1

PROJECT REPORT
ON

A Study on MERCHANT BANKING

With special reference to BANKING
INDUSTRY.

2
INTRODUCTION TO BANK

Bank is a business establishment that safeguards people money and uses it to

make loans and investments. People keep their money in banks rather than at

home for several reasons. Money is safer in a bank than at home. A current

account with a bank provides an easy way to pay bills. Also, money

deposited in many types of bank accounts earns additional money for

depositor. People who put money in a bank are actually lending it to bank,

which may pay them interest for the use of their funds.

Banks are essential part of business activity. Companies borrow from banks

to buy new equipments and build new factories. People who do not have

enough money to pay a full price of home, a car, or some other product also

borrow from bank. In these ways, bank promotes the sale of a wide range of

goods and services.

Banking is nearly as old as civilization. The World Bank comes from the

Italian word “banco” or “banca”, meaning “bench”.

Since 1960’s, banking has become much more international. This is because

of the increase in the number of the multinational companies and the spread

of their operation worldwide. Such companies require the service of banks

wherever they are. Banks also provide large joint loans, with other banks for
3
projects all over the world. The world’s biggest banks lend money to

developing countries. Some countries have had difficulty in repaying their

debts. Banks also have been affected by new technology, which has made

possible for it to transfer money from one place, or country, to another

quickly as possible. Many people now use plastic cards, which give them

credit, and cash from cash dispensers.

Foreign exchange can now be taken from one country to another much more

easily. In some countries, companies other than banks offer many services

those previously only banks were permitted to offer. In the United Kingdom,

for e.g., building societies offer current accounts that earn interest. They also

offer travelers cheques, insurance services, pension services, and other

investments.

Some banks have merged or been taken over. To secure more services to

offer its customers, a bank may purchase another bank or an insurance

company.

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CHRONOLOGY OF BANKS IN INDIA – AN

EXECUTIVE SUMMARY

Given below is a brief history of development of the Banking system in

India in the modern era. This would provide a bird’s eye view of how has

modern banking come into existence:

JANUARY 1, 1949 The Reserve Bank of India is nationalized and

made a Central Bank in India by an act of

Parliament.

SEPTEMBER 4, 1951 The Government of India planned to seek loan from

World Bank.

1956 Life Insurance Companies was nationalized.

JULY 3, 1964 IDBI was set up.

JULY 6, 1966 First time the Rupee was devalued by 36.5%, one

Dollar became Rs. 7.50 from Rs. 4.75.

JULY 19, 1969 Mrs. Indira Gandhi, the Prime Minister of India at

that time, nationalized 14 major banks.

1973 The Foreign Exchange Regulation Act came into

existence. (Now Foreign Exchange Management

Act)

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JANUARY 11, 1978 Currency notes in denomination of Rs. 1000, Rs

5000 and Rs. 10,000 were withdrawn from

circulation.

NOVEMBER 19, Government of India launched Indira Vikas Patra.

1986

1987 Government of India introduced 9% Tax-free relief

bonds, to mobilize resources for meeting draught

relating expenditure.

APRIL 1988 National Housing Bank was set up with a share

capital of Rs. 100 crore entirely subscribed by RBI.

JULY 1 AND 3, 1991 RBI devalued the rupee downward of 17.38

percent.

NOVEMBER, 1991 M Narsiham committee on reforming the financial

system submitted its report suggesting phased

reduction of SLR to 25% in three years and CRR to

10% in four years.

MARCH 1992 Dual Exchange rate system is instituted under

liberalized rate. Management enabling orderly

transition from a managed floated regime to a

market determined one.

APRIL, 1992 RBI introduced Risk-Assets-Ratio for banks as a

6
 capital adequacy measure.

JANUARY 8, 1993 FERA is amended and subsequently repealed and

replaced by Foreign Exchange Regulation Act,

1993.

JANUARY, 1993 Guidelines for setting up private sector banks are

issued.

MARCH, 1993 Process of convertibility started and rupee is made

convertible on the trade account.

SEPTEMBER, 1993 New Bank of India was merged into Punjab

National Bank.

MARCH 1994 UTI Bank became the first private sector bank to

start its operation.

JUNE 13, 1994 RBI issued guidelines on prudential norms. Banks

should achieve minimum capital adequacy ratio 6%

on their risk-weighted assets and off Balance Sheet

exposure by march 31, 1995 and 8% by March

1996.

JULY 15, 1994 Amendment in Banking Companies Act 1970,

enabled the Nationalized bank to tap the capital

market. The Nationalized Banks are allowed to

strengthen their capital base to contribute their

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 capital upto 49% in the capital market.

AUGUST, 1994 Full convertibility was taken by making the Rupee

convertible on the current account.

OCTOBER, 1994 Oriental Bank of Commerce became the first

nationalized bank to access the capital market to

raise Rs. 387.24 crore capital.

OCTOBER 1995 Banks are allowed to fix their own interest rate on

domestic term deposits with maturity of two years.

JULY, 1996 The insurance regulatory authority was set up to

privatize the insurance sector.

MAY 9, 1997 RBI issued new norms for Non Banking Finance

companies to improve their financial health and

viability. The financial companies are required to

apply for registration with RBI by July 8, 1997.

DECEMBER 7, 1997 RBI constituted a working group under the

chairmanship of S.H.Khan to examine the

harmonization of role and operations of

development of Financial Institutions and Banks.

APRIL 24, 1998 The S.H.Khan committee on the harmonization of

the role and operations of development of Financial

Institutions and Banks submitted its

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 recommendation to move towards universal

banking.

AUGUST 9, 2000 Banks having a minimum net worth of Rs. 500

crore and satisfying other criteria were regarded to

capital adequacy are allowed to enter insurance

business through joint venture.

NOVEMBER 10, Guidelines to Bank for financing of equities and

2000 investment in shares were issued. Banks are

allowed to invest upto 5% of its total outstanding

domestic credit in capital market.

JANUARY 3, 2001 Revised guidelines for licensing of new banks in

private sector are issued. This stipulate a minimum

initial paid-up-capital of Rs. 200 crore ( to be raised

to Rs. 3000 crore within three years of

commencement of business) with a minimum 40%

as contribution from its promoter.

APRIL 19, 2001 Banks permitted to formulate Fixed Deposit

Schemes specifically for senior citizen offering

higher and fixed rate of interest.

APRIL 28, 2001 RBI clarifies approach to universal banking for

term lending and reframing institutions.

9
EVOLUTION OF FINANCIAL SYSTEMS

BARTER

MONEY LENDER

NIDHIS/ CHIT FUNDS

INDIGINEOUS BANKING

BANKS

NATIONALISATION

COMMERCIAL BANKS

MERCHANT BANKING

UNIVERSAL BANKING

INDIAN FINANCIAL SYSTEM

Indian Financial System is broadly classified into two groups:

1. Organized sector

2. Unorganized sector
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The financial system is also divided into users of financial services and

providers. Financial institutions sell their services to households, business

and government who are the users of financial services. The providers of

financial services are :

1. Central bank

2. Banks

3. Financial institutions

4. Money and Capital markets

5. Informal financial enterprises

The organized financial system comprises the following subsystems :

1. The banking system

2. The co-operative system

3. Development banking system

a. Public sector

b. Private sector

1. Money markets

2. Financial companies/institutions

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The unorganized financial system comprises of moneylenders, oindigenous

bankers, lending pawnbrokers, landlords, traders, etc. There are also a host

of financial companies, investment companies, chit funds, etc. in the

unorganized sector. The Central Bank or the government does not regulate

these in a systematic manner.

INDIAN BANKING SYSTEM

Banking in India has its origin as early as the Vedic period. It is believed that

the transaction from money lending to banking must have occurred even

before Manu, the great Hindu Jurist, who has devoted a section of his work

to deposits and advances and laid down rules relating to rates of interest.
12
During the Mogul period, the indigenous bankers played a very important

role in lending money and financing foreign trade and commerce. During the

days of the East India Company, it was the turn of the agency houses to

carry on the banking business. The General Bank of India was the first Joint

Stock Bank to be established in the year 1786. The others, which followed,

were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is

reported to have continued till 1906 while the other two failed in the

meantime. In the first half of the 19th century the East India Company

established three banks; the Bank of Bengal in 1809, the Bank of Bombay in

1840 and the Bank of Madras in 1843. These three banks also known as

Presidency Banks were independent units and functioned well. These three

banks were amalgamated in 1920 and a new bank, the Imperial Bank of

India was established on 27th January 1921. With the passing of the State

Bank of India Act in 1955 the undertaking of the Imperial Bank of India was

taken over by the newly constituted State Bank of India. The Reserve Bank

which is the Central Bank was created in 1935 by passing Reserve Bank of

India Act 1934. In the wake of the Swadeshi Movement, a number of banks

with Indian management were established in the country namely, Punjab

National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd,

the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14

13
major banks of the country were nationalized and in 15th April 1980 six more

commercial private sector banks were also taken over by the government.

Today the commercial banking system in India may be distinguished into:

1. Public Sector Banks

a. State Bank of India and its associate banks called the State Bank

group

b. 20 nationalized banks

c. Regional Rural Banks mainly sponsored by Public Sector Banks

2. Private Sector Banks

a. Old generation private banks

b. New generation private banks

c. Foreign banks in India

d. Scheduled Co-operative Banks

e. Non-scheduled Banks

CO-OPERATIVE SECTOR

The co-operative banking sector has been developed in the country to the

supplement the village moneylender. The co-operative banking sector in

India is divided into 4 components

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 1. State Co-operative Banks oo

2. Central Co-operative Banks

3. Primary Agriculture Credit Societies

4. Land Development Banks

5. Urban Co-operative Banks

6. Primary Agricultural Development Banks

7. Primary Land Development Banks

8. State Land Development Banks

DEVELOPMENT BANKS

Development Banks are those financial institutions, which provide long-

term capital for industries and agriculture namely:

1. Industrial Finance Corporation of India (IFCI)

2. Industrial Development Bank of India (IDBI)

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

4. Industrial Investment Bank of India (IIBI)

5. Small Industries Development Bank of India (SIDBI)

6. SCICI Ltd.

7. National Bank for Agriculture and Rural Development (NABARD)

8. Export Import Bank of India

9. National Housing Bank

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MONEY MARKET

The money market is the market in which short-term funds are borrowed and

lend. The leading money market institutions are:

1. Discount and Finance House of India Limited (DFHI)

2. Securities Trading Corporation of India (STCI)

FINANCIAL COMPANIES

Financial companies are those companies who mobilize and channel savings

into investment. They are only partly controlled by the Reserve Bank and

partly by the Registrar of Companies under the Companies Act. Over the

years, the structure of financial institutions in India has developed and

become broad based. Today, there are more than 4,58,782 institutions

channelising credit into the various areas of the economy

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PRIVATE BANKING

Investment in India - Banking - Private Banks

After the nationalizations of 14 commercial banks in 1969, RBI in the

country licensed no new private banks though there was no legal bank on the

entry of private sector banks. The Narasimham Committee report of 1991,

has envisaged a larger role for private sector banks. In recognition of the

17
need to introduce greater competition with a view to achieving higher

productivity and efficiency of the banking system, RBI issued guidelines

regarding the formation and functioning of private sector banks in January

1993 for the entry of private sector banks. It prescribed a minimum paid up

capital of Rs. 100 crores for the new banks and the shares are to be listed at

the stock exchanges. Also he new bank after being granted licence under the

Banking Regulation Act shall be registered as a Public limited Company

under the companies Act, 1956. Subsequently 9 new commercial banks have

been grant license to start banking operations. The new private sector banks

have been very aggressive in business expansion and are also reporting

higher profit levels taking the advantage of technology and skilled

manpower. In certain areas, these banks have even out crossed the other

grouped of banks including foreign banks. Private banks are made to adhere

to significant amount of rules and regulations. The RBI will carefully

manage freedom of the entry into the banking sector. The RBI will grant

approvals for the entry of private sector banks provided such banks offer

competitive, efficient and low cost financial intermediaries services, result in

up gradation of technology in the banking sector, are financially viable and

do not resort to unfair means like preemption and concentration of credit,

monopolization of economic power, cross holding with industrial groups etc.

Currently there are 30 Private sector banks in India.

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In 1993, the Reserve Bank has issued guidelines for the formation and

functioning of Private Banks in India. These guidelines are as follows:

1. The banks shall be governed by the provisions of The Reserve Bank of

India Act, 1934 The Banking Regulations Act, 1949 other relevant statuaries.

2. Private sector banks are required to be registered as public limited

companies in India.

3. The authority to grant a license lies with the RBI.

4. The shares of banks are required to be listed on stock exchanges.

5. Preference will be given to those banks whose headquarters are proposed

to be located in a center, which does not have headquarters of any other

bank.

6. Maximum voting rights of an individual shareholder would be limited to

1% of total voting rights.

7. The new bank would not be allowed to have as its director any person

who is already a director in a banking company.

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8. The bank will be subject to prudential norms in respect of banking

operations, accounting policies and other policies, as laid down by RBI. The

bank will be required to adhere to the following: Minimum paid up share

capital of Rs. 1 bln. Promoters' contribution as determined by the RBI

Capital adequacy of 8% of the risk weighted assets Single borrower and

group borrower exposure limits in force Priority sector lending Export credit

Loan policy within overall policy guidelines laid down by the RBI.

9. The banks will be free to open branches anywhere once they satisfy the

capital adequacy and prudential accounting norms.

10.The banks would not be allowed to have investments in subsidiaries,

mutual funds and portfolio investments in other companies in excess of 20%

of the banks' own paid up capital and reserves.

11. The banks would be required to use modern infrastructure facilities in

office equipment, computer, and telecommunications

LIST OF PRIVATE SECTOR BANKS IN INDIA

1 BANK OF MADURA

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2 BANK OF PUNJAB

3 BHARAT OVERSEAS BANK

4 BENARAS STATE BANK

5 CATHOLIC SYRIAN BANK

6 CENTURION BANK

7 CITY UNION BANK

8 DHANLAKSHMI BANK

9 FEDERAL BANK

10 GANESH BANK OF KURUNDWAD

11 GLOBAT TRUST BANK

12 HDFC BANK

13 ICICI BANK

14 IDBI BANK

15 INDUSIND BANK

16 JAMMU AND KASHMIR BANK

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17 KARNATAKA BANK

18 KARUR VYSYA BANK

19 LAKSHMI BANK

20 LORD KRISHNA BANK

21 NAINITAL BANK

22 NEDUNGADI BANK

23 RATNAKAR BANK

24 SBI COMMERCIAL AND INTL BANK

25 SANGLI BANK

26 SOUTH INDIAN BANK

27 TAMILNAD MERCANTILE BANK

28 UNITED WESTERN BANK

29 UTI BANK

30 VYSYA BANK

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23
WHAT IS MERCHANT BANKING?

Merchant banking implies investment management. This includes

management of mutual funds, public issues, trusts, securities and

international funds. It involves dealing with the corporate clients and

advising them on various issues like - mergers, acquisitions, public issues,

capital structure decisions etc. This being the era where mergers and

acquisitions are hot, the scope of merchant banking has grown to a large

extent.

DEFINITION

“ A Merchant Bank is defined as a financial institution or an organization

that underwrites corporate securities and advices such clients on issues like

corporate mergers etc. involved in the ownership of commercial ventures,

etc. This organization may be a Bank, Corporate body, a firm or a

proprietary concern.”

“ A Merchant Banker has been defined under the Securities and Exchange

Board of India Rules, 1992 as “ any person who is engaged in the business

of issue management either by making arrangements regarding selling,

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buying or subscribing to securities as manager, consultant, advisor or

rendering Corporate advisory service in relation to such issue management.”

ORIGIN OF MERCHANT BANKING- ABROAD

The origin of merchant banking is to be traced to Italy in late medieval times

and France during the seventeenth and eighteenth centuries. The Italian

merchant bankers introduced in England not only the bill of exchange but

also all the institutions and techniques connected with an organized money

market. In France, during seventeenth and eighteenth centuries merchant

banker (i.e. Merchant Banquer) was not merely a trader but an entrepreneur

in excellence. He invested his accumulated profits in all kinds of promoting

activities He added banking business to his merchant activities and became a

merchant banker.

GROWTH OF MERCHANT BANKING IN INDIA:

Merchant banking activities in India originated in 1969 with the Merchant

Banking division set up by the Grindlay’s Bank, the largest foreign bank in

the country, at that time. The main service offered to the corporate

enterprises by the Merchant Bank included management of Public issues and

financial consultancy. Other foreign banks like Citi Bank, Chartered Bank

also assumed the merchant banking activity in India. State Bank Of India

25
started merchant banking activity in 1973 followed by ICICI in 1974. Both

emerged as leaders in merchant banking activities with significant business

during the period of 1974-1985 in comparison to Foreign Banks. Mid

seventies witnessed a growth of Merchant Bank organizations in the country

with various Commercial Banks, Financial Institutions, Broker firms

entering into the field of Merchant banking.

The growth in merchant banking business during the early seventies was due

to Foreign Exchange Regulation Act, 1973 (FERA) where in a large number

of foreign companies operating in India were required to dilute their foreign

holdings in order to continue business in the country. This resulted in the

expansion of capital markets providing enough opportunities to Merchant

bankers to establish themselves. The change in Indian Economy opened new

doors for merchant banking business to enter in the diversified area of

activities, but at the same time it has brought competition in the merchant

banking sector. This sector as traditionally been dominated by financial

institutions, banks and their subsidiaries. Now, various private sector

merchant bankers have emerged and some of them are having international

reputations. Till the end of 1990, the merchant-banking sector was almost a

monopoly of public sector institutions and commercial banks, however since

1991 a considerable number of private merchant bankers have emerged on

26
scene. Various existing corporate entities and non- banking finance

companies have also focused their activities in merchant banking business.

Before 1990 there were less than 40 merchants banking concerns while in

1994 this number has exceeded to more than 400 firms.

IMPORTANCE AND NEED OF MERCHANT BANKING IN INDIA:

Important reasons for the growth of Merchant Bank has been developmental

activities throughout the country, exerting excess demand on the sources of

funds for ever expanding industries and trade, thus leaving a widening gap

unbridged between the supply and demand of investible funds. All India

Financial Institutions has experienced constraint of resources to meet ever-

increasing demand for funds from the Corporate Sector Enterprises. In such

circumstances Corporate Sector had the only alternative to avail of the

capital market service for meting their long-term financial requirement

through capital issues of equity shares and debentures. Growing demand for

funds put pressure on capital market that enthused commercial bank, share

brokers and financial consultancy firms to enter into the field of merchant

banking and share the growing capital market. As a result all the commercial

banks in nationalized and Public Sector as well as in Private Sector

including Foreign Banks in India have opened their merchant banking

windows and are competing in this field.

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Need for merchant banking is felt in the wake of public savings lying

untapped. Merchant bankers can play significant role in mobilizing funds of

savers to investible channels assuring promising returns on investments and

thus can assist in meeting the widening demand for investible funds for

economic activity. With growth of Merchant banking profession corporate

enterprises both in Private and Public sectors would be able to raise required

amount of funds annually from the capital market to meet the growing

requirement 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 Banking.

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 sectors to comply

with all those requirements prescribed therein the need of a skilled agency

existed which could provide counseling in these matters in a package form.

Merchant bankers with their skills updated information and knowledge,

provide this service to the corporate units and advise them on such

requirements to be complied with for raising funds from the capital markets

under different enactments, viz. Companies Act, Income Tax Act, Foreign

Exchange Regulation Act, Securities Contracts (Regulation) Act and various

28
other corporate laws and regulations. Merchant Bank advise the investors of

the incentives available in the form of tax relief, other statutory relaxation,

good return on investment and capital appreciation in such investment to

motivate them to invest their savings in securities of the corporate sector.

Thus, merchant banks help industries and trade to raise funds and the

investors to invest their saved money in sound and healthy concerns with

confidence, safety and expectations for higher yields. Finance is the

backbone of business activities. Merchant Banks make available for

Business enterprises acting as intermediaries between them raising demand

for funds and the supplies of funds besides rendering various other services.

STEPS FOR SETTING UP MERCHANT BANKS:

1. Formation of the business organization.

2. Adoption of a viable business plan.

3. Seeking SEBI registration as merchant banker.

4. Essentials for commencement of business.

SEBI GUIDELINES ON MERCHANT BANKING

Those with minimum net worth of Rs. 1 crore are authorized to act as Lead

managers, Managers to the issue:

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  Minimum net worth of Rs. 50 lakh as co-managers to the issue

 Minimum net worth of Rs. 25 lakh as consultant’s advisers to the issue

 The number of Lead Managers to the issue is restricted to 2 for issues

less than Rs. 50 crore, 3 for less than Rs. 100 crore and 4 for above

100 crore.

 Prior permission from SEBI is needed for carrying out Merchant

Banking Activities.

Merchant Banking activities are now being controlled by SEBI because it

pertains to Capital Market function. Accordingly SEBI license is required to

undertake merchant banking activity. Banks cannot act as Merchant Bankers

now. They can carry on such activity only through a subsidiary.

ORGANISATIONAL SET UP OF MERCHANT BANKERS IN INDIA:

In India, a common organizational set up of merchant bankers to operate 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. Financial and technical consultants and

professionals also organize some firms. Securities and Exchange Board of

India has divided the Merchant bankers into four categories based on their

capital adequacy.

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Each category is authorized to perform certain functions. From the point of

organizational set up India’s merchant banking organizations into 4 groups

on the basis of their linkage with parent activity. They are:

1. 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 set up plays

CATEGORY MINIMUM AMOUNT
a role on the lines of
I RS. 1 CRORE
Governmental
II RS. 50 LAKHS
priorities and III RS. 20 LAKHS policies.
IV NIL

2. BANKER BASE:

These merchant bankers function as division/ subsidiary of banking

organization. The parent banks are either nationalized commercial banks

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.

3. BROKER BASE:
31
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.

4. 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 the are providing skill oriented specialized services

to their clients. Some foreign merchant banks are also entering either

independently or through collaborations with their Indian counterparts.

Private sector merchant banking firms have come up either as sole

proprietorship, partnership, private limited 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

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

Financial Institutions.

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ACTIVITIES OF MERCHANT BANKERS

1. CORPORATE COUNCELLING

It denotes the advise provided by a merchant banker to a 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 is wide

enough to include all activities related to Merchant Banking. However, the

counseling is limited to only opinions and suggestions and any detailed

analysis would form part of a specific service. The service of corporate

counseling is being offered in a limited and unsystematically manner by

the Merchant Bankers. In most of the cases, corporate counseling is

provide free of costs.

2. PROJECT COUNSELLNG

It is a very important and lucrative Merchant Banking service. It is

provided by most of the Merchant Bankers. However, only a few having

expertise available in technical, marketing, and financial area have it to

provide satisfactory services. Project counseling covers development of an

idea intp project, preparation of the project report, estimation of the cost of

the project, and deciding the means of financial and techno-economic

33
appraisal of projects for capital issue/financing etc. The fee charged for

project report preparation/ appraisal ranges between 0.25% to 2% of the

total project cost. The fee charged depends upon:

 Total size of the project

 The complexity of the project.

3. LOAN SYNDICATION

It refers to the services rendered by an organization in arranging procuring

credit from financial institutions, banks, and other lending and investment

companies for financing the project or meeting working capital

requirements. The loan syndication work involves identification of the

sources where from funds could be arranged, approaching these resources

with requisite application and supporting documents and complying with

all formalities involved in the sanction and disbursal of loan. The fee

charged by Merchant Bankers for undertaking loan syndication varies upto

1% of the total amount.

4.MANAGEMENT OF CAPITAL ISSUES

The capital issues are managed by category – I Merchant Bankers and

constitute the most important aspect of their services. The public issue of
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 corporate securities involves marketing of capital issues of new and

existing companies, additional issues of existing companies including

rights issues and dilution of shares by letter of offer. The public issues are

managed by involvement of various agencies, i.e. underwriters, brokers,

bankers, advertising agency, printer, auditors, legal advisers, registrar to

the issue and Merchant Bankers providing specialized service to make the

issue a success. However, merchant bankers is the agency t the apex level

who plan, co-ordinate and control the entire issue activity and direct

different agencies to contribute to the successful marketing of the

securities. The procedure of managing a public issue by Merchant Bankers

is divided into two phases, viz.,

A. Pre-issue Management

B. Post- issue Management

PRE-ISSUE MANAGEMENT

Steps required to be taken to manage pre-issue activity is as follows:

1. Obtaining stock exchange approvals to memorandum and Articles of

Association

2. Taking action as per SEBI guidelines.

3. Finalizing appointment of following agencies:

 Co-managers/ Advisers to the issue.

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  Underwriters to the issue.

 Brokers to the issue

 Bankers to the issue and Refund Banker.

 Advertising Agency.

 Printers and Registrar to the Issue.

4. Advise the company to appoint auditors, legal advisers and broad base

Board of Directors.

5. Drafting of prospectus.

6. Obtaining approvals of draft prospectus from the company’s legal

advisers, underwriting financial institutions/ Banks.

7. Obtaining consent from parties and agencies acting for the issue to be

enclosed with the prospectus.

8. Approval of prospectus from SEBI

9. Filing of he prospectus from the Registrar of Companies.

10. Making an application for enlistment with Stock Exchange along with the

copy of Prospectus.

11.Publicity of the issue with advertisement and conferences.

12. Open subscription list.

POST – ISSUE MANAGEMENT

Steps involved in post-issue management are:

36
1. To verify and confirm that the issue is subscried 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 /certificate within the

prescribed time limit of ten weeks after the closure of subscription list.

4. To report periodically to SEBI about the progress in the matters related to

the allotment and refunds.

5. To ensure the listing of securities at stock exchanges.

6. To attend the investors grievances regarding he 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 issue upto Rs 25 crores and

 0.2% of the amount exceeding Rs 25 Crores, if more than 1

Merchant Bankers are managing the issue.

5. UNDERWRITING

Underwriting of Securities is done by all categories of Merchant Bankers

except category – IV. This activity is good business option if due care is

taken in selecting and marketing the issue so that likely development is

generated. The Merchant bankers are authorized to take a minimum

underwriting of 5 times its net worth at any point of time.

37
6. PORTFOLIO MANAGEMENT

Category- II merchant bankers and I can render the Portfolio

management service. The portfolio manager pursuant t o a contract or

agreement with a client advises or directs or undertakes on behalf of the

client the management of investments of different types of marketable

securities or investment papers like shares, debentures, bonds, etc with a

view to ensure maximum return, by such investments by minimum risk

of loss of return. Portfolio management should aim at investing in

different securities and financial instruments so as to earn best possible

returns besides safety and security of invested funds. SEBI has laid down

specific guidelines for the portfolio services. These guidelines pertain o

the duties and responsibilities of the portfolio manager to redressal of

grievances and penalties for non-compliances. Portfolio management as a

concept is catching up in India. With more and more companies tapping

the capital markets the investor is more likely than non-equipped to

handle he complexities of stock trading.

7. EQUIPMENT LEASING AND HIRE PURCHASE

The financial service of equipment leasing and hire purchase are offered

by most of the merchant bankers. Leasing and hire purchase income

38
 constitute a major portion of total income generation of present day

Merchant Banking organization. The lease rental/ installments provide a

return of about 20% and in addition provide a tax shield.

8. DEALING IN SECONDARY MARKET-OPERATION

The leading merchant bankers also deal in sale/purchase of Securities in

Secondary market on their own. This activity is followed on account of

availability of expertise in finance, in general and capital markets and

equity research in particular company.

9. MERGERS AND ACQUISITIONS (M & A)

For merchant bankers mergers and acquisitions is promising to be new

business. I-Sec, Kotak Mahindra, J.M. Financial are actively involved in

bringing together buyers and sellers. They have already set up separate

team of professional for this purpose. New entrants view Mergers and

Acquisitions more seriously. It is an important additional business. M&A

was not in focus till recently but now all merchant bankers are planning

to set up a separate cell for this purpose. They are all in process of

building a database whereby they will be constantly monitoring the

companies’ ideal for takeovers.

39
REGULATIONS OF MERCHANT BANKING

 NOTIFICATION OF THE MINISTRY OF FINANCE AND SEBI

Merchant Bankers have to be organized as body corporates. They are

governed by the Merchant Bankers Rules (MB Rules) issued by the

Ministry of Finance and Merchant Bankers Regulations (MB Regulations)

issued by SEBI (22.12.1992).

 RATIONALE OF NOTIFICATIONS

Investor’s confidence is a prerequisite for an orderly growth and

development of the securities market. In the primary market, investor’s

confidence depends in a large measure on the efficiency of the issue

management function which covers drafting and issue of prospectus or

letter of offer after submitting to SEBI and timely dispatch of share

certificates or refund orders. To ensure proper disclosure and to bring about

transparency in the primary market with a view to protect investor’s

interests, SEBI has issued MB Regulations.

 OBJECTIVES OF THE MERCHANT BANKERS REGULATIONS

MB regulation which seek to regulate the raising of funds in the primary

market would assure the issue a market for raising resources effectively

and easily, at low cost, to ensure a high degree of protection of the interests

40
of the investors and provide for the merchant banker a dynamic and

competitive market with high standard of professional competence,

honesty, integrity and solvency. The regulation would promote a primary

market, which is fair, efficient, and flexible and inspires confidence.

The regulations stipulate that any person or body proposing to engage in

the business of merchant banking or presently engaged as managers,

consultants or advisors to issue would need authorization by SEBI.

41
42
ABOUT THE BANK

UTI Bank was the first of the new private banks to have begun operations in

1994, after the Government of India allowed new private banks to be

established. The Bank was promoted jointly by the Administrator of the

specified undertaking of the Unit Trust of India (UTI - I), Life Insurance

Corporation of India (LIC) and General Insurance Corporation Ltd. and its

associates viz. National Insurance Company Ltd., The New India Assurance

Company, The Oriental Insurance Corporation and United Insurance

Company Ltd. The Bank today is capitalized to the extent of Rs. 231.15

Crores with the public holding (other than promoters) at 45.94%.

The Bank's Registered Office is at Ahmedabad and its Central Office is

located at Mumbai. Presently the Bank has a very wide network of more

than 200 branch offices and Extension Counters. The Bank has a network of

over 1150 ATMs providing 24hrs a day banking convenience to its

customers. This is one of the largest ATM networks in the country. The Bank

has strengths in both retail and corporate banking and is committed to

adopting the best industry practices internationally in order to achieve

excellence.

PROMOTERS

43
The largest and the best Financial Institution of the country, UTI -I, have

promoted UTI was set up with a capital of Rs. 115 crores, with UTI

contributing Rs. 100 crores, LIC BANK LTD. The Bank - Rs. 7.5 crores and

GIC and its four subsidiaries contributing Rs. 1.5 crores each.

UTI – I SHAREHOLDING 33.44%

UTI - I is the largest mutual fund in India. UTI presently occupies a special

position in Indian capital market. With a servicing and distribution network

of more than 53 branch Offices, 320 Chief Representatives and about 90,000

agents, UTI provides the complete range of services to its investors.

 MILESTONES OF UTI BANK

December 1993
UTI Bank comes into being
Registered office at Ahmedabad
Head office at Mumbai

April 1994 First branch of UTI Bank inaugurated at Ahmedabad by Dr.

Manmohan Singh, Hon'ble Finance Minister, Government of
India.

March 1995 Completes first profitable year in operation

June 1996 Crosses Rs.1000 crores deposit mark

September 1998 UTI Bank goes public with a Rs. 71 crores public issue; Issue
over-subscribed 1.2 times, over 1 lakh retail investors UTI
holding reduces to 60.85%

March 1999 Deposit crosses Rs.3000 crores

44
September 1999 Cash management services (CMS) launched, Co branded credit
card launched

January 2000 Dr.P.J Nayak takes over as Chairman and Managing Director from
Shri Supriya Gupta.

February 2000 Retail and institutional marketing department set-up

Bank adopts Finacle software from Infosys for core banking

March 2000 Bank crosses deposit of Rs 5700 crores profits cross

Rs 50 crores mark for the first time.

April 2000 Bank launches its Internet banking module, iConnect

Retail loans introduced for the first time by the Bank

July 2000 E-commerce initiatives announced

Financial Advisory Services offered beginning with marketing of
US 64

October 2000 Bank becomes fully networked

December 2000 Bank opens its 200th ATM. It becomes the 2nd largest ATM
network in the country
Jan 2001 The net profits for the first three-quarters of FY01 declared at Rs
56 Crores
April 2001 Bank declares a profit of Rs 86.12 crores for FY01, a growth of
69% over the previous year
July 2001 Bank declares a profit of Rs35 crores for the 1Q of FY02
July 2001 Bank ties up with Govt of Andhra Pradesh for collection of
commercial tax
September 2001 Private placement of 26% stake in the bank to CDC Capital
Partners, Mauritius
November 2001 The deposit base for the Bank crosses Rs. 10,000 Crores
December 2001 Total Advances cross Rs 5,000 Crores
January 2002 100th branch opens at Tuticorin, Tamilnadu
March 2002 Deposits Cross Rs.12, 000 Crores

45
April 2002 The Bank opens its 500th ATM
May 2002 The Bank announces the net profit of Rs. 134.14 Crores, for the
FY01-02
June 2002 UTI Bank launches Visa Electron International Debit Card
July 2002 ABN Amro Bank ties up with UTI Bank to share ATM network
August 2002 UTI Bank crosses 100 customer touch points in the Mumbai
region
October 2002 UTI Bank launches 3 ATM galleries at Fort, Mumbai; Main
Branch, Kolkata; Go park Branch, Kolkata
December 2002 The Bank ties up with BSNL for the first time for online payments
of Telephone Bills through ATMs and Internet
January 2003 UTI Bank declares a record net profit of Rs. 131.65 Crores for the
first 9 months of FY 2002-03
January 2003
The Bank introduces resident Foreign Currency (Domestic)
Account
February 2003 UTI Bank introduces AT PAR Cheque facility for all Savings
Bank customers

MERCHANT BANKING IN UTI BANK

The Bank received an authorization to unction s a category – I merchant

banker in January 1995, and today has a significant presence in all the areas

covering the entire gamut of merchant banking activities. The Bank has over

the period established itself as a major player with significant market

presence in various merchant banking activities like:

 Debt and Equity Placement and Syndication

 Project Advisory Services

46
  Infrastructure Advisory

 Disinvestments Advisory

 Advisory services on Mergers and Amalgamation

 Restructuring Advisory

 Privatization Consultancy

 Issue management and related activities

 Debentures/ Security Trusteeship

The Merchant Banking Department also handles investment and trading in

corporate debt instruments, preference shares and equity.

The Bank has been arranged to issue aggregating over Rs. 16,700 crores in

the financial year 2003 – 2004 and has been ranked No 1 as Arranger for

private placement or debt by the prime database for the nine months period

ended December 31, 2003. During FY 2003, Prime database for the nine

months period ended December 31, 2003. During FY 2003, the bank has

mobilized an amount exceeding rs 8,000 crores and was ranked FIRST by

Prime Database.

 OFFERING

47
 . The Bank's Merchant Banking Division has developed significant expertise

in the area of public / rights issue management, private placement of debt

and equity and syndication.

 SCOPE OF ACTIVITIES

Advising the company on designing of its Capital Structure.

Advising the company on the instrument to be offered to the public.
Pricing of the instrument.
Advising the company on Legal/ regulatory matters and interaction

with SEBI/ ROC/ Stock

Exchanges and other regulatory authorities.
Assisting the company in marketing the issue.

NETWORK AND BUSINESS SPECTRUM

BRANCH BANKING
270 + OFFICES
110 + LOCATIONS

MERCHANT CORPORATE
BANKING BANKING

CENTRALISED DATABASE

INTERNATIONAL
BANKING RETAIL
OFF – SITE BANKING BANKING
1200 +48ATMs
INTERNET BANKING
 MERCHANT BANKING: AN OVERVIEW

a) Active in Merchant Banking Arena since 1995

b) Among the Top Merchant Banks in India

c) Ranked FIRST in the prime & Credence Databases as

Arrangers for Private Placement of debt during FY 2002-03 and

FY 2003-04.

d) Active in Issue Management and Private Placement/

Syndication of both Debt and Equity.

 ACTIVITIES UNDERTAKEN

a) Debt/ Equity Placement

b) Project/ Infrastructure Advisory Services

49
 c) Privatization Advisory

d) Partner Search

e) Capital Structuring

f) Restructuring Advisory & Financial Engineering

g) Issue management

h) Debenture Trusteeship

 ADVISORY SERVICES

a) Project Appraisal & Financial Advisory with special focus on

Infrastructure Projects.

b) Restructuring Advisory

c) Disinvestments Advisory to Central & State PSUs

d) Bid Process Management

e) Advisory services in Mergers & Acquisition including Brand

Acquisition & Partner Search.

 ADVISORY – SECTORAL FOCUS

A. TELECOM

B. POWER

C. ROADS

D. RAILWAYS

E. PORTS

50
 F. INDUSTRIAL

G. AVIATION

 INFRASTRUCTURE ADVISORY

JAIPRAKASH HYDRO-POWER LTD

Largest Private Sector Hydel project

developed in the country.

Advisor for Financial Restructuring

Debt Rs 900 cr
Equity Rs 135 cr

SOUTH WEST PORT LTD

Merchandized Multi- Purpose

Cargo terminal at Mormugao Port

Advisor

Debt Rs 65 cr

VIRAMGAM MAHESANA PROJECT LTD

First private railway project based on BOT

concept in the country.

Financial Advisor

Debt Rs5163 cr
 CESC LIMITED

Generation and distribution of electricity to Calcutta and

suburbs

Advisor for Financial Restructuring

Debt Rs 1,200 Cr

JAYPEE DSC VENTURES LTD

Delhi – Gurgaon 8/6-lane access controlled highway

on BOT basis

Financial Advisor

Project Cost Rs 547 Cr

Debt Rs 383 Cr.

TAMIL NADU MARITIME BOARD

Development of Cuddalore Port with private sector

participation.
52
Technical Assistance provider
 JINDAL STAINLESS LTD.

Green field Ferro Alloys project

Arranger

Debt Rs 200 Cr.

DS VICON VENTURES PVT LTD.

Conversion of Raipur- Durg section of NH-6 into a four-

lane highway on BOT basis.

Financial Advisor

Debt Rs 63 Cr.

JSW POWER LTD

2*100 MW Corex Gas based power plant

Advisor & Arranger

Debt Rs. 326 Cr.

53
 NATIONAL MINERAL DEVELOPMENT
CORPORATION LTD.

Due Diligence in respect of Dharma Port Project

Advisor

 CORPORATE ADVISORY

ORISSA STATE FINANCIAL CORPORATION LTD.

Diagnostic Study

Advisor.

ANDHRA PRADESH STATE CO-OPERATIVE MARKETING

FEDERATION LTD.

Reform Options Study

Advisor

ANDHRA PRADESH STATE DIARY DEVELOPMENT CO-

OPERATIVE FEDERATION LTD.

Reform Options Study

Advisor
HMT LTD.

Diagnostic Study
54
Advisor
  DISINVESTMENT ADVISORY –
MANDATES

 SELL SIDE

Braithwaite & Co Ltd.

Burn Standard Company Ltd.

Hindustan Paper Corporation Ltd.

Central Inland Water Transport Corporation Ltd.

Punjab Alkalies & Chemicals Ltd.

Hirakud Industrial Works Ltd. (Transaction Completed)

IDCOL Rolling Mill Ltd. (Transaction Completed)

 BUY SIDE (TARGET COMPANIES)

Manganese ore India Ltd.

Sponge Iron India Ltd.

55
  MAJOR ISSUES – FY 2004

ISSUE (RS IN CRORES)

HUDCO 3,151

IDBI 2,540

NABARD 1,035

HDFC 1,000

APGENCO 944

IRFC 920

NPCIL 820

APPFC 771

GAIL 500

NTC 500

REC 400

APTRANSCO 380

BSES 375

APWRDC 350

56
KERALA POWER FINANCE 300

EXIM BANK 300

GEB 300

PNB 265

 MAJOR DEALS

HOUSING AND URAN DEVELOPMENT CORPORATION LTD.

SIZE: RS. 3,151 crores

Arranger

INDUSTRIAL DEVELOPMENT BANK OF INDIA

SIZE: RS. 1,200 crores

Arranger

HDFC LTD

SIZE: RS. 1,000 crores

Arranger

57
 ANDHRA PRADESH POWER GENERATION CORPORATION LTD.

SIZE: RS. 944.30 crores

Sole Arranger
NUCLEAR POWER CORPORATION OF INDIA LTD.

SIZE: RS 820 crores

Arranger

ANDHRA PRADESH POWER FINANCE CORPORATION LTD

SIZE: RS. 771crores

Sole Arranger

INDUSTRIAL DEVELOPMENT BANK OF INDIA

First 15-year bond issue

SIZE: RS 500 crores

Sole Arranger

RELIANCE ENERGY LTD.

SIZE: RS. 375 crores

Arranger

58
  PRIMARY MARKET SERVICES
 Management of:

 Public Issues/ IPOs:

 Fixed Price

 Book Building

o Rights Issues

o Offer for sale

o Buyback – Tender Offer/ Stock Market

o Open Offers – Under Takeover regulations

o Delisting Offers

 Merchant Appraisals

59
  CAPITAL MARKET SERVICES
 Clearing Bank for NSE & BSE

 Professional Clearing member (PCM) for futures & options segment of

NSE

 Clearing bank for National Commodity and Derivatives Exchange

Limited (NCDEX)

 Extends Fund – based and Non – Fund based assistance to brokers.

 Extends funding for application in IPO to individuals

 DEPOSITORY SERVICES
 Depositor Participants with National Securities Depository Ltd.

(NSDL), Central Depository Services (India) Ltd. (CDSL) and

empanelled by National Commodities and Derivatives Exchange

(NCDEX).

 Maintaining 1 lakh plus Demat Accounts

 Maintaining securities worth Rs. 25,000 Crs. Plus under custody.

 Online viewing facility of balances in Demat Accounts on Internet.

 Speed – E facility of transfer of securities between Demat accounts

on Internet.

60
 

TRUSTEE TO DEBENTURE HOLDERS/

LOAN TRUSTEES

The bank stared this activity in June 1998 and has already appointed to act

as Trustees for issues aggregating more than Rs. 50,000 crores by corporates

such as GE CAPITAL, L&T, RELIANCE GROUP, CITI GROUP, BPL

LTD, UTI, LIC, GIC, IFCI, IFC WASHINGTON and OPIC U.S.A.

SECURITIZATION

The bank is currently acting as Trustee/ Investor representative In respect of

more than 60 Securitization issues floated by Industry peers like CITI Bank,

Ashok Leyland Finance Ltd, Kotak Mahindra bank, Standard Chartered

Bank, Deutsche Bank, Tata Finance Ltd., Mahindra & Mahindra Financial

Services Ltd., etc.

The Services offered by Bank cover SPV creation, Trusteeship and acting as

Investors’ Representative and involve:

 Coordinating and finalizing the terms, conditions and structure of the

issues with the originators.

 Tapping potential investors for subscription

 Documentation

61
  Co-ordination with Rating Agency, NSDL, Transaction Counsel, R&T

Agents, etc.

 Due diligence auditors, Originator and Servicer

 Issuance of PTC after closure of issue and payment of purchase

consideration.

CAPITAL MARKETS DIVISION

The Bank set up capital market division in July 2000. The division extends

fund based and non- fund based assistance to the brokers of the Stock

Exchange, Mumbai (BSE) and National Stock Exchange (NSE). The Bank

also acts as a Clearing and Settlement Bank for BSE and NSE and OTCEI.

62
63
CONCLUSION

The merchant banking business has increased over a short period of time and

with continues economic reforms. However, a stiff competition exists in his

line and survival will depend upon the financial skill and spectrum of

financial services and instruments offered by the merchant banker. Hence,

merchant-banking service is taking shape for turbulent times.

Merchant banking is an activity initially undertaken y a few larger

commercial banks in India, and is now being adopted or undertaken by

practically every commercial bank through its merchant-banking

department. The range of activities covered under merchant banking is very

wide indeed. The merchant banks offer a package of financial services.

Unlike in the past, their activities are now primarily non- fund based.

Therefore, they do not require much capital. One of the basic requirements

of merchant banking is highly professional staff and worldwide contacts.

Merchant banking is usually international in character.

64