CHAPTER-1

INTRODUCTION OF MERCHANT BANKING

In banking, a merchant bank is a financial institution primarily engaged in offering

financial services and advice to corporations and wealthy individuals on how to
use their money. The term can also be used to describe the private equity activities
of banking.
According to Cox, merchant banking is defined as, merchant banks are the
financial institutions providing specialist services which generally include the
acceptance of bills of exchange, corporate finance, portfolio management and other
banking services.
The Notification of the Ministry of Finance defines a merchant banker as,
any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory service in relation to such issue
management.
In short, merchant bankers assist in raising capital and advice on related issues.

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Definition
A bank that deals mostly in (but is not limited to) international finance, long-term
loans for companies and underwriting. Merchant banks do not provide regular
banking services to the general public.

What does merchant banking mean exactly??

Well there are many meanings for a merchant bank. It is not because the term
merchant banking is misunderstood but its because a merchant bank in its nature
performance many function which most of the other banks dont do. It is an
institution or an organization which provides a number of services including
management of securities, portfolio management, underwriting of capital and
issue, insurance, financial advice and project counseling etc. Large brokers, Mutual
Funds, Venture capital companies and Investment Banks offer merchant banking
services.

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 CHAPTER-2
HISTORY

Merchant banking originated through the entering of London merchants in foreign

trade through acceptance of bill. Later, the merchants assisted the Government of
under developed countries in raising long terms through floatation of bonds in
London money market. Over a period they extended their activities to domestic
business of syndication of long term and short term finance, underwriting of new
issues, acting as registrars and share transfer agents, debenture trustees, portfolio
managers, negotiating agents for mergers, takeovers etc.

Merchant Banking in India Historical Perspective:

Till 18th century moneylenders, moneychangers, village merchants (maharanis), &
saucers performed the function of banks & merchant banks. They also issued &
discounted bills of exchange (handiest) & bank draft. They gave loans on mutual
trust, on mortgage of lands, ornaments & other property. JAGAT SHETH (1720-

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1773AD, BENGAL) HABIB & SONS which is now HABIB BANK (founded in
1941, now is in PAKISTAN).These were the organized merchant bankers in recent
history of INDIA.
Merchant Banking is an activity that includes corporate finance activities, such as
advice on complex financings, merger and acquisition advice (international or
domestic), and at times direct equity investments in corporations by the banks.
Merchant banks are private financial institution. Their primary sources of income
are PIPE financings and international trade. Their secondary income sources are
consulting, Mergers & Acquisitions help and financial market speculation. Because
they do not invest against collateral, they take far greater risks than traditional
banks. Because they are private, do not take money from the public and are
international in scope, they are not regulated.
Anyone considering dealing with any merchant bank should investigate the bank
and its managers before seeking their help.
The reason that businesses should develop a working relationship with a merchant
bank is that they have more money than venture capitalists. Their advice tends to
be more pragmatic than venture capitalists. It is rare for a merchant bank to fail.
The last major failure was Barings Bank (1992). It failed because of unsupervised
trading of copper futures contracts and buybacks. When the Dot Com Bubble burst
in 2001, scores of venture capital firms failed. The greatest merchant bank failure
in history was the Knights Templar. After the Crusades, the Order became
immensely wealthy controlling and funding the trade between the Middle East and
Western Europe. They foolishly loaned money to the French Government. To avoid
repaying the money, King Louie had the Pope declare the Order heretics.
Thousands of monks lost their lives, but France balanced its budget. To understand
Merchant Banks, you should know something of their history. Modern merchant
banking started in Italy during the 7th Century. The Banking practices evolved
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from the financing structure of the Silk Road Trading that predates the Roman
Empire. The basic financing structure was the advance payment for goods by
merchant bankers at a great discount to the delivery value of those goods. In the
case of Italy and then Germany, wheat was the product. The merchant banks
purchased the wheat soon after planting. They accepted the risk of crop failure.
They profited when they sold the wheat. In most countries today, the national
government accepts the risk through government crop insurance.
As the British Empire expanded in the 18th and 19th Centuries, merchant banks
prospered in London. For instance, merchant bankers funded Canadas Hudson
Bay Company. This period saw the rise of such merchant banks as Schroders,
Warburgs or Rothschilds. Amsterdam benefited from the trade created by the
Dutch East Indian Company. Since the 18th century. The role of the merchant
banker has been considerably broadened to include a composite of modern day
skills. Such skills are inherently entrepreneurial, managerial, financial and
transactional. Today, North American merchant banks have taken the form of
"boutiques"-whereby, each offers its own specialized services. The hallmarks of
these merchant bank boutiques are that they typically charge fees payable in cash
and/or the client's stock for each service rendered. You can find a merchant bank
that meets any reasonable set of needs.

Merchant Banking in India Post Independence:

In 1967, RBI issued its first merchant banking license to grind lays started with
management of capital issues, production planning, system design and also market
research. It provides management consulting services as well. Citibank setup its
merchant banking division in 1970. its scope includes assisting new entrepreneur,
evaluating new projects, raising funds through borrowing and issuing equity.
Indian banks started banking services as a part of multiple services they offered to
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clients from 1972.
State bank of India started the merchant banking division in 1972.
In the initial years the objective was to render corporate advice and assistance to
small and medium entrepreneurs.
Merchant banking activities are organized and undertaken in several forms.
Commercial banks and foreign development finance institutions have organized
them through formation of division; nationalized banks have formed subsidiaries
companies and share brokers and consultancies constituted themselves into public
ltd. Co. or registered themselves as private ltd. companies. Some of them have
equity stake of foreign merchant bankers.

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 CHAPTER-3
FUNCTIONS OF MERCHANT BANKING

The functions of merchant banking are listed as follows:

1. Raising Finance for Clients: Merchant Banking helps its clients to raise
finance through issue of shares, debentures, bank loans, etc. It helps its clients to
raise finance from the domestic and international market. The finance raised is
used for starting a new business or project or for modernization, Diversification or
expansion of the business.
2. Broker in Stock Exchange: Merchant bankers also take form of a broker in
the stock exchange. They buy and sell shares on behalf of their clients. Lot of
research is done by these merchant bankers on equity shares. They also advise
their clients about which shares to buy, when to buy, how much to buy and when to
sell.

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3. Project Management: Merchant bankers offer help to their clients in every
way possible. For e.g. They advise about location of a project, preparing a project
report, conducting feasibility studies, making a plan for financing the project,
finding out sources of finance, advising about concessions and incentives from the
government which the companies are not aware of.
4. Advice on Expansion and Modernization: Merchant bankers also give advice
for expansion and modernization of the business units. They give expert advice on
mergers and amalgamations, acquisition and takeovers, diversification of business,
foreign collaborations and joint-ventures, also in technology up gradation, etc.
5. Managing Public Issue of Companies: Merchant bankers offer to advice as
well as manage the public issue of their clients.
They provide following services:

i. Merchant bankers advise on the timing of the public issue.

ii. Merchant bankers advise on the size and price of the issue.

iii. Merchant bankers Act as manager to the issue, and help in accepting
applications and allotment of securities.

iv. Merchant bankers Help in appointing underwriters and brokers to the issue.

v. Merchant bankers help in the listing of shares of its clients on the stock
exchange, etc.

6. Handling Government Consent for Industrial Projects: the government has

to grant permission for a person to start his business or expand his business.
Similarly, a company requires permission for expansion or modernization

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activities. For this, many formalities have to be completed. Merchant bankers
advice on these matters and do all this work for their clients.
7. Revival of Sick Industrial Units: Merchant banks help to bring back(cure)
sick industrial units. It goes to the extent of negotiating with different agencies like
banks, term lending institutions, and BIFR (Board for Industrial and Financial
Reconstruction). It also creates a detail plan and executes the same to revive the
industry from its downfall.
8. Portfolio Management : A merchant bank helps its clients to manage their
portfolio (investments) of its clients. This makes investments safe, liquid and
profitable for the client. It offers expert guidance to its clients for taking investment
decisions.
9. Money Market Operation : Merchant bankers deal with and underwrite
short-term money market instruments, such as:

i. Government Bonds.

ii. Certificate of deposit issued by banks and financial institutions.

iii. Commercial paper issued by large corporate firms.

iv. Treasury bills issued by the Government (Here in India by RBI).

10. Leasing Services: Merchant bankers also help in leasing services. Lease is a
contract between the lessor and lessee, whereby the lessor allows the use of his
specific asset such as equipment by the lessee for a certain period. The lessor
charges a fee called lease rentals.

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 CHAPTER-4
IMPORTANCE AND NEED

Important reason for the growth of merchant banking has been developmental
activity throughout the country, exerting excess demand on the sources of funds for
ever expanding industry and trade, thus, leaving a widening gap under bridged
between the supply and demand of 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

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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/modernization/diversification of the existing enterprises. This reinforces
the need for a vigorous role to be played by merchant banks.
Merchant banks have been procuring impressive support from capital market for
the corporate sector for financing their projects.
This is evidenced from the increasing amount raised form the capital market by the
corporate enterprises year after year. In view of multitude of enactments, rules and
regulations, guidelines and offshoot press release instructions brought out by the
government from time to time imposing statutory obligations upon the corporate
sector to comply with all those requirements prescribed therein, the need of skilled
agency existed which could provide counseling in these matters in a package form.

Merchant bankers, with their skills, updated information and knowledge, provide

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this service to the corporate units and advise them on such requirements to be
complied with for raising funds from the capital market under different enactments
viz. Companies Act, Income-tax Act, Foreign Exchange Regulation Act, Securities
Contracts (Regulation) Act and various other corporate laws and regulations.
Merchant bankers advise the investors of the incentives available in the form of tax
reliefs, good return on investment and capital appreciation in such investment to
motivate them to invest their savings in securities of the corporate sector.

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 suggest ways and means to solve it. The nature of merchant
banking services is development oriented and promotional to help the
industry and trade to grow and survive.
Merchant banker is, therefore, dedicated to achieve this objective through
his dynamism. He is always awake to renew his skills, develop expertise in new
areas so as to equip himself with the knowledge and techniques to deal with
emerging new problems of corporate business world. He has to keep pace
with the changing environment where government rules, regulations and
politics affecting business conditions frequently change; where science and
technology create new innovations in production processes of industries envisaging
immediate renovations, diversifications, modernizations or replacements of
existing plant and machinery or other equipments putting new demands for
finances and necessitating overhauling of the capital structure of the firms.
Merchant banker has to think and devise new instruments of financing industrial
projects.
He has to assume wider responsibilities of saving industrial units from going sick

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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. To
discharge the above role, a merchant banker has to be dynamic.
In the days ahead, merchant bankers have very significant role to play tuning their
activities to the requirements of the growth pattern of the corporate sector, the
industry and the economy as a whole which is, init, 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.

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 CHAPTER-5
SERVICES PROVIDED BY MERCHANT BANKS IN INDIA

.
The development activity through the country had exerted excess demand on the
sources of funds by the ever expanding industry and trade which could not be met
by the All India Financial Institutions. In these circumstances, the corporate sector
enterprises had the only alternative to avail themselves of the capital market
services for meeting the long-term fund requirements through capital issues of
equity and debentures.
The growing demand for funds from capital market has enabled many
organizations to enter into the field of merchant banking for managing the public
issues. The need of merchant banker is also felt in the wake of huge untapped
public savings as merchant bankers can play a highly significant role in mobilizing
funds from savers to invest in channels assuring promising return on investments
and thus narrow down the gap between demand for and supply of investible funds.

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Merchant bankers not only provide advisory services to corporate enterprises but
also advise the investors of the incentives available in the form of tax relief and
other statutory obligations. Thus, the merchant bankers help industry and trade to
raise funds, and the investors to invest their saved money in sound and healthy
concerns with confidence, safety and expectation of higher yields.
Broadly a merchant banker can provide the following services:

1. Corporate Counseling
2. Project Counseling And Pre-Investment Studies
3. Credit Syndication And Project Finance
4. Issue Management
5. Underwriting
6. Bankers
7. Portfolio Management
8. Venture Capital Financing
9. Leasing
10. Non-Resident Investment Counseling And Management
11. Acceptance Credit And Bill Discounting
12. Advising On Mergers, Amalgamations And Take-Over
13. Arranging Offshore Finance
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14. Fixed Deposit Broking
15. Relief To Sick Industries
Lets take a brief look at each of these functions:

CORPORATE COUNSELLING:
Corporate counseling denotes the advice provided by the Merchant Banking to the
corporate unit to ensure better corporate performance in terms of image building
among investors, steady growth through good working appreciation in market
value of its equity shares. The scope of corporate counseling, capital restructuring
and, portfolio management and the full range of financial engineering includes
venture capital, public issue management, and loan syndication, working capital,
fixed deposit, lease financing, acceptance credit, etc. However counseling is
limited to only opinions and suggestions and any detailed analysis would form part
of a specific service.

PROJECT COUNSELLING:
Project counseling services may be rendered independently or may be it relates to
project financ and broadly covers study of the project and offering advisory
assistance on the project viability and procedural steps for implementation broadly
including following aspects:- general review of he project ideas/ project profile,
advice on procedural aspects of project implementation, review of technical
feasibility of the project on the basis of the report prepared by own experts r by the
outside consultants, selecting Technical consultancy Organization (TCO) for
preparing project reports and market survey, or review of the project reports or
market survey report prepared by the TCO, preparing project report form financial
angle, and advice and act on various procedural steps including obtaining
government consents for implementation of projects. This assistance can include
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obtaining of the following approvals/licenses/permission/grants etc form the govt.
agencies viz. letter of intent, industrial license and DGTD registration and
government approval for foreign collaboration.

LOAN SYNDICATION:
Credit syndication is also known as credit procurement and project finance service.
The main task involved is to raise to rupee and foreign currency loans with the
bank and financial institution in India and abroad. It also arranges the bridge
finance and the resources for cost escalations or cost Overruns.
Broadly, the credit syndications include the following acts;
(a) Estimating the total costs
(b) Drawing a financing plan for the total project cost-conforming to the
requirements of the promoters and their collaborators. Financial institutions
and banks, government agencies and underwriters.
(c) Preparing loan application for financial assistance from term
lenders/financial institutions/banks and monitoring their progress including
the pre-sanction negotiations.
(d) Selecting the institutions and banks for participation in financing.
(e) Follow-up of the term loan application with the financial institutions and
banks and obtaining the satisfaction for their respective share of
participation.
(f) Arranging bridge finance.
(g) Assisting in completion of formalities for drawl of term finance sanctioned
by institution expediting legal documentation formalities drawing up inter-se
agreements etc. prescribed by the participating financial institutions and
banks.
(h) Assessing the working capital requirements.
Issue management :
Capital issue are managed are category-1 merchant banker and constitutes the most

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important aspect of their services. The public issue of corporate securities involves
marketing of capital issue of new and existing companies, additional issues of
existing companies including rights issue and dilution of shares by letter of offer,.
The public issues are managed by the involvement of various agencies i.e.
underwriters, brokers, bankers, advertising agency, printers, auditors, legal
advisers, registrar to the issue and merchant bankers providing specialized services
to make the issue of the success. However merchant banker is the agency at the
apex level than that plan, coordinate and control the entire issue activity and direct
different agencies to contribute to the successful marketing of securities. The
procedure of the managing a public issue by a merchant banker is divided into two
phases, viz;
Pre-issue management
Post-issue management
Pre-Issue Management:-
Steps required to be taken to manage pre-issue activity is as follows:-
Obtaining stock exchange approvals to memorandum and articles of
associations.
Taking action as per SEBI guide lines.
Finalizing the appointments of the following agencies:
Co-manager/Advisers to the issue
Underwriters to the issue
Brokers to the issue
Bankers to the issue and refund Banker
Advertising agency
Printers and Registrar to the issue
Advise the company to appoint auditors, legal advisers and broad base
Board of Directors.
Drafting of prospectus.
Obtaining approvals of draft prospectus from the companys legal advisers,

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 underwriting financial institutions/Banks.
Obtaining consent from parties and agencies acting for the issue to be
enclosed with the prospectus.
Approval of prospectus from Securities and Exchange Board of India.
Filing of the prospectus with Registrar of Companies.
Making an application for enlistment with Stock Exchange along, with copy
of the prospectus.
Publicity of the issue with advertisement and conferences.
Open subscription list.

Post-issue Management:-
Steps involved in post-issue management are:-

(1) To verify and confirm that the issue is subscribed to the extent of 90%
including devolvement from underwriters in case of under subscription
(2) To supervise and co-ordinate the allotment procedure of registrar to the issue as
per prescribed Stock Exchange guidelines
(3) To ensure issue of refund order, allotment letters / certificates within the
prescribed time limit of10 weeks after the closure of subscription list
(4) To report periodically to SEBI about the progress in the matters related to
allotment and refunds
(5) To ensure he listing of securities at Stock Exchanges.
(6) To attend the investors grievances regarding the public issue
The Merchant Bankers for managing public issue can negotiate a fee subject to a
ceiling. This fee is to be shared by all lead managers, advisers etc. 0.5% of the
amount of public issues up to Rs.25crores 0.2% of the amount exceeding
Rs.25crores, if more than one Merchant bankers are managing the issue.

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Underwriting of public issues:
Another important intermediary in the new issue/primary market in the
underwriters to the issue of capital who agree to take securities which are not fully
subscribed. They make commitment to get issue subscribed either by other or by
them.
Through underwriting is not mandatory after April 1995, its organization is an
important element of the primary market are appointed by the issuing companies in
consultation with the lead manager/ merchant banker to the issues. A statement to
the effect that in the opinion of the lead manager, the underwriters asset are
adequate to meet their obligation should be incorporated in the prospectus
certificate.

Registration:
To act as underwriter, a certificate of registration must be obtained from the SEBI
in granting the registration, the SEBI considers all matters relevant relating to the
underwriting and in particular,
The necessary infrastructural like adequate office space, equipment and
manpower to effectively discharged the activity:
Past experience in underwriting/ employment of at least two persons with
experience in underwriting:
Any person directly/ indirectly connect with the applicant is not registered
with the SEBI as underwriter or previous application of any such person has been
rejected or any disciplinary action has been taken against such person under the
SEBI act/rules/regulation.
Capital adequacy requirement of not less than the net worth ( CAPITAL +
free reserve) of Rs. 20 lakh: and
The applicant/ director/ principle officer/ partner has been convicted of
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offence involving moral turpitude or found guilty of any economic offence. Fee
underwriters, had to, for grant or renewal of registration, pay a fee to the SEBI
from the date of initial grant of certificate, Rs 2 lakh for the first and second year
and Rs 1 lakh for the third year. A fee of Rs 20,000 was payable every year to keep
the certificate in force or for its renewal. Since 1999 the registration fee has been
raised to Rs 5 lakh. To keep the registration in force, renewal fee of Rs 1 lakh.
Every three years from the forth year the date of initial registration is payable.
Failure to pay the fee would result in the suspension of the certificate of
registration.
General obligations and responsibilities of Underwriters:

a) Code of conduct :
Every underwriter has at all time to abide by a code of conduct; he has to maintain
high standard of integrity, dignity and fairness in all his dealings with his clients
and, other underwriters in the conduct of his business. He has to ensure that he and
his personal act in an ethical manner in all dealing with the issuers of capital. An
underwriter has to rendered high standard of service exercise due diligence, ensure
proper care and exercise independent professional judgment. He must disclose to
the issuer his possible source/ potential areas of conflict of duties and interest of
other underwriters to place them in a disadvantageous position in relation to him
while competing for/carrying out any assignment. He must not make any written or
oral statement to misrepresent
The service that he to be capable of performing for the issuer/ or has
rendered to other issuer or
He underwriting commitment.
He should not divulge to other issuer/ any party any confidence information about
his issuer, which forms the come to his knowledge and deal in securities of any
21
issuer without disclosing to the SEBI or to the board of director of the issuer. An
underwriter should not willfully make untrue statement/suppress material fact in
any document, reports, papers or information furnished to the SEBI.

b) Agreement with clients:

Every underwriter has to enter into an agreement with the issuing company. The
agreement, among others, provides for the period during which the agreement is in
for amount of underwriting obligations, the period within which the underwriter
has to subscribe to the after being intimated by/on behalf of the issue, the amount
of commission/ brokerage, and detail of arrangement, If any, made by the
underwriter for fulfilling the underwriting obligations.

c) General responsibilities :
An underwriter cannot derive any direct or indirect benefit from underwriting the
issue other than by the underwriting commission. The maximum obligation under
all writing agreements of an underwriter cannot exceed 20 times his net worth,
underwriters have to subscribe for securities under the agreement within 45 days of
the receipt of intimation from he issuer.

d) Inspection and disciplinary proceedings:

The framework of the SEBI right to undertake the inspection of the book of
account, other record documents of the underwriters, the procedure for inspection
and obligation of the underwriters is on the same pattern as applicable to the lead
manager.

e) Action in case of default :

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The liability for action in case of default arising out of
Non-compliance with any conditions subject to which registration was granted,
Contravention of any provision of the SEBI act/rules/ regulation underwriter
involves the suspension/cancellation of registration: the effect of suspension/
cancellation on the lines followed by the SEBI in case of lead manager.
7) Portfolio management:
Portfolio refers to investment in different types of marketable securities or
investment papers like shared, debentures and debenture stocks, bonds etc. from
different companies or institutions held by individuals firm or corporate units.
Portfolio management refers to managing efficiently the investment in the
securities held by professionals to others. Merchant bankers take up management
of a portfolio of securities on behalf of their clients, providing special services with
a view to ensure maximum return by such investments with a minimum risk of loss
of return on the money invested in securities. A merchant banker while performing
the services of portfolio management has to enquire of the investment needs of the
client, the tax bracket, ability to bare risk, liquidity requirements, etc. they should
study the economic environment affecting the capital market, study the securities
market and identify blue chip companies in which money can be invested. They
should keep record of latest amendment in government guidelines, stock exchange
regulations, RBI regulations, etc.

8) Managers consultants or advice on mergers and takeovers:

A merger is defined as a combination of two or more companies into a single
company where one services and other looses their corporate existence. A merger
is also defied as an amalgamation wherein the shareholders of the combining
companies become substantially the shareholders of the company formed. A
takeover is referred to as an acquisition, which is the purchase, by one company of
23
a controlling interest in the share capital of another existing company. Merchant
bankers are the middlemen settling negotiations between the offered and the
offeror.
Their role is specific and specialized in handling the mergers and taker over
assignments. Being a professional expert, the merchant banker is apt to safeguard
the interest of the shareholders in both the companies and as such his assistance is
useful for both the companies ,i.e. the acquirer as well as the acquired company.
Based on the purpose of business objective, the search of the acquirer company
will start for a merger partner company. If the objective of merger is growth
oriented i.e. seeking expansion in production and market segments, utilization of
existing companies or optimum utilization of resources, then the acquirer company
will select a business related company as a merger partner.

If the objective is diversification in production line or business activities, then it

will select a non-related company as a merger partner. Once the merger partner is
proposed the merchant banker has to appraise the merger/takeover proposal with
respect to financial viability and technical feasibility. He has to negotiate with the
parties and decide the purchase consideration and mode of payment. He has to
comply with the legal formalities like getting approval from the Government/ RBI;
drafting the scheme of amalgamation; getting approval of company Board,
financial institution, high court if required; arranging for the meeting etc.

Venture Capital Financing:

Financing an emerging high-risk project is called venture capital financing. Many
merchant bankers are entering into this area by also financing viable upcoming
projects. The financing is by subscription to the equity capital while repayment is
by selling the equity through stock market when the shares are listed.
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LEASING:
Is there another lucrative area of financing where merchant bankers are turning?
Leasing is a viable source of financing while acquiring capital assets. The services
include arrangement for lease finance facilities for leasing companies, legal;
documents and tax consultancy.

Non Resident Investment:

To attract NRI investments in the primary and secondary markets, the merchant
bankers provide investment advisory services to the NRIs in terms of identification
of investment opportunities, selection of securities, portfolio management, etc. they
also take care of operational details like purchase and sale of securities securing the
necessary clearance from RBI under FERA for repatriation of dividends and
interest, etc.

Acceptance Credit and Bill Discounting:

Though merchant bankers world over specialize in acceptance credit and bill
discounting, these services are not currently provided by merchant bankers in India
the principal reasoning being the lack of an active market for commercial bills.

ARRANGING OFFSHORE FINANCE:

The merchant bankers also help their clients in the following areas involving
foreign currency financing:

1.Financing Of Exports And Imports

2.Long Term Foreign Currency Loans
3.Joint Ventures Abroad
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4.Foreign Collaboration Arrangements
The assistance rendered as in the case of financial services covers appraisals,
negotiations, compliance with procedural and legal aspects etc.

Management of Fixed Deposits of Companies:

Recently, merchants bankers have begun to structure and mobilize fixed deposits
for their corporate clients. They take care of the procedural and legal aspects, and
also mange the collection and subsequent servicing of the deposits. Advice with
regard to the amount to be raised, interest charges, terms of deposits and other
related issues are also offered to the client.
Relief to Sick Industries-The services offered by merchant bankers to sick
industries can be summarized as follows:
1.Assessment of capital requirements and counseling on capital restructuring;
2.Appraisal of technological, environmental, financial and other factors causing
sickness;
3.Preparations of programs and packages for rehabilitation of sick units;
4.Providing necessary assistance where the rehabilitation package involves
mergers or amalgamation;
5.Obtaining necessary approval for implementation the rehabilitation package from
the statutory authorities;
6.Monitoring the implementation of the scheme of rehabilitation.

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27
 CHAPTER-6
QUALITIES OF A MERCHANT BANKER

To be a successful merchant banker, following qualities are necessary:

1.Knowledge:

Thorough understanding of technical issues related to business, understanding of

legal and statutory requirements, appreciation of business acumen; financial
expertise is a key thing a merchant banker must know. Delivery of his services
depends on his basic understanding of these issues.

2.Capital market familiarity:

Merchant banker should be well versed with stock markets, their movements. He
should track imp happenings in the market on ongoing basis.

3.Liasioning ability:

Merchant bankers are required to liaison with SEBI, RBI, the stock exchanges,
depositories and other government authorities for public issue related duties. It is
imperative that a merchant bank maintains excellent rapport with all of them and
also close relations even at informal levels. This only can see speedy and favorable
clearances by the authorities.

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4.Innovation:

Corporate may approach with unique requirements. Standard solutions and

products may not solve problems sometimes. Merchant bankers should do out of
box thinking and be able to do financial engineering. They can device new
financial instruments and get approved from the authorities. Innovation is required
even to address stringent legal requirements.

5.Integrity:

Merchant banker has valuable and confidential information of its customers.

Merchants bankers should take utmost care that the information is not leaked and
also not consumed for the purpose other than for which it was disclosed to the
merchant banker.

CHAPTER-7
CHALLENGES FACED IN INDIA AND GUIDELINES OF SEBI

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Not many but some problems are faced by Indian merchant bankers.
I. Industry compartmentalization:
Company which is in merchant banking business would have expertise in
underwriting, hire purchase, leasing, and portfolio management, money-lending.
But RBI does not permit merchant banking firms to get into these activities. So the
same promoters have to set up different companies for different purposes.
Management cost increases and expertise pooling i.e. multiple use of same talent is
not possible.

II. Malafide practices:

India corporate culture is bettering. but still manycorporate have excessively
friendly approach. Favored allotment of shares, tampering with project appraisal
report to bankers is common. Corporate like to use merchant bankers for malafide
intentions. This gives growth to more boutique fly-by-day firms. Giant professional
or multinational merchant bankers are cautions in their approach to Indian market.

III. Regulations:
Though regulations are much better now, there is still scope for further
improvement. Merchant bankers can be made more accountable and responsible.
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Professional qualification focused on merchant banking is not available. Industry is
not well organized and all the players do not play the same tune. This is
specifically evident in comparison with insurance industry and mutual funds
industry.
Requirements for setting up a merchant banking outfit:
1. Formation of the Business Organization
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 Enterpriseses. 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.

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.

3. Registration of Merchant Bankers-Application for grant of certificate

An application for grant of a certificate needs to be made to SEBI .The application
can be made for any one of the following categories of the merchant banker
namely:-
Category I, that is (i) to carry on any activity of the issue management,
which will inter-alia consist of preparation of prospectus and other
information relating to the issue, determining financial structure, tie-up of
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 financiers and final allotment and refund of the subscription; and (ii) to act
as adviser, consultant, manager, underwriter, portfolio manager.

Category II, that is, to act as adviser, consultant, co- manager, underwriter,
portfolio manager;
Category III, that is to act as underwriter, adviser, consultant to an issue;
Category IV, that is to act only as adviser 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.
b. Application to conform to the requirements
The application should conform to all the requirements under the SEBI guidelines,
otherwise it may be rejected.
c. 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.
d. 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
the applicant has the necessary infrastructure like adequate office space,

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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 fulfils the capital adequacy requirement is as follows: The capital
adequacy requirement should not be less than the net worth of the person making
the application for grant of registration.
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 anytime 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.

e. Procedure for Registration

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.
f. 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, where upon 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
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Registration from the SEBI after completion of the above mentioned formalities.

Main Objectives Of Merchant Bankers:

Merchant bankers render their specialized assistance in achieving the main
objectives which are presented below:
1.To carry on the business of merchant banking, assist in the capital formation,
manage advice, underwrite, provide standby assistance, securities and all kinds of
investments issued, to be issued or guaranteed by any company, corporation,
society, firm, trust person, government, municipality, civil body, public authority
established in India.
2.The main object of merchant banker is to create secondary market for bills and
discount or re-discount bills and acts as an acceptance house.
3.Merchant bankers another objective is to set up and provide services for the
venture capital technology funds.
4.They also provide services to the finance housing schemes for the construction of
houses and buying of land.
5.They render the services like foreign exchange dealer, money exchange, and
authorized dealer and to buy and sell foreign exchange in all lawful ways in
compliance with the relevant laws of India
.6.They will invest in buying and selling of transfers, hypothecate and deal with
dispose of shares, stocks, debentures, securities and properties of any other
company.
Obligations and Responsibilites:
Merchant bankers have the following obligations and responsibilities
.1.Merchant banker should maintain proper books of accounts, records and submit
half yearly/annual financial statements to the SEBI within stipulated period of
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time.

2.No merchant banker should associate with another merchant banker who is not
registered in SEBI.
3.Merchant bankers should not enter into any transactions on the basis of
unpublished information available to them in the course of their professional
assignment.
4.Every merchant banker must submit himself to the inspection by SEBI when
required for and submit all the records.
5.Every merchant banker must disclose information to the SEBI when it requires
any information from them.
6.All merchant bankers must abide by the code of conduct prescribed for them.
7.Every merchant banker who acts as lead manager must enter into an agreement
with the issuer setting out mutual rights, liabilities, obligations, relating to such
issues with particular reference to disclosures allotment, refund etc.

Code of Conduct:
According to the 13 Regulation of the SEBI of 1992 (Merchant bankers), every
merchant banker should comply with following codes of conduct.
They are:
a)The merchant banker must observe high integrity and fairness in all his dealings.
b)He shall render at all times high standard of services, exercise due diligence,
exercise independent professional judgement.
c)If necessary, he must disclose to his clients the possible source of conflict of
duties and interests.
d)The merchant banker should not indulge in unfair practice or unfair competition
with other merchant bankers.
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e)He should not make any exaggerated statement about his capacity or
achievement.
f)He should always Endeavour to give the best possible advise and prompt efficient
and cost effective service.
g)He should maintain the secrecy of all the confidential information received
during the course of service to his client .h)He should not engage in the creation of
a false market or price rigging or manipulation.

GUIDELINES OF SEBI
After the obligations of the CCI, the place was occupied by a legal organ called as
Securities and Exchange Board of India. The issue of capital and pricing of
issues by companies has become free of prior approval. The SEBI has issued
guidelines for the issue of capital by the companies. The guidelines broadly covers
the requirement of the first issue by a new or the first issue of a new company set
up by the existing company, the first issue by the existing private companies and
public issues by the existing listing companies. The SEBI is the most powerful
organization to control and lead both the primary market and secondary market.
The SEBI has announced the new guidelines for the disclosures by the Companies
leading to the investor protection.
They are presented below:
a) If any Companys other income exceeds 10 per cent of the total income, the
details should be disclosed.
b) The Company should disclose any adverse situation which affects the operations
of the Company and occurs within one year prior to the date filing of the offer
document with the Registrar of Companies or Stock Exchange.
c) The Company should also disclose the information regarding the capacity
utilization of the plant for the last 3 years.
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d)The Promoters of the Company must maintain their holding at least at20 per cent
of the expanded capital.
e) The minimum application money payable should not be less than 25 per cent of
the issue price.
f) The company should disclose the time normally taken for the disposal of various
types of investors grievances.
g) The Company can make firm allotments in public issues as follows:
Indian mutual funds (20%),
FIIS (24%),
Regular employees of the company (10%),
Financial institution (20%).
h) The Company should disclose the safety net scheme or buy back arrangements
of the shares proposed in public issue. This scheme is applicable to a limited
number of 500 shares per allottee and the offer should be valid for a period of at
least 6 months from the date of dispatch of securities.
i) According to the guidelines, in case of the public issues, at least 30mandatory
collection centres should be established.
j) According to the SEBI guidelines regarding rights issue, the Company should
give advertisements in not less than two news- papers about the dispatch of letters
of offer. No preferential allotment may be made along with any rights issue.
k) The Company should also disclose about the fee agreed between the lead
managers and the Company in the memorandum of understanding.

CHAPTER-7
GROWTH AND SCOPE OF MERCHANT BANKING

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The growth of Merchant banking in India:
Formal merchant activity in India was originated in 1969 with the merchant
banking division setup by the Grind lays 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. Among the development banks, ICICI started merchant
banking activities in 1973 followed by IFCI(1986) and IDBI (1991).

SCOPE OF MERCHANT BANK IN INDIA:

In the present day capital market scenario, the merchant banks play the role of an
encouraging and supporting force to the entrepreneurs, corporate sectors and the
investors. There is vast scope for merchant bankers to enlarge their operations both
in domestic and international market.

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1.Size and dynamics of the market:
Indian market is growing. In fact India is one of the largest emerging markets.
Obviously, public issues, FDI, debt raising are on rise. Lots of new and green fried
projects are happening. Merchant bankers have lots space to contribute.

2.Restrictions-
liberalization: more liberal the market is, more the things left to be decided by the
corporate. Merchant bankers assist indecision making and hence their scope
increases. With significant market freedom, merchant bankers work has increased
many folds.

3.Banking policies:
RBI prefers that commercial banks do not indulge in merchant banking business
directly. They should setup a subsidiary or the purpose. This limits scope of
commercial banks and gives space to merchant bankers. This policy also results in
fair business practices. Some countries allow commercial bankers to get involved
in IPOs, placement of debentures, etc. Indian scenario is favorable to merchant
bank

4.Corporate culture:
Corporate can do project appraisal, strategic restructuring in house as well. If the
corporate prefer third-party independent assessment, then only they will engage
merchant bankers. Otherwise merchant bankers role is only statutory as in issue
management. India inc. apparently prefers and is happy with merchant bankers
work.

5.Corporate dynamics:
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More happening in business gives more opportunities to merchant bankers.
Mergers, takeover acquisition, new Greenfield projects, fund raising for
government institutions, active money market are all providing better business
prospectus to merchant bankers.

6. Growth of new issues market:

The growth of new issue market is unprecedented since 1990-91.the amount of
annual average of capital issues by non government public companies was only
about 90crores in the 80s and further to rs12700crores in the first four years of
1990s.the trend is expected to increase in future.

8) Entry of foreign investors:

An outstanding development in the history of Indian capital market was it opening
up in 1992 by allowing foreign institutional investors to invest in primary and
secondary market and also permitting Indian companies to directly tap foreign
capital through Euro issues. Further the foreign direct investment has also
investment by NRIs have risen considerably. The need services of merchant
bankers to advise them for the investment in India. The increasing number of joint
ventures abroad by Indian companies also requires expert services of Merchant
bankers.

9) Changing policies of financial institutions :

With the changing emphasis in the lending policies of financial institutions from
security orientation to project orientation, corporate enterprises would require the
expert services of merchant bankers for project appraisal, financial management
etc. The policy Of decentralization and encouragement of small and medium
40
industries will further increase and demand for technical and financial services
which can be provided by merchant bankers.

10) Development of Debt market :

Concept of debt market has set to work through national stock exchange and the
over the counter exchange of India. Experts feel that of the estimated capital issues
Rupees 40000crores in 1994-1995. A good portion may be raised through debt
instruments. The development of debt market will offer tremendous opportunity to
merchant bankers.

11) Innovations in financial instruments :

The Indian capital market has witnessed innovation in introduction of financial
instruments such as non-convertible debentures with detachable warrants,
cumulative convertible preference shares, deep discount bonds, option bonds,
secured premium notes, floating rate bonds etc. this has further extended the role of
merchant bankers as market makers for these instruments.

12) Corporate restructuring :

As a result of Liberalisation and Globalisation the competition in the corporate
sector is becoming intense. To survive in competiton companies are reviewing
there strategies, structure, functioning. This had let to corporate restructuring
including mergers, acquisitions, splits, disinvestments and financial restructuring.
This offer good opportunity to merchant bankers extend the area of their operation.

13) Disinvestment :
Government raised rupees 2000crores through investments equity shares of
selected public sector undertakings in 1993-1994. Government proposes to shift
41
the method of periodic sale public sector shares to round the year of loading of
shares directly on the stock exchange from the year 1995-1996. The Government
sell the shares of identified public sector at any time during the year when they get
a good price above many stipulated level. This is likely to provide good business to
merchant bankers in future.

CHAPTER-8
ORGANIZATIONAL SETUP AND PROGRESS OF MERCHANT
BANK IN INDIA
42
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
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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 inexistence for quite some times before they added a
new activity in the formof merchant banking services by opening new divisions on
the lines of commercial banks and All India Financial Institutions.

PROGRESS OF MERCHANT BANK IN INDIA:

Upto 1970, there were only two foreign banks which performed merchant banking
operations in the country.
SBI was the first Indian commercial bank and ICICI the first financial institution to
44
take up the activities in 1972 and 1973 respectively.
As a result of buoyancy in the capital market in 1980s some commercial banks set
up their subsidiaries to operate exclusively in merchant banking industry. In
addition, a number of large stock broking firms and financial consultants also
entered into business. Thus, by the end of the end of 1980s there were
33 merchant bankers belonging to three major segments viz., commercial banks,
all India financial institutions, and private firms.
Merchant banking functions of these institutions was related only to management
of new capital issues. Merchant banking industry which remained almost stagnant
and stereotyped for over two decades, witnessed an astonishing growth after the
process of economic reforms and deregulation of Indian economy in 1991.The
number of merchant banks increased to 115 by the end of 1992-93 300 by the end
of 1993-94 and 501 by the end of August, 1994. all merchant bankers registered
with SEBI under four different categories include 50commercial banks, 6 all Indian
financial institutions ICICI, IFCI, IDBI,IRBI, Tourism Finance corporation of
India, infrastructure Leasing and Financial Services Ltd. and private merchant
bankers. In addition to Indian Merchant Bankers, a large number of reputed
international Merchant Bankers like Merrill Lynch, Morgan Stanley, Goldman
Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India under
authorization of SEBI.
As a result of proliferation, Indian Merchant Bankers are faced with severe
competition not only among themselves but also with the well developed global
players.

CHAPTER-8
CONCLUSION

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 The merchant banker plays a vital role in channelising 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 predicted on a
sound, fair and transparent regulatory framework. To sustain the growth of the
market and crystallize the growing awareness and interest into a committed,
discerning and growing awareness and interest into an essential to remove the
trading malpractice and structural inadequacies prevailing in the market, and
provide the investors an organized, well regulated market.

Bibliography and Webilography

BOOKS:

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Seth publications financial service management

Vipul publications financial service management

NEWSPAPERS:
The times of India

Economic times

WEBILOGRAPHY:
http://www.scribd.com/doc/28076595/Merchant-Banking-in-India

http://www.mbaknol.com/financial-management/merchant-banking-services-
management-of-capital-issues/

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