Manisha3078 - Merchhant Banking

PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS
MERCHANT BANKING IN INDIA
CHAPTER NO 1.
INTRODUCTION
The term Merchant Banking has its origin in the trading methods
of countries in the late eighteenth and early nineteenth century when trade
taking place was financed by bill of exchange drawn by merchanting houses. At
that time the merchants were merely financing their own activities. As
international trade grew and other lesser-known names wanted to import goods
from abroad, the established merchants ‘lent their names’ to the new arrival by
agreeing to accept bills of exchange on their behalf. The acceptance houses
would charge a commission for this service and thus there grew up the business
of accepting bills of finance trade not simply of themselves, but of others.
Acceptance business thus became and to a degree always has been hallmark of
true Merchant Banks.
The second historical of Merchant Banks was the raising of capital for
foreign Government. In many cases, the Merchant Banks have been trading in
the countries concerned and gained the confidence of Governments and other
MERCHANT BANKING IN INDIA Page |1

authorities in those countries. Thus, the second principal element of Merchant

Banking became and still is raising of capital through the issue of stocks and
bonds. Therefore, Merchant Banks can be accepting houses or issuing houses or
both. Merchant Banking started in the beginning of 20 th century in UK and
USA. More recently, the services offered by Merchant Banks have entered into
the other areas of operations. Their role is wide ranging and they can now offer
most of the financial services required by a company, touching almost all
aspects of establishing and running of industrial units on sound financial
footing.
Dictionary meaning of ‘merchant bank’ refers to an organization that

underwrites corporate securities and advises such clients on issues like
corporate mergers, etc. involved in the ownership of commercial ventures. This
organization may be a bank, corporate body, firm or proprietary apprehension
MEANING
Merchant Banking is a combination of Banking and consultancy

services. It provides consultancy, to its clients, for financial, marketing,
managerial and legal matters. Consultancy means to provide advice, guidance
and service for a fee. It helps a businessman to start a business. It helps to
raise (collect) finance. It helps to develop and modernize the business. It helps
in restructuring of a business. It helps to revive sick business units. It also
helps companies to register, buy and sell shares at the stock exchange.
DEFINITION OF MERCHANT BANKING
 According to Random House Dictionary, “merchant bank is an organization that

underwrites securities for corporations, advises such clients on mergers and is
involved in the ownership of commercial ventures. These organizations are

sometimes banks which are not merchants and sometimes merchants who are not
banks and sometimes houses which are neither merchants nor banks.”
HISTORY OF MERCHANT BANKING
In late 17th and early 18th century Europe, the largest companies of the
world were merchant adventurers. Reinforced by wealthy groups of people and a
network of overseas trading posts, the collected large amounts of money to
finance trade across parts of the world. For example, The East India Trading
Company secured a Royal Warrant from England, providing the firm with official
rights to lucrative trading activities in India. This company was the forerunner in
developing the crown jewel of the English Empire. The English colony was
started by what we would today call merchant bankers, because of the firm's
involvement in financing, negotiating, and implementing trade transactions. The
colonies of other European countries were started in the same routine. For
example, the Dutch merchant adventurers were active in what are now Indonesia;
the French and Portuguese acted similarly in their respective colonies.
Till early 1960’s there was no merchant banking in the in the Indian
banking system. It was the Grind lays Bank which started Merchant banking
service as far back as 1967. After Grind lays bank, other foreign banks like
Citibank and chartered bank, started these provisions in India.

EVOLUTION & EMERGENCE OF MERCHANT

BANKING
India has arrived the 21st century as one of the Asia’s supreme
dynamic economies. This is the part of the assessment made by International
Financial and Capital Market Institutions based on India’s economic and
financial reforms initiated in 1991 and brought to fruition in various budget.
The progress of any economy mainly be contingent on the efficient

financial system of the country. Indian economy is no exception financial
system of the country. The importance of the financial sector reforms affirms
an effective means for solving the problems of economic, financial and social
in India and elsewhere in the developing nations of the world. The progress of
the Securities Industry of any country depends mainly on the flow of funds.
In fact, capital generation is the lifeblood of the capital market without which
the health and soundness of the financial system cannot be geared and for
which well-developed capital market as well as money market is essential.
India’s capital market is among the largest in the developing world. The
market is comprised of 24 stock exchanges transacting long-term debt;
debentures and equity shares both electronic and physical forms. Derivatives
financial instruments are also be added to the market shortly. The number of
firms listed on the Indian Stock Exchange is more than the USA. Market
Capitalization of listed firms is 1980s was similar to Brazil, Malaysia,
Singapore and Denmark.
The capital market of the country, however, underwent dramatic variations
since the beginning of 1980s basically because of a progressive realization
that the command economy on which the emphasis was placed could not lead
to higher levels of economic development and that a slant towards a market-
oriented economy is necessary.

SCOPE FOR GROWTH OF MERCHANT BANKING 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.
 ENTRY OF FOREIGN INVESTORS

An outstanding development in the history of India capital market was
its opening up in 1992 by permitting foreign institutional investors to invest in
primary and secondary market and also permitting Indian companies to directly
tap foreign capital through euro issues. Within two years to March 1994, the
total inflow if foreign capital through these routes grasped to about $5 billion. It
is estimated that this figure may go up to $ 35-40 billion by the turn of this
century. Further, foreign direct investments as also investment by NRIs have
risen considerably due to number of incentives offered to them. They need the
services of Merchant Bankers to advise them for their investment in India.
 CHANGING POLICY 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 industries will further increase the demand for technical and
financial services which can be provided by merchant bankers.
 DEVELOPMENT OF DEBT MARKET
The concept of debt market has set to work through National Stock
Exchange and the Over the Counter Exchange of India. Experts feel that the

estimated capital issues of Rs. 40,000 crores in 1994-95, a good portion may be
raised through debt instruments. The development of debt market will offer
tremendous opportunity to Merchant Bankers.
 INNOVATIONS IN FINANCIAL INSTRUMENTS
The Indian capital market has witnessed innovations in the introduction of

financial instruments such as non-convertible debentures with detachable
warrants, cumulative convertible preference shares, zero coupon bonds, deep
discount bonds, triple option bonds, secured premium notes, floating rate bonds,
auction rated debentures etc.
 CORPORATE RESTRUCTURING
As a result of liberalization and globalization the competition in the
corporate sector is becoming intense. To survive in the competition, companies
are reviewing their strategies, structure and functioning. This had led to
corporate restructuring including mergers, acquisitions, splits, disinvestments
and financial restructuring. This offers good opportunity to Merchant Bankers to
extend the area of their operations.
 DISINVESTMENT
The government raised Rs. 2000 crores through disinvestment of equity

shares of selected public sector undertakings in 1993-94. The government
proposes to shift the present method of periodic sale of public sector shares
to round the year off loading of shares directly on the stock exchange from
the year 1995-96.

MERCHANT BANKING IN INDIA
In India prior to the enactment of Indian Companies Act, 1956, managing

agents acted as issue houses for securities, evaluated project reports, planned
capital structure and to some extent provided venture capital for new firms. The
merchant banking services were started by foreign banks, namely the National
Grind lays Bank in 1967 and the City Bank in 1970. The Banking
Commission in its report in 1972 recommended the setting up of merchant
banking institutions. This marked the beginning of specialized merchant
banking in India.
To begin with, merchant banking services were offered along with

other traditional banking services. In the mid-Eighties, the Banking Regulation
Act was amended permitting commercial banks to offer a wide range of
financial services through the subsidy rule. The State Bank of India was the
first India Bank to set up merchant Banking division in 1972. Later ICICI
set up its Merchant Banking division followed by Bank of India, Bank of
Baroda, Canada Bank, Punjab National Bank and UCO Bank. The merchant
banking gained prominence during 1983-84 due to new issue boom.

Merchant
Banking
Divisions
Financial Private
Foreign Banks
Indian Banks Institutions Merchant Bank
Division in
Subsidiary Bank
CHAPTER NO.2:
RESEARCH METHODOLOGY
The study is based on secondary data. Data have been collected from the
Research books, Websites for getting the latest data and information related to study.
OBJECTIVES OF THE STUDY:
1.To know the role of merchant banking services in our economy.
2.To study the duties and responsibilities of merchant bank.
3.To understand the problems in merchant banking.
4.To analyze the recent development in merchant banking in India.
5.To examine the role of merchant banking in promoting capital market in India.
NEED & IMPORTANCE IN INDIA
1. Important reason for the growth of merchant banking is due to exerting surplus
demand on the sources of funds forever expanding industry and trade.

2. 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.
3. With the growing demand for funds there was pressure on capital market that
enthused the commercial, share brokers and financial consultancy firms to enter into the
field of merchant banking and share the growing capital market.
4. In India have opened their merchant banking windows and are competing in this field,
and also doing advisory functions as merchant bankers as well as managing public issues
in syndication with other merchant bankers.
5. Merchant banks can play highly significant role in mobilizing funds of savers to
investible channels assuring promising return on investments activity.
6. With the growth of merchant banking profession corporate enterprises in both public
and private, sectors would be able to meet the growing requirements for the funds for
establishing new enterprise. Expansion / Modernization /Diversification of the existing
enterprises.
7. Merchant banks have been procuring remarkable support from capital market for the
corporate sector for financing their projects.
8. 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 accomplished agency existed which could provide
counseling.
9. Merchant bankers advise the investors of the incentives available in the form of tax
reliefs, other statutory relaxations, good yield on investment and capital appreciation in
such investment to motivate them to invest their savings in securities.
10 Thus, the merchant bankers help industry and trade to raise funds, and the investors
to invest their saved money in sound and healthy concerns with confidence, safety and
organizations for higher yields.

SCOPE OF MERCHANT BANKING IN INDIA
Scope for merchant banking depends upon size of the markets, restriction-liberation,
banking policies, corporate culture, and corporate dynamics.
1. Size and dynamics of the market: Indian market is growing. In fact India
is one if 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 in decision making and
hence their scope increases. With significant market freedom, Merchant Bankers
work has increased 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 for 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 IPO’s placement of debentures, etc. Indian
scenario is favorable to merchant bankers work.
MERCHANT BANKING IN INDIA Page |

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4. Corporate culture: Corporate can-do project appraisal, strategic restructuring

in house as well. If the corporate prefer third-party independent assessment, then
will engage merchant bankers. Otherwise merchant banker’s role is only statutory
as in issue management. India Inc. apparently prefers and is happy with merchant
bankers work.
5. Corporate dynamics: 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.
GROWTH OF MERCHANT BANK IN INDIA
Formal merchant banking activity in India was originated in 1969 with Merchant
Banking Division set up by the Grindlays Bank, the largest foreign bank in the
country. The main service offered at that time to the corporate enterprises by the
merchant banks included the management of public issues and some aspects of
financial consultancy. Other foreign banks like Citi Bank, Chartered Bank also
anticipated the merchant banking activity in India.
State Bank of India started merchant banking in 1973 followed by ICICI in 1974.
Both these Indian merchant bankers emerged as leaders in merchant banking having
done significant business during the period of 1974-1987 in comparison to foreign
banks. The early and mid-seventies witnessed a boom in the growth of merchant
banking organizations in the country with various commercial banks, financial
institutions, broker’s firms entering in to the field of merchant banking.
The early growth of merchant banking in the country is assigned to the Foreign
Exchange Regulation Act, 1973 (FERA) where under large number of foreign
companies operating in India were required to dilute their foreign holdings in order to
continue business in the country. This had caused two-pronged effect viz. firstly, in
the form of spate in ‘Foreign Exchange Regulation Act Issues’ eliciting interest of the
investors by creating massive awareness about capital markets amongst the new class

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of investing public, secondly, merchant banking activity became attractive to banks

and the firms of consultants and share brokers who entered into this fields vigorously
to reap the advantages of the expenditure capital markets.
Organizational set up of Merchant Bankers in India
In India a common organizational set up 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, Canada Bank, Punjab National Bank, Bank
of some firms are also organized by financial and technical consultants and professionals.
Securities and exchanges Board of India has divided the merchant bankers into four
categories based on their capital adequacy. Each category is authorized to perform certain
function. From the point of Organizational set up India’s merchant banking organizations
can be categorized into 4 group 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 set up plays a role on
the lines of governmental priorities and policies.
b) 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.
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 baking
related operating also like providing investment and portfolio management services.
d) Private Base:

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These merchant banking firms are originated in private sectors. 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 Sectors 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 time before they added a new activity in the form
of merchant banking services by opening new division on the lines of commercial banks
and All India Financial Institution (AIFI).
Developments in Merchant Banking Establishment:
 Setting up of Banks Subsidiaries
 Re-organization of Private Firm.
 Establishment of SUA
 Securities and Exchange Board of India (SEBI)
 Discount and Finance House of India (DFHI)
 Credit Rating Information Services of India Ltd. (CRISIL)
 Stock-Holding Corporation of India Ltd. (SHC)
Development -1: Setting up of Banks Subsidiaries:

In order to meet the growing demand for broad-based financial services from the
corporate sector more effectively, the merchant banking divisions of the nationalized
Banks have started forming independent subsidiaries. These subsidiaries offer more
specialized services with professional expertise and skills. SBI Capital Markets Ltd , was
incorporated as the first such subsidiary of SBI on 2nd July, 1986. Then Can bank
Financial Services Ltd. was set up as wholly owned subsidiary of Canada Bank in 1987.
PNB Capital Services Ltd. was promoted by PNB during mid-1988.

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Development -2: Re-organization of Private Firms: Expecting tough

competition from growing number of merchant banking subsidiary companies of
nationalized banks, private merchant bankers have also started re-organizing their
activities e.g., J.M. Financial & Investment Consultancy Ltd., 20th Century Finance
Corporation Lid., LKP Merchant Financing Ltd. etc. are some of the private sector firms
of merchant bankers who have taken steps to re-organize their activities.
Development -3: Establishment of SUA

In order to educate and protect the interest of investors, to provide information about new
issues of capital market, to evolve a code of conduct for underwriters and to render legal
and other services to members and public, the Stockbroker Underwriters Association
(SUA) was established in 1984. SUA works in co-ordination with merchant bankers and
takes steps for promoting the activities of capital market.
Development -4: Securities and Exchange Board of India (SEBI):

To develop and regulate securities market, investor protection and to formulate rules and
guidelines for regulation of securities market, the Central Government constituted
Securities and Exchange Board of India on April 4, 1988. The Board carries out all
functions as may be delegated to the Board/Chairman by Central Government for the
development and regulation of securities market. Persons dealing in security market,
merchant bankers, underwriters, sub-brokers, portfolio managers, mutual funds etc. have
to seek authorization from the Board.
Development – 5: Discount and Finance House of India (DFHI):

DFHI was incorporated as a company under the Companies Act, 1956 with an authorized
and paid up capital of Rs. 100 crores. Out of this, Rs. 51 crores have been contributed by
RBI, Rs. 16 crores by financial institutions and 33 crores by public sector banks. It would
also have lines of credit from public sector banks; refinance facility from the Reserve
Bank of India in order to meet the working capital requirements. DFHI aims at providing
liquidity in money market as it deals mainly in commercial bills.

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Development – 6: Credit Rating Information Services of India Ltd.

(CRISIL): CRISIL has been set up in 1987 to provide help to investors, merchant
bankers, underwriters, brokers, banks and financial institutions etc. CRISIL rates various
types of instruments such as debt, equity and fixed return securities offered to the public.
It helps the investors in taking investment decisions.
Development – 7: Stock-Holding Corporation of India Ltd. (SHC):

SHC was set up in 1986 by the All India Financial Institutions to take care of safe
custody, delivery of shares and collection of sale proceeds of the securities. The setting
up of SHC is bound to affect the capital market in future.
Guidelines issued by SEBI towards Merchant Banking
SEBI has laid down following authorized activities of Merchant bankers:
 Issue management
 Corporate advisor
 Underwriting
 Portfolio management Services
 Managers, consultants or advisors.

The following are the SEBI guidelines for merchant bankers –
1. Authorisation:
Any person or body proposing to engage in the business of merchant banking

would need authorisation by the Securities and Exchange Board of India (SEBI) in
their prescribed format. This will also apply to those presently engaged in merchant
banking activity, including as managers, consultants, or advisers to issues.
2 Authorised activities

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(a) Issue of management, which will inter-alia consist of preparation of

prospectus & other information relating to the issues, determining financing
structure, tie-up of financiers & final allotment &/or refund of subscription
(b) Corporate advisory services relating to the issue
(c) Underwriting
(d) Portfolio management services
(e) Managers, consultant or adviser in the issue
3. Authorisation criteria:
All merchant bankers are expected to perform with high standards of integrity &
fairness in all their dealings. A code of conduct for merchant bankers will be prescribed
by SEBI. Within this context, SEBI’s authorisation criteria would take into account
mainly the following-
(a) Professional competence
(b) Personnel, their adequacy & quality, & other infrastructure
(c) Capital adequacy
(d) Past track record, experience, general reputation & fairness in all their
transaction
4. Terms of authorisation
All merchant bankers, including the existing ones, must obtained the authorisation
from SEBI within three months from the issue of these guidelines. SEBI may
extend this period at its discretion by a maximum of three more months.
a) All merchant bankers must have a minimum net worth of RS 1 crore

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b) The authorisation will be for an initial period of 3 years
c) SEBI may collect from the merchant bankers an initial authorisation fee, an
annual fee & a renewal fee.
d) All issues must be managed by at least one authorised banker functioning as the
sole or lead manager. Ordinarily not more than two merchant bankers should be
associated as lead managers, advisers or consultants to a public issue.
e) The specific responsibilities of each lead manager must be submitted to SEBI
prior to the issue.
f) While directors, promoters & every person who authorises the issue of
prospectus shall bear full responsibility for the contents of the prospectus,
merchant banker shall exercise due diligence independently verifying the
contents of prospectus & reasonableness of the views expressed therein.
g) To ensure a direct stake of merchant bankers in the issue managed by them, lead
managers would be required to accept a minimum 5% underwriting obligation
in the issue, subject to a ceiling.
h) Lead managers/merchant bankers would be responsible for ensuring timely
refunds and allotment of securities to the investors.
i) The involvement of the merchant banker in an issue should continue at least till
the completion of essential follow- up steps, which must include the listing of
the instrument, & dispatch of certificates
j) The merchant banker shall make available to SEBI such information,
documents, returns & reports as may be prescribed & called for.
k) SEBI may suspend/cancel the authorisation of merchant bankers for a suitable
duration in case of violations of the guidelines.

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REGISTRATION PROCESS OF MERCHANT BANKING
The term ‘Merchant Banking’ originated in the 18th and early 19th centuries in the United
Kingdom when trade between countries was financed by bills of exchange drawn on the
principal merchant houses. With the increase in international trade, the established
merchants started the practice of lending their names to the new comers and accepting the
bills of exchange on their behalf. They would charge a commission for the purpose and
thus acceptance business became the hallmark of Merchant Bankers. Once these banks
had gained the confidence of the government, they also entrusted with the job of issuing
bonds in the London market.
Although Merchant Banking activity ushered in two decades ago, it was only in 1992, in
India, after the formation of SEBI that is defined and a set of rules and regulations
governing it are in place. In fact, the origin of Merchant Banking is to be traced to Italy
in late medieval times and France throughout the seventeenth and eighteenth centuries.
Merchant Banker invested accumulated profits in all kinds of promising activities.
Merchant banker without holding a certificate of registration granted by the Securities

and Exchange Board of India cannot act as a merchant banker.
SEBI will grant certificate to Merchant banker if it follows the following condition: -

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 Merchant banker should be a body corporate and should not be non banking
finance company
 They must have a necessary infrastructure for maintaining an office
 They must have employed a minimum of 2 persons with experience in merchant

banking business.
 They should not be connected with any company directly or indirectly.
CAPITAL STRUCTURE DECISION
In India, merchant banks operate in the form of Divisions of Indian and Foreign
banks and financial institutions, subsidiary companies established by banks like SBI
Capital Markets Ltd., can Bank Financial Services Ltd., PNB Capital Services Ltd.,
Indian Bank Merchant Banking services Ltd., etc., the firm organized by the stock
brokers, stock exchange dealers, the financial and technical consultants and chartered
accountants. Securities and Exchange Board of India (SEBI) has divided merchant
bankers into four categories, which are as follows: -
CATEGORIES ACTIVITIES NETWORTH

Categories I To carry on the activity issue 1 Crore
management & to act as
adviser, consultant, manager,
underwriter, portfolio manager.
Categories II Can act only as co-manager 50 lakhs
Categories III Can act as co-manager but 20lakhs

cannot undertake portfolio
management
Categories IV Can merely act as consultant to Nil

issue of capital
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MERCHANT BANKER’S CODE OF CONDUCT
Merchant Bankers have to abide by the following Code of Conduct as prescribed by the
SEBI:
 INTEGRITY: Observation of high standards of integrity and fairness in all

dealings with clients and other merchant bankers.
 QUALITY SERVICE: Rendering high standard of service, exercising due

diligence, ensuring proper care and exercising independent professional judgment,
disclosing to the clients.
 FAIR PRACTICE: Refraining from making any statement or becoming
privy to any act, practice unfair competition, this is likely to be a harmful to the
interests of other merchant bankers, or is likely to place other merchant bankers in
a disadvantageous position in relation to the merchant banker.
 RESPONSIBLE STATEMENT: Not to indulge in making any exaggerated

statement, oral or written, to the client, either about the qualification or the

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capability to render certain services, or achievements in regard to services

rendered to other clients.
 BEST ADVICE: Endeavoring to render the best possible advice to the

clients keeping in mind the client’s needs, and the merchant banker’s own
professional skill in order to ensure that all professional dealings are affected in
prompt, efficient, and cost-effective manner.
 SECRECY: Not to divulge to other clients, press or any other party, any
confidential information about the client and deal in the securities of any client
without disclosing to the Board, as required under the regulations.
QUALITIES REQUIRED FOR GOOD MERCHANT

BANKERS
Merchant bankers play a significant role as catalyst to transform the project ideas into
industrial ventures. They help promotion of the enterprises by undertaking various
activities such as market surveys, choice of suitable location and its size, preparation
of documents and obtaining consent from various authorities. They help in taking
important decisions such as financing mix, management of public issues, credit
syndication the success of merchant banker depends on the qualities which are
described below
 Knowledge:
Thorough understanding of technical issues related to business, understanding of

legal and statutory requirement, appreciation of business acumen, financial expertise
are key things a merchant banker must know. Delivery of his services depends upon
his basic understanding of these issues.

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 Liaisoning 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
clearance the authorities.
 Capital market familiarity:
Merchant banker should be well versed with stock markets, their movements. He
should track important happenings in the market on ongoing basis.
 Innovation:
Corporate may approach with unique requirements. Standard solution 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 instrument and
get approved from the authorities. Innovation is required even to address stringent
legal requirement.
 Integrity:
Merchant banker has valuable and confidential information of its customers.

Merchant bankers should take utmost care that the information is not leaked and also
not consumed for the purpose other than for which it was disclose to the merchant
banker.
 Leadership:

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Merchant banker should possess all relevant skills, update knowledge to interact with
the client and effectively communicate. Leadership is synonymous with followers
who follow the one who leads.
 Aggressive Acton:
Aggressiveness is a personality trait of a good leader but in merchant banking it has a
wider connotation. Aggressive merchant bankers are always looking for new
business. Once a business opportunity has been located, the merchant banker has got
to obtain the mandate for the merchant banking assignment from the clients at once
which will depend upon his own communication skills, persuasiveness and the
background of the organization to which he belongs. A good merchant banker is one
who does not allow his client to think anything outside except what has been advised.
 Cooperation & Friendliness:
These two characteristics are the symbols of good leadership but it hardly needs to be
stressed that cooperation and friendliness coupled with persuasiveness are the main
instruments with which a merchant banker mixes with the people, gathers
information, obtains business mandate and renders satisfactory services to the clients.
Business of an honest business merchant banker spreads with geometrical
propagation when he shares the thoughts of his clients with sympathetic gestures and
offers pragmatic suggestions without greed or favors. Very often, rude, intemperate
and indifferent disposition or blunt outburst withdrew fortunate business
opportunities forever. Affability and cooperation must flow as natural traits in the
merchant banker to win the trust of the clients.
 Contacts:
Success of merchant banker depends upon his sociable nature and the richness of
wider contacts. A merchant banker is supposed to be acquainted deeply with all the
constituents of merchant banking. The scope of contact encompasses intimate
contiguity and acquaintances within his own organization, Central and State
Government Offices where compliances under various relevant enactments are to be
reported, Indian and foreign banks, financial institutions at Central and State levels,
promoters/directors/owners and chief executives of the private and public enterprises

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which would be prospective beneficiaries of merchant banking services, printers,

advertising agencies, brokers and stock exchange dealers, advocates and solicitors
and members of the press whose services are availed of in executing merchant
banking assignments. Merchant bankers should widen contacts and references and
continue to maintain them with goodness, honor and humor by meeting people.
 Attitude Towards Problem Solving:
The most important personality trait of a merchant banker is his attitude towards problem
solving. Even client coming to him has got to return fully satisfied having consulted a
merchant banker. Positive approach to understand the view points of others, their
difficulties and their adverse circumstances is possible only when a person is skilled in
human relations particularly the inter-personal and intra-personal behavior. Effective
communication and proper feedback are the pre-requisite for creating a positive attitude
towards problem solving. Many persons are effective in this trait without any training for
reasons of cultivating a habit from environment in which they have been brought up at
home, in school, college and office. This is so important that it must be treated as a
separate objective quality of a good merchant banker.
 Inquisitives For Acquiring New Skills, Information &

knowledge:
Merchant banker’s lice on their wits they earn by giving information to needy clients.
Therefore, they should keep abreast with latest information in the area of the service
product, they market. This is possible if merchant bankers possess the quality of
inquisitiveness. The above qualities of a merchant banker are only illustrative illustrative
Nevertheless, merchant banker should possess super business acumen, managerial
abilities, administrative capacities and salesmanship so as to understand the problems and
sell the service product to the needy clients.

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25
RESPONSIBILITIES OF MERCHANT BANKER

 To the Investors
Investor protection is fundamental to a healthy growth of the Capital Market. Protection
is not to be conceived as that of compensating for the losses suffered. The responsibility
of the Merchant Banker in ensuring the completeness of the disclosures is of paramount
importance in view of the fact that entire reliance is based on offer Document either
Prospectus or Letter of Offer because an independent agency like a Merchant Banker has
done the scrutiny.
 Capital structuring
The Merchant Bankers while designing the capital structure take into account the various
factors such as Leverage effect on earnings per share, the project cost and the gestation
period, cash flow ability of the company, the cost of capital, the considerations of
management control, size of the company, and general economic factors. These exercise
are done mainly in order to meet the fund requirement of the company taking due
cognizance of the investor’s preference.
 Project Evaluation and due Diligence
Due diligence and project evaluation is another major responsibility of the Merchant
Banker. Where the project has already been appraised by a bank/financial institution, the
Merchant Banker relies on the said appraisal before accepting an assignment. However,
where the project has not been appraised by as bank/financial institution, the Merchant
Bank undertakes a detailed evaluation of the project before taking up an assignment for
issue management.
The factors that are looked into in case of the legal aspects are:
 Compliance with the SEBI guidelines and the various guidelines issued by the
Ministry of Finance and Department of Company Affairs.

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 Pending litigation’s towards tax liabilities or any criminal/civil prosecution any of

the directors for any offenses.
 Fair and adequate disclosures in the prospectus.
 Pricing of the Issue
The Merchant Banker looks into the various factors while pricing the issue. Some of the
factors are past financial performance of the company, Book value per share, stock
market performance of the shares. The Merchant Banker has a vital role to play in
pricing of the instrument.
 Marketing of the Issue
Marketing of the issue is a vital responsibility of the Merchant Banker. The first stage is
Pre-issue marketing for placement of the issue with the financial institutions, banks,
mutual funds, FII’s and NRI’s. The second stage is the marketing of the issue to the
general public through various vehicles such as press, brokers, etc.
 Bought out Deals
The concept of wholesale but out of public offerings by the Merchant Bankers started off
with over the Counter Exchange of India where a Merchant banker acts also as a sponsor
and either takes up the entire issue to be offered wholly of jointly with other co-investors
and off-loads the same to the public at a later date by an offer for sale. Major
amendments were made to the SEBI regulations regarding Merchant Bankers. The
duration of this transaction period has not officially been announced.

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SERVICES RENDERED BY MERCHANT BANKERS
Among the important financial intermediaries are the merchant bankers. The services of
Merchant bankers have been identified in India with just issue management. It is quite
common to come across reference to merchant banking and financial services as though
they are distinct categories. The services provided by merchant banks depend on their
inclination and resources - technical and financial. Merchant bankers (Category 1) are
mandated by SEBI to manage public issues (as lead managers) and open offers in take-
overs. These two activities have major implications for the integrity of the market. They
affect investors' interest and, therefore, transparency has to be ensured. These are also
areas where compliance can be monitored and enforced.
Merchant banks are rendering diverse services and functions, which are as follows:
A. ISSUE MANAGEMENT:
The public issue of securities is the core of merchant banking function. At one time it
was constructed as the sole function. Merchant bankers were identified as issue houses.
It was later perceived that they provide other financial services. When companies seek to
raise resources for implementation of a new project or finance expansion or
modernization or diversification of an existing unit or fund long term working capital
requirement, they retain the services of a merchant banker. To a large extent the type of
issue would vary with the purpose for which funds are raised. Merchant bankers when
retained as managers to issue will have to assist the company in all the stages connected
with public issue.
The merchant bankers help corporate to raise money from the markets through the issue
of shares, debentures, bonds etc. They are designated as managers to the issue. Their
main business is to attract public money to capital issues.
They usually render the following services:
 Drafting of prospectus and getting it approves from the stock exchanges.

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 Obtaining consent/acknowledgement from SEBI.

 Appointing bankers, underwriters, brokers, advertisers, printers etc.
 Obtaining the consent of all the agencies involved in the public issue.
 Holding road shows, to sell the issue. These shows are held for the
analysts, brokers & institutional investors. The purpose of these shows is to
answer queries from these people about the company and the project for
which the funds are being raised.
 Deciding the pattern of advertising.
 Deciding the branches where application money should be collected.
 Deciding the dates of opening and closing of the issue.
 Obtaining the daily report of application money collected at various
branches.
 Obtaining subscription to the issue.
 After the close of the issue, obtaining consent of stock exchange for
deciding basis of allotment etc.
B. CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE
In India, the pricing of issues is now freely decided by the company, with valuable inputs
from the merchant bankers, who have to sell the issue at the decided price. The pricing of
the issue especially in a public issue is very important. The pricing has to be such, that
the investors will be attracted to invest in the issue at that price, at the same time the
company should get the premium that it is looking for. After all, the premium can play a
very role in deciding the company’s capital structure, as larger the premium lesser will be
the requirement for borrowed funds.
The promoter also needs to decide whether to go in for a fresh issue or to go for a rights
issue. However, this will depend mainly on the quantum of funds that the company needs
to raise. The success of the issue is dependent on the selection of the right type of
security. In this matter, the expert advice of merchant bankers is of immense importance.
In the issue management the merchant bankers have to coordinate the various agencies to
the issue. The success of the issue depends on the cooperation of all the agencies
involved.
The merchant bankers offer following services during the public issues:

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 Preparing an action plan and budget for the total expenses for the issue.
 Preparation of application to SEBI and assistance in obtaining the consent
from SEBI.
 Drafting of the prospectus.
 Selection of underwriters, Brokers etc.
 Selection of bankers to the issue.
 Selection of advertising agency for publicity.
 Obtaining approval of the institutional underwriters and stock exchanges
for publication of the prospectus.
Companies are free to appoint one or more agencies as Managers to an issue. SEBI
guidelines insist that all issues should be managed by at least one authorized merchant
banker, functioning either as the sole or lead manager to the issue. Ordinarily, not more
than two merchant bankers should be associated as lead managers, advisors and
consultants to a public issue. In issues of over Rs. 100 crores, the number could be up to
a maximum of four.
The responsibilities of merchant bankers in management of

public issues are many.
Some of these are:
We have seen that many unscrupulous promoters have raised money from the market. This has
hurt the investors a lot and has also made investors nervous about stock market investments. This
in turn affects the functioning of stock markets both the primary and the secondary markets. It is
therefore necessary that merchant bankers are satisfied with the viability of the project, which
they can then sell to the investors with confidence. It is therefore important for the reputation of
merchant bankers, to only associate themselves with good issues.
C.UNDERWRITING
Underwriting is like insurance against the failure of an issue. It is a guarantee to the

issuing the company, that the money that it requires for its project will definitely be
raised. It means that even if the issue is not fully subscribed to by the public, the
underwriters will make up the short fall.

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Underwriting involves the underwriter agreeing to subscribe directly, or to procure

subscription for the unsubscribe portion of the issue, which is not taken up. For the risk
that the underwriter takes, he is paid commission. New companies entering the markets
for the first time, always face number of problems in raising funds from the market. One
of the biggest problems of course that the company is not well known to the investors and
many of them will be unwilling to invest their money in such ventures. Many a times
even existing companies may find it difficult to raise money, due to some reasons.
Issuing companies therefore approach different underwriters with a request to underwrite
the issue.
D.MERGERS AND ACQUISITIONS
Mergers and acquisitions (M&A) and corporate restructuring are a big part of the
corporate finance world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form larger ones. When
they're not creating big companies from smaller ones, corporate finance deals do the
reverse and break up companies through spin-offs, carve-outs or tracking stocks.
Role of Merchant Banker
Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in

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

 Financial & Technical appraisal of the merger/takeover proposal.

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 Negotiation with the parties for arriving at the suitable price or exchange
ratio.
 Assistance in obtaining necessary approval & addressing procedural & legal
issues.
E. PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking services which only very
few merchant bankers having advantages of knowledge, skills and experience over others are able
to render satisfactorily. The corporate seek advice in respect of identification of profitable
investment opportunities in the related business areas (like forward/backward integration) or as
part of diversification process. The merchant bankers carry out detailed studies on product
demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study
may involve arrangement of a foreign collaboration, advice on technical parameters and also legal
issues.
Scope of services
Project services are needed by industrial entrepreneurs in India in the following areas: -
 Preparation of project report

 Deciding upon the financing pattern to finance the cost of the project.
 Aspects of project appraisal with financial institutions/banks.
Project report
Project report consists of technical process, location, management profile, means of
financing, reports on market surveys and market explorations. Merchant bankers
advise the clients on project preparation. Merchant bankers, on behalf of their clients,
engage technical consultants specialized in the specific area, and marketing experts to
prepare technical feasibility report and market survey reports. Merchant bankers
maintain the list of such experts approves by financial institutions and assign the
work to these experts.
Project report purpose

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Project report about the proposed activity is prepared to obtain government

approvals particularly in the following areas:
 Grant of industrial license to undertake specified industrial activity.

 Foreign investment and technology tie-up.
 Grant import license for importing raw material, plant, machinery and
equipments.
 Grant of foreign exchange allocation for import of capital goods or raw
materials, etc.
 Grant of subsidies and other concessions from the government at center or
state levels or from government sponsored agencies, etc.
F. LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term loans for
projects. Such loans may be obtained from a single development finance institution or
a syndicate or consortium as in the case of large term loans. Merchant banks can also
help corporate clients to raise syndicated loans from commercial banks.
Scope of service
Once the client company has decided about the project proposed to be undertaken, the
next step is looking for the sources wherefrom funds could be procured to implement
the project. The responsibility of locating the sources of finance, approaching these
sources by positioning in requisite prescribed applications and complying with all the
formalities involved in the sanction and disbursal of loan rests with the merchant
bankers who provide the service of loan/credit syndication.
Loan syndication in the case of domestic borrowing is undertaken with the

institutional lenders and the banks. Amongst institutional lenders the following
institutions are the main suppliers of the long- and medium-term funds with which the
merchant bankers contact, liaison and arrange loans working for and on behalf of
their clients.
All India financial institutions

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i. Industrial Finance Corporation of India (IFCI)

ii. Industrial Development Bank of India (IDBI)
iii. Us trial Credit & Investment Corporation of India Ltd (ICICI)
State level financial bodies
i. State Financial Corporations (SFCs)
ii. State Industrial Development Corporations (SIDCs)
iii. State Industrial & Investment Corporations (SIICs)
All India level investment institutions
i. Life Insurance Corporation of India (LIC)
ii. Unit Trust of India (UTI)
iii. General Insurance Corporation of India (GIC) & its subsidiary companies.
Commercial banks: Commercial banks join in consortium loan being provided by the
above institutions.
Mutual Funds & Venture Capital Funds: these funds generally invest in equity but mutual
funds contribute to the issues of Debentures/Bonds on private placement basis as well as
subscribe to public issues.
G. RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to successfully
restructure various activities, which include mergers and acquisitions, divestitures,
organization buyouts, joint venture among others. To help companies achieve the
objectives of these restructuring strategies, the merchant banker participates in different
activities at various stages which include understanding the objectives behind the strategy
(objectives could be either to obtain financial, marketing, or production benefits), and
help in searching for the right partner in the strategic decision and financial valuation of
the proposal.
H. CAPITAL ASSISTANCE

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In providing financial assistance, merchant banks offer a full understanding of all facets
of the capital markets. This includes all types of debt and equity financing available from
both the domestic and international markets.
It should be understood that interest rates are not the only definition of capital costs.
Restraints on availability, prepayment terms, and operating effectiveness can often
outweigh what might appear to be inexpensive capital with low interest rates. Too often,
capital includes costs, which force an entrepreneur or a business to undertake undesirable
actions. In the short-run, some actions might be necessary, but often in the long run are
detrimental. He also knows how to substitute one type of capital for another, sometimes
utilizing internal sources from asset repositioning or cash creation from enhancements in
working capital. He understands fully the menace versus return elements necessary to
complete the capital procurement process.
I.CORPORATE ADVISORY SERVICES
Merchant bankers offer customised solutions to solve the financial problems of their
clients. Advice is sought in areas of financial structuring (as shown in the Modern
Manufacturing case above). Merchant bankers study the working capital practices that
exist within the company and suggest alternative policies. They also advise the company
on rehabilitation and turnaround strategies, which would help companies to recover from
their current position.
J. FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a client (the exporter or
manufacturer) transfers his/her ownership of the accounts to a factor (an organization, firm).
The factor buys all the client’s outstanding invoices and takes over all the subsequent dealings
with the buyer/importer/customer. It is short-term debt financing. Here three parties are
involved
1.The factoring organization /firms

2.The manufacturer/exporter/seller

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3.The importer/customer/buyer
Role of Merchant Banker In Factoring
The merchant banker may act as factor organization with a view to earning a great amount of
commission. The factor provides the following services:
(a) Financing
(b) Advisory services if necessary
(c) Collection of bills/Account Receivable against sales proceeds.
(d) Maintenance of sales ledger
(e) Provide further if necessary
(f) Covering losses if there are any
K. ASSET SECURITIZATION
It is a process through which some inactive assets (mortgage assets) are converted into
cash/active assets. It is long-term debt financing. Here assets are converted into long-term
bonds. The whole process is done by the Special Purpose Vehicle (SPV). In this
approach, the merchant banker for issuance of security bonds against the assets with a
matching of time and terms between mortgage property and security bonds. Here the
selection of asset is generally considered on the basis of the following:
(i) Quality of assets
(ii) Certainty of repayment
(iii) Good ranking from the credit rating agency.
The process of asset securitization takes place in the following firms:
 Originating Institutions/Firm
 Special Purpose Vehicle (SPV)
 Merchant Banker (MB)

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L. FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex flow in the
country is increasing and the international markets are funding the operations of the
corporate in India. The success of any business is measured by the fund management; this
makes treasury management as a very critical finance function. Management of treasury
profit center requires a wide variety of knowledge in the area of global money markets
and financial instruments such as deposit certificates, treasury bills, forecasting, source
evaluation and cost of domestic and foreign currency funds. Treasury and risk
management ensures cost effectiveness in planning strategies in this era of deregulation.
Role of merchant banker in Forex function
The currency values, interest rates, share index and commodities affect the financial
derivatives like futures, swaps and other tools of risk management. Corporate therefore
employ well-trained professionals to manage treasury and forex functions so that they can
ensure competent management. Thus, this service is provided to Corporate through
merchant bankers. Merchant bankers assess various markets to advice Corporate or other
banks that needs currency. Merchant bankers constantly update about the policies of the
regulatory bodies, monitors the current prices, makes predictions based on the analysis of
trends etc.
M. HIRE PURCHASE SERVICE
It involves a system under which term loans for purchases of goods and services are
advanced to be liquidated in stages through a contractual obligation. The goods whose
purchases are thus financed may be consumer goods or producer goods or they may be
simply services such as air travel. Hire purchase credit may be provided by the seller
himself or by any financial institution. However, unlike in other countries, the emphasis
in India is on the provision of instalment credit for productive goods and services rather
than for purely consumer goods.

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Merchant Banker undertakes the activity of financing for hire-purchase activities. The
merchant banker looks more to the credit-worthiness and business morality of the buyer
than the value of security
N. LEASE FINANCE COMPANIES
Lease finance companies provide finance to acquire the use of assets for a stipulated
period of time without owning them. The user of the asset is known as the lessee, and the
owner of the asset is known as the Lessor. Leasing is medium-term arrangement for
finance.
Role of Merchant Banker

Merchant Bankers helps in assessing the credit risk of industrial borrowers. The
merchant bankers provide help in evaluating lease proposals. He analyse the merits and
demerits of lease finance with reference to a given proposal and leave it to their clients to
decide on the appropriate source and type of finance, thus enlarging their range of choices
and the variety of services available to them.
O. VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside management in
young, rapidly growing companies that have the prospective to develop into significant
economic contributors. Venture capital is an important source of equity for start-up
companies. Professionally managed venture capital firms generally are private
partnerships or closely-held corporations funded by private and public pension funds,
endowment funds, foundations, corporations, wealthy individuals, foreign investors, and
the venture capitalists themselves.
 Merchant Bankers assist ventures proposals of technocrats, with high technology,

which are new, and high risk. To seek assistance from venture capital funds or
companies.
 They also provide technical, financial & managerial services & help the company to
set up a track record.

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FUNCTIONS OF MERCHANT BANKING
The important function of merchant banking in India
Merchant banks advise small companies about business opportunities, government

policies, incentives and concessions available. It also helps them to take advantage of
these opportunities, concessions the functions of merchant banking are listed as follows-
 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. This finance is used for starting a new business or project or for
modernization or expansion of the business.
 Broker in Stock Exchange:
Merchant bankers act as brokers in the stock exchange. They buy and sell shares on
behalf of their clients. They conduct research on equity shares. They also advise their
clients about which shares to buy, when to buy, how much to buy and when to sell.
Large brokers, Mutual Funds, Venture capital companies and Investment Banks offer
merchant banking services.
 Project Management :
Merchant bankers help their clients in the many ways. For e.g. Advising 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

39
 Advice on Expansion and Modernization:
Merchant bankers 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, technology
upgradation, etc.
Managing Public Issue of Companies Merchant bank advice and manage the public issue
of companies. They provide following services:
Advise on the timing of the public issue.
 Advise on the size and price of the issue.

 Acting as manager to the issue, and helping in accepting applications and
allotment of securities.
 Help in appointing underwriters and brokers to the issue.
 Listing of shares on the stock exchange, etc
 Handling Government Consent for Industrial Projects.
A businessman has to get government permission for starting of the project.

Similarly, a company requires permission for expansion or modernization activities.
For this, many formalities have to be completed. Merchant banks do all this work for
their clients.
 Special Assistances to Small Companies and Entrepreneurs:
Merchant banks advise small companies about business opportunities, government

policies, incentives and concessions available. It also helps them to take advantage of
these opportunities, concessions, etc.

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 Services to Public Sector Units:
Merchant banks offer many services to public sector units and public utilities. They
help in raising long-term capital, marketing of securities, foreign collaborations and
arranging long-term finance from term lending institutions.
 Revival of Sick Industrial Units:
Merchant banks help to revive (cure) sick industrial units. It negotiates with different
agencies like banks, term lending institutions, and BIFR (Board for Industrial and
Financial Reconstruction). It also strategies and executes the full renewal package.
 Portfolio Management :
A merchant bank manages the portfolios (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.
 Corporate Restructuring:
It includes mergers or acquisitions of existing business units, sale of existing unit or

disinvestment. This requires proper negotiations, preparation of documents and
completion of legal formalities. Merchant bankers offer all these services to their clients.
 Money Market Operation :
Merchant bankers deal with and underwrite short-term money market instruments, such
as:
a. Government Bonds.
b. Certificate of deposit issued by banks and financial institutions.
c. Commercial paper issued by large corporate firms.

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d. Treasury bills issued by the Government (Here in India by RBI).
 Leasing Services:
Merchant bankers also help in leasing services. Lease is an agreement 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 rentals.
 Management of Interest and Dividend:
Merchant bankers help their clients in the management of interest on debentures / loans,
and dividend on shares. They also advise their client about the timing (interim / yearly)
and rate of dividend

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PROBLEMS OF MERCHANT BANKERS
1. SEBI guidelines have authorized merchant bankers to undertake issue related activities
only with an exception of portfolio management. These guidelines have made the
merchant bankers either to restrict their activities or think of separating these activities
from the present one and float new subsidiary and enlarge the scope of its activities.
2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization of
merchant bankers. Small but professional and specialized merchant bankers who do not
have a net worth of Rs.1 crore may have to close down their business. The entry is denied
to young, specialized professionals into merchant banking business.
3. Non co-operation of the issuing companies in timely allotment of securities and
refund of application money is another problem of merchant bankers. The guidelines
have put the responsibility on the merchant bankers. They have to seek the co-operation
of the issuing company to shoulder the responsibility.

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COMPARISON BETWEEN MERCHANT BANK &

COMMERCIAL BANKS
MERCHANT BANKS COMMERCIAL BANKS
Assist in raising capital in the form of Provide funds in the form of term loan &
equity, preference shares, syndicated loan working capital.
and working capital instruments.
Advisors not financers Financing is the main business
Do not accept the chequable deposits Demand deposit is a key feature
Mainly fees-based business Mainly Fund Based Business
Most of the works they get about Commercial banks majority business is of
management of equity issues in the term lending & bank deposits.
capacity of lead managers, underwriters,
pricing of issues, book running,
Liaisoning ability.
Being Advisors, they are closer to the Being lenders, they are more cautious,
customers and get to know risks of the evaluate risks in lending proposal and cannot
transactions properly. They work on risk afford to be grossly relationship based and
shields i.e. mitigation measures. close to the customers.

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MERCHANT BANKING: INDIAN SCENARIO
Merchant Banking activity was formally initiated into the Indian capital markets when
Grind lays Bank received the license from Reserve Bank in 1967. Grind lays which
started with management of capital issues, recognized the needs of emerging class of
entrepreneurs for diverse financial services ranging from production planning and system
design to market research. Apart from meeting specially, the needs of small-scale units it
provided management constancy services to large and medium sized companies.
Following Grind lays Bank, Citi Bank set-up its Merchant Banking division in 1970. The
division took up the task of assisting new entrepreneur and prevailing units in the
evaluation of new projects and raising funds through borrowing and issue of equity.
Management professional services were also offered. Consequent to the
recommendations of Banking Commission in1972, that Indian bank should start
Merchant Banking Division in 1972. In the initial years the SBI’s objective was to
extract corporate advice and assistance to small and medium entrepreneurs.
The economic reforms initiated by the Government since July 1991 in the files of
industry, trade and financial sector have paved the way for prompt development of the
economy. Several projects have been conceived since then and practically all the major
groups in the country that have announced their intentions to set-up mega projects in
infrastructure sector envisaging investment of thousands of crores. With several large
projects been set-up and many more on the drawing board, the demand for a complete
range of Merchant Banking services encompassing project advisory services, issue
management and financial advisory services for corporate sector has increased
considerably. This has led to a sharp growth in the Merchant Banking business in the last
2 years.

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PLAYERS IN MERCHANT BANKING
1. ENAM
ENAM was founded in1984 to provide knowledge-driven financial services at the time
when Indian economy investors faced a bewildering array of options. ENAM is the one
of the largest underwriters in India. ENAM offers promising & exciting companies the
opportunity of assessing the public market equity finances. ENAM’s long-term
association with capital markets & primary markets has provided it with deep insights of
the functioning of Indian financial institutions.
The merchant banking services provided by ENAM are: -
 Equity debt/syndication: Raising capital through a private placement of a

company’s securities is an effective & appropriate offering to a public offering.
ENAM represents the clients in the private placement of debt and equity with
institutional & high net worth investors.
 Corporate Restructuring: ENAM provides client with strategic and
practical clarifications to financial challenges. Their restructuring services
includes Mergers & Acquisitions, Takeovers, Debt restructuring, Buyers services
etc.
 ENAM also provide the seed period services, value creation services and IPO’s
advisory services which are represented below:

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2. ICICI BANK
ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are
experienced in every aspect of the business from domestic and international capital
markets advisory, to M&A advisory, Private Equity syndication, Restructuring and
infrastructure advisory. Our investment banking team, based across key cities in India and
New York, London, and Singapore consists of professionals with expertise across a range
of industries.
ICICI SECURITIES provide following services:
 Mergers and Acquisitions: - ICICI Securities Limited is amongst the first

Indian investment Banks to form a dedicated M&A practice and continues to be
a leader by providing innovative and distinctive solutions to achieve varied
objectives of the client. They offer a full range of advisory services, which
include joint ventures, mergers, acquisitions, and divestitures.
 Equity Capital Markets: - ICICI Securities Limited is at the forefront of
capital markets advisory having been involved in most major book building and
fixed price offerings over the last decade. It is amongst the foremost
underwriters of Indian equity and equity-linked offerings.
 Infrastructure Advisory: - ICICI Securities Limited has a dedicated
infrastructure vertical focused on assisting clients in identifying and capitalizing
on the opportunities thrown up by the all-pervasive flourishing in the Indian
infrastructure sector.
 Dealing with Bulls and Bears: - ICICI Securities Limited assists global
institutional investors to make the right decisions through insightful research
coverage and a client focused Sales and Dealing team. The equity group

47
leverages research and distribution reach to domestic and foreign institutional

investors in case of public offerings.
3 KOTAK SECURITIES LIMITED
Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock broking
and distribution arm of the Kotak Mahindra Group. The company was set up in 1994.
Kotak Securities is a corporate member of both The Bombay Stock Exchange and
The National Stock Exchange of India Limited. Its operations include stock broking
and distribution of various financial products - including private and secondary
placement of debt and equity and mutual funds. Currently, Kotak Securities is one of
the largest broking houses in India with wide geographical reach.
The company has four main areas of business:
 Kotak Institutional Equities: - Kotak Institutional Equities, among the top
institutional brokers in India. It mainly covers secondary market broking and the
marketing of equity offerings, including IPOs, to domestic and foreign institutional
investors.
 Structured Finance (Project Finance & Advisory Business) : -KMCC
has developed expertise in various vertical segments in the infrastructure sector
including power, oil, gas, ports, automobiles, steel & metals and hotels, by offering
structured finance solutions. Some of the transactions executed by this team include:
 Advisor to Ford on financial closure for its Car project in India.
 Advisor to one of the largest LNG projects on the Western coast of India.
 Financial advisors and loan syndications to British Gas and GAIL.
 Mergers & Acquisitions: -In the area of Mergers & Acquisitions, we provide
our clients expertise and a comprehensive set of services that help them achieve
their strategic and financial objectives. Our spectrum of services include:

48
 Divestments
 Spin-Offs / Restructuring & Joint Ventures / Strategic Alliances
4. CITIGROUP
Citigroup Corporate and Investment Banking achieve the extraordinary for our clients
around the world. No financial institution is more committed to advancing the goals of its
clients our diverse and talented staff in more than 100 countries advises companies,
governments and institutions on the best ways to realize their strategic objectives. We
create solutions for and provide the broadest possible capital and market access to
thousands of issuer and investor clients. And no institution better executes the
increasingly complex payment and cash management solutions required in today's global
economy. The features Citigroup are as follows: -
Over the years, Citigroup has established a track record of outstanding business
milestones such as Cash Management, pioneered by Citigroup in 1986 and utilized by
over 900 Corporate with through-puts totaling around $ 35 billion (8% of India's GDP).
It is India's largest foreign bank in the FX (foreign exchange) market with a 14 per
cent market share.
As the leading custodian, Citibank has over $22 billion of custody assets under
management any deal is valuation. And when the market booms, agreed valuations for
proposed M&A are thrown into disarray.

49
5 DSP MERRILL LYNCH LTD
DSP Merrill Lynch Limited (DSPML), among India's leading investment banking and brokerage
company, is a culmination of a long standing relationship between DSP Financial Consultants
Ltd., and Merrill Lynch & Co., the leading international capital raising, financial management
and advisory company. DSPML is a full-service investment bank and broking company with
leadership position in M&A, Capital
Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory services. Euro
money Magazine has ranked DSPML as the "Best Domestic Securities firm in India" for the last
four consecutive years. This Transaction heralds DSPML as a key player in the private equity
market. The service features of DSPML are as follows: -
 DSPML has consistently been rated as one of India's leaders in origination,

distribution, and trading of equity and debt securities.
 DSPML has consistently brought reputable issues to the capital markets.
 A diverse client base made up of India's most prestigious private and public
sector corporations and multinational corporations have rendered DSPML a
commanding presence in the Indian capital market.
 Through direct market's group, DSPML offers investors access to every major
initial or subsequent public offering.
 DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked
offerings across domestic and international markets. By leveraging their
extensive knowledge of local markets and global resources, they have delivered
innovative and customized solutions to their clients.

50
6.UPFC (Uttar Pradesh Financial

Corporation) Scheme for merchant banking & financial
services. Decades ago UPFC has taken a humble step for the
industrial development of U.P. by providing term loan assistance to small & medium
scale units. Since then it has acquired a matured professional approach in Industrial
Financing, several small-scale units nurtured by UPFC has groomed into big enterprises.
In order to meet the challenges of liberalized policy of the Government & Changed
economic Scenario, UPFC has started Merchant Banking & other financial Services to
serve its valued clients. UPFC, a category-I Merchant Banker with unmatched expertise
in project appraisal and term lending offers a whole gamut of Merchant Banking
Services.
1. Issue management: UPFC provides expert services to manage public issues of

the companies successfully; it has already managed Public Issues as a lead
Manager with great success.
2. Underwriting: In order to provide a protective umbrella to the public issues

of its clients, UPFC also underwrites the issue.
3. Subscription to equity share: UPFC subscribes to the equity shares

reserved under FI quota, to enable the company to market the public issue
effectively.
4. Advisory services: UPFC, with its long experience, advises its clients for
various advisory services such as capital Structuring, loan syndication etc.
5. Project certification: UPFC also certifies the projects going to capital

markets for raising funds. This is a specialized activity of the Corporation.

51
6. Other financial services: As a part of its commitment to provide

professionalized financial services to its clients, UPFC also offers Bill
Discounting, Equipment Leasing & Hire Purchase Services, Short- term loan,
Brand Equity loan, etc to meet diversified requirements of it's clients
7 JM Morgan Stanley
Investment Banking focuses on capital raising, mergers, acquisitions,
restructuring and financial advisory and private equity for Indian corporates in the
international and domestic capital markets. Through innovation and value-added services,
the firm has contributed immensely to the overall development of the capital market and
mergers and acquisitions in India. It has the merchant banking and underwriting licenses
from the Indian securities market regulator, the Securities and Exchange Board of India.
Some of the recent transactions of JM Morgan Stanley
 US$ 20MM fund raising for Nipuna Services (a BPO subsidiary of Satyam
Computer Services)
 Rs. 3,219 MM preferential allotment of equity shares/ warrants in Bajaj Auto
Finance Limited to financial investors and the promoter, Bajaj Auto Limited.
The services of JM Morgan Stanley are:
 JM Morgan Stanley has a dedicated group that regularly interacts with over 40
financial investors in India as well as overseas.
 JM Morgan Stanley offers research-based investment advisory and equity
broking services to corporates, high net-worth individuals and retail investors
across a wide range of financial products.
They are known for lead managing some of the most complex and innovative and large
equity and debt offerings in India and abroad by the Indian issuers. A robust deal-flow

52
across sectors has allowed them to build significant traction with the financial investors.
This helps in raising private equity capital for the companies.
CHAPTER NO.3:
LITRATURE REVIEW
SHARMA (2005) In his research paper studied the marketing effectiveness in merchant.
banking services in India. According to the researcher, the liberalization process India has
led to major developments in the industrial sector to make India a truly formidable and
globally competitive industrial power and consequently, the merchant banks have
emerged as an important intermediary in the financial market The study aimed to analyze
the relevance of marketing mix in the merchant banking services and to make a
comparative analysis of its effectiveness of public as well as the private sector merchant
banks. The researcher found that the ‘people’ was the most important component of
marketing mix followed by product, price, promotion, and place respectively. The results
also showed that private sector merchant banking had more effective and efficient
marketing mix as compared to public sector merchant banks. Unbalanced service mix
with the dominance of issue management, Inadequate quality of services, inadequate
distribution network and inadequate promotional measures were found to be the major
deficiencies which hindered the marketing performance of merchant banks in India.
GUPTA (2002) In his paper examined the performance of merchant banks in India on
the basis of their different positions (lead manager, co-manager, and adviser) and
different categories of different ownership (public, private and foreign). The researcher
selected 104 working merchant bankers out of 164 registered with SEBI and covered the
period from 1997-98 to 2001-02. The researcher concluded that the private sector
merchant banker performed well as compared to public sector and foreign merchant

53
banks both as regards to public issues managed and the amount of funds raised. Although,
public sector and foreign banks performed identically as regards total number of public
issues managed but the performance of foreign merchant bankers was better than that of
the public sector banks in terms of funds raised. The author pointed out that merchant
banking was mainly restricted to the activity of issue management and other activities
such as underwriting, loan syndication, investment counseling and portfolio management
were still not much emphasized. The researcher’s recommendations included the need for
providing quality services functional cum expert oriented organization and a team of
specialist.
Aggarwal (1995)5 traced the origin, growth and history of merchant banking in India and
abroad. The objectives of the study included the analysis of organizational structure,
management pattern and performance evaluation of SEBI registered category I merchant
bankers during the period 1989- 90 to 1993-94. The study found that merchant banking
institutions lack skill development programmer for training the staff, up to date
information and more concentration of decision making power. Despite this, the study
highlighted the important role of merchant bankers in the growth of capital market and
mobilization of resources from public through issue management activities. The author
recommended for stopping the turnover of personnel in merchant banking divisions of
nationalized banks due to transfers, who have up to date market information and adopt
professional attitude for providing services as merchant bankers.

54
CHAPTER NO.4:
DATA ANALYSIS, INTERPRETATION AND

PRESENTATION.
To know the role of Merchant Banking services in our economy.
The role of merchant bank in India is as Promoter, Advisor, Rehabitator, Managerial

economist, corporate advisor Financial export. These banks act as a sort of intermediary
between capital issuers and the buyers of the securities. The Necessity of Merchant
Banking Services, the economy of the country is often afflicted with different
unpredictable conditions like inflation, unemployment, stagnation and so forth. The need
to sustain a steady growth is necessary for corporations and individuals which is possible
only with a long-term strategy and financial options. The merchant banking services
provide solutions and financial options. These banks provide advisor services to clients
based on a particulars fee. They also provide other financial services to mergers and
clients. It is the only financial institute that invests its capital in the client’s company. It
acts as an intermediary between those who possess capital and those who need capital. To
help their clients with a number of financial options, the merchant banking services
operate in a number of countries all over the world. In this manner the clients have the
opportunity to survey the different financial options to ensure better growth.
To study the duties and responsibilities of Merchant bank.
A merchant banker in the conduct of his business has to observe high standards of
integrity and fairness in all his dealings with his clients and other merchant bankers.

55
Merchant bank has to render at all times high standards of service, exercise due diligence,
ensure proper care and exercise independent professional judgement.
Merchant bank cannot make any statement or become privy to any act, practice unfair
competition, which is likely to be harmful to the interest of other merchant bankers.
Merchant banks should not make any exaggerated statement, whether oral or written, to
the client either about his qualification or his capability to render certain services or his
achievements in regard to services rendered to others clients.
To understand the problems faced by Indian merchant bankers.
The problem with merchant banking is not allowing youthful professionals into merchant
banking business. Even though merchant banking is vast it needs more acceptable
expertise to provide more services. Some problems faced by Indian merchant bankers.
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 setup different companies for different
purposes.
Malafide practices: India corporate culture is bettering, but still many corporates have
excessively friendly approach. Allotment of shares, tampering with project appraisal
report to bankers is common. Corporate like to use merchant bankers for malafide
intentions.
Regulations: Though regulations are much better now, there is still scope for further
improvement. Merchant bankers can be made more accountable and professional
qualification focused 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.
To analyse the recent development in merchant banking in India.

56
India has contributed to the merchant banking system. They acquiring more foreign
investors, disinvesting from the government, and introducing new financial instruments
to assist in work. The foreign investors both in the form of portfolio investment and
through foreign direct investments are venturing in Indian economy. It is increasing the
scope of merchant bankers in many ways. Disinvestment in the government sector in the
country gives a big scope to the merchant banks to function as consultants. New financial
instruments are introduced in the market time and again. This basically provides more
and more opportunity to the merchant banks. The Mergers and corporate restructuring
along with Memorandum of understanding and Memorandum of association are giving
immense opportunity to the merchant bankers for consultancy jobs.
To examine the role of merchant banking in promoting capital market

in India.
Merchant bank is a financial institution primarily engaged in offering financial services

and advice to corporations and to wealthy individuals. The term can also be used to
describe the private equity activities of banking. Merchant bank invests its own capital in
a client company.

57
CHAPTER NO,5:
CONCLUSION
Merchant banker plays a vital role in canalizing the financial surplus of the society into
productive investment avenues. Hence before selecting a merchant banker, one must
decide what the services for which he is being approached are. Selecting the right
intermediary who has the necessary skills to meet the requirements of the client will
ensure success.
It can be said that this project helped me to understand every detail about Merchant
banking and in future how it’s going to get emerged in the Indian economy. Hence,
Merchant Banking can be considered as essential financial body in Indian financial
system.
Market development is 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 essential to remove
the trading malpractice and structural inadequacies prevailing in the market, and provide
the investors an organized, well regulated market place in future.
Merchant bankers act as a critical link between the corporate that are intended to raise
funds and the investors who are interested to invest in securities industry. Beside issue
management, the Merchant Bankers are also undertake the activities like underwriting
connected with the public issue management, Managing/advising on International
offerings of Debt/Equity Bonds And other instruments, Private placement securities,
Primary or Satellite dealership of government securities, Corporate Advisory Services
related to securities market(e.g., Takeovers, Acquisitions, Disengagement), Stock-

58
Broking, Advisory Services for projects, Syndication of rupee term loans and
International Advisory Services.
CHAPTER 6
BIBLIOGRAPHY AND WEBLIOGRAPHY
BOOKS REFFERED
 Merchant Banker – H.R. SUNEJA
 Merchant Banking & Financial Services – Himalaya Publishing House
Websites
www.scribd.com/doc/28076595/Merchant-Banking
http://www.investopedia.com
http://www.wallstreetmojo.com
www.businessmanagemnetideas.com
http://corporatefinanceinstitute.com
http://indianmoney.com

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS

MERCHANT BANKING IN INDIA

MERCHANT BANKING IN INDIA Page |1

authorities in those countries. Thus, the second principal element of Merchant

Dictionary meaning of ‘merchant bank’ refers to an organization that

Merchant Banking is a combination of Banking and consultancy

DEFINITION OF MERCHANT BANKING

 According to Random House Dictionary, “merchant bank is an organization that

MERCHANT BANKING IN INDIA Page |2

HISTORY OF MERCHANT BANKING

MERCHANT BANKING IN INDIA Page |3

EVOLUTION & EMERGENCE OF MERCHANT

The progress of any economy mainly be contingent on the efficient

MERCHANT BANKING IN INDIA Page |4

SCOPE FOR GROWTH OF MERCHANT BANKING IN

 ENTRY OF FOREIGN INVESTORS

 CHANGING POLICY OF FINANCIAL INSTITUTIONS

 DEVELOPMENT OF DEBT MARKET

MERCHANT BANKING IN INDIA Page |5

 INNOVATIONS IN FINANCIAL INSTRUMENTS

The Indian capital market has witnessed innovations in the introduction of

The government raised Rs. 2000 crores through disinvestment of equity

MERCHANT BANKING IN INDIA Page |6

MERCHANT BANKING IN INDIA

In India prior to the enactment of Indian Companies Act, 1956, managing

To begin with, merchant banking services were offered along with

MERCHANT BANKING IN INDIA Page |7

OBJECTIVES OF THE STUDY:

1.To know the role of merchant banking services in our economy.

2.To study the duties and responsibilities of merchant bank.

3.To understand the problems in merchant banking.

4.To analyze the recent development in merchant banking in India.

NEED & IMPORTANCE IN INDIA

MERCHANT BANKING IN INDIA Page |8

MERCHANT BANKING IN INDIA Page |9

SCOPE OF MERCHANT BANKING IN INDIA

3. Banking –policies: RBI prefers that commercial banks do not indulge in

MERCHANT BANKING IN INDIA Page |

4. Corporate culture: Corporate can-do project appraisal, strategic restructuring

5. Corporate dynamics: More happening in business gives more opportunities

GROWTH OF MERCHANT BANK IN INDIA

MERCHANT BANKING IN INDIA Page |

of investing public, secondly, merchant banking activity became attractive to banks

Organizational set up of Merchant Bankers in India

In India a common organizational set up of merchant bankers to operate is in the

Where merchant banks function as an independent wing or as subsidiary of various

MERCHANT BANKING IN INDIA Page |

Developments in Merchant Banking Establishment:

 Setting up of Banks Subsidiaries

 Re-organization of Private Firm.

 Securities and Exchange Board of India (SEBI)

 Discount and Finance House of India (DFHI)

 Credit Rating Information Services of India Ltd. (CRISIL)

 Stock-Holding Corporation of India Ltd. (SHC)

Development -1: Setting up of Banks Subsidiaries:

MERCHANT BANKING IN INDIA Page |

Development -2: Re-organization of Private Firms: Expecting tough

Development -3: Establishment of SUA

Development -4: Securities and Exchange Board of India (SEBI):

Development – 5: Discount and Finance House of India (DFHI):

MERCHANT BANKING IN INDIA Page |

Development – 6: Credit Rating Information Services of India Ltd.

Development – 7: Stock-Holding Corporation of India Ltd. (SHC):