CHAPTER 1

The Objective of the Study is as follows:

To understand the need and the role played by Merchant banks.

To understand the functioning of Merchant Banks.

Limitations of the project:

As the scope of Merchant Banking is extremely vast, I have covered a
few important points such as Concept of Merchant Banking, Need, Importance
and Role of Merchant Banking, Qualities of a good Merchant Banker, Some of
the Services provided by Merchant Banks, Organisational setup of Merchant
Bankers in India

CHAPTER 2

Research Methodology

Collection of Data
For the purpose of my study I have collected the relevant data keeping in mind
the aim of my research. I have collected the data from different sources namely
primary and secondary sources.
Primary Data
The primary data related to the study was collected from:

Books

Websites

Secondary Data
Besides primary data, I have also collected the secondary data. And the
secondary data was collected from my project guide and some senior students.

CHAPTER 3

Concept of merchant banking

The 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. This
organization may be a bank, corporate body, firm or proprietary concern.
The Securities and Exchange Board of India has defined merchant banks as

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, advisor or rendering corporate advisory service in relation
to such issue management.
In Indian context this definition suits well. Merchant banking in India started with
the management of public issues and loan syndication and has been slowly and
gradually covering activities like project counselling, portfolio management,

investment counselling and mergers and amalgamation of the corporate firms.

Although, merchant banking organizations present a long list of services they
contemplate to render to their clients but the main services so far being
rendered by them are those as authorized by the SEBI.

CHAPTER 4

History of Merchant Banking

Origin of merchant banking
The origin of merchant banking can be traced back to the 13 th century
when the development of international trade and finance took place. The early
merchant bankers were traders of commodities. These bankers also acted as
bankers to the kings of European States and financed continental wars and
coastal trades. The earlier merchant bankers used to lend their name to the
lesser known traders by accepting bills through which they guaranteed that the
holder of the bill would receive full value on the date of payment. Hence the
name merchant was used because of its roots in merchant trade.

The growth of merchant banking in India

Formal merchant activity in India was originated in 1969 with the
merchant banking division setup 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. Following Grindlays Bank, Citibank set up its

merchant banking division in 1970.The division took up the task of assisting

new entrepreneurs and existing units in the evaluation of new projects and
raising funds through borrowing and equity issues. Management consultancy
services were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. Consequent to the
recommendations of Banking Commission in 1972, that Indian banks should
offer merchant banking services as part of the multiple services they could
provide their clients, State Bank of India started the Merchant Banking Division
in 1972. In the initial years the SBIs objective was to render corporate advice
and assistance to small and medium entrepreneurs.
The commercial banks that followed State Bank of India were Central
Bank of India, Bank of India and Syndicate Bank in 1977.Bank of Baroda,
Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of
India, United Commercial Bank, Punjab National Bank, Canara Bank and Indian
Overseas Bank in late 70s and early 80s. Among the development banks,
ICICI started merchant banking activities in 1973 followed by IFCI (1986) and
IDBI (1991).

CHAPTER 5

Importance, Need and Role of Merchant Bankers

Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand on the
sources of funds for ever expanding industry and trade thus, leaving a widening
gap unbridged between the supply and demand of inventible funds. All Indian
financial institutions and experienced resources constraint to meet the ever
increasing demands for funds from the corporate sector enterprises. In the
circumstances corporate sector had the only alternative to avail of the capital
market services for meeting their long-term financial requirements through
capital issues of equity and debentures. With the growing demand for funds
there was pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field of merchant
banking and share the growing capital markets. With the result, all the
commercial banks in nationalized and public sector as well as in private sector
including the foreign banks in India have opened their merchant banking
windows and are competing in this field. There has been a mushroom growth of
financial consultancy firms and broker firms doing advisory functions as well as
managing public issues in syndication with other merchant bankers.

Notwithstanding the above facts, the need of merchant banking

institutions is felt in the wake of huge public savings lying still untapped.
Merchant banks can play highly significant role in mobilizing funds of savers to
investible channels assuring promising return on investments and thus can help
in meeting the widening demand for investible funds for economic activity. With
the growth of merchant banking profession corporate enterprises in both public
and private sectors would be able to raise required amount of funds annually
from the capital market to meet the growing requirements for funds for
establishing new enterprises, undertaking expansion or modernization or
diversification of the existing enterprises. This reinforces the need for a vigorous
role to be played by merchant banks.
Merchant banks have been procuring impressive support from capital
market for the corporate sector for financing their projects. This is evidenced
from the increasing amount raised form the capital market by the corporate
enterprises year after year.
Merchant bankers, with their skills, updated information and knowledge,
provide service to the corporate units and advise them on such requirements to
be complied with for raising funds from the capital market under different
enactments viz. Companies Act, Income-tax Act, Foreign Exchange Regulation
Act, Securities Contracts (Regulation) Act and various other corporate laws and
regulations.

Merchant bankers advise the investors of the incentives available in the

form of tax reliefs, other statutory relaxations, and good return on investment
and capital appreciation in such investment to motivate them to invest their
savings in securities of the corporate sector. Thus, the merchant bankers help
the industry and trade to raise funds and the investors to invest their saved
money in sound and healthy concerns with confidence, safety and expectation
for higher yields.
Role of Merchant Banker
The role of merchant banker is dynamic in the wake of diverse nature of
merchant banking services. Merchant bankers 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.

He is always awake to renew his skills, develop expertise in new areas

so as to equip himself with the knowledge and techniques to deal with
emerging new problems of corporate business world.

He has to keep pace with the changing environment where government

rules, regulations and politics affecting business conditions frequently
change; where science and technology create new innovations in
production processes of industries.

10

Merchant banker has to think and devise new instruments of financing

industrial projects.

He has to assume wider responsibilities of saving industrial units from

going sick and guiding industries to be setup in industrially backward
areas to eliminate regional imbalances in industrial development of the
country.

He has to guide the wider section of the community possessing surplus

money to invest in corporate securities and other productive investment
channels.

He has to help the industry in different forms to ensure that it runs risk
free and devoid of uncertainty by assisting the promoters with his
knowledge and skills to resolve the problems being faced by them.

He has to watch the interest and win over the confidence of the
government, its agencies, along with the entrepreneurs, the investors
and the whole community.

He must bridge the communication gap between different sections and

resolve the problem being faced in different areas concerned with the
business world.

11

In the days ahead, merchant bankers have very significant role to play
tuning their activities to the requirements of the growth pattern of the corporate
sector, the industry and the economy as a whole which is, in itself, a challenging
task and to meet these challenges merchant bankers will have to be more
vigorous and strategic in playing their role. They will have also to adopt new
ways and means in discharging their role.

12

CHAPTER 6

Merchant Banking: Objectives

Merchant Banker plays a vital role in the economic and financial
development of the country. As a result of economic and financial liberalization
new companies are formed and number of issues floated to raise resources
from the investor community. Considering the significance of the issue the
Government of India instituted SEBI in 1990 to regulate and control various
market intermediaries. SEBI issued various rules and regulations for each and
every segment of the capital market. To regulate Merchant bankers, with the
twin objective viz., investor protection and development of the capital market,
SEBI issued rules and regulations for Merchant Bankers. Subsequent
amendments also have been made to these regulations to further strengthen
this segment of the securities industry. These regulations (Merchant Banking)
specified that every company desires to float an issue to the public should
engage Merchant Banker (Registered under these regulations with SEBI) as
Lead Manager. In this context Merchant Banker gained the importance in the
Indian Securities Industry.

In the wake of economic reforms and financial

liberalization the need for financial resources has significantly increased. As an

intermediary-Merchant Banker plays a crucial role in exploring the ways and
means for the funds.

Besides, issue management, Merchant Banker also

13

performs several other important functions like underwriting of securities,

Private placement of securities, corporate advisory services e.g., Takeovers,
Acquisitions, Disinvestments Managing & International offerings of debt/equity,
i.e. GDR, ADR, Primary dealership of government securities, Syndication of
rupee, term loans, international financial advisory services, etc. which require
special skills.
Having given a serious and careful thought to securities industry reforms, SEBI
has taken efforts seriously to boost the splendid endeavor of securities market
intermediaries. As a result, Merchant Bankers came into being to look after the
promotion and administration of issues.

It is well known fact that without

adequate professional support of Merchant Bankers the securities industry

cannot prosper

Merchant Banking for India: Advantages

The bane of Indian capital markets today is lack of investor confidence.
This is reflected in the poor performance in the primary and secondary markets.
The cause for the existing situations are many but primarily arise on account of
lack of liquidity, unscrupulous issuers and Merchant Bankers and poor or
unappeased issues.

Merchant banking can solve this problem because

14

investors would be dealing with reputed merchant bankers in the primary

market rather than unknown issuers.
The Merchant Banks, whatever are their issue management techniques
have their own capital on hold. The issues are likely to be properly appraised
and priced. Merchant banks would hold the issue until the market conditions
are appropriate for issue, thus reducing risk exposure of investors to gestation
for issue. Merchant Banks make the primary market for IPOs thus assuring
protection to the issuers also about subscription. In sum, the quality of pricing
appraisal and primary market functions will improve resulting in substantial
improvement in investor confidence. The necessity of Merchant Banking is
indicated in the view of the wide industrial base of the Indian Economy.

15

CHAPTER 7
Organizational setup of merchant bankers in India
In India a common organizational setup of merchant bankers to operate
is in the form of divisions of Indian and foreign banks and financial institutions,
subsidiary companies established by bankers like SBI, Canara Bank, Punjab
National Bank, Bank of India, etc. Some firms are also organized by financial
and technical consultants and professionals. Securities and Exchange Board of
India has divided the merchant bankers into four categories based on their
capital adequacy. Each category is authorized to perform certain functions.
From the point of organizational setup Indias merchant banking organizations
can be categorized into four groups on the basis of their linkage with parent
activity. They are:
(A) Institutional Base
Where merchant banks function as an independent wing or as subsidiary
of

various

private/Central

Governments/State

Governments

financial

institutions. Most of the financial institutions in India are in public sector and
therefore such setup plays a role on the lines of government priorities and
policies.
(B) Banker Base

16

These merchant bankers function as division/subsidiary of banking

organization. The parent banks are either nationalized commercial bank or the
foreign

banks operating

in

India. These organizations have

brought

professionalism in merchant banking sector and they help their parent

organization to make a presence in capital market.
(C) Broker Base
In the recent past there has been an inflow of qualified and professionally
skilled brokers in various stock exchanges of India. These brokers undertake
merchant banking related operations also like providing investment and portfolio
management services.
(D) Private Base
These merchant banking firms are originated in private sector. These
organizations are the outcome of opportunities and scope in merchant banking
business and they are providing skill-oriented specialized services to their
clients. Some foreign merchant bankers are also entering either independently
or through some collaboration with their Indian counterparts. Private sector
merchant banking firms have come up either as the sole proprietorship or public
limited companies. Many of these firms were in existence for quite some times
before they added a new activity in the form of merchant banking services by

17

opening new divisions on the lines of commercial banks and All India Financial
Institutions.

18

CHAPTER 8

Qualities of good merchant bankers

Merchant bankers are individual experts who organize and manage the
merchant banks. For the success of merchant banks operations, the qualities
which merchant bankers should have are discussed below:1. Leadership Merchant banker should posses all relevant skills, updated
knowledge to interact with the clients and effectively communicate.
Leadership is synonymous with followers who follow the one who leads.
2. 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. A good merchant
banker is one who does not allow his client to think anything outside
except what has been advised. Therefore, promptness in grasping the
clients problems and providing better choice amongst alternative
solutions evidence aggressive approach in the profession to hold the
clients interest in entirety for the present as well as the future.
3. Co-operation and friendliness No doubt, 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

19

main instruments with which a merchant banker mixes with the people,
gathers information, obtains business mandate and renders satisfactory
services to the clients.
4. Contacts Success of a merchant banker depends upon his sociable
nature and the richness of wider contacts. 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.
5. Attitude towards problem solving The most important personality
trait of a merchant banker is his attitude towards problem solving. Every
client coming to him has got to return fully satisfied having consulted a
merchant banker. Positive approach to understand the view point 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 behaviour.

20

6. Inquisitiveness for acquiring new skills, information and knowledge

Merchant bankers live on the 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 posses the quality of inquisitiveness.
Nevertheless, merchant banker should possess super business acumen,
managerial abilities, administrative capacities and salesmanship so as to
understand the problems of trade and industry, devise ways and means to sort
out and resolve those problems and sell the service product to the needy
clients.

21

CHAPTER 9

Requirements for setting up a merchant banking outfit

1. Formation of the Business Organisation
SEBI act, 1992 does not prescribe any specific form of business
organization to carry on the activities as merchant banker. However, the
types of organizations are listed below:
a) Sole proprietorship
b) Partnership firm
c) Hindu Undivided Family (HUF)
d) Corporate Enterprises
e) Co-operative Society
Generally it is preferred that the Merchant Banking outfit be a registered
company. Merchant Banks are generally setup as subsidiary companies of
banks (Public or Private). For example, SBI caps, ICICI Securities etc.

22

2. Adoption of a viable business plan

All the basic tests required to find out whether the business to be
undertaken is viable or not are also applicable to a Merchant Banking setup.
Capital adequacy, profitability, growth opportunities and current market size
are some of the factors which need to be looked into.

23

3. Registration of Merchant Bankers

Application for grant of certificate

a)

b) An application for grant of a certificate needs to be made to SEBI .

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., etc. Securities and Exchange Board of India (SEBI) has
divided merchant bankers into four categories based on its capital
requirements, which are as follows: -

CATEGORIES

Category I

ACTIVITIES

NETWORTH

To carry on the activity of issue management Rs.1crore

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

Category II

To act as adviser, consultant, co-manager, Rs.50 lakhs

underwriter, portfolio manager.

Category III

To act as underwriter, adviser or consultant to an Rs. 20 lakhs

issue.

24

Category IV

To act only as adviser or consultant to an issue

Nil

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.
To carry on the activity as underwriter or portfolio manager a separate
certificate of registration needs to be obtained from SEBI.
c)

Application to conform to the requirements

The application should conform to all the requirements under the SEBI
guidelines, otherwise it may be rejected.

25

d)

Furnishing

of

information,

clarification

and

personal

representation
The Board may require the applicant to furnish further information or
clarification regarding matters relevant to the activity of a merchant banker for
the purpose of disposal of the application. The applicant or its principal officer
may appear before the Board for personal representation.

e)

Consideration of application

The Board shall take into account for considering the grant of a certificate, all
matters, which are relevant to the activities relating to merchant banker and in
particular the applicant complies with the following requirements, namely: the applicant shall be a body corporate other than a non- banking
financial company
the merchant banker who has been granted registration by the Reserve
Bank of India to act as a Primary or Satellite dealer may carry on such
activity subject to the condition that it shall not accept or hold public
deposit

26

 the applicant has the necessary infrastructure like adequate office space,
equipments, and manpower to effectively discharge his activities
the applicant has in his employment minimum of two persons who have
the experience to conduct the business of the merchant banker
a person directly or indirectly connected with the applicant has not been
granted registration by the Board;
the applicant, his partner, director or principal officer is not involved in
any litigation connected with the securities market which has an adverse
bearing on the business of the applicant and have not at any time been
convicted for any offence involving moral turpitude or has been found
guilty of any economic offence
the applicant has the professional qualification from an institution
recognised by the Government in finance, law or business management
Grant of certificate to the applicant is in the interest of investors.

f)

Procedure for Registration

27

The Board on being satisfied that the applicant is eligible shall grant a
certificate. On the grant of a certificate the applicant shall be liable to pay the
fees as prescribed.

g)

Payment of fees and the consequences of failure to pay fees

Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
Where a merchant banker fails to pay the Annual fees as provided in Schedule
II, the Board may suspend the registration certificate, whereupon the merchant
banker shall cease to carry on any activity as a merchant banker for the period
during which the suspension subsists.
The Merchant Bank can commence business on acquisition of a Certificate of
Registration from the SEBI after completion of the above mentioned formalities.

28

CHAPTER 10

Services provided by Merchant Bankers

Issue Management

Underwriting

Loan Syndication

Project Counselling

Portfolio Management

Mergers & Acquisitions

Mutual Funds

Factoring

Restructuring service

Corporate Advisory Services

Factoring Services

Asset Securitizations

Forex Services

Hire Purchase

Lease finance

Venture capital

29

Of the above services, I have discussed some of them in detail below:

30

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. 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:
Drafting of prospectus and getting it approves from the stock
exchanges.
Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers
etc.
Obtaining the consent of all the agencies involved in the public
issue.
Holding road shows, to sell the issue. These shows are held for
the analysts, brokers & institutional investors.

The purpose of

these shows is to answer queries from these people about the

company and the project for which the funds are being raised.

31

 Deciding the pattern of advertising.

Deciding the branches where application money should be
collected.
Deciding the dates of opening and closing of the issue.
Obtaining the daily report of application money collected at
various branches.
Obtaining subscription to the issue.
After the close of the issue, obtaining consent of stock exchange
for deciding basis of allotment etc.
Obtaining approval of the institutional underwriters and stock
exchanges for publication of the prospectus.

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 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.

32

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.

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.
Procedure and steps for managing public issues could be discussed
under two phases. They are:

33

(A) Pre-issue management

(B) Post-issue management

(A) Pre-issue management

The various steps which are taken in managing capital issues in
general are listed below. The coverage of these activities include all the
activities beginning with the planning of bringing the capital issue till the
opening of subscription list. The steps are as follows:
I. Steps to be taken by the issuing company.
II. Steps to be taken by lead manager to the public issue.

I. Steps to be taken by the company:

Before going public the company has to take steps to ensure on its part
compliance of certain formalities. These formalities are:

34

1) Planning the capital issue The Company has to assess its requirements for
the funds to be raised from the public. The requirement should be assessed
with reference to the balanced capital mix between the owners funds and the
borrowed funds and be based on the capital structure of the company. In case
the company has availed of the services of merchant bankers for corporate
counselling or project counselling then the merchant banker could advise the
company over this aspect. Another aspect to be taken care of while planning
the capital issue is the type of securities to be issued. Trend of public response
for equity capital and debenture should be considered.
(2) Choice of a merchant banker to act as a lead manager and selection
criteria The next step is to select a merchant banker to act as a lead manager
and the selection criteria for this comprises of the following elements:

The ability of the merchant banker to sell the issue to the investors.

The status and organizational competence of the merchant banker and

infrastructure available with it to manage the public issue effectively.

The efficiency in service provide by the merchant bankers through well

informed, skilled and expert man-power it employs.

35

The confidence that a company can have in the merchant banker to

avail of the assistance in the odd circumstances and unfavourable
market situation.

The merchant banker to be appointed as lead manager to public issue

should be the one having authorization from SEBI.

Also the company will appoint the lead merchant banker to the proposed issue
as per the provisions of SEBI (Merchant Bankers) Regulation. The issuer
company is also required to enter into a formal agreement with the lead
merchant banker as per the requirement of the regulation.
(3) Number of co-managers to the issue The number of lead merchant
bankers should not exceed in case of any of the following issues:

Size of the public issue

Number of Lead Merchant Bankers

(Rs. in crores)

Less than Rs.50 crores

Two

Rs.50 crores but less than Rs100

Three

crores
Rs.100 crores but less than

Four

36

Rs.200 crores

Rs.200 crores but less than

Five

Rs.400 crores
Rs.400 crores and above

Five or more as may be agreed by

the SEBI

(II) Steps to be taken by lead manager to the public issue for new
companies, rights issue or dilution shares for existing companies Once
the company has appointed lead manager to the public issue, its executives
work in close coordination with the lead merchant banker. In case, there is more
than one lead manager, the role to be played by each of the lead managers is
discussed and the work relating to issue management could be allocated
amongst them keeping in view their respective expertise and resourcefulness in
the specific area. Such merchant banker will be responsible and accountable
for all matters related to the specified and accepted roles. Lead merchant
banker/s has/have to plan the public issue activities through a schedule listing
the activities to be performed and the time-frame within which each activity has
to be performed and completed. A specimen activity schedule which is generally
prepared by lead managers to the issue is given as check-list. The major
activities to be performed by the merchant bankers are as follows:

37

1. Stock exchange approval.

2. Considerations regarding the adequacy of capital, balanced capital
structure, debt-equity ratio and preference equity ratio.
3. Taking action as per SEBI guidelines Requirements for capital
issues under the SEBI guidelines are listed below:
a) Fresh issue of capital to public: equity shares and preference
shares.
b) Rights issue/public issue by existing listed companies.
c) Bonus issue.
d) Debenture issue.
e) Public sector bonds.
f) Public issues by financial institutions.
4. Finalising appointment of different agencies The various agencies
which are to be appointed for the management of capital issues are
required to be registered with SEBI. The various agencies to be
appointed by the lead managers are as follows:
a) Appointment of underwriters to the issue.

38

b) Appointing brokers for selling the issue.

c) Appointment of bankers to the issue.
d) Appointment of registrars to the issue.
e) Appointment of printers.
f) Appointment of advertising agency.
5. Appointment of other agencies The merchant banks may also
advise the company that in addition to the above agencies it may also
appoint the following persons involved in the public issue:
a) Auditors of the company.
b) Solicitors/Advocate as legal advisors to the public issue/issue
of prospectus.
c) Broad base the Board of Directors so as to nominate
prominent parties in India or abroad on its Board.
6. Drafting of prospectus Prospectus is an important document upon
which the investors rely, repose confidence in the company and invest
their savings in subscribing to the capital of such offering company.
7. Approval of prospectus by different agencies. They are as follows:

39

a) Legal advisor.
b) Auditors.
c) Co-managers to the issue.
d) Institutional underwriters.
e) SEBI clearance to prospectus.
f) Approval of stock exchanges to the draft prospectus.
8. Action to be taken by the company
a) Board of directors meetings.
b) Making application to stock exchanges for permission.
c) Filing prospectus with Registrar of Companies.
d) Forwarding copy of the prospectus to SEBI.
e) Appointment of underwriters/brokers by the board.
9. Printing and dispatch of issue material On receipt of the
acknowledgement of the prospectus from the Registrar of Companies
the printing of prospectus, application forms, brochure, press release
and other material should start. Both printers and advertising agency

40

should coordinate to get efficiency and economy of time and money.

The merchant bankers should go through the final proof of the entire
issue material before printing starts. The application form, brochure and
press releases as designed by advertising agency should be approved
by

managers to the issue before the company gives print orders to

avoid errors and discrepancies.

10. Publicity campaign The publicity campaign for the public issue may
be organized with a view to make the investors aware of the opening of
the public issue, inform them about the company bringing out the public
issue, its promoters background and creditability, status of the project
to be financed out of the public issue, the marketability of the product to
be manufactured or service to be provided by the company and the
future profitability projection to enable the investors to make their
independent judgements about the future of the company and the
money they may decide to invest in the company by subscribing to its
shares.
a) Advertisements.
b) Write-ups/reporting about the company/its promoters in
economic journals.

41

c)

Holding press/brokers/investors conferences at prominent

centres.

11. Instructions to bankers Bankers to the issue designate their

branches, as collection centres keeping gin view the general response
of the investors, location of the project, expectation of regional support
from the public, their past performance in the area, facilities available in
their branches to handle the collection of public issue applications.
These branches work under the directions of a controlling branch or
pooling centre.
12. Opening of the subscription list All canvassing about the issue
stops from the day of prospectus announcement in the newspapers
which is done ten days before the issue is opens. All collecting centres
display with posters and banners availability of application forms and
make arrangements for the convenience of the investors to receive the
application form with application money.

(B) Post-issue management General public becomes entitled to subscribe

to the shares/debentures of the issuing company on the day the subscription
list opens as announced in the prospectus or other offer documents and the
statutory advertisement.

42

1. First day response The response on the first day is a fair indication of
the success or failure of the public issue of securities. Good issues may
get over-subscribed on the first day itself. But this will depend upon the
efforts made to sell the issue, the investors mood with bullish spiral
prevalent on the stock market on the opening day and the existing and
near future economic, social, political and business environment.
2.

Communication channels during the issue period Merchant

bankers. Brokers, underwriters, bankers and the company all are eager
to know the exact figure of applications received for subscription and the
money collected thereof. The collecting branches of the bankers which in
turn provide the information to the Registrars, Managers and the
company as per the communication channels depicted in the module
given below: -

43

Communication Module
Managers to the

The Issuing

issue

Company

Registrars to the
Issue

Controlling

Controlling

Branch Bank A

Branch Bank B

Controlling
Branch Bank C

Bank A

Bank B

Bank C

Collection Centres

Collection Centres

Collection Centres

3. Brokers and underwriters are getting information from managers or the

concerned company about the subscription to the issue. For effective
and immediate collection of information the representatives of Registrars
sit with the controlling branch and collect information from banks
collection centres is passed on to controlling branch of the bank.

44

4. Information from the issue Registrars, interact with merchant

banks/managers and send centre-wise information to them from time to
time.
5. Nave analysis of collection Merchant bankers managing the issue
make through estimate of the collections and assess the progress of
subscription following the ABC analysis. For the purposes of the
collection money the important towns which show better collections are
put in category A. in these towns collection is made upto 80% of the total
amount. These are five towns Delhi, Mumbai, Calcutta, Madras and
Ahmedabad. If on the first day of opening of the issue collections come
upto 20% in any of these towns then exploration is done to forecast the
total subscription. This is done by multiplying the number of these five
prominent centres by 20% i.e. 20% x 5 = 100. This shows that the issue
will get over subscribed. Category B towns which contribute only 20% to
the issue will collect some money too, that will be added to the figures.
Category C towns may not collect any amount but if any amount is
collected it will be further added to the total sum. Thus, the rough
estimate is made about the collections. Registrar to the issue monitors
progress in category A towns to pass on the actual collection figures to
the managers.

45

6. Closure of the subscription list Subscription list is open for minimum

period of three days and maximum period of 10 working days as
approved by the stock exchanges. The period is extended from minimum
to maximum when the issue remains under-subscribed. In other words,
the closure of the issue is made on the final date shown in the
prospectus for closing of subscription list.
7. Over-Subscription Retention of over-subscription of equity or
debenture is now not allowed by SEBI. No doubt over-subscription
reflects the popularity and image of the company in the eyes of investors,
but it also adds to costs of handling of the issue. A company used to be
allowed by the Controller of capital Issues to retain 25% of the oversubscription of equity and 50% of debentures if announced by it in the
prospectus or statement in lieu of prospectus or letter of rights offer. This
percentage was reduced on uniform basis to 15% both for shares and
debentures in public and rights issue. The company could retain the
over-subscription to the prescribed extent of the total share capital
inclusive of the over-subscription, provided it did not exceed Rs.1 crore
without permission of Controller of Capital Issues.
8. Minimum subscription in public/rights issues The Central
Government has decided that from April 9, 1990, a company making any
rights or public issue of securities will be allowed to allot shares and

46

debentures only if it has received a minimum of 90% subscription against

the entire issue. If the required amount is not received, the application
money will have to be refunded to the applicants at the end of 90 days
from the closure of issue. This is one to protect the interest of investors
particularly in under-subscribed capital issues.
9. Under-subscription Under subscription does not render all persons
happy. It causes devolvement upon underwriters/sub-underwriters.
Having guessed under-subscription, underwriters, especially financial
institutions should make application to popularize the issue and ensure
maximum subscription from the public. According to the SEBI guidelines,
if a company does not receive 90% of issued amount from public
subscription plus accepted devolvement from underwriters, within 120
days from the date of opening of the issue, the company shall refund the
subscription if the above conditions are not met.
10. Processing of data Registrar to the issue or issue-house commences
processing of the data on computer or manually as the case may be, on
receipt of applications from different centres. Verification of each and
every application is made with reference to the amount on application,
correct name, age, address and occupation of subscriber, signatures of
the subscriber(s). In the case of NRI subscribers verification is made with
reference to Central Government stipulations under FERA. Applications

47

made under power of attorney are accompanied with respective power of

attorney document which has to be verified. No applicant, it is ensured is
a fictitious person. Having ascertained and verified all these above facts,
applications are serially numbered for quick identification and future
reference. By using computer systems the processing is done fast.
11. SEBIs guidelines To monitor the post-issue process, obligations have
been placed upon lead merchant bankers to strictly supervise and followup the post-issue activities and periodically report to SEBI the progress
in the matters of allotment and refunds as noted below: i. 7 days reporting from closure of issue Lead managers to confirm
to SEBI that the issue is subscribed to the extent of 90% within 7
days from the date of the closure of the issue.
ii. 45 days reporting from closure of issue This is compliance report
to be sent to SEBI. In this report lead manager shall also include if
the company was permitted by stock exchange to utilize the funds
on receipt of 90% subscription.
iii. Report on the basis of allotment.
iv. 90 days final report SEBI vide its letter to all merchant bankers on
July 6, 1993 has amended the Compendium of Circulars wherein it

48

has prescribed a complete reporting system for subscribed public

issues, unsubscribed public issues, subscribed right issues and
undersubscribed right issues in the prescribed performance.
12. Under-subscription and underwriters liability Under-subscription of
the issue causes difficulties for the company and underwriters. Registrars
advise the company to call upon the underwriters to fulfill their
commitments. Underwriters liability is decided by deducting the total
number of shares underwritten to the extent of deficiency, he has to be
liable. In case any particular underwriter has procured adequate number
of shares, he incurs no liabilityWatch on defaulting underwriters In
order to keep a close watch over such underwriters who have failed to
meet their underwriting devolvement and to consider penal action
against such underwriters and debar them from underwriting public
issues in future, the merchant bankers are required to provide
information to SEBI in the below given format beginning from July, 1993:
Name of the merchant banker
Name of the issuer company
Issue size

49

13. Bridge loan from institutional underwriters against public issue of

shares Financial institutions provide bridge loan to the company to the
extent of 50% of their underwriting commitments which has demand
character, to be adjusted on allotment. To avail of the amount of bridge
loan the company has got to notify in the prospectus its intentions.
14. Devolvement and commitment of underwriters

Institutional

underwriters including banks should be immediately contracted by the

company through its Mangers to put in the application to the extent of
devolvement. The underwriter Banks should be approached in writing
with the following documents enclosed.
Auditors Certificate showing that the promoters and their
associates have contributed their share of contribution in the
equity capital of the company in terms of the prospectus.
Auditors Certificate explaining that the obligation of underwriters
in respect of contingent underwriting have been duly fulfilled by
the underwriters.
Statement of underwriters obligations showing therein the extent
of devolvement upon institutions/banks, which has also got to be
verified by the auditors.

50

Underwriting
Meaning
The word underwriting was coined by British Merchants who used to write their
names at the end of marine insurance document wherein each agreed to
assure joint risk.
The dictionary meaning of underwriting is to agree to sell bonds, etc. to the
public, or to furnish the necessary money for such securities and to buy those
which cannot be sold.
Underwriting is an important primary market activity performed by stock
brokers, merchant bankers and underwriters approved by SEBI for this
purpose. It is related to marketing and merchant banking for an issue. The
industry positions are measured by the amount of underwriting one does.
Underwriters are distributors for the financial products- assuring a sale and if
the sale does not actually take place, they agree to pick up the residual. It is an
assurance against the possible failure of the issue and the underwriters have to
step in if the issue remains under subscribed to the extent of the amount
underwritten. If the market does not take the share, it is an indication of
overpricing of scrip. As such, the underwriter exposes himself to risk on account
of fall in market price and blockening his funds.

51

Underwriting offer is similar to insurance business, where the insurer is exposed

to risk to the extent of amount insured, but the only game is the insurance
commission. In underwriting, the compensation is underwriting commission. The
underwriting decision is evaluation of risk and probable loss which can also be
reduced by sub-underwriting.
In India underwriting commission is regulated by statute at a maximum of 2.5%.
Similarly, the entry into this business is also regulated by SEBI thereby only
SEBI registered agencies can act as underwriters. These are:1. Category 1,2 & 3 Merchant bankers.
2. Underwriters.
3. Stockbrokers.
Underwriting and SEBI guidelines
According to SEBI guidelines on investor protection and disclosure dated
11/06/1992, underwriting was mandatory for the full issue amount for each issue
of capital to the public. This has since been relaxed in view of high costs
involved and now the underwriting is optional.
The lead managers are required to satisfy themselves that the financial of the
underwriters

are

adequate

for

them

to

undertake

their

underwriting

commitments; such opinion has to be included in the prospectus also.

52

Underwriting agreement
To avoid disputes between the underwriters and Issuer Company, SEBI has
formulated a model underwriting agreement which seeks to standardize the
legal relationship between the two parties. It provides clear guidelines for
resolving the issues of disputes. It stipulates several norms for interest of both
the parties including the time limit within which the issue should open from the
date of agreement i.e. three months.
The practice in our country is that lead managers obtain blank and undated
consents from the underwriters which the underwriters do in order to get the
business and there have been cases where the issues really came even after
one year of sending consents.
The underwriters shall be entitled to appoint sub-underwriters but the main
underwriter will be primarily responsible. The underwriters are also asked to
produce a statement of devolvement of issues and a statement of declaration of
net worth alongwith Chartered Accountants Certificate at the time of sending
consents. All underwriters who are members of recognized stock exchanges
have also to obtain permission to act as underwriter from their Stock Exchange.
Underwriting agreement is a legally enforceable contract between a company or
an issuer and the underwriter. There is no legal difference between underwriting
and contingent underwriting as all underwritings are dependent on a

53

contingency. Sometimes, a company enters into a standby arrangement

whereby there is an agreement between the company and an undertaker who
agrees to apply for shares, if not subscribed by public. This is also an
underwriting agreement.
Evaluation by underwriter:
Since the underwriters contingent stake is involved in any issue, it is desirable
for any underwriter to evaluate the project or issue before consenting to act as
an underwriter. He should stress upon following points while deciding whether
to underwrite and how much to underwrite.
1. Companys standing and past track record
2. Management of the company, competence of promoters and
professional approach.
3. Objects of the proposed issue.
4. Project details, means of finance, pricing and marketing.
5. Foreign participation in technology, finance and management.
6. Price of the issue and listed price of companys shares or of other
companies in industry.
7. Pending disputes and litigations.

54

8. Statutory clearances.
9. Financial institutions loans and participation in equity.

What the company looks for in underwriters:

The companies or their lead managers appoint underwriters on the basis of
their standing in the market and past experience as to procurement and
honouring of commitments.
The major points that are looked into are:1. Financial strength of the underwriters.
2. Experience in primary market.
3. Primary market network.
4. Past performance and procurements.
5. Outstanding underwriting commitments.
Sub-underwriting
The underwriter shall be entitled to arrange for sub-underwriting of his
underwriting obligation on his own account with any person, broker or

55

underwriter on terms and conditions to be agreed upon between them.

Notwithstanding any such sub-underwriting arrangement, the main underwriter
only shall be primarily responsible for sub-underwriting and any failure or
default on the part of sub-underwriters to discharge their respective subunderwriting obligation, shall not exempt or discharge the underwriter of his
underwriting obligation to the company.
Wherever such arrangements are done, it should be informed to the company,
lead managers and concerned stock exchanges.

56

Loan Syndication
Loan syndication or credit syndication refers to the services rendered by the
merchant bankers in arranging and procuring credit from financial institutions,
banks and other lending and investment organizations for financing the clients
project cost or meeting working capital requirements. In other words, it is a
project finance service. In sequence of merchant banking services it ranks next
to project counselling.
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources from where funds could be
procured to implement the project. The responsibility of locating the sources of
finance, approaching these sources by putting in requisite prescribed
applications and complying with all formalities involved in the sanction and
disbursal of loan rests with the merchant bankers who provide the service
loan/credit syndication.
Steps in Loan syndication:
1. Preparing project details and estimating capital requirements of the
applicant.
2. Locating sources of finance i.e. the lenders or supplier of funds.

57

3. Selection of suppliers of funds. Preliminary discussions with the suppliers

of funds to ascertain possibilities of getting credit.
4. Preparation of loan application.
5. Filing the loan application with the financial institution/bank and follow-up
action.
6. Rendering

assistance

in

project

appraisal

with

the

financial

institution/bank.
7. Obtaining sanction letter/letter of intent from the lenders.
8. Assistance in compliance of terms and conditions for the availment of the
loan.
9. Assistance in documentation and creation of security.
10. Assistance in obtaining disbursement of loan.
Loan syndication in the case of domestic borrowing is undertaken with the
institutional lenders and the banks. Amongst institutional lenders the following
institutions are the main suppliers of the long and medium term funds with
which the merchant bankers contact, liaison, and arrange loans for and on
behalf of their clients.
1. All India Financial Institutions:

58

i.

Industrial Finance Corporation of India (IFCI)

ii.

Industrial Development Bank of India (IDBI)

iii.

Industrial Credit and Investment Corporation of India Ltd. (ICICI)

iv.

Industrial Reconstruction Bank of India (IRBI)

v.

Shipping Credit and Investment Company of India Ltd. (SCICI Ltd.)

2. State Level Financial Bodies:

i.

State Financial Corporations (SFCs)

ii.

State Industrial Development Corporations (SIDCs)

iii.

State Industrial and Investment Corporations (SIICs)

3. All India Level Investment Institutions:

i.

Life Insurance Corporation of India (LIC)

ii.

Unit Trust of India (UTI)

iii.

General Insurance Corporation of India (GIC) and its subsidiary

companies.

59

4. Commercial Banks:-- Commercial banks join consortium financing with all

India financial institutions to provide medium term loan to industrial projects,
otherwise they cater to the needs for working capital requirements.
5. Mutual Funds
6. Venture Capital Funds

60

Project Counselling

Project counseling is very important and lucrative merchant banking service

which only very few merchant bankers having advantages of knowledge, skills
and experience over others are able to render satisfactorily.
Project report its meaning and need
The dictionary meaning of the word project is plan, scheme, course of
action etc.
The above meaning of the project is acceptable from merchant banking point of
view. But merchant bankers may contribute to the basic idea which a promoter
initially picks up for the proposed industrial activity.
Merchant bankers advise the clients on project preparation. Thus, two reports
viz. technical feasibility report and the market survey report must be prepared

61

separately. Various agencies, at different levels, evaluate these two reports to

extract the desired information for taking decisions.
Project report purposes Preparation of project report is necessary for the
following purposes

For obtaining government approvals Government has put restrictions on

taking up certain economic activities without its prior approval. Most of these
restrictions have been placed to ensure that economic activity conforms to the
basic norm of planned way where scarce resources of the nation could be put
to better utilization for producing goods and services. Project report about the
proposed activity is prepared to obtain government approvals particularly in the
following areas:

Grant of industrial licence to undertake specified industrial activity.

Foreign investment and technology tie-up.

Grant of import licence for importing raw material, plant, machinery and
equipments.

Grant of foreign exchange allocation for import of capital goods or raw

materials etc.

62

Grant of subsidies and other concessions from the government at centre

or state levels or from government sponsored agencies, etc.

For procuring financial assistance from different financial institutions,

banks and public sources Financial institutions and banks grant term loans
and working capital limits respectively to the business enterprises on the basis
of the requirements projected and justified in the project report. For procuring
public subscription towards equity it is necessary to convince the investing
public about the technical feasibility and economic viability of the project from
practical as well as from legal angle to justify the financial requirements and
comply with various statutory formalities for which the project report is needed.

For planned implementation of action plan or project Project report

enables a company for planned utilization of resources and implementation of
the project within scheduled time.
For ensuring market for the proposed product Project report presents
integrated aspects about the product being proposed to be produced and to
explore market for it. Market survey reports are part of the project report.
Product, in real sense, is known only through market survey, which provides
information about the existing as well as the future demand for the product.
Such market explorations provide information about end users of the product,
segments of the market for promotional efforts as well as for pricing decisions.

63

For

ensuring

specified

technical

process

and

engineering

requirement for manufacture of the product Cost of the project is affected

by the technical process involved in production of the desired goods. Project
report describes the technical process. Technical process suggests for suitable
location of project site, size of plant, requirement of raw material, labour and
skills, power, fuel, water, effluent treatment and degree of pollution control,
transportation, etc. Project report provides all these details for taking quick
decision on its implementations.

Scope of project counselling services Project counselling services

are needed by industrial entrepreneurs in India in the following areas:1. Preparation of project report.
2. Deciding upon the financing pattern to finance the cost of the project.
3. Aspects of project appraisal with financial institutions/banks.

Preparation of project report:

Preparation of project report involves pre-investment study of the proposed
production activity from different angles including the following:--

64

(1) Planning of objectives Planning of objectives of the proposed activity is

essential from different angles.
(2) Evaluating the plan objective The above objectives and targets should
be evaluated individually on consideration of the following aspects by the
promoters of the project themselves or through the help of the merchant
bankers or other professional consultants:
(3) Evaluate activity having identified the objectives This is to be done
with reference to requirements of the following elements:
i. Technical know-how and other requirements.
ii. Plant and equipment.
iii. Manpower requirements for both skilled and non-skilled.
iv. Financial requirements.
v. Managerial competence and organizational set-up.
i. (4) Take a decision whether or not to undertake the project idea
Merchant bankers, wile giving suggestions or opinions on the above
aspect are guided by their own experience and professional skills
attained over the years of their practice and experience in the field work.

65

(5) Format of the project report No format of project report is prescribed.

Project report for different products involving different technical process will
contain information best suited to the manufacturing process of each of such
products. But there are certain aspects which are common in all project reports.
These aspects are discussed below:
i. Product
ii. Capacity
iii. Technical process
iv. Schedule of implementation
v. Cost of the project
vi. Market study
(6) Deciding upon the financial pattern Financing the project cost
Important aspects of project counselling is the planning for raising funds
required to finance the project cost. Apparently there are two sources of funds
available to finance the project cost viz. internal sources and external sources.
Internal resources refer to owners funds whereas external sources are
borrowed funds. Internal source of funds could be the owners funds retained in

66

the company in the form of reserves and surpluses or provision for depreciation
or retained earnings.
External finance is in the form of loans from banks, private investors and
financial institution. Loans may be short-term and long-term for periods. These
loans are raised as borrowings from the banks and term lending financial
institutions. Company may burrow from public by way of public issues through
prospects or private investment institution in the form of debentures at fixed rate
with different conditions of convertibility, non-convertibility and redemption.
Based on the above background the project cost of a company is financed as
per the following pattern:
Means of financing the project cost:
1) Share capital (owners funds); and/or
Equity/Preferences shares
Indian promoters
Non-resident Indians
Public issue
2) Term loans (borrowed funds); and/or

67

 Rupee loan or foreign currency loan from financial institutions/banks;

Convertible debentures or non-convertible debentures from public issue or
private placement with investment institutions;
Unsecured loans/deposits; Lease financing
(3) Subsidies; and/or
(4) Internal cash accruals.

68

Portfolio Management
Portfolio management is a way of handling clients investments in order to gain
returns. The main objectives of portfolio management sought to be achieved by
the merchant bankers for their clients include the following:
Safety of investment or funds The investment should be preserved, not be
lost and remain in a returnable position in cash or kind.
Marketability The investment made in securities should be marketable i.e.
the securities must be listed and traded at the stock exchange so as to avoid
difficulty in their encashment.
Liquidity The portfolio must consist of such securities which could be
encashed without any difficulty or involvement of time to meet urgent need of
funds. Marketability ensures liquidity of the portfolio.
Reasonable return The investment should earn a reasonable return to
upkeep the declining value of money and be compatible with opportunity cost of
the money in terms of current income in the form of interest or dividend.
Appreciation in capital The money invested in portfolio should grow and
result in capital gains.

69

Tax planning Efficient portfolio management is concerned with composite tax

planning covering income-tax, capital gains tax and wealth-tax.
Risk avoidance Risk avoidance and minimization of risk are important
objectives of portfolio management. Portfolio managers achieve these
objectives by effective investment planning and periodical review of the market
situation and economic environment affecting the financial market.
Functions of Portfolio managers
Merchant bankers and portfolio managers rendering the services of portfolio
management to their clients in different categories viz. individuals, resident
Indians and non-resident Indians, firms, association of persons, like joint Hindu
family, trust, society, corporate enterprises, provident fund trustees, etc. have to
enquire of their respective individual objectives, need pattern for funds,
perspective towards growth and attitude towards risk before counselling them
on the subject and acceptance of the assignment. Nevertheless, the portfolio
managers in the wake of rendering this service perform following set of
functions:-1. Doing complete study of economic environment affecting the capital
market in the country covering important aspects of international
economic situation likely to affect the money, capital or securities
markets.

70

2. Studying the securities market and evaluate price trends of different

types of securities quoted at stock exchange and identify the blue-chip
companies securities where investors could be advised to invest their
money for better and safe investments.
3. Maintaining complete updated financial performance data of the bluechip companies and other good companies where investment could be
made. Record should be maintained in a systematic way with ratio
analysis about debt-equity, rate of profitability and dividend payout ratio,
earning per share, dividends during the past two years, retained income
growth rate, capital nature of securities issued, bonus and right issue
details, market performance of securities and current prices, speculative
nature of the security, etc
4. Keeping record of latest amendment in government guidelines, stock
exchange regulations, RBI regulations over bank lending against
security of shares, loans to invest in shares of new companies, tax
incentives for investment in corporate securities, policy towards NRIs
investments, foreign capital inflow and repatriation restrictions, etc.
5. Studying problems of industry affecting securities market attitude of
investors.

71

6. Studying the behaviour pattern of financial/investment institutions and

banks, their policy structure towards investment, their funds position and
liquidity requirements. Keeping latest and detailed information about the
moves of these institutions will help in managing risk of investment or
price change of securities affected by sale and purchase activities to
these financial institutions.
7. Studying the attitude and behaviour pattern of brokers community
dealing in different stock exchange, their expectations, manipulative
practices, etc.
8. Counselling the prospective investors on share market and suggest
investments in certain assured securities.
9. Carrying out investment in securities or sale or purchase of securities on
behalf of their clients to attain maximum return at lesser risk.
General responsibilities of Portfolio Manager
The general responsibilities for the discretionary portfolio manager as well as
the portfolio manager have been specified in regulation 15 of the SEBI (Portfolio
Management) Regulations, 1993 that are summarized below:

72

1. He shall transact in securities within the limitations placed by the

client himself with regard to dealing in securities under the provisions
of the Reserve Bank of India Act,1934 (2 of 1934);
2. He shall not derive any direct or indirect benefit out of the clients
funds or securities;
3. He shall not pledge or give on loan securities held on behalf of clients
to a third person without obtaining a written permission from his
client;
4. He shall ensure proper and timely handling of complaints from his
clients and take appropriate action immediately;
5. He shall abide by the code of conduct.
Basic principles of portfolio management
There are two basic principles, given below, for effective portfolio management:
1. Effective investment planning, and
2. Constant review of investment.

1. Effective investment planning

73

Merchant bankers rendering the service as portfolio managers plan for the
investment in securities by considering the following factors:
i. Fiscal, financial and monetary policies of the Central Government or
Reserve Bank of India.
ii. Industrial and economic policy of the Government and their impact on
industry prospects in terms of prospective technological change,
competition in the market, capacity utilization in the industry, demand
prospects, etc.
2. Constant review of investment
Merchant

bankers/

portfolio

managers

should

constantly

review

their

investments in securities and continue selling and purchasing to change

investments in more profitable avenues. For this purpose it is necessary to
carry on the following analysis:i. Assessment of quality of management of the companies in which
investment has already been made or is planned to be made;
ii. Financial analysis and trend analysis of companies balance sheets/profit
and loss accounts to choose more sound companies with optimum
capital structure and better performance and off-load investment made in
companies with slackening performance;

74

iii. Analysis of securities market trend is done on a continuous basis.

75

Mergers and Acquisitions

Business combinations are known

by different names viz.

mergers,

consolidations, takeover, amalgamations, and acquisitions. Meanings of these

terms should be understood as some of these terms carry different meanings in
different situations. For example, the meaning of the word combination it
refers to mergers and consolidation as a common term used interchangeably
but carrying legally distinct interpretation.
Meaning of terms:
Merger Mergers is defined as a combination of two or more companies into a
single company where one survives and the others lose their corporate
existence. The survivor acquires the assets as well as the liabilities of the
merged company or companies. Generally, the company which survives is the
buyer which retains its identity and the seller company is extinguished. Merger
is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and stock of one company stand transferred to
Transferee Company in consideration of payment in the form of equity shares of
Transferee Company or debentures or cash or mix of the two or three modes.
Amalgamation Ordinarily amalgamation means merger. Both the terms are
used interchangeably.

76

Consolidation Consolidation is known as the fusion of two existing

companies into a new company in which both the existing companies
extinguish. Thus, consolidation is mixing up of the two companies to make them
into a new one in which both the existing companies lose their identity and
cease to exist. The mix-up assets of the two companies are known by a new
name and the shareholders of two companies become shareholders of the new
company. None of the consolidating firms legally survive. There is no
designation of buyer and seller. All consolidating companies are dissolved. In
other words, all the assets, liabilities and stocks of payment in terms of equity
shares or bonds or cash or combination of the two or all modes of payments in
proper mix
Holding Company Mergers and consolidations are distinct business
combinations which differ from a holding company. The relationship of the two
companies when combine their resources are differently known as parent
company which holds the equity stock of the other company known as
subsidiary and controls its affairs. The main criteria of becoming holding
company is the control in the composition in the Board of Directors in another
company and such control should emerge from holding of equity shares and
thereby more than 50% of the total voting power of such company.

77

Acquisition In the context of business combinations, an acquisition is the

purchase by one company of a controlling interest in the share capital of
another existing company. An acquisition may be affected by:
a) Agreement with the persons holding major interest in the company
management like members of the board or major shareholders
commanding majority of voting power.
b) Purchase of shares in open market.
c) Takeover offer to the general body of shareholders.
d) Purchase of new shares by private treaty.
e) Acquisition of share capital of one company either by all or any one of
the following forms of considerations viz. means of cash, issuance of
loan capital, or insurance of share capital.
Takeover A takeover is acquisition and both the terms are used
interchangeably. Takeover differs from merger in approach to business
combinations i.e. the process of takeover, transaction involved in takeover,
determination of the share exchange or cash price and the fulfillment of goals of
combination all are different in takeovers than in mergers. For example, process
of takeover is unilateral and the offeror company decides about the maximum

78

price. Time taken in completion of transaction is less in takeover than in

mergers.
Role of Merchant Bankers in Merger
Merchant bankers are middlemen in settling negotiations for merger between
the offeree and the offeror. Their role is specific and specialized in handling the
merger and takeover assignments. They have to take care and observe some
professional standards assumed in the role to play, briefly listed below.
Merchant bankers assistance is useful for both the companies i.e. the acquirer
as well as the amalgamated company. Being a professional expert, merchant
banker is apt to safeguard the interest of the shareholders in both the
companies. This role covers all the four areas in the merger. They are listed
below:
(I) Observance of professional norms
Observance of secrecy Strict secrecy of the deal is to be maintained till final
settlements are reduced to writing to avoid intervention of other parties as
hostile bidder, to avoid disruptive transactions in the stock market, to obviate
insider trading in the stocks and prevent proxy wars at the shareholders
meeting.

79

Compliance of legal formalities Statutes, laws and the procedures laid

down by the statutes should not be bypassed by the offeror or offeree because
violation of law on the part of the seller or target company at times devolves
upon the buyer and the merchant banker could also be held for abetment. Apart
from the above, there are other legal formalities to be complied with in issuing
shares in exchange, safeguard pre-emptive rights of existing shareholders,
checking minutes book, stock books of the target company or its subsidiaries,
locating pending litigation against target company or its subsidiaries.
Completion

of

financial

arrangements

Completion

of

financial

arrangements shall depend upon the following two aspects:

a) Prepare

checklist

by

making

assessment

of

target

companys

outstanding preference shares/debentures or any other instrument to be

settled, to be redeemed or kept outstanding as per terms of agreement
between the parties.
b) Checklist of the lenders formalities to be complied with so as to conclude
loan transactions for financing the acquisition by raising credit from
banks, financial institutions or the private lenders or management.
Closing of the transaction Merchant banks should prepare a schedule and
the checklist of formalities to be completed to conclude the transaction of

80

merger or takeover. In this connection, the following points are important which
deserve enlistment:
a) For cash transactions, the format of contents of the certificate or letters
to be signed by the acquiring company and the target company.
b) For sale of assets, the documents like bill of sale, agreements, sale deed
for transferring the freehold immovables like real estate, etc. deed of
assignment of lease in the case of leasehold properties, or deed of
assignment for patent rights, trademarks or copy rights, title to motor
vehicles, etc. be drafted for finalization.
c) Settlement documents for retrenchment or unemployment compensation.
d) Documents for transfer of deposits from target companys account to
buyers account.
e) Delivery of comfort letter on completion of transaction which must spell
out that the account procedures have been adhered to, the information
has been as per books of accounts and records maintained by the target
company.

(II) Steps to be taken: Primary investigations about proposed merger

partner company:

81

Purchase investigation before merger It is the fundamental task of the

merchant banker/consultant or the financial executives of the company to carry
out following type of analysis before starting negotiations with the proposed
merger partner company or vice versa
1) Industry analysis
2) Accounting and financial analysis
3) Management analysis
4) Marketing analysis
5) Manufacturing and distribution: Engineering analysis.
6) Miscellaneous information analysis.
7) Economic analysis.
8) Non-balance sheet factory analysis

(III) Selection of methods of merger:

Mode of payment The following methods are in vogue by which merger or
takeover can be affected. Selection should be made of one or more methods on

82

the basis of the information received about the target company and the means
available with the acquirer:
a) Acquisition (for cash) of the shares or assets of one company by the
other.
b) Acquisition (in exchange for shares or other securities in the acquiring
company) of shares or assets of one company by another.
c) Acquisition of undertaking or shares of both companies by a new
company in exchange for shares or other securities.
d) Acquisition of minority held shares of a subsidiary by parent company.
(IV) Follow the check list for completing preliminary investigation for
merger
1. Memorandum and articles of association of the company.
2. Management agreement and documents relating to succession, etc.
3. Shareholding pattern, agreement between shareholders.
4. Directors loan to the company.
5. Information for preliminary investigation.
a) Audited accounts for 5 years and current year.

83

b) Cash flow and ratio analysis for 5 years with projections for 5 years.
c) Recent valuation report on land, building, plant and machinery,
leases, stocks, etc.
d) Financial analysis for last 5 years covering turnover and profit
margins product-wise, market-wise with projections for 5 years with
comments of management about continuation of present policy or
addition of alternatives.
e) Budgeted accounts and management accounts for past 5 years
covering current year with comments of management.
f) Departmental analysis for past 5 years commenting on staff,
workload, output, suggested changes.
g) Production costs for current year and projection for 5 years.
h) Requirement of funds for investment in capital assets, working
capital, replacements, expansion, etc. for next 5 years.
i) Financial forecasts for 5 year, repayments of loans, interest
payments, liquidity with reference to debtors and creditors.
j) Depreciation policy.
k) Dividend policy.

84

l) Expected profits and use of profits with reference to dividends,

bonuses, pensions, gratuity or provident funds.
6. Production
a) Different products and techniques of production.
b) Plant location, deficiency of labour on plant.
c) Total number of companies in industry and the position of the target
company in the industry production-wise.
d) Product research or technological obsolescence.
7. Sales
a) Product performance in the market or market share.
b) Image of the company.
c) Probability of product substitutes and replacements.

85

Mutual Funds
A mutual fund is a professionally-managed form of collective investments that
pools money from many investors and invests it in stocks, bonds, short-term
money market instruments, and/or other securities. In a mutual fund, the fund
manager, who is also known as the portfolio manager, trades the fund's
underlying securities, realizing capital gains or losses, and collects the dividend
or interest income. The investment proceeds are then passed along to the
individual investors. The value of a share of the mutual fund, known as the net
asset value per share (NAV), is calculated daily based on the total value of the
fund divided by the number of shares currently issued and outstanding.
Advantages of mutual funds Advantages of mutual funds over direct
investment are noted below:
1) Reduce risk Mutual fund provides small investors access to reduced
investment risk resulting from diversification, economies of scale in
transaction cost and professional finance management.
2) Diversified investment Small investors participate in larger basket of
securities and share the benefits of efficiently managed portfolio by the
experts and are freed of keeping any records of share certificates, etc. of
various companies, tax rules, etc.

86

3) Botheration-free investment Investors get freedom from emotional

stress involved in buying or selling securities. Mutual funds relieve them
from such stress as it is managed by professional experts who act
scientifically with right timings in buying and selling for their clients.
4) Revolving type of investment Automatic re-investment of dividends
and capital gains provides relief to the members of mutual funds.
5) Selection and timings of investment expertise in stock selection and
timing is made available to investors so that invested funds generate
higher returns to them.
6) Wide investment opportunities Availment of wider investment
opportunities that create an increased level of liquidity for the funds
holders become possible because of package of more liquid securities in
the portfolio of mutual funds. These securities could be converted into
cash without any loss of time.
Mutual fund returns Holders of mutual funds get return in the following
forms:
1) Dividends The dividend income to mutual fund company from
investments in shares, both equity and preference are passed on to

87

holders. These dividends are subject to tax deduction as per Income-tax

laws.
2) Capital gains Mutual fund holders or owners also get benefits of
capital gains which are realized and distributed to them in cash or kind.
These are subject to tax in the same way as gains or losses of directly
held securities.
3) Increase or decrease in net assets value The increase or decrease
in net assets value are the results of unrealized gains and losses on
portfolio holdings. They are not taxed until realized.
Sale and purchase of mutual funds shares:
Mutual fund shares may be easily purchased or sold directly through the
management companys sales offices/agents or through stock brokers. A
loading fee is usually charged (in the case of open fund mutual funds) for the
initial purchase. The fee is added to the NAV of shares in order to arrive at the
purchase price. Such a loading fee reduces the quantity of funds invested. The
fee range may differ as per prevalent practices in different countries and usually
range of 4% to 9% of the total purchase. Such mutual funds are called load
mutual funds where no load fee is charged, are called non-load mutual funds.
Non-load mutual funds will have higher management fee to off set the absence
of the load fee. A small fee is charged on redemption for non-load mutual fund

88

shares when redemption occurs within 6 months of the purchase date. The fee
is 1.5% and is meant to discourage trading of the shares on stock exchanges.
Close-end mutual fund shares are sold through underwriters, like equity shares
offerings, load mutual fund shares are bought and sold through dealers at their
bid and ask price. The bid price represents the current pro rata market value of
the assets backing each share. The ask price reflects the bid price plus a
commission. The commission which may be as high as 8.5% goes to the dealer
or underwriter who sells the shares to cover expenses. On the other hand, nonload mutual funds buy and sell their shares at the same price without charging
any additional sum towards fee or load charges.

89

Factoring
Factoring , a sort of suppliers credit , is understood by the services an
agent renders to its principal by managing
realizing

the latters scales ledger ,

the book debts or bills receivables against a

pre-determined

commission known as commercial charge. For example, the manufacturer

or trader sells the goods directly or through agent and advises the details
of

the

sale

to

the factory

to

realize

the

credits. Thus, the factors

responsibility is contractual with the privity of contract with

the seller.

Depending upon the terms of the contract, the factor may assume risk for
non-payment by the customer also. The need for factor services is felt in
view of expanding sales by the manufacturer suppliers so as to manage
the sales realization of books debts. Thus, it reduces dependence upon bank
credit for working capital requirements.
The above service of factoring is different what merchant bankers used to
render in the early part of nineteenth century. Then, the mercantile agent had
full control of his principal goods i.e. he used to sell and invoice the goods in his
own name either on term cash or credit depending upon the nature of
transaction.
Mechanisms of factoring

90

Credit sales generate the factoring business in ordinary course of business

dealings. Realization of credit sales is the main function of factoring services.
Once sale transaction is completed the factor steps in and takes course to
realize the sales. Thus, factor works between the seller and the buyer and
sometimes with sellers banks together. The following figure presents a
schematic view of factoring mechanism explaining therein the interaction
between the different parties and flow of information between them:
(1) The buyer:
a) Buyer negotiates terms of purchasing plant and machinery or other
material with the seller.
b) Buyer receives delivery of goods with invoice and instructions by the
seller to make payment to the factor on due dates.
c) Buyer makes payment to factor in time or gets extension of time or in the
case of default is subject to legal process at the hands of factor.
(2) The seller:
a) Memorandum of understanding with the buyer in the form of letter
exchanged between them or agreement entered into between them.
b) Sells goods to the buyer as per memorandum of understanding.

91

c) Delivers

copies

of

invoice,

delivery

challan,

memorandum

of

understanding, instructions to make payment to factor given to buyer.

d) Seller receives 80% or more payment in advance from factor on selling
the receivables from the buyer to him.
e) Seller receives balance payment from factor after deduction of factors
service charges, etc.

(3) The factor:

a) The factor enters into agreement with seller for rendering factor services
to it.
b) On receipt of copies of sale documents as referred to above makes
payment to the seller of the 80% of the price of the debt.
c) The factor receives payment from the buyer on due dates and remits the
money to seller after usual deductions.
d) The factor also ensures that the following conditions should be met to
give full effect to the factoring arrangements:

92

i. The invoice, bills or other documents drawn by seller should contain a

clause that these payments arising out of the transaction as referred to
or mentioned therein might be factored.
ii. The seller should confirm in writing to factor that all the payments
arising out of these bills are free from any encumberances, charge,
lien, pledge, hypothecation or mortgage or right of set-off or counterclaim from another etc.
iii. The seller should execute a deed of assignment in favour of factor to
enable the latter to recover the payment at the time or after default.
iv. The seller should confirm by a letter of confirmation that all conditions
to sell buy contract between the buyer and him have been complied
with and the transaction is complete.
v. The seller should procure a letter of waiver from the bank in favour of
the factor in case the bank has a charge over the assets sold out to
buyer and the sale proceeds are to be deposited in the account of the
bank.

Types of factoring:

93

The factor could be of three broad types i.e. (1) domestic factoring, (2) export
factoring, (3) cross border factoring.
(1) Domestic factoring Domestic factoring could be again sub-divided into
three main principle types viz.:
(i) Disclosed factoring In disclosed factoring the name of the factor is
disclosed in the invoice by the supplier manufacturer of the goods asking
the buyer to make payment to the factor so named therein.
(ii) Undisclosed factoring The name of the factor is not disclosed in the
invoice although factor maintains the sales ledger of the supplier
manufacturer. The entire realization of the business transaction is done in
the name of the supplier company but controls of all moneys remain with
the factor.
(iii) Invoice discounting The factor could be a bank or the supplier of
funds which discounts the invoices of the supplier at a pre-agreed credit
limit providing finance to the supplier against the security in the form of a
charge on the book debts of the supplier on a specific cash receivables.
(2) Export factoring In export factoring, banks play an important part. The
export company obtains finance from the bank by virtually selling the export
document to it on a reasonable basis i.e. if the claims are not honoured by the

94

importers bank the exporter shall repay the bank the amount received. The
factor bank usually advances 75%--50% of the export claims of the supplier
exporter.
(3) Cross border factoring Export factoring is also known as cross border
factoring when import factor at the debtors place is engaged by export factor.
Import factor has knowledge of local conditions and provides help in realization
as well as reduction of commercial risk. Export factor takes over the commercial
risk from the exporter on the assurances given by import factor.

Main terms and conditions of factoring The main terms and conditions of
factoring which are included in the agreement to be entered into between the
supplier and factor are precisely listed below:1. Assignment of debt in favour of factor.
2. Selling limits and the conditions with which the factor will have no
recourse to the supplier on non-payment from the customer and in what
circumstances the factor will turn to recourse to the supplier.
3. Selling out details of the payment to the factor for his services known as
service charge or commercial charge which is usually a percentage on
turnover.

95

4. Selling out details of the interest to be allowed to the factor on the

accounts where credit has been allowed/to be allowed to the supplier.
The rate of interest is to vary depending upon the money market
conditions and is commonly fixed at 2 and a half to 4 percent per annum
above the base rate so as to give a better margin to the factor.
5. Agreement should set the limit of any overdraft by the supplier and the
rate of interest to be charged by the factor on such overdrafts.
6. The agreement should specify that the amount to be paid by the factor to
the supplier should be net of the service charge.
7. The percentage of the amount of the invoice value to be received from
the factor by the supplier be specified in the agreement. Usually, about
80% of the invoice value of the amount is provided by the factor to the
supplier.
8. Specific schedule be provided in the agreement setting out special terms
for the factor to handle accounts of different customers.

96

Benefits of factoring:
1. Factoring makes through discounting the bills, the funds available to
business enterprises which do not carry legal strings like loans or fixed
deposits as the former one is neither a loan nor a deposit.
2. Since factoring makes available to the firm short-term money, the firms
needs for funds is satisfied without recourse to borrowing. Thus, factoring
helps in avoiding increased debts.
3. Since the finds are easily made available by factors to the extent of 80%
of the invoices, the firm can easily meet its liabilities. This enables the
firm to reduce in balance sheet the realizations from debtors and also the
elimination of current liabilities to the same extent. Thus, the current
assets are flexibility managed by the firm reducing current ratio as well
as the working capital requirements.
4. Factoring services assist in improving the financial position of the
enterprise and avoidance of sickness for want of realization of sales.

97

CHAPTER 11

PLAYERS IN MERCHANT BANKING

1. ENAM
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. ENAMs 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

private

placement of a companys 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.

98

 ENAM also provide the seed stage services, value creation services
and IPOs advisory services which are represented below:

2. ICICI SECURITIES
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
advisory services, which include joint ventures, mergers, acquisitions,
and divestitures.

99

 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.
.

100

3. CITIGROUP
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 clientsour 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).

101

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.

CHAPTER 12

CHALLENGES AHEAD
Merchant bankers have to tap the opportunities lying ahead with the developing
pace of the economy.

These opportunities arise in the form of challenges

before the merchant bankers to test their skills, expertise and efforts to attune
their activities with the programme of economic development of the country,
adopt new instruments and innovative means of financing to meet the growing
financial requirements of the corporate clients.

Some of the areas of

challenges, which have been explored on the basis of research, are classified
as under:

102

Merchant bankers will have to conduct management of capital issues in a

different fashion than what is being done at present to provide the full benefit
of their services of corporate counseling, project counseling and loan
syndication to small industries then besides distributions of their securities to
the public and arranging long-term institutional or banking finance for them

If the planned objective of economic decentralization and rapid development

of rural economy is to be achieved merchant bankers will have to make
expert efforts in the interest of the national economy by mobilizing the
savings from the rural sector and creating avenues for its investment in rural
areas in industry, trade and commerce in different shapes and different
magnitudes encouraging the local people to reduce their dependence on
land farming and involve in other activities

Increasing number of sick industries is the ever-growing threat for the

industrial economy of the country. Merchant bankers have to find out ways
and means for rehabilitating the sick industries and also devise the manner
by which the running industry might be saved from going sick

103

The millions of small savers are unable to manage their savings in India in
both rural and urban areas. There are mainly the people from the middle
class and lower middle class. Merchant bankers must devise ways and
means to provide services for portfolio management to these citizens.

Public and private sector institutions engaged in trade, commerce and

industry have many times surplus funds lying with them awaiting opportunity
outside. These funds should be tapped by the merchant bankers from time
to time by mobilizing them to deficit areas on profitable return basis playing
the interest rate games as is done in SWAP deals in international finance.

In the international field, where the public and private enterprises are
entering to raise foreign currency resources, Indian counterparts have to
depend upon the assistance of foreign merchant bankers. Indian merchant
bankers, therefore, will have to sharpen their skills and attain the requisite
expertise in the field of international merchant banking.

To tap the latest technology available internationally and procure the transfer
of the technology to India, merchant bankers should frequently make-

104

exploring tours to foreign countries, organize meetings and conferences with

the Chamber of Commerce and Industry and other commercial, industrial
and financial organizations so as to enthuse the foreigners to take interest in
investment activity in India.

The challenges noted above are only indicative of the expected role of
merchant bankers and in no way be constructed as exhaustive and final.
These challenges continue to stand before the merchant bankers to meet
the test of time and shall grow in number with the growing requirements of
financial services for the corporate sector and the community as a whole.

105

CHAPTER 13

Recommendations
(1) Indian public issues are characterized for their high cost on expenses
like advertisement, stationery, and commission to intermediaries. Dual
payment to underwriters on same issue one as underwriting commission
and other as brokerage should be curtailed as such type of overlapping
payments enhances cost of the issues. With increased competition the
merchant banker should be allowed to negotiate their issue management
fees instead of having fixed fees. Due to this the merchant bankers will
have to offer comparable services at lower cost. This also means that
public sector banks may face difficulties if they do not become cost
effective. Cost reduction would also be possible by restoring to the
maximum use of non-traditional practices of raising the equity and
debenture capital in the market viz. offer for sale without prospectus,
offer for sale by tender, public issue by tender, private placement of
shares etc.
(2) There have been a large number of investors who have come in capital
markets through primary markets. These investors are in majority not
exposed to stock market operations. They remain in a state of
uncertainty about the marketability of their stock. The merchant banker in

106

future can play an active role in establishing a link between primary

market investors and stock exchanges. This would remove uncertainty
from the minds of investors about marketability of their security holding
and also create a balance in bullish and bearish forces by attracting their
attention to these transactions. Stock exchange introduction would be
made more prominent and be frequently permitted as a less costly way
for obtaining quotation and making the shares familiar with the investing
public. This may help those companies who have widespread of
shareholders but could not obtain a quotation from stock exchanges.
(3) The traditional process of issue management takes between three to four
months on an average causing in uncertainty and delay in raising funds.
The issue becomes risky as for a new company its success also
depends on success of issue. It increases companys stake and thus the
cost of issue. Merchant banks can provide a permanent solution to the
problem by buying the entire issue at a discount from the company and
encash it at a premium in the market when the companys project goes
into production after gestation period. SBI Capital Market Ltd. has taken
the first step in this direction. The company will pick up entire equity
issue of small companies and later on sell the shares in phases through
private placement and through stock exchanges.

107

(4) The real threat to the merchant bankers functioning in the country is from
the entry of international investment bankers. Managing rural surplus can
be an area in which Indian Merchant Bankers can have an edge over the
foreign counter- parts. Indian merchant bankers seem to have some
glamorous attraction for NRIs Funds and they are not giving due
attention to the vast resource of indigenous sources should not go
untapped. In this area merchant banks have to put their efforts in moping
up the rural surplus and channelize it into corporate securities. This is an
open field and the Indian merchant bankers can explore it instead of
concentrating on NRI Funds.

108

CHAPTER 14

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 the services for which he is being
approached. 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 its 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 a essential to remove the trading malpractice and structural

109

inadequacies prevailing in the market, and provide the investors an organized,

well regulated market place in future

110