MERCHANT BANKING

Prof Faye N Salins

Merchant Bankers act as a link between corporate bodies who intend on raising funds and investors who are interested in investing in securities. It helps corporates establish new companies, expand, diversify, merge, commission projects etc. Apart from that, merchant banking was the necessity of banks themselves which were in need of non fund based income so as to improve their profitability margins by all means in the changed economic scenario. Merchant Banking is known by different names in different places. In the !"A, it is known as #Investment Banking$. In the !% it is known as #accepting and clearing houses$. Definitions of Merchant Banking &'( A Merchant Bank is a bank or financial institution that handles all the tasks related to incorporation of a company as well as marketing corporate and other securities. &)( Merchant Banking is an institution engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities or acting as manager, consultant, advisors or rending corporate advisory services in relation to issue management. &*( As per SEBI, Merchant Bank mostly provide advisory services, issue management, portfolio management and underwriting services, which re+uire less capital but generate more income &non interest income(. &,( As per the Ministry of Finance- any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to the securities as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. Classification of Merchant Banks: &'( .ublic "ector Merchant Banks/ 0ommercial Banks &public( 1ational 2inancial Institutions "tate 2inancial Institutions &)( .rivate "ector Merchant Banks/ 2oreign Banks Indian .rivate Banks 3easing Banks 2inance and investment companies Functions/ Services offere !y Merchant Bankers: &'( .roject Appraisal 4his service helps corporates analy5e the soundness of a project, which may be setting up a new unit6expansion6moderni5ation etc. It is a process of examining

the technical, commercial, financial and economic viability of a project to ensure that it generates sufficient returns on the resources invested in it. 4he study of viability involves detached verification of project7s ability to stand the tests of technical, financial and commercial feasibilities and management7s capabilities to successfully implement and run the project. A service project report will be prepared for the company, including finali5ation of capital structure. .roject appraisal includes/ 2inancial appraisal &li+uidity analysis, capital structure analysis, profitability analysis etc 4echnical appraisal &factors of production, technology, civil works, site location etc( 8conomic appraisal &also known as cost benefit analysis, social cost, impact on employment, impact of the economy( &)( "yndication of 3oan Merchant Bankers arrange short, medium and long term loans for their clients. 4hey analy5e the pattern of clients cash flows, based on which the terms of borrowing can be defined. It then prepares a detailed loan memorandum which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. 4he merchant banks then negotiate the terms of lending based on which the final allotment is done. It also arranges for raising foreign exchange loans and external commercial borrowings for import of capital. &*( Issue Management 4his is the primary function of merchant bankers. It refers to the management of securities offering of corporates to the general public and existing shareholders on rights basis. Merchant bankers act as lead managers and assists companies in arriving at +uantum and nature of issue and obtaining consent6clearance from various statutory authorities, preparing draft prospectus, obtaining approval from appropriate authorities etc. it also assists companies in tying up with underwriters for the issue, appoint other intermediaries like brokers, bankers, advertising agents, registrar to the issue and co ordinates the activities of these agencies and institutions from the successful flotation of the issue. It also helps in listing the securities in stock exchange, finali5ing basis of allotment, arranging for refund, handling investor complaints etc. Merchant banks help companies raise funds by selling shares to the public by issuing prospectus, "hares may be issued at par, premium or discount. "8BI guidelines for pricing of public issues are as follows/ 1ew 0o. set up by entrepreneurs without a track record 9 can issue shares only at par 1ew 0o. set up by an existing co with a : year track record of consistent profitability 9 is free to price its issue provided promoting company takes atleast :;< of the e+uity and the issue price is offered to all new investors uniformly. An existing private6closely held co with * year track record of consistent profitability is allowed to freely price the issue.

8xisting listed co. can freely price further issue. .rocess of public issues/ =etting of prospectus &by "8BI( Appointment of underwriters, bankers, registrars and brokers 2iling and prospectus with registrar of companies .rinting and dispatch of prospectus and application forms 2iling of initial listing application &within '; days of filing prospectus with >?0/ initial listing application be made to concerned stock exchange( .romotion of issue "tatutory announcement &opening and closing dates, announcement to be made atleast '; days before opening subscription list( 0ollection of application .rocessing of allocation &by registrar to the issue( 8stablishing liability of underwriters &if issue is undersubscribed( Allotment of shares &after formal approval by concerned stock exchange( 3isting of issue &with concerned stock exchange( &,( !nderwriting of issues In order to ensure full subscription or the stipulated minimum subscription of @;< of the issue, companies enter into an agreement with financial institutions, banks, brokers and bankers to underwrite the issue amount. Merchant bankers can underwrite issues and assist companies in tying up with other underwriters &:( 0orporate 0ounseling >endering assistance to corporate clients on various aspects of business operations in the areas of financial planning, performance budgeting, restructuring capital, and other aspects of financial management and monitoring systems and operations. &A( Bankers to the issue 0ollection of subscription money6application money for an issue from the investors, acknowledgement, proper accounting of the money received, sending reports6certificates, informing collection details are the services provided in the banker to the issue role. &B( Investment 0ounseling 4his activity involved assisting firms, companies, trusts, funds and associations in the choice of shares and stocks for investment depending upon the needs and the risk return trade off, as well as taxation and time considerations. &C( .ortfolio Management "ervices A portfolio is a collection of different kinds of investments. Merchant bankers provide portfolio management services. &@( >egistrar and 4ransfer Agent 4ransfer agency work involves carrying out transfer work in respect of securities

after complying with stipulated formalities6procedures. .reparation and printing of dividend warrants and dispatching them to share holders is also covered here. ?ther services include attending to complaints of applicants6investors, coding and verification of applications, allotment, processing and dispatching allotment letters, providing various documents and certificates etc. &';(Mergers, amalgamations and Ac+uisitions "ome companies desire to restructure themselves in order to effectively meet competition. Merchant bankers provide all re+uisite guidance and services for restructuring, to prepare due diligence, necessary clearance from statutory bodies like "8BI, >?0 etc as per the statutory stipulations, for the process of mergers, ac+uisitions and amalgamations. &''(=enture 0apital Merchant Bankers help co obtaining venture capital for financing their new and innovative strategies. &add points from 2"M chapter on #venture capital$( &')(3easing 2inance &elaborate by using points from the 2"M chapter on #3easing$( &'*( 1on resident investment Merchant bankers provide investment advisory services to attract 1>I investment in primary and secondary markets, undertake buying and selling securities on their behalf, secure clearances from >BI under 28MA for repatriation of interest and dividends etc. &',( Doint ventures Merchant Bankers help corporates with joint ventures in India and abroad. "egistration of Merchant Bankers/Pre#re$uisites for Merchant Bankers: >egistration with "8BI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms/ &'( Applicant should be a body corporate &)( Applicant should have minimum net worth of >s. : crore. &*( Applicant must have atleast ) employees with prior experience of merchant banking. &,( Applicant should have necessary infrastructure like office space, e+uipment, manpower etc &:( Applicant should not carry on any business other than those connected with the securities market and must have necessary experience in the same. &A( Applicant should not have been involved in any securities scam, proved guilty for any offense or been accused of moral turpitude. &B( Any associate co, group co, subsidiary or inter connected co of applicant should not have been a registered merchant banker.

Sco%e for Merchant Banking in In ia: &'( Erowth of 1ew Issues Market 4he growth of new issue market is unprecedented since '@@; '@@'. Merchant banking can help with the further sophistication and penetration of the new issues market. &)( 8ntry of 2oreign Investors 2oreign institutional investors were allowed to invest in the primary and secondary market in '@@) and also, Indian companies were allowed to directly tap foreign capital through euro issues. 2urther, foreign direct investment by 1>Is has risen considerably due to number of incentives offered to them. 4hey need the services of merchant bankers to advise them for their investment in India. 4he increasing number of joint ventures abroad by Indian companies also re+uires expert services of merchant bankers. &*( 0hanging .olicy of 2inancial Institutions 4he policy of decentrali5ation, increase in demand for technical and financial services and encouragement of small and medium industries, re+uires the services of merchant bankers. &,( Fevelopment of Febt Market 4he development of debt market will offer tremendous opportunity to Merchant Bankers. &:( Innovations in 2inancial Instruments 4he Indian capital market has witnessed innovations in the introduction of financial instruments. 4his has further extended the role of merchant bankers as market makers for these instruments. &A( 0orporate >estructuring Fue to liberali5ation and globali5ation, competition in the corporate sector is becoming intense. 4o survive and thrive, companies need new strategies, structures and methods of functioning. 4his has led to corporate restructuring including mergers, ac+uisitions, etc. 4hese developments offer a good opportunity to merchant bankers to extend their area of operations. &B( Fisinvestment 4he government of India has raised >s. );;; crores through disinvestment of e+uity shares of selected pubic sector undertakings in @* @,. Merchant Bankers can help in the disinvestment process.