestment Ministry has already issued letters to Suzuki Motor Corporation, Ministry of Heavy Industry and both the merchant bankers regarding the commencement of sale process. The merchant bankers will start studying company’s financials soon however it will take at least three to four months more to hit the market actually, the official added.

Maruti’s public float is scheduled to be completed by March 31, 2003 with an extendible deadline up to December 31, 2003.

The Government hopes to realise at least Rs 3,200 per share, the amount paid by Suzuki Motor Corporation for the Rs 400 crore rights issue.

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CONCLUSION

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

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

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

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Some Example of Merchant Banker

Fin Invt& Leas Compn Mrh Bnkg

Merc. Banking Co. Corp Fina

Merchant Bank

Merchant Banker

Finance Solutions

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RECOMMENDATION

I recommended the company which is in merchant banking business would have expertise in Underwriting, Hire Purchase, Leasing, Portfolio Management, Money-lending. But RBI does not permit merchant banking firms to get into these activities. So the same promoters have to set up different company from different purpose.

India corporate cultural is bettering. But still many corporate have ‘excessively friendly’ approaches. Favoured allotment of shares, tempering with project appraisal report to bankers is common. corporate like to’ use’ merchant bankers for malafide intension. This gives growth to more boutique flyby- day firms.

Though regulations are much better now, there is still scope for further improvement. Merchant banker can be made more accountable & responsible.

Professional qualification focused on

merchant

banking is not available. Industry is not well organised & all the players do not play the same tune. This is

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specifically evident in comparison with insurance industry & mutual funds industry.

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BIBLIOGRAPHY

BOOKS REFFERED Merchant Banker – H.R. SUNEJA

Merchant Banking

H.R.MACHIRAJU

Principles

Merchant Banking in India-

&

Practices-

B.C. LAKSHMANNA & C.N. KRISHNA NAIK

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

Merchant Banking and financial Services –

Dr.K.RAVICHANDRAN

WEBILOGRAPHY

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