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ORIGIN OF MERCHANT BANKING

(EVOLUTION)
In banking a merchant bank is a traditional term for an
investment bank. The so called merchant banks, were in fact
the original ‘banks’.
These were invented in the middle ages by Italian grain
merchants.
Merchant bankers were individuals or banking houses whose
major objective was to provide capital for commodity traders,
cargo owners, and buying, selling and shipping of goods. They
carried out their lending operations from a bench, which in
Italian term was known as ‘banco’. Thus the merchant banking
came into existence. Later on, the centre of merchant banking
operations was shifted from Italy to Amsterdam and thereafter
to London.
INTRODUCTION
Section 2(e) of SEBI Act, 1992 defines
merchant banker as ‘any person who is
engaged in the business of issue management
either by making arrangements regarding
selling, buying, or subscribing to securities as
manager, consultant, adviser or rendering
corporate advisory service in relation to such
issue management’.
Merchant Banks - Concept
 There is no statutory or any authoritative definition for the
term Merchant Banking. For many, it just means
management of capital issues of companies. Some confuse
this with investment banking and an issue house. Yet
another group of persons mean it to what a merchant banker
does. In this situation, let us try to settle for a workable
definition of this term.

 Merchant banking… is the financial intermediation that


matches the entities that need capital and those that have
capital. It is a function that facilitates the low of capital in
the market.
Characteristics
A merchant bank should contain the following eleven
characteristics:
 High proportion of decision makers as a percentage of total staff.

 Quick decision process.

 High density of information.

 Intense contact with the environment.

 Loose organizational structure.

 Concentration of short and medium term engagements.

 Emphasis on fee and commission income.

 Innovative instead of repetitive operations.

 Sophisticated services on a national and international level.

 Low rate of profit distribution.

 High liquidity ratio.


Banking and Finance - Overview

Financial
Services

Commercial Investment Advisory


Insurance
Bank Services Services

• Private banking • Asset • Insurance • Stock brokers


Management Brokerage (private client
• Investment
services) and
Banks • Hedge Fund • Insurance
discount brokers
Managers Underwriting
• Bank cards
• Custody services • Reinsurance
• Credit card
machine services
and networks
MERCHANT BANKING Vs COMMERCIAL BANKING
Commercial banking and merchant banking both involve
the provision of financial services and advice. Merchant
banking, however, often focuses on investing a
depositor’s assets in a finance portfolio and managing
these investments. Merchant banks are commonly called
investment banks in the United States. Apart from
investing and managing the assets of wealthy clients,
merchant banks also offer counsel and advice to large
corporations
Commercial banking is also sometimes defined as the
provision of banking services such as checking and loans
to large businesses, as distinguished from individual
citizens. In this case, banking provided to individuals is
referred to as retail banking
 Merchant Banking Vs Investment Banking

There is a thin difference between these two


 An investment banker does the following
 Selling issues of securities of companies

 Underwriting functions

 Helps in mergers and acquisitions

 Investment advises

 Finding buyers for private placement

 Dealing in securities

 Hence, similarities between MB and IB. Generally,


investment advises and dealing in securities are not
performed by MB
Merchant Banking in India
 Grindlays Banks-1967
 Management of capital issue
 Production planning, system design to market research
 Management consultancy

 Citibank-1970

 SBI-1972
SEBI Merchant Banking Regulations
Categorization
 Category I to act as lead manager and carry on any activity
of the issue management, including preparation of
prospectus and other information relating to the issue,
determining financial structure, tie up of financiers and final
allotment and refund and refund of the subscription and to
act as a adviser ,consultant, manager, underwriter, portfolio
manager
 Category II : to act as adviser ,consultant, co-manager,
underwriter, portfolio manager
 Category III : to act as underwriter , adviser and consultant
to an issue
 Category IV : to act only as advisor or consultant to an issue
Ranking of Merchant Banking in India:
Merchant Banker OE FSS QPS QM INN
ICICI Securities 4.0 4.0 4.2 3.8 4.3
IDBI 4.2 3.2 4.5 4.0 4.8
SBI Caps 4.4. 3.9 4.6. 6.7 5.2
DPS 6.1 5.7 6.0 6.0 5.3
IFCI 6.1 5.7 6.0 6.0 6.3
Bank of Baroda 6.7 6.5 6.7 6.6 6.8
Jardine Fleming 5.8 6.2 5.9 5.0 5.5
JM Finance 6.0 6.5 5.5 5.9 5.4
ENAM 6.3 6.8 6.4 6.3 6.2
PNB Caps 6.8 6.8 6.7 6.8 6.8

Note: OE: Overall Excellence; FSS: Financial Soundness ; QPS: Quality Product/Service;
QM: Quality Management; INN: Innovativeness.
Capital Adequacy Requirement
 SEBI has prescribed the following net worth
requirements for merchant bankers. The total paid
up capital and free reserves is considered as net
worth
 Category Minimum Amount of Net Worth
I Rs 5,00,00,000
II Rs 5,00,000
III Rs 20,00,000
IV Rs Nil
REGULATORY FRAMEWORK
 The merchant banking activity in India is governed by SEBI (Merchant Bankers)
The merchant banking activity in India is governed by SEBI (Merchant Bankers)
Regulations, 1992. Registration with SEBI is mandatory to carry out the business of
merchant banking in India. An applicant should comply with the following norms:
i) The applicant should be a corporate body.
ii) The applicant should not carry on any business other than those connected with
the securities market.
iii) The applicant should have necessary infrastructure like office space, equipment,
manpower, etc.
iv) The applicant must have at least two employees with prior experience in
merchant banking.
v) Any associate company, group company, subsidiary or interconnected company
of the applicant should not have been a registered merchant banker.
vi) The applicant should not have been involved in any securities scam or proved
guilt for any offence.
vii) The applicant should have a minimum net worth Rs50 million.
FAQ
 Q. Is it mandatory for a merchant banker to register with
the SEBI?
 Q. Who is eligible to obtain registration as a merchant
banker? A
 Q. What are the various categories for which registration
can be obtained? Q. What is the capital requirement for
carrying on activity as merchant banker?
 Q. What is the procedure for getting registration?
 Q. What is the registration fee payable to SEBI?
 Q. What is the validity period of certificate of registration?
 Q. How to renew the certificate?
 Q. What is the renewal fee payable to SEBI?
 Q. What is the consequence of non-registration or failure
to renew registration?
Services of merchant bankers

 The services provided by merchant bankers


includes management of mutual funds, public
issues, trusts, securities and international
funds. It involves dealing with the corporate
clients and advising them on various issues
like- mergers, acquisitions, public issues, etc.
Functions of merchant bankers include:
 i) Management of debt and equity offerings. This forms the main
function of the merchant banker. He assists the companies in raising
funds from the market. The undergoing tasks include instrument
designing, pricing the issue, registration of the offer document,
underwriting support, marketing of the issue, allotment and refund
and listing on stock exchanges.
ii) Placement and Distribution. The merchant banker helps in
distributing various securities like equity shares, debt instruments,
mutual funds, insurance products, and commercial paper, to name a
few. The distribution network of the merchant banker can be
classified as institutional and retail in nature. The institutional
network consists of mutual funds, foreign institutional investors,
private equity funds pension funds, financial institutions, etc.
iii) Corporate advisory services. Merchant bankers offer customized
solutions to their clients' financial problems. Financial structuring
includes determining the right debt-equity ratio and the framing of
appropriate capital structure theory.
 iv) Project advisory services. Merchant bankers help their clients in
various stages of the project undertaken by the clients. They assist
them in conceptualizing the project idea in the initial stage. Once the
idea is formed, they conduct feasibility studies to examine the
viability of the proposed project.

v) Loan Syndication. Merchant bankers arrange to tie up loans for


their clients. This takes place in a series of steps. Firstly, they analyze
the pattern of the client's cash flows, based on which the terms of the
borrowings can be defined. Then the merchant banker prepares a
detailed loan memorandum, which is circulated to various banks and
financial institutions and they are invited to participate in the
syndicate. The banks then negotiate the terms of lending on the basis
of which the final allocation is done.

vi) Providing venture capital financing. Merchant bankers help


companies in obtaining venture capital financing for financing their
new and innovative strategies
Scope of merchant banking in India
 Merchant banking activities help in channelizing the
financial surplus of the general public into productive
investment avenues. They help to coordinate the activities
of various intermediaries to the share issue such as the
registrar, bankers, advertising agency, printers,
underwriters, brokers, etc. and to ensure the compliance
with rules and regulations governing the securities market.
This being the era where mergers and acquisitions are hot,
the scope of merchant banking has grown to a large extent.
OUTLOOK MONEY NEWS
 Best Merchant BankerWinner SBI Capital Markets The
investment banking subsidiary of State Bank of India, SBI
Caps is an old player in the capital market, going back to the
pre-liberalisation days of 1986. Starting off with merchant
banking and project appraisals, it soon expanded its range of
activities. It got a boost in 1997 when Asian Development
Bank acquired a 13.8 per cent stake. SBI Caps offers services
in the broad areas of mergers and acquisitions, project
advisory, structural finance, and capital markets. In M&A, for
instance, it offers advice on privatisation, business valuation,
and restructuring. In the capital markets, it handles public and
rights offers, private placements and buybacks, while ‘project
advisory’ involves handling core sectors such as power and
telecom. It has also been exploring new avenues like
securitisation.
 We evaluated SBI Caps purely on the performance of its merchant
banking division, restricted to the public offerings it handled between
July 2003 and June 2004. SBI Caps has not disgraced its lineage,
beating the likes of ICICI Securities and Kotak Mahindra to the top
spot.Merchant banks were ranked on parameters like number and
quality of issues handled, and post-IPO returns to investors. Another
factor was the number of IPOs whose stock prices dipped below offer
price vis-a-vis the number of IPOs the merchant bank handled: the
lesser this percentage, the higher the score.

 Runner-up Kotak Mahindra CapitalIt may have lost out to SBI


Caps in the awards stakes but it’s not without reason that Kotak
Mahindra Capital had the mandate to manage 13 equity issues
(against SBI Caps’ 8) in the year to 30 June 2004–among them
several high-profile ones too, such as the ONGC, Biocon, and Infosys
ADR offerings. It garnered Rs 19,643 crore from 20 issues between
July 2001 and June 2004, which is a measure of its pedigree.
However, one of the critical counts on which Kotak lost out to SBI
Caps was the average post-listing returns from the issues it had
managed.
CANARA BANK
 Canara Bank is also one of the leading Merchant Bankers in India, offering
specialised services to Banks, PSUs, State owned Corporations, Local Statutory
bodies and corporate sector.
We are SEBI registered Category I Merchant Banker / Underwriter to carry on Issue
Management (Public / Rights / Private Placement Issues), Underwriting,
Consultancy and Corporate Advisory Services etc.
We also hold SEBI registration Certificate to act as "Bankers to an Issue" with
network of exclusive Capital Market Service Branches to handle "Capital Market"
related assignments.
We undertake "project appraisals" with resource raising plans from Capital Market/
Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential
Investors.
Our uniqueness is extending services under single window concept covering the
following areas:

 Merchant Banking
 As leading Merchant Bankers in India, we have associated with issues
ranging from Rs.1 crore to Rs.1500 crores, involving various types of
industries, banks, statutory Bodies etc. and have an edge in handling
Private Placement issues – both retail & HNIs.
SPECTRUM OF SERVICES :

 Equity Issue (Public/Rights) Management

 Debt Issue Management

 Private Placements

 Project Appraisals
 Monitoring Agency Assignments

 IPO Funding
Security Trustee Services

 Agriculture Consultancy Services

 Corporate Advisory Services

 Mergers and Acquisitions Buy Back Assignments


 Share Valuations
 ISSUE MANAGEMENT SERVICES :

 Project Appraisal Capital structuring

 Preparation of offer document Formalities with SEBI / Stock


Exchange / ROC etc.,

 Underwriting Promotion /Marketing of Issues

 Collecting Banker / Banker to an issue Post Issue


Management

 Refund Bankers Handling of Dividend Warrant/Interest Warrant


Payments
Debenture Trusteeship