28076595 Merchant Banking in India Project

Merchant Banking in India

MERCHANT BANKING

INTRODUCTIONIn attracting public savings, merchant bankers play a vital role as specialized

agencies. The resources raising functions remains to be the primary business

of a merchant banker. The primary market holds the key to rapid capital

formation, growth in industrial productions and exports. There has to be

accountability to the end use of funds raised from the market. The increase

in the number of issues and amount raised the number of merchant bankers.

Therefore, the field became highly competitive market where it requires a

specialized skill in handling the situation. The merchant bankers have a

social responsibility to in building an industrial structure in India.

Merchant bankers assist corporate in raising capital. They assist in issue of

Shares, syndicating loans, public issue of debentures. They do not provide

funds.

They only assist. They also actively arrange working capital, appraisal

Projects scrutinize & persuade merger proposals.

In BRITAIN merchant bankers & investment bankers are synonymous.

In the U.S., Merchant bank means as investment bank which is well-

equipped to handle multinational corporations.

1


In INDIA merchant bankers is a body corporate who carries on any activity

of the issue management, which consist of preparing prospectus & other

information relating to the issue. Merchant banks in India are not allowed to

conduct any business other than that related to securities market. There is no

official category in investment banking.

DEFINITION:

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

offering financial services and advice to corporations and wealthy

individuals on how to use their money. The term can also be used to

describe the private equity activities of banking.

According to Cox, D. merchant banking is defined as, “merchant banks are

the financial institutions providing specialist services which generally

include the acceptance of bills of exchange, corporate finance, portfolio

management and other banking services”.

The Notification of the Ministry of Finance defines a merchant banker as,

“any person who is engaged in the business of issue management either

by making arrangements regarding selling, buying or subscribing to

securities as manager, consultant, advisor or rendering corporate

advisory service in relation to such issue management”.

In short, merchant bankers assist in raising capital and advice on related

issues.

2

http://en.wikipedia.org/wiki/Private_equity

http://en.wikipedia.org/wiki/Bank


Merchant Bank

A merchant bank deals with the commercial banking needs of international

finance, long term company loans, and stock underwriting. A merchant bank

does not have retail offices where one can go and open a savings or checking

account. A merchant bank is sometimes said to be a wholesale bank, or in

the business of wholesale banking. This is because merchant banks tend to

deal primarily with other merchant banks and other large financial

institutions.

The most familiar role of the merchant bank is stock underwriting.

A large company that wishes to raise money from investors through the

stock market can hire a merchant bank to implement and underwrite the

process. The merchant bank determines the number of stocks to be issued,

the price at which the stock will be issued, and the timing of the release of

this new stock. The merchant bank files all the paperwork required with the

various market authorities, and is also frequently responsible for marketing

the new stock, though this may be a joint effort with the company and

managed by the merchant bank. For really large stock offerings, several

merchant banks may work together, with one being the lead underwriter.

3

http://www.wisegeek.com/what-is-an-underwriter.htm

http://www.wisegeek.com/what-is-paperwork.htm

http://www.wisegeek.com/what-is-the-stock-market.htm

http://www.wisegeek.com/what-is-wholesale-banking.htm

http://www.wisegeek.com/what-is-a-checking-account.htm

http://www.wisegeek.com/what-is-a-checking-account.htm

http://www.wisegeek.com/what-is-underwriting.htm


By limiting their scope to the needs of large companies, merchant banks can

focus their knowledge and be of specific use to such clients. Some merchant

banks specialize in a single area, such as underwriting or international

finance.

Many of the largest banks have both a retail division and a merchant bank

division. The divisions are generally very separate entities, as there is very

little similarity between retail banking and what goes on in a merchant bank.

Although your life is probably affected every day in some way by decisions

made in a merchant bank, most people reading this article are unlikely ever

to visit or deal directly with a merchant bank. Merchant banks operate

behind the scenes and away from the spotlight.

4


Role of Merchant Banker

The role of merchant banker is dynamic in the wake of diverse nature

of merchant banking services. Merchant banker’s dynamism lies in

promptly attending to the corporate problems and suggest ways and means

to solve it. The nature of merchant banking services is development oriented

and promotional to help the industry and trade to grow and survive.

Merchant banker is, therefore, dedicated to achieve this objective through

his dynamism. He is always awake to renew his skills, develop expertise in

new areas so as to equip himself with the knowledge and techniques to deal

with emerging new problems of corporate business world. He has to keep

pace with the changing environment where government rules, regulations

and politics affecting business conditions frequently change; where science

and technology create new innovations in production processes of industries

envisaging immediate renovations, diversifications, modernizations or

replacements of existing plant and machinery or other equipments putting

new demands for finances and necessitating overhauling of the capital

structure of the firms. Merchant banker has to think and devise new

instruments of financing industrial projects. He has to assume wider

responsibilities of saving industrial units from going sick and guiding

industries to be setup in industrially backward areas to eliminate regional

imbalances in industrial development of the country.

5


He has to guide the wider section of the community possessing surplus

money to invest in corporate securities and other productive investment

channels. He has to help the industry in different forms to ensure that it runs

risk free and devoid of uncertainty by assisting the promoters with his

knowledge and skills to resolve the problems being faced by them. He has to

watch the interest and win over the confidence of the government, its

agencies, along with the entrepreneurs, the investors and the whole

community. He must bridge the communication gap between different

sections and resolve the problem being faced in different areas concerned

with the business world. To discharge the above role, a merchant banker has

to be dynamic.

In the days ahead, merchant bankers have very significant role to play

tuning their activities to the requirements of the growth pattern of the

corporate sector, the industry and the economy as a whole which is, in

it, a challenging task and to meet these challenges merchant bankers

will have to be more vigorous and strategic in playing their role. They

will have also to adopt new ways and means in discharging their role.

6


The growth of Merchant banking in India

Formal merchant activity in India was originated in 1969 with the merchant

banking division setup 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. Following Grindlays Bank, Citibank set up

its merchant banking division in 1970.The division took up the task of

assisting new entrepreneurs and existing units in the evaluation of new

projects and raising funds through borrowing and equity issues.

Management consultancy services were also offered. Merchant bankers are

permitted to carry on activities of primary dealers in government securities.

Consequent to the recommendations of Banking Commission in 1972, that

Indian banks should offer merchant banking services as part of the multiple

services they could provide their clients, State Bank of India started the

Merchant Banking Division in 1972. In the initial years the SBI’s objective

was to render corporate advice and assistance to small and medium

entrepreneurs.

The commercial banks that followed State Bank of India were Central Bank

of India, Bank of India and Syndicate Bank in 1977.Bank of Baroda,

Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of

India, United Commercial Bank, Punjab National Bank, Canara Bank and

Indian Overseas Bank in late ‘70s and early ‘80s. Among the development

banks, ICICI started merchant banking activities in 1973 followed by IFCI

(1986) and IDBI (1991).

7


Organizational setup of merchant bankers in India

In India a common organizational setup of merchant bankers to operate is in

the form of divisions of Indian and foreign banks and financial institutions,

subsidiary companies established by bankers like SBI, Canara Bank, Punjab

National Bank, Bank of India, etc. Some firms are also organized by

financial and technical consultants and professionals. Securities and

Exchange Board of India has divided the merchant bankers into four

categories based on their capital adequacy. Each category is authorized to

perform certain functions. From the point of organizational setup India’s

merchant banking organizations can be categorized into four groups on the

basis of their linkage with parent activity. They are:

(A) Institutional Base

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

various private/Central Governments/State Governments financial

institutions. Most of the financial institutions in India are in public sector

and therefore such setup plays a role on the lines of government priorities

and policies.

(B) Banker Base

These merchant bankers function as division/subsidiary of banking

organization. The parent banks are either nationalized commercial bank or

the foreign banks operating in India. These organizations have brought

8


professionalism in merchant banking sector and they help their parent

organization to make a presence in capital market.

(C) Broker Base

In the recent past there has been an inflow of qualified and professionally

skilled brokers in various stock exchanges of India. These brokers undertake

merchant banking related operations also like providing investment and

portfolio management services.

(D) Private Base

These merchant banking firms are originated in private sector. These

organizations are the outcome of opportunities and scope in merchant

banking business and they are providing skill-oriented specialized services

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

independently or through some collaboration with their Indian counterparts.

Private sector merchant banking firms have come up either as the sole

proprietorship or public limited companies. Many of these firms were in

existence for quite some times before they added a new activity in the form

of merchant banking services by opening new divisions on the lines of

commercial banks and All India Financial Institutions.

9


Requirements for setting up a merchant banking outfit

1. Formation of the Business Organization

SEBI act, 1992 does not prescribe any specific form of business

organization to carry on the activities as merchant banker. However, the

types of organizations are listed below:

a. Sole proprietorship

b. Partnership firm

c. Hindu Undivided Family (HUF)

d. Corporate Enterprises

e. Co-operative Society

Generally it is preferred that the Merchant Banking outfit be a registered

company. Merchant Banks are generally setup as subsidiary companies of

banks (Public or Private). For example, SBI caps, ICICI Securities etc.

2. Adoption of a viable business plan

All the basic tests required to find out whether the business to be undertaken

is viable or not are also applicable to a Merchant Banking setup. Capital

adequacy, profitability, growth opportunities and current market size are

some of the factors which need to be looked into.

10


3. Registration of Merchant Bankers

a. Application for grant of certificate

An application for grant of a certificate needs to be made to SEBI .

The application can be made for any one of the following categories of the

merchant banker namely:-

Category I, that is –

(i) to carry on any activity of the issue management, which will inter-alia

consist of preparation of prospectus and other information relating to the

issue, determining financial structure, tie-up of financiers and final allotment

and refund of the subscription; and

(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.

Category II, that is, to act as adviser, consultant, co- manager,

underwriter, portfolio manager;

Category III, that is to act as underwriter, adviser, consultant to an

issue;

Category IV, that is to act only as adviser or consultant to an issue.

To carry on the activity as underwriter or portfolio manager a separate

certificate of registration needs to be obtained from SEBI.

11


b. Application to conform to the requirements

The application should conform to all the requirements under the SEBI

guidelines, otherwise it may be rejected.

c. Furnishing of information, clarification and personal

representation

The Board may require the applicant to furnish further information or

clarification regarding matters relevant to the activity of a merchant banker

for the purpose of disposal of the application. The applicant or its principal

officer may appear before the Board for personal representation.

d. Consideration of application

The Board shall take into account for considering the grant of a certificate,

all matters, which are relevant to the activities relating to merchant banker

and in particular the applicant complies with the following requirements,

namely: -

the applicant shall be a body corporate other than a non- banking

financial company

the merchant banker who has been granted registration by the Reserve

Bank of India to act as a Primary or Satellite dealer may carry on such

activity subject to the condition that it shall not accept or hold public deposit

the applicant has the necessary infrastructure like adequate office

space, equipments, and manpower to effectively discharge his activities

the applicant has in his employment minimum of two persons who

have the experience to conduct the business of the merchant banker

12


a person directly or indirectly connected with the applicant has not

been granted registration by the Board;

the applicant fulfils the capital adequacy requirement is as follows:

The capital adequacy requirement should not be less than the net worth of

the person making the application for grant of registration. The networth

shall be as follows,

Category Minimum Amount

Category I Rs. 5, 00, 00, 000

Category II Rs. 50, 00, 000

Category III Rs. 20, 00, 000

Category IV Nil

the applicant, his partner, director or principal officer is not involved

in any litigation connected with the securities market which has an adverse

bearing on the business of the applicant and have not at any time been

convicted for any offence involving moral turpitude or has been found guilty

of any economic offence

the applicant has the professional qualification from an institution

recognised by the Government in finance, law or business management

grant of certificate to the applicant is in the interest of investors.

13


e. Procedure for Registration

The Board on being satisfied that the applicant is eligible shall grant a

certificate. On the grant of a certificate the applicant shall be liable to pay

the fees as prescribed.

f. Payment of fees and the consequences of failure to pay fees

Every applicant eligible for grant of a certificate shall pay such fees in such

manner and within the period specified.

Where a merchant banker fails to pay the Annual fees as provided in

Schedule II, the Board may suspend the registration certificate, whereupon

the merchant banker shall cease to carry on any activity as a merchant

banker for the period during which the suspension subsists.

The Merchant Bank can commence business on acquisition of a Certificate

of Registration from the SEBI after completion of the above mentioned

formalities.

14


Main Objectives Of Merchant Bankers

Merchant bankers render their specialized assistance in achieving the

main objectives which are presented below:

1. To carry on the business of merchant banking, assist in the capital

formation, manage advice, underwrite, provide standby assistance, securities

and all kinds of investments issued, to be issued or guaranteed by any

company, corporation, society, firm, trust person, government, municipality,

civil body, public authority established in India.

2. The main object of merchant banker is to create secondary market for

bills and discount or re-discount bills and acts as an acceptance house.

3. Merchant banker’s another objective is to set up and provide services

for the venture capital technology funds.

4. They also provide services to the finance housing schemes for the

construction of houses and buying of land.

5. They render the services like foreign exchange dealer, money

exchange, and authorized dealer and to buy and sell foreign exchange in all

lawful ways in compliance with the relevant laws of India.

6. They will invest in buying and selling of transfers, hypothecate and

deal with dispose of shares, stocks, debentures, securities and properties of

any other company.

15


Obligations and Responsibilites

Merchant bankers have the following obligations and responsibilities.

1. Merchant banker should maintain proper books of accounts, records

and submit half yearly/annual financial statements to the SEBI within

stipulated period of time.

2. No merchant banker should associate with another merchant banker

who is not registered in SEBI.

3. Merchant bankers should not enter into any transactions on the basis

of unpublished information available to them in the course of their

professional assignment.

4. Every merchant banker must submit himself to the inspection by SEBI

when required for and submit all the records.

5. Every merchant banker must disclose information to the SEBI when it

requires any information from them.

6. All merchant bankers must abide by the code of conduct prescribed

for them.

7. Every merchant banker who acts as lead manager must enter into an

agreement with the issuer setting out mutual rights, liabilities, obligations,

16

Merchant Banking in Indiarelating to such issues with particular reference to disclosures allotment,

refund etc.

Code of Conduct

According to the 13 Regulation of the SEBI of 1992 (Merchant

bankers), every merchant banker should comply with following codes of

conduct. They are:

a) The merchant banker must observe high integrity and fairness in all

his dealings.

b) He shall render at all times high standard of services, exercise due

diligence, exercise independent professional judgement.

c) If necessary, he must disclose to his clients the possible source of

conflict of duties and interests.

d) The merchant banker should not indulge in unfair practice or unfair

competition with other merchant bankers.

e) He should not make any exaggerated statement about his capacity or

achievement.

17

Merchant Banking in Indiaf) He should always Endeavour to give the best possible advise and

prompt efficient and cost effective service.

g) He should maintain the secrecy of all the confidential information

received during the course of service to his client.

h) He should not engage in the creation of a false market or price rigging

or manipulation.

Guidelines of SEBI

After the obligations of the CCI, the place was occupied by a legal organ

called as “Securities and Exchange Board of India”. The issue of capital and

pricing of issues by companies has become free of prior approval. The SEBI

has issued guidelines for the issue of capital by the companies. The

guidelines broadly covers the requirement of the first issue by a new or the

first issue of a new company set up by the existing company, the first issue

by the existing private companies and public issues by the existing listing

companies. The SEBI is the most powerful organization to control and lead

both the primary market and secondary market.

18

Merchant Banking in IndiaThe SEBI has announced the new guidelines for the disclosures by the

Companies leading to the investor protection. They are presented

below:

a) If any Company’s other income exceeds 10 per cent of the total

income, the details should be disclosed.

b) The Company should disclose any adverse situation which affects the

operations of the Company and occurs within one year prior to the date

filing of the offer document with the Registrar of Companies or Stock

Exchange.

c) The Company should also disclose the information regarding the

capacity utilization of the plant for the last 3 years.

d) The Promoters of the Company must maintain their holding at least at

20 per cent of the expanded capital.

e) The minimum application money payable should not be less than 25

per cent of the issue price.

f) The company should disclose the time normally taken for the disposal

of various types of investor’s grievances.

g) The Company can make firm allotments in public issues as follows:

Indian mutual funds (20%),

FIIS (24%),

19

Merchant Banking in India Regular employees of the company (10%),

Financial institution (20%).

h) The Company should disclose the safety net scheme or buy back

arrangements of the shares proposed in public issue. This scheme is

applicable to a limited number of 500 shares per allottee and the offer should

be valid for a period of at least 6 months from the date of dispatch of

securities.

i) According to the guidelines, in case of the public issues, at least 30

mandatory collection centres should be established.

j) According to the SEBI guidelines regarding rights issue, the Company

should give advertisements in not less than two news-papers about the

dispatch of letters of offer. No preferential allotment may be made along

with any rights issue.

k) The Company should also disclose about the fee agreed between the

lead managers and the Company in the memorandum of understanding.

Merchant banks and Commercial banks

Merchant banks Commercial banks

20

Merchant Banking in India1) Assist in raising capital in the form of

equity, preference shares, and syndicated

loan working capital instruments.

Provide funds in the form of

term loan and working capital.

2) Advisor not financer. Financing is the main business.

3) Do not accept chequable deposits. Demand deposits are the key

feature.

4) Mainly fees based business. Mainly fund based business

5) Being advisors, they are closer to the

customers and get to know risks of the

transaction s properly. They work on

risks shields i.e. mitigation measures

Being lenders, they are more

cautions, assess risks in lending

proposal and cannot afford to be

grossly relationship based and

close to the customer.

6) Most of work they get is about

management of equity issues in the

capacity of lead manager, underwriter,

piercing of issue, book running, and

liaisoning with SEBI.

Commercial banks majority

business is of terms lending and

bank deposits.

Services of Merchant Bankers In India:-

Merchant bankers provide services as follows:

21

Merchant Banking in IndiaBusiness planning stage: 1)project feasibility study

2)advice on capital structuring

Equity raising: 3)preparation of prospectus and

liaison with SEBI

4)pricing decisions

5)marketing in the capacity of lead

managers

6)underwriters to the issue

7)post issue management

8)assistance in ADR/GDR

Debt raising: 9)management of debenture issue

10)preparation of bankable proposal

and syndication of loan

Working capital raising: 11)assistance in arranging optimal

capital finance

Strategic advice: 12)advice on mergers and

acquisitions

13)corporate structuring advice

SERVICES PROVIDED BY MERCHANT BANKS: (in detail)

The development activity through the country had exerted excess demand on

the sources of funds by the ever expanding industry and trade which could

22

Merchant Banking in Indianot be met by the All India Financial Institutions. In these circumstances, the

corporate sector enterprises had the only alternative to avail themselves of

the capital market services for meeting the long-term fund requirements

through capital issues of equity and debentures. The growing demand for

funds from capital market has enthusied many organizations to enter into the

field of merchant banking for managing the public issues.

The need of merchant banker is also felt in the wake of huge untapped

public savings as merchant bankers can play a highly significant role in

mobilizing funds from savers to invest in channels assuring promising return

on investments and thus narrow down the gap between demand for and

supply of investible funds.

Merchant bankers not only provide advisory services to corporate

enterprises but also advise the investors of the incentives available in the

form of tax relief and other statutory obligations. Thus, the merchant

bankers help industry and trade to raise funds, and the investors to

invest their saved money in sound and healthy concerns with

confidence, safety and expectation of higher yields.

Broadly a merchant banker can provide the following services:

1. Corporate Counseling

2. Project Counseling And Pre-Investment Studies

3. Credit Syndication And Project Finance

23

Merchant Banking in India4. Issue Management

5. Underwriting

6. Bankers

7. Portfolio Management

8. Venture Capital Financing

9. Leasing

10.Non-Resident Investment Counseling And Management

11.Acceptance Credit And Bill Discounting

12.Advising On Mergers, Amalgamations And Take-Over

13.Arranging Offshore Finance

14.Fixed Deposit Broking

15.Relief To Sick Industries

Let’s take a brief look at each of these functions:

Corporate Counseling

24

Merchant Banking in IndiaIt includes a whole range of financial services provided by a merchant

banker to a corporate unit a view to ensure better performance, maintain

steady growth and create a better image among investors.

It covers the entire field of merchant banking activities i.e., project

counseling, capital restructuring, portfolio management and the full range of

financial engineering including venture capital, public issue management,

loan syndication, working capital, fixed deposits, lease financing, acceptance

credit, etc. However, the scope of corporate counseling is limited to

suggestions and opinions leaving to the client to take corrective actions for

solving its corporate problems.

A merchant banker finds out the problems of enterprise, which shall include

organizational goals for the enterprise, size of the organization and

operational scales, choice of a product, pricing, etc, and suggests ways and

means to solve those problems.

Project Counseling

25

Merchant Banking in IndiaProject counseling is an important merchant banking service which includes

preparation of project reports, deciding upon the financing pattern to finance

the cost of the project, appraising the project report with the financial

institutions/banks.

Project reports are prepared to obtain government approval of the project,

for procuring financial assistance from financial institutions and banks, for

ensuring market for the proposed product, for planning public issues, etc.

Financing the project cost is an important aspect of project counseling. The

two sources of funds available to finance the project cost are internal sources

of funds (or owners' funds) which includes promoter's contribution and

retained earnings; and external sources of funds which refers to the

borrowed funds in the form of loans from banks, private investors and

financial institutions and in the form of debentures from the public.

Merchant banker has to decide the financing mix of the internal and external

sources of funds keeping in view the rules, regulations and norms prescribed

by the government or followed by the term lending financial institutions.

While rendering project counseling services, the merchant banker has to

ensure that the application forms for obtaining the funds from financial

institutions are filled in with relevant and appropriate information and before

submitting the application, the merchant banker has to appraise the project

considering the various aspects as to the type of the project, location,

technical, commercial and financial viability of the project.

26

Merchant Banking in IndiaCredit Syndication

Once the client company has decided about the project proposed to be

undertaken, the next step is looking for the sources wherefrom the funds

could be procured to implement the project.

Merchant banker has to locate the sources of funds and comply the

formalities required to procure the funds. This service rendered by the

merchant banker in arranging and procuring credit from financial

institutions, banks and other lending and investment organizations for

financing the clients' project cost or meeting working capital requirement is

referred to as loan syndication or credit syndication.

Credit syndication in case of domestic borrowings is with the institutional

lenders and banks. Long and medium term funds are obtained from the All

India Financial Institutions like IFCI, IDBI etc., state level financial bodies

like SFC, SIDC etc., commercial banks, mutual funds etc. Short-term funds

are also required by the firm for purchase of raw materials, payment of

wages, salaries etc. Sources of financing these short term requirements or

working capital needs can be from internal sources like internal accruals

from working or operations and short term loans from friends and relatives;

or from external sources like short term borrowings from banks etc.

Issue Management and Underwriting

27

Merchant Banking in IndiaManagement of capital issues is a professional service rendered by the

skilled and experienced merchant bankers. Previously, the managing agents

for a particular corporate used to manage public issues. The abolition of the

managing agency system, the growth in the public limited companies in

number and size, the imposition of new rules and regulations regarding the

public issue of securities made it necessary for merchant bankers to play a

definite role in the management of public issues.

Public issue management involves marketing of corporate securities by

offering the securities to the public, procuring private subscription to the

securities and offering securities to existing shareholders of the company.

As a manager to the public issue, the merchant banker, before the public

issue has to obtain the consent of the stock exchanges to the memorandum

and articles of association, appoint other managers, bankers, underwriters,

brokers etc. ,advice the company to appoint auditors, solicitors and board of

directors, draft the prospectus and obtain consent from the companies legal

advisors, board of directors and other concerned parties, file the prospectus

with registrar, make an application for enlistment with stock exchanges and

finally advertise for the issue.

A merchant bankers post issue activities include final allotment and/or

refund of subscription amount, calculation of underwriters liability in case of

under subscription and complying the necessary statutory requirements for

listing of securities on the stock exchange.

Under writing of public issue

28

Merchant Banking in IndiaA fully underwritten public issue spells confidence to the investing public,

which ensures a good response to the issue. Keeping this in view companies,

which float a public issue usually, desire a full underwriting of the issue.

Underwriting is only the guarantee given by the underwriter that in the event

of under subscription, the amount underwritten would be subscribed in

proportion by the underwriter. An underwriter of the issue gets the following

benefits:

It earns a commission of the commitment given.

It earns the right to be appointed as bankers of that issue.

It expands its clientele by underwriting more and more issues.

Bankers to the Issue

The merchant banker can automatically become the banker to the issue in

the following cases:

The bank is a broker to the company

It has given underwriting commitments.

It acts as a manger to the issue

The function of a banker to the issue is to accept application forms

from the public together with subscription money and transfer them to the

account of the controlling branch.

Portfolio Management

29

Merchant Banking in IndiaPortfolio refers to investment in different types of marketable securities or

investment papers like shared, debentures and debenture stocks, bonds etc.

from different companies or institutions held by individuals firm or

corporate units.

Portfolio management refers to managing efficiently the investment in the

securities held by professionals to others.

Merchant bankers take up management of a portfolio of securities on behalf

of their clients, providing special services with a view to ensure maximum

return by such investments with a minimum risk of loss of return on the

money invested in securities.

A merchant banker while performing the services of portfolio management

has to enquire of the investment needs of the client, the tax bracket, ability to

bare risk, liquidity requirements, etc. they should study the economic

environment affecting the capital market, study the securities market and

identify blue chip companies in which money can be invested. They should

keep record of latest amendment in government guidelines, stock exchange

regulations, RBI regulations, etc.

30

Merchant Banking in IndiaQualities of merchant bankers:-

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

1. Knowledge: Thorough understanding of technical issues related to

business, understanding of legal and statutory requirements, appreciation of

business acumen; financial expertise is a key thing a merchant banker must

know. Delivery of his services depends on his basic understanding of these

issues.

2. Capital market familiarity: Merchant banker should be well versed

with stock markets, their movements. He should track imp happenings in the

market on ongoing basis.

3. Liasioning ability: Merchant bankers are required to liaison with SEBI,

RBI, the stock exchanges, depositories and other government authorities for

public issue related duties. It is imperative that a merchant bank maintains

excellent rapport with all of them and also close relations even at informal

levels. This only can see speedy and favorable clearances by the authorities.

31


4. Innovation: Corporate may approach with unique requirements.

Standard solutions and products may not solve problems sometimes.

Merchant bankers should do out of box thinking and be able to do financial

engineering. They can device new financial instruments and get approved

from the authorities. Innovation is required even to address stringent legal

requirements.

5. Integrity: Merchant banker has valuable and confidential information of

its customers. Merchants bankers should take utmost care that the

information is not leaked and also not consumed for the purpose other than

for which it was disclosed to the merchant banker.

32


Progress of Merchant Banking in India:-Upto 1970, there were only two foreign banks which performed

merchant banking operations in the country. SBI was the first Indian

commercial bank and ICICI the first financial institution to take up the

activities in 1972 and 1973 respectively. As a result of buoyancy in the

capital market in 1980’s some commercial banks set – up their subsidiaries

to operate exclusively in merchant banking industry. In addition, a number

of large stock broking firms and financial consultants also entered into

business. Thus, by the end of the end of 1980’s there were 33 merchant

bankers belonging to three major segments viz., commercial banks, all

India financial institutions, and private firms. Merchant banking

functions of these institutions was related only to management of new

capital issues.

Merchant banking industry which remained almost stagnant and

stereotyped for over two decades, witnessed an astonishing growth after the

process of economic reforms and deregulation of Indian economy in 1991.

The number of merchant banks increased to 115 by the end of 1992-93 300

by the end of 1993-94 and 501 by the end of August, 1994. all merchant

bankers registered with SEBI under four different categories include 50

commercial banks, 6 all Indian financial institutions – ICICI, IFCI, IDBI,

IRBI, Tourism Finance corporation of India, infrastructure Leasing and

Financial Services Ltd. and private merchant bankers.

33

Documents

28076595 Merchant Banking in India Project