Merchant Banking

Merchant Banker (MB) is any person who is engaged

in the business of issue management through –

1) making arrangement in respect of selling

securities;
2) making arrangement for buying / subscribing to
securities;
3) acting as a manager / consultant / advisor in
respect of issue of securities.
 Merchant Banker renders the following services:
• Determining the composition of capital structure (type of
securities to be issued).
• Drafting of offer documents (prospectus) and application forms.
• Compliance with procedural formalities relating to issue of
securities.
• Appointment of registrars to deal with share application and
transfer.
• Compliance with listing formalities.
• Arrangement of underwriting.
• Placing of issues and determining allocation of securities.
• Selection of brokers and bankers to the issue, publicity and
advertising agent.
 Merchant Bankers fall under four categories:

Category I MB acts as issue manager, adviser,

consultant, underwriter and Portfolio
Manager
Category II MB acts as adviser, consultant, underwriter
and Portfolio Manager.

Category III MB acts as adviser, consultant and

underwriter to an issue.

Category IV MB acts as adviser or consultant to an

issue.
Functions of Merchant Banker:

1) Promotional Services
2) Project Financing
3) Management of Public Issues
4) Investment Advice
5) Portfolio Management
6) Stock Exchange Operations
7) International Services
8) Money Market Activities
 SEBI & Merchant Banking

The SEBI Act, 1992 provides for rules and

regulations for MB. The SEBI Act classified
MBs into 4 categories as mentioned earlier. All
MBs are required to have compulsory
registration with SEBI to carry out their
activities. Each category of MB is required to
have minimum net worth as prescribed by the
SEBI which is as follows:
Category of MB Minimum Net Worth
I At least Rs.1 Crore

II At least Rs.50Lakh

III At least rs.20Lakh

IV Not prescribed
 Only categories I, II and III are permitted to
take up underwriting business. The
underwriting is limited to 5% of the public
issue or Rs.25 Lakh which ever is less.
Underwriting of capital issue is also subject to
the limit that outstanding commitment of any
such MB does not exceed, at any point of time,
5 times of its net worth.
(i.e., paid up capital + free reserve excluding
revaluation reserve).