Merchant Banking
EXECUTIVE SUMMARY
Although merchant banking activity was ushered in two decades ago, it was only in
1992 after the formation of Securities and Exchange Board of India that it is defined
and a set of rules and regulations in place. Today a merchant banker is who has the
ability to merchandise that is, create or expand a need and fulfill capital requirements.
I have given an overview about the financial markets and the role of merchant bankers
in the growth of these markets. My project covers how the merchant banks works,
rules & regulations laid by SEBI & its impact on the merchant banking activities.
Their importance in the economy is expected to grow even further in the coming years
with an increasing proportion of household savings getting invested in corporate &
other securities. Hence, my project covers the challenges and advantages, which
India will get and is getting by merchant banking activities. I have covered several
services provided by Merchant Bankers & the role of Merchant bankers in providing
those services to the business world.
Finally, the top players, which exist in merchant banking, are also covered; their
services are also been focused. To get the practical knowledge about merchant
banking activities I have interviewed visited State bank of India, Kotak mahindra
bank and SPA Merchant bankers ltd.
1
Merchant Banking
INDEX
SR.NO.
CONTENTS
PAGE
NO.
1.
Introduction
1
2.
History
2
3.
Definition
4
4.
Evolution & Emergence of Merchant Banking
5
5.
Merchant Banking in India
6.
Merchant banking past and present
7
7.
Need & Importance in India
8
8.
Role of Merchant Bankers
9
9.
Merchant Bankers Commission
11
10.
Commercial Banks & Merchant Baks
12
11.
Growth of Merchant Banks in India
13
12.
Problems of Merchant Bankers
14
13.
Current Scenario
15
14.
Merchant Banking Indian Scenario
16
15.
Merchant Banking International Scenario
17
16.
Merchant Banking Organisation
19
17.
Qualities of good Merchant Bankers
20
18.
Responsibilities of Merchant banker
22
19.
20.
Registration of Merchant Banker
Scope of services
24
26
2
Merchant Banking
21.
Services Rendered by Merchant Bankers
27
22.
Recent Trends
39
23.
Players in Merchant Banking
41
24.
Merchant Banking – Future Development
48
25.
Questionnaire
51
26.
Annexure
53
27.
Conclussion
62
28.
Bibliography
63
3
Merchant Banking
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 lesserknown names wanted to import goods from abroad, the established merchants ‘lent
their names’ to the newcomers 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 merely 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 authorities in those
countries. Thus the second principal ingredient 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 20th 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 provide most of the financial services required by a
company, touching almost all aspects of establishing and running of industrial units
on sound financial footing.
4
Merchant Banking
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 concern.
HISTORY OF MERCHANT BANKING
During the seventeenth and most of the eighteenth century international finance was
centred on Amsterdam. Consequently Amsterdam merchants became the first masters
of the various financial techniques and developments which, in the course of time,
became identified with the emergent profession of ‘Merchant Bankers’.
Commercial Banking and Investment Banking are often confused with Merchant
Banking. In many ways, there may be similarities in their functions. However, in
certain ways, Merchant Banking is distinctly different from commercial Banking and
Investment Banking.
The primary function of a commercial bank is to receive deposits from the public and
lend the same to others. Commercial Banks can undertake some of the merchant
banking activities like Issue Management whereas Merchant Banking Units can not
undertake commercial banking activities. However, the functions of Merchant
Banking may not widely vary from Investment Banking. The Merchant Banker
mainly deals with Issue Management, post issue services, corporate adviser services
etc. the Investment Banker undertaken trading in securities, Investment advises and
Bought out deals which are not the main activities of Merchant Bankers.
In todays Scenario the Merchant banker and management consultants undertake
advisory services to the corporate sector. The Merchant Banker advices corporation
and firms relating to opening of issues, receiving loans etc, which the management
5
Merchant Banking
consultants also do. The management consultant have a wide area operations like
production, Marketing, Personnel Relations, of finance etc. but they lack statutory
recognition to undertake capital market related activities which has enabled the
merchant banker to cater to the needs of the Corporate Sector.
A merchant bank may be considered as an institution which centres its operation on
all or most of the following activities.
(1) corporate financial advice, on such diverse matters as new share and bond
issues, capital reconstructions, mergers and acquisitions;
(2) The taking of deposits and currency, money market operations including foreign
exchange dealing;
(3) Medium-term lending and syndication of loans;
(4) Acceptance credits and all forms of export finance;
(5) The holding and dealing in quoted and unquoted investment; and
(6) Fund management on behalf of clients, most typically pension funds, unit trust,
investment trusts and wealthy individuals.
6
Merchant Banking
DEFINITION
The first authoritative definition for the term ‘Merchant Banker’ has been given in the
Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, “A Merchant
Banker means 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 of rendering Corporate Advisory Service in relation to
such Issue Management”.
Sec/5 (b) of the Banking Regulation Act,1949 defines Banking as “accepting, for the
purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheque, draft, order or otherwise”.
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 the securities as manager,
consult, adviser or rendering corporate advisory service in relation to such issue
management”.
7
Merchant Banking
EVOLUTION & EMERGENCE OF MERCHANT BANKING
India has entered the 21st century as one of the Asia’s most 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 depends 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 Capitalisation of listed firms is 1980s was
similar to Brazil, Malaysia, Singapore and Denmark.
8
Merchant Banking
The capital market of the country, however, underwent dramatic changes 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.
It is in the context of fast expanding economy and a liberalized and deregulated
atmosphere that the growth of the Indian Stock Market activities has to be viewed.
No wonder that the markets have registered a quantum jump judge by any standards.
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. Few share broking firms also
functioned as merchant bankers.
The need for specialized merchant banking services was felt in India with the rapid
growth in the number and size of the issues made in the primary market. The
merchant banking services were started by foreign banks, namely the National
Grindlays 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.
9
Merchant Banking
MERCHANT BANKING: PAST AND PRESENT
Many banks entered merchant banking in the 1960s to take advantage of the
economies of scope produced when private equity investing is added to other bank
services, particularly commercial lending. As lenders to small and medium-sized
companies, banks become knowledgeable about individual firms’ products and
prospects and consequently are natural providers of direct private equity investment to
these firms. As mentioned above, commercial banks were the largest providers of
venture capital in the 1960s. In the middle to late 1980s, the decision to enter
merchant banking was thrust on other banks and bank holding companies by
unforeseen events. In those years, as a result of the LDC (less-developed-country)
debt crisis, many banks received private equity from developing nations in return for
their defaulted loans. At that time, many of these banks set up merchant banking
subsidiaries to try to get some value from this private equity.
Also at about that time, most commercial banks began refocusing their private equity
investments to middle-market and public companies (often low-tech, already
profitable companies) and, rather than providing seed capital, financed expansion or
changes in capital structure and ownership. Most particularly, they took equity
positions in LBOs, takeovers, or recapitalizations or provided subordinated debt in the
form of bridge loans to facilitate the transaction. Often they did both. Commercial
banks financed much of the LBO activity of the 1980s.Then, in the mid-1990s, major
commercial banks began once again focusing on venture capital, where they had
substantial expertise from their previous exposure to this kind of investment. Some of
10
Merchant Banking
these recent venture-capital investments have been spectacularly successful. For
example, the Internet search engine Lycos was a 1998 investment of Chase
Manhattan’s venture-capital arm. Commercial banks are permitted to report either
realized or unrealized gains on their merchant-banking portfolios, as long as they are
consistent in the reporting. This option makes it difficult for one to compare different
entities’ financial results and could lead to an overly liberal reporting of profits.
NEED & IMPORTANCE IN INDIA

Important reason for the growth of merchant banking is due to exerting excess
demand on the sources of funds forever expanding industry and trade.

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.

With the growing demand for funds there was pressure on capital market that
enthused the commercial banks, share brokers and financial consultancy firms to
enter into the field of merchant banking and share the growing capital market.

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.

Merchant banks can play highly significant role in mobilizing funds of savers to
investible channels assuring promising return on investments. activity.

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
enterprises,
undertaking
expansion/modernization/diversification of the existing enterprises.

Merchant banks have been procuring impressive support from capital market for
the corporate sector for financing their projects.

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
11
Merchant Banking
requirements prescribed therein, the need of skilled agency existed which could
provide counseling.

Merchant bankers advise the investors of the incentives available in the form of
tax reliefs, other statutory relaxations, good return on investment and capital
appreciation in such investment to motivate them to invest their savings in
securities.

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.
ROLE OF MERCHANT BANKERS
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 suggests 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 policies
affecting business conditions frequently change; where science and technology create
new innovations in production processes of industries envisaging immediate
renovations, diversification, 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 set up industrially backward areas to eliminate
regional imbalances in industrial development of the country. 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
12
Merchant Banking
different forms to ensure that it runs risk free and devoid of uncertainty by assisting
the 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 t be dynamic. For this reason, a
merchant banker is sometimes, called M.B i.e. Moving Bottom, i.e., one who never
sits at one place, always moving- attending meetings and meeting clients and
constituents, doing business and getting business by attending meetings and
conferences, imparting knowledge to others and acquiring new knowledge to maintain
his supremacy in possession of latest information. His role depicts a personality cult,
which is unique and envious to be followed by others.
In the days ahead, merchant bankers have very significant role to play tuning their
activities to the requirements of the growth pattern of 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.
ROLE IN THE MARKET
The Securities and Exchange Board of India (SEBI) has stated that merchant bankers
must be involved more closely in the market making process as share brokers do not
have the requisite expertise to evaluate the fundamentals of the scrips before taking
over the role of market makers. Further, share brokers generally being partnership;
firms do not have the financial clout which is necessary for market making activity.
Resultantly, the SEBI has suggested that any member of the stock exchange along
with one merchant banker registered with SEBI could act as a market maker.
The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate greater
movement, which could only be achieved through the institution of market makers.
Market makers would also create a market for the scrips by offering two way quotes
13
Merchant Banking
to the investors. A minimum of ten scrips has been proposed by SEBI for the market
makers.
MERCHANT BANKERS COMMISSION
As determined by the Finance Ministry, Government of India, Merchant Bankers are
eligible to charge commission / fee from their clients as detailed below :
(i)
A Merchant Banker can charge 0.5% as the maximum as commission for whole
of the issue.
(ii) They can charge project appraisal fees.
(iii) A lead manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in
excess of Rs.25 crore.
(iv) Underwriting Commission.
On amount
Type of Security
Devolving
On
on subscribed
underwriters
public
2.50
2.50
(a) Upto Rs. 5 lakh
2.50
1.50
(b) Excess of Rs. 5 lakh
2.00
1.00
1.Equity shares
amount
by
2.Preference share/debentures
(v)
Brokerage commission 1.5%.
(vi) Other expenses like advertising, printing, Registrar’s expenses, stamp duty etc.,
in connection with the issue can be reimbursed from its clients.
14
Merchant Banking
COMMERCIAL BANKS AND MERCHANT BANKS
There are differences in approach, attitude, and areas of operations between
commercial banks and merchant banks. The differences between merchant banks and
commercial banks are summarized below:
COMMERCIAL BANKS

MERCHANT BANKS
Basically deal in debt related finance 
Basically they deal with mainly
and their activities are appropriately
funds raised through money market
arrayed around credit proposals,
and capital market and the area of
credit appraisal and loan sanctions.
activity is ‘equity and equity
related finance’.

Are asset oriented and their lending 
Are management oriented. They
decisions are based on detailed credit
generally are willing to accept risks
analysis of loan proposals and the
of business.
value of security offered against
loans. They generally avoid risks.

They are merely finanaciers.

There
activities
include
project
counseling, corporate counseling in
areas
of
capital
restructuring,
amalgamations, mergers, takeovers
etc., discounting and rediscounting
of short term paper in money
15
Merchant Banking
markets,
managing,
underwriting
and supporting public issues and
new issue market and acting as
brokers and advisers on portfolio
management in stock exchange. This
activities have impact on growth,
stability and liquidity of money
markets.
GROWTH OF MERCHANT BANKING 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
assumed 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
of investing public, secondly, merchant banking activity became attractive to banks
16
Merchant Banking
and the firms of consultants and share brokers who entered into this fields vigorously
to reap the advantages of the expanding capital markets.
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 cooperation of the issuing company to shoulder the responsibility.
17
Merchant Banking
CURRENT SCENARIO
Merchant banking is an area that we need to build and grow in the years to come. As
India forms part of the global village, it becomes increasingly necessary for us to look
at this business in a more holistic manner.
Obviously, international players with strong domestic partners such as DSP Merrill
Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with experienced
organisations like Enam and institutional backed investment bankers such as ICICI
Securities, etc., are the ones who have expertise, muscle, and placement power in a
greater measure than relatively new entrants.
The red hot economy is the obvious starting point. India is likely to end the year with
GDP growth in excess of 7 percent. Companies and private equity investors are sitting
on large piles of cash. In 2006 deal activity was largely restricted to the IT and
Telecom sectors.
Thus, while there is a steady flow of deals, there is now a shortage of talent to do the
job.
18
Merchant Banking
MERCHANT BANKING: INDIAN SCENARIO
Merchant Banking activity was formally initiated into the Indian capital markets when
Grindlays Bank received the license from Reserve Bank in 1967. Grindlays 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 smallscale units it provided management constancy services to large and medium sized
companies.
Following Grindlays Bank, Citi Bank set-up its Merchant Banking
division in 1970. The division took up the task of assisting new entrepreneur and
existing units in the evaluation of new projects and raising funds through borrowing
and issue of equity. Management consultant 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
render 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 rapid development of the
economy. Several projects have been conceived since then and almost 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
19
Merchant Banking
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.
MERCHANT BANKING: INTERNATIONAL SCENARIO
The Merchant Banking scenario in developed countries like USA and UK are
different from Indian Merchant Banking activities. The Merchant banker is also
called as Investment Bankers. A brief outline of Merchant Banking in USA and UK
has shown in the following paragraphs.
Merchant Banks in UK
In United Kingdom, Merchant Banks came on the scene in the late eighteenth century
and early nineteenth century. Industrial revolution made England into a powerful
trading nation. Rich merchant houses that made their fortunes in a colonial trade
diversified into banking.
Their principle activity started with the acceptance of
commercial bills pertaining to domestic as well as international trade. The acceptance
of the trade bills and their discounting gave rise to acceptance houses, discount
houses, and issue houses. Merchant Bankers initially included acceptance houses,
discount houses and issue houses. A Merchant Banker was primarily a merchant
rather than his customers entrusted banker but him with funds. Merchant Banks in
UK:

Finance foreign trade,

Issue capital,

Manage individual funds,

Undertake foreign security business, and
20
Merchant Banking

Foreign loan business.
They also used to finance sovereign government through grant of long-term loans.
Since the end of Second World War commercial banks in Western Europe have been
offering multiple services including Merchant Banking services to their individual and
corporate clients. British banks set-up division or subsidiaries to offer their customers
Merchant Banking services.
Merchant Banking in USA
Merchant banks make the primary markets in USA, arrange mergers and acquisitions,
undertake global, custody, proprietary trading and market making, niche business,
fund management and advisory services to governments and firms.
The increased regulation and control of domestic operations gave a fillip to large US
banks to undertake Merchant Banking functions in international capital markets. The
US investments Banks have extended their operations to the international level. They
are largely responsible for the development of the Euro-dollar market in the securities
and globalisation of capital markets. They have a prominent presence in London and
other European financial centers. Merchant Banks have today a strong parent, a
strong balance sheet and a strong international network to play a global role.
21
Merchant Banking
MERCHANT BANKING ORGANISATIONS
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
Category I
To carry on the activity of issue management Rs.1crore
and to act as adviser, consultant, manager,
underwriter, portfolio manager.
Category II
To act as adviser, consultant, co-manager, Rs.50 lakhs
underwriter, portfolio manager.
Category III
To act as underwriter, adviser or consultant to Rs. 20 lakhs
an issue.
Category IV
To act only as adviser or consultant to an issue
Nil
Merchant Bankers are classified into 4 categories as shown in the above table having
regard to their nature and range of activities and their responsibilities to SEBI,
investors and issuers of securities. The minimum net worth and initial authorization
fee depends on the category. The first category consists of merchant bankers who
carry on any activity of issue management, determining financial structure, tie-up of
22
Merchant Banking
financiers, advisor or consultant to an issue, portfolio manager and underwriter. The
second category consists of those authorized to act in the capacity of comanager/advisor, consultant, and underwriter to an issue or portfolio manager. The
third category consists of those authorized to act as underwriter, advisor or consultant
to an issue. The fourth category consists of merchant bankers who act as advisor or
consultant to an issue.
QUALITIES OF GOOD MERCHANT BANKERS
Merchant bankers are individual experts who organize and manage the merchant
banks. The operations of merchant banks are, therefore, influenced by the personality
trait of these individuals. For the success of merchant bank’s operations, the qualities
which merchant bankers should have are discussed below: LEADERSHIP:– merchant banker should possess all relevant skills, update
knowledge to interact with the clients and effectively communicate. Leadership is
synonymous with followers who follow the one who leads.
 AGGRESSIVE ACTION:- 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 AND 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
23
Merchant Banking
without greed or favours. Very often, rude, intemperate and indifferent disposition or
blunt out burst withdrew fortunate business opportunities forever.
Friendliness 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
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, honour and humour 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.
 INQUISITINESS FOR ACQUIRING NEW SKILLS, INFORMATION AND
KNOLEDGE: – merchant bankers lice on their wits they earn by giving information
to needy clients. Therefore, they should keep abreast with latest information in the
24
Merchant Banking
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. All good qualities in
merchant bankers are difficult to be defined so elaborately. 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.
25
Merchant Banking
RESPONSIBILITIES OF MERCHANT BANKER
 To the Investors
Investor protection is fundamental to a healthy growth of the Capital Maerket.
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 instituion, the Merchant Bank undertakes a detailed evaluation
of the project before taking up an assignment for issue management.
 Legal aspect
The factors that are looked into in case of the legal aspects are:
 Compliance with the SEBI guidelinesand the various guidelines issued by the
Ministry of Finance and Department of CompanyAffairs.
 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.
26
Merchant Banking
 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.
27
Merchant Banking
REGISTRATION OF MERCHANT BANKER
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 during the seventeenth and eighteenth
centuries. Merchant Banker invested accumulated profits in all kinds of promising
activities. Since they added banking business into the profession of Merchant
activities and became a Merchant Banker. A distinction was existed in banking
systems between moneychanger and exchanger. Moneychangers concentrate on the
mutual exchange of different currencies, operated locally and later accepted deposits
for security reasons. Passage of time money changers evolved into public or deposit
banks whereas exchangers, who operated internationally, engaged in bill-broking that
raising foreign exchange and provision of long-term capital for public borrowers. The
exchanges were remitters and Merchant Bankers. In the seventeenth century, a
Merchant Banker was a dealer in bills of exchange who operated with correspondents
abroad and speculated on the rate of exchange. Initially, Merchant Bankers were not
banks at all and a distinction was drawn between banks, Merchant Banks and other
Financial Institutions. Among all these, Institutions it was only banks that accepted
deposits from public. No person s allowed carrying out any activity as a Merchant
Banker unless he or she holds a certificate grated by SEBI. Registration with SEBI is
mandatory to carry out the business of merchant banking in India.
An applicant should comply with the following norms:
28
Merchant Banking

The applicant should be a body corporate

The applicant should not carry on any business other than those connected with
the securities market

The applicant should have necessary infrastructure like office space, equipment,
manpower etc.

The applicant must have at least two employees with prior experience in merchant
banking

Any associate company, group company, subsidiary or interconnected company of
the applicant should not have been a registered merchant banker

The applicant should not have been involved in any securities scam or proved
guilt for any offence

The applicant should have a minimum net worth of Rs.5 crores
29
Merchant Banking
MERCHANT BANKING SERVICES: SCOPE
In the present dynamic environment where public money is playing a vital role in
financing a large number of projects, both in the public and private sectors, Merchant
Banking has a significant role in managing the show and meeting the growing
demands for funds by the corporate sector. Merchant Banking includes a whole
gamut of activities which meet the needs of both corporate and individual investors
and which range from identification, evaluation, promoting and financing of projects
(both domestic and overseas) by raising resources in the equity and long-term loans,
to organize and participate in international consortia, to raise foreign currency loans
and to offer advisory services on various matters related to finance, investment,
capital management, structure, mergers, amalgamation, takeovers and acquisitions.
They also play a useful role in the portfolio management, money market operations,
venture capital, leasing, etc. Merchant bankers act as a guide for the entrepreneurs
who are unaware, or have little knowledge or experience, of the complexities involved
in the above spheres.
In addition to the above, the scope of Merchant Banking services has extended to
providing advisory services to companies to increase or divest their stakes, public
sector undertaking disinvestments, international issues, etc. With the OTCEI being
operation now, Merchant Bankers will have a key role to play in terms of appraising
the projects and offering two-way quotes for market making in case of entrepreneur
going for listing in the above exchange.
Merchant Bankers act as a critical link between the corporate who are intend to raise
funds and the investors who are interested to invest in securities Industry. Besides
issue management, the Merchant Bankers are also undertake the activities like
underwriting connected with the public issue management business,
Managing/advising on International offerings of Debt/Equity i.e., GDR, ADR, 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-Broking, Advisory Services for
projects, Syndication of rupee term loans and International Financial Advisory
Services. The services can be represented as follows: -
30
Merchant Banking
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:
31
Merchant Banking
 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.
 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.
 CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE
32
Merchant Banking
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:
 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.
33
Merchant Banking
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.
The merchant banker should act as the custodians of the investors money and this
puts a lot of responsibility on them. To discharge this function the merchant
bankers have to exercise due diligence independent by verifying the contents of
the prospectus and the reasonableness of the views expressed therein.
It is the responsibility of the merchant bankers to get the securities listed on all the
stock exchanges mentioned in the prospectus. With the introduction of Demat
accounts the complaints about allotment have surely gone down.
It is the
responsibility of the merchant bankers to ensure timely refunds and allotment of
securities to the investors.
The merchant bankers have to certify that they verified everything and that they
believe it to be true. This assures the investing public about the safety of their
investment. The precautions by the merchant bankers would ensure that all the
fake companies, whose intention is to defraud the investors, don’t have access to
the market.
 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.
34
Merchant Banking
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.
Underwriters on their part need to satisfy themselves about the viability of the
project and also about the integrity of the promoters of the company. It must be
noted that when an issue is under subscribed, the underwriters will pick the shares
and only if the project is good enough, then in future they can sell the shares in the
market and get not only their money back, but can also make a decent profit as
well.
It is obligatory for the merchant bankers to accept a minimum 5% underwriting in
the issue subject to a ceiling. By taking underwriting in an issue managed by
them, they show their full commitment to the issue that they are managing.
 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
35
Merchant Banking
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 in M&A: 
Identification of potential takeover targets.

Financial & Technical appraisal of the merger/takeover proposal.

Negotiation with the parties for arriving at the suitable price or exchange ratio.

Assistance in obtaining necessary approval & addressing procedural & legal
issues.
 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 counseling 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
36
Merchant Banking
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
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.
 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 putting in requisite prescribed applications and
complying with all the formalities involved in the sanction and disbursal of loan
37
Merchant Banking
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.
1. All India financial institutions
i. Industrial Finance Corporation of India (IFCI)
ii. Industrial Development Bank of India (IDBI)
iii. Industrial Credit & Investment Corporation of India Ltd (ICICI)
2. State level financial bodies
i.
State Financial Corporations (SFCs)
ii.
State Industrial Development Corporations (SIDCs)
iii.
State Industrial & Investment Corporations (SIICs)
3. 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.
4. Commercial banks: Commercial banks join in consortium loan being
provided by the above institutions.
5. 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.
 RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to successfully
restructure various activities, which include mergers and acquisitions, divestitures,
management 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
38
Merchant Banking
obtain financial, marketing, or production benefits), and help in searching for the
right partner in the strategic decision and financial valuation of the proposal.
 CAPITAL ASSISTANCE
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. Restrictions 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. The traditional merchant
banker understands these capital limitations and can structure a transaction, which
is beneficial to all sides of the table -- not just the capital source.
He also knows how to substitute one type of capital for another, sometimes
utilizing internal sources from asset repositioning or cash creation from
improvements in working capital. He understands fully the risk versus return
elements necessary to complete the capital procurement process.
 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.
 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
39
Merchant Banking
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
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
 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)
 FOREX SERVICES
40
Merchant Banking
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.
Corporates therefore employ well-trained professionals to manage treasury and
forex functions so that they can ensure competent management. Thus, this service
is provided to Corporates through merchant bankers. Merchant bankers assess
various markets to advice Corporates 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
 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.
Role of Merchant Banker
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
41
Merchant Banking
 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 mediumterm 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.
 VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential 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.
Role of Merchant Banker

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.

The assistance should mainly be for equity support, through loan support to
supplement this may be extended.
42
Merchant Banking
RECENT TRENDS
Merger & Acquisition transaction -- Merchant banks' services not taxable
The Finance Ministry has excluded services provided by merchant banks and other
agencies in a merger and acquisition (M&A) transaction from the scope of taxable
services provided by a `management consultant.'
The rationale accorded is that the role of such agencies is limited to compliance of
any statute or regulation -- such as takeover regulations of the Securities and
Exchange Board of India (SEBI) -- and not governed by any contractual
relationship with the advisee company.
Merchant banks do not provide any consultancy on an M&A transaction, but merely
verify and submit a report to the authorities concerned, according to the Central Board
for Excise and Customs (CBEC).
Barring the services of merchant banks, any service rendered in relation to an M&A
transaction will be covered under the scope of taxable service provided by the
management consultant and will be liable to service tax, the Board has ruled. Industry
representatives held that services provided in respect of M&A cannot be construed as
a management consultancy service, but were in the nature of financial advisory
service.
They further opined that acquisition or divesting of shareholdings was a purely
financial transaction and distinct from the advice or service provided prior to taking a
decision to divest, merge or acquire an organisation.
RAPID RISE IN VALUATION IMPEDES M&As
The surging stock market is creating an unusual problem: Mergers & Acquisitions
(M&A) deals are becoming tougher to close as the two parties to a deal keep looking
over their shoulders to figure out how the market is pricing their shares. The key to
43
Merchant Banking
any deal is valuation. And when the market booms, agreed valuations for proposed
M&A are thrown into disarray.
In this scenario, M&A rankings will change depending on who has been able to close
deals faster.
In the first nine months of 2005, (ended September), Kotak
Mahindra/Goldman Sachs topped the heap by executing 13 deals valued at $2.53
billion (about 11,000 crore). This bank was ranked No. 4 last year in the process, the
investment bank has increased its share by 420 basis points from 13.1% for last year
to 17.3% now. Morgan Stanley retained its No 2 position, having sewn up 11 deals
worth $2.23 billion so far. Its market share is up 50 basis points to 15.2%. Stock
prices have gone up because of profitability. Indian companies are also looking at
overseas opportunities. M&A are also getting hit because more & more companies
are opting for the global depository receipts/foreign currency convertible bonds issue
to sate their capital needs. The analyst sees pharmaceuticals, information technology
& engineering specifically auto ancillaries as the areas where an increasing amount of
M&As will take place in India.
Rapid valuation changes do cause some delays, but in the end, the deals go through if
there are benefits to both parties. Infrastructure related business, airlines and the auto
component sectors as being prime for acquisitions.
INDIA’S TOP 10 M&A PLAYERS
PLAYERS
Rank
‘05
Rank
’04
Mkt
share’
04
13.1
Value
($m)
Deals
4
Mkt
share’
05
17.3
Kotak/Goldman Sachs
1
2,534
13
Morgan Stanley
Merrill Lynch & Co.
Standard Chartered
Ernst & Young
Citigroup
Ambit Corporate Fin
DBS Group
ICICI Securities
UBS
2
3
4
5
6
7
8
9
10-
2
3
9
1
6
8
5
-
15.2
12.1
6.7
6.7
6.6
6.4
4.8
4.4
3.8
14.7
14
4.8
16.9
11
4.9
12.2
-
2 ,227
1,771
981
980
962
936
704
649
550
11
12
5
37
8
21
1
10
3
Rankings based on deals in up to 30th September, 2007 .
44
Merchant Banking
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 & timely 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
solutions to financial challenges. Their restructuring services includes Mergers &
Acquisitions, Takeovers, Debt restructuring, Buyers services etc.
 ENAM also provide the seed stage services, value creation services and IPO’s
advisory services which are represented below:
45
Merchant Banking
2. ICICI SECURITIES
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 unique 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 leading 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 capitalising on the
opportunities thrown up by the all pervasive boom 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
leverages research and distribution reach to domestic and foreign institutional
investors in case of public offerings.
Thus the quality of analysis and client servicing standards, are a testimony to the
quality of ICICI SECURITIES team.
46
Merchant Banking
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:

Divestments

Spin-Offs / Restructuring & Joint Ventures / Strategic Alliances
47
Merchant Banking
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 Corporates 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.
48
Merchant Banking
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.
49
Merchant Banking
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 smallscale 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.
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
50
Merchant Banking
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 have 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 across sectors has allowed them to build significant traction with the
financial investors. This helps in raising private equity capital for the companies.
51
Merchant Banking
MERCHANT BANKING-FUTURE DEVELOPMENT
Time and again the Merchant banking Industry in India witnessed, experienced and
underwent significant changes. The very purpose for which these firms are
commences their services should be taken care of and they should mould their policy
decision and activities to move in tune with the main objectives of Investor’s
protection and to create healthy environment in capital markets. No doubt, Merchant
Banking firms are subject to a host of control measures, regulations and rules framed
and guided by SEBI. To some extent, frequent changes and /or amendments to
policies and control measures, though needed for smooth working of the securities
Industry, proves to be detrimental to the very existence of the Merchant Banking
system in the country. The SEBI’s Act 1992 confers power upon SEBI to supervise
and control the affairs of the Merchant Banking firms in India.
The various studies which had been undertaken in India for evaluating the
performance of Merchant Banking firms and the implications of these on securities
industry. No single study has been emerged so far pertaining to the evaluation of
Merchant Banking firms and in-depth study on their activities as well as operational
and financial performance in the light of changing regulatory environment.
In recent past, the small investor has turned his back on the primary capital market.
Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and
reinforce his faith. He has lost all hopes of appreciation of his investment. And this
when all these years millions have though capital market, ate capital market and
dreamt capital market. It needed an extraordinary effort and skill the drive the small
investor away! High premiums, false premiums and gray market operations. The
professed protector of his interests first laid down the dictum of proportionate
allotment, then of minimum subscription, all working against his interests. This
would make an observant student of the stock market infer that there is some game
plan afoot to dethrone the small investor from his prominent; he was believed to be
the king.
With the coming to SEBI, an organisation that was ostensibly brought into existence
to guard the interest of the small investor, hopes ran high that the small investor
52
Merchant Banking
would now have a safe playing field. But these hopes were soon belied. Far from
guarding the interests of the investing public, SEBI embarked on a course of action,
which has positively hurt them. The latest fiat of EBI bans corporate advertising after
the receipt of acknowledgement card by a company wanting to go public. SEBI’s this
action has caused the closure of an information window. Now 50 million potential
investors are deprived of official and authentic information given by the Issuer. It is
hard to understand reasons for this drastic and totally uncalled for action. While there
has been no official explanation for this fiat, there is reason to believe that it may be
based on a wrong perception of the role for corporate advertising.
All this has been done perhaps because the corporate and intermediaries is to follow
the practices of Western capital markets here, oblivious of the fact that our capital
markets are altogether different in structure, in systems and in the number of
participantsFreedom of commercial expression could be exploited by some to serve
their own ends, just a s freedom of speech and expression could be abused but this has
not led our Government to put arbitrary restrictions on our freedom.
Merchant Bankers have reason to believe they will be handicapped without the
marketing support. But the worst sufferer would be the investor, especially the small
investor it is this class, which forms the backbone of the capital market. As a result of
the ban, the small investor would be deprived of the opportunity to study the
corporate profile of the Issuer. In the absence of adequate information, they will have
to depend on manipulated facts and information fed by unreliable sources.
Besides, there are larger issuers arising out of SEBI’s action. From the point of view
of liberalisation of the economy, SEBI has taken a retrograde step.
A market
economy flourished through bigger markets, higher sales and lesser profits.
To
achieve this performance, a company needs an aggressive marketing plan and
advertising effort is the main thrust to such a plan. No marketing plan can be
worthwhile unless it is backed by an effective advertising plan. The ban imposed by
SEBI nips the marketing plan in the bud.
The Indian primary capital market is basically a retail market.
It consists of
innumerable investors who take own individual investment decisions. Whatever, the
system, it is this market that will bring in the funds. If these markets destabilised, the
53
Merchant Banking
investors will look for alternative avenues to invest their funds. SEBI in its one of the
first documents on “SEBI and Investor Protection, Development and Regulation of
Securities Market” clearly specifies significance of regulating capital market and its
future plans for fulfilling the twin objectives viz., Development of capital market and
investor protection are explained in introductory paragraphs. It speak out that, “The
decade of the 1980 witnessed a phenomenal growth and development of the securities
market, demonstrated its potential not only to mobilize the savings of the horseshold
sector but also to allocate it with some degree of efficiency for industrial
development. The dilution of the holdings of the multinational companies at
affordable prices in the latter part of the 1970s had generated considerable interest,
which was, carries well into the next decade. Several companies’ came in the early
part of the 1980s and successfully raised large resources from the market especially
through debt instruments, which further sustained investor interest.
There were
several changes in Government policy, which significantly influenced industry and
aided the market. India was then entering the phase of liberalization and decontrol
which was to accelerate and gather momentum in the 1980s.
By the end of the decade, the securities market in India came to be firmly integrated
with the financial system of the country. With the corporate sector increasingly
relying on the securities market for meeting their long-term requirement of funds, the
securities market their long-term requirement of funds; the securities market
competed on equal terms with the Development Financial Institutions, which were the
traditional purveyors of long-term capital. The emergence of the securities markets
into the main stream of the financial system of the country was thus one of the major
economic processes of the 1980s – an inevitable outcome of the maturing process of
the financial system. They brought about notable changes in the capital structure of
the companies across industries, gave birth to new intermediaries and institutions in
the securities market and created a new awareness and interest in investment
opportunities in the securities market among investor. In spite market, its quality
lagged far behind and there was absence of adequate professionalism and fair
competition among the various players in the market.
Besides, the regulatory
framework then prevailing was fragmented difficult, if not effective.
54
Merchant Banking
QUESTIONAIRE
STATE BANK OF INDIA
KOTAK MAHINDRA BANK
1) Details of the person Interviewed
Name:- Vasudha Waman Joshi
Name:- Chandrakala Gururani
Qualification:- Graduate in Maths
Qualificatin:- B.com Graduate &
MBA(ICFA)
Experience:- 23 years
Experience:- 1 years
2) Which activities does your Company/Bank undertakes?
Import/Export, Remittances, Issue
Home loan, Personal loan, over
of Bank guarantees and letter of credit
drafts, etc. But not into credit
card
3) What are the service provided?
On presentation of Documents in
Overdraft facilities, settlement of
case of physical Import/Export.
Cash. Bank to bank sercices
Required proof in case of remittances.
4) According to you what is the need for Merchant Banking?
Facilities to the banks like funds,
support from government
Infrastructure,etc so that more and
to aware the banks and compani
more banks can have this facility
es about the schemes available
in there bank and provide more
services related to the same
5) What is Importance of Merchant Banking?
Due to this people will enjoy those
This
helps
the
mergers
services which are not provided by
commercial banks
55
Merchant Banking
6) Names of the company with which you crack deals
Shiv shakti plastic, Inglobe and
Vijayan Group of Hotels, Shree
shreeram Industries,etc
nath hunday and other small
companies
56
Merchant Banking
ANNEXURE
SCHEDULE I - FORMS
FORM A
SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
(REGULATION 3)
APPLICATION FOR GRANT OF CERTIFICATE /
RENEWAL OF CERTIFICATE
ADDITIONAL INFORMATION FOR FRESH REGISTRATION
NAME OF APPLICANT
CATEGORY:
CONTACT NAME ______________________
TELEPHONE NO: _____________________
INSTRUCTIONS FOR FILLING UP FORM
1. Is important that this application form should be filled in accordance with the
regulations.
2. Applicants must submit a completed application form together with appropriate
supporting documents to the Board.
3. Application for registration will be considered provided it is complete in all
respects.
4. Answers must be typed.
5.All signatures must be original.
6.Information, which needs to be supplied in more details, may be given on separate
sheets, which should be attached to the application form.
1. PARTICULARS OF THE APPLICANT
1.1 Name of the Applicant:
1.2 (A) Address - Principal Place of business / Registered Office of the Company.
Pin code: ______________________ Telephone No:________________
Telex No:______________________Fax No:______________________
57
Merchant Banking
(B) Address for Correspondence:
Pin code:______________________Telephone No:________________
Telex No:______________________Fax No:______________________
(C) Address of Branch Offices:
2. ORGANISATION STRUCTURE
(Organization Chart separately showing functional responsibilities of Merchant
Banking activities to be enclosed).
2.1 Objectives:(To be given in brief along with copy of Memorandum and Articles of Association).
2.2 Date and Place of Incorporation:
Day Month Year Place
2.3 Status of the Applicant:
(e.g. limited company - Private/Public, unlimited company, partnership, proprietary,
others. If listed, names of Stock Exchanges and latest share price to be given).
2.4 Particulars of all Directors/Partners/Proprietors:Name
Qualification
Experience in Merchant Banking &
Financial Services related areas
Share in applicants firm company
Directorship in other companies
2.5 Particulars of Key Management Personnel: (Particulars of merchant banking
division)
Name
Qualification
Experience with particular
reference to merchant banking
Date of appointment
Functional areas
2.6 Name and activities of associate companies/concerns
Name of Company
Address/firm
Type of activity handled
Nature of Interest of Promoter/Director
58
Merchant Banking
Nature and interest of Applicant Company
3. BUSINESS INFORMATION
3.1 History, major events and present activities:
3.2 Details of Experience in Merchant Banking activities.
3.3 Experience in other financial services rendered:3.4 Business handled during the last three years:
a) Issue Management
Name of client
Type of Issue
Size of Issue
Year of Issue
Times subscribed
Name of lead merchant banker
Functional responsibilities
b) Investment Adviser: Name of Client Year for which services are rendered
Nature of services rendered
c) Underwriting
Name of client Type and size
Amount underwritten of Issue
% Age of issue under Year of Issue
Whether there was any devolvement written
d) Portfolio Management
Name of Scheme
Features of the Scheme
Number of Clients
Total Volume of Funds managed
Average Returns
e) Consultants/Advisors to the Issue
Name of the Client
Year of Issue
Type and Size of Issue
Nature of services rendered
59
Merchant Banking
Name of Lead Merchant Banker(s)
4. CLIENT INFORMATION
4.1 List of major clients with address
Name
Services Rendered
4.2 If the applicant is proposing to engage in Merchant Banking activities for the first
time, the experience of key management personnel to be indicated.
Name of Key management personnel
Qualification
Previous positions held
Experience particularly in respect of merchant banking activities
4.2 (a) If the applicant is proposing to engage in Merchant Banking activities for the
first time, business plan of the company with projected volume of activities and
income for which registration is sought to be specifically given.
4.3 Details of infrastructure including computing facilities, equity research and
database available with the applicant.
4.4 Any other information considered relevant to the nature of services rendered by
the applicant.
5. FINANCIAL INFORMATION
5.1 Capital Structure (Rs. in lakhs)
Year prior to the preceding year of current year
Preceding year
Current year
a) Paid-up capital
b) Free reserves
(excluding re- valuation reserves)
c) Total (a) + (b)
Note: - 1. In case of partnership or proprietary concerns, please indicate capital minus
drawings.
2. In case of partnership or proprietary concerns, please indicate the financial position,
means, and networth of the partners.
5.2 Deployment of Resources (Rs. in lakhs)
60
Merchant Banking
Year prior to the preceding year of current year
Preceding year
Current year
(a) Fixed Assets
(b) Plant & Machinery and
Office Equipment
(c) Quoted Investments
(d) Unquoted Investments
(e) Details of Liquid Assets
(f) Others
(Details of Investments, Loans & Advances made to Associate Companies/ firms
where Promoters/ Directors have an interest be separately given).
5.3 Major Sources of Income: (Rs. in lakhs)
Year prior to the preceding year of Preceding
current year
year
Current year
*Fees charged as %
of issue
(a) Issue Management
(b) Underwriting
(c) Portfolio Management
(d) Consultant/ Advisor to Issue
(e) Investment Adviser
(f) Others
*As fees charged by the merchant banker may vary from issue to issue, please
indicate range within which fees have been charged.
5.4 Net Profit
Year prior to the preceding year of current year
Preceding year
Current year
Preceding year
Current year
5. 5 Dividend
Year prior to the preceding year of current year
61
Merchant Banking
Amount
Percentage
Note: Please enclose three years of audited annual accounts. Where unaudited reports
are submitted, give reasons. If minimum networth requirement has been met after last
audited annual accounts, audited statement of accounts of a later date also be
submitted.
5.6 List of major shareholders (holding 5% and above of applicant directly or along
with associates –
Applicable only to limited companies)
Shareholding as on: ______________________________
Name of shareholder
No. of Shares held
% age of total paid up capital of the company
5.7 Name and Address of the Principal bankers of the applicant.
5.8 Name and address of the Auditors.
6. OTHER INFORMATION
6.1 Details of all settled and pending disputes:
Nature of dispute Name of the party Pending/settled.
6.2 Indictment of involvement in any economic offences by the applicant or any of
the
Directors,
or
key
managerial
Personnel
in
the
last
three
years.
DECLARATION
THIS DECLARATION MUST BE SIGNED BY TWO DIRECTORS, TWO
PARTNERS OR THE SOLE PROPRIETOR AS THE CASE MAY BE
I/We hereby apply for registration. I/We warrant that I/We have truthfully and fully
answered the questions above and provided all the information which might
reasonably be considered relevant for the purposes of my registration. I/We declare
that the information supplied in the application form is complete and correct.
For and on behalf of ------------------------------------------ (Name of Applicant)
Director/Partner or Sole Proprietor Director/Partner ___________________
(Name in Block Letters) (Name in Block Letters) _______________________
62
Merchant Banking
Date
FORM B
SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
(REGULATION 8
CERTIFICATE OF REGISTRATION)
In exercise of the powers conferred by sub-section (1) of section 12 of the Securities
and Exchange Board of India Act, 1992, read with the rules and regulations made
there under the Board hereby grants a certificate of registration to
______________________________ as a merchant banker in Category I subject to
the conditions in the rules and in accordance with the regulations to carry out the
following activities: 1. Management of any issue, including preparation of prospectus, gathering
information relating to the Issue, determining financing structure, tie up of financiers,
final allotment and refund of excess application money.
2. Investment Advisor.
5. Managers, Consultant or Adviser to any issue including corporate advisory
services.
6. Consultant or Advisor.
(*Delete whichever are not applicable)
II. Registration Code for the merchant banker is MB / / /
III. This certificate shall be valid from _____________ to _________ and may be
renewed as specified in regulation 9 of Securities and Exchange Board of India
(Merchant Bankers) Regulations, 1992.
Place
Date
By Order
Sd/For and on behalf of Securities and Exchange Board of India
63
Merchant Banking
FORM C
SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
(REGULATION 23)
DUE DILIGENCE CERTIFICATE
To,
SECURITIES AND EXCHANGE BOARD OF INDIA
Dear Sirs,
SUB: ISSUE OF ____________________ BY _______________________ LTD.
We, the under noted Lead Manager(s) to the above mentioned forthcoming issue state
as follows:
1. We have while finalizing the draft prospectus/letter of offer pertaining to the said
issue have examined various documents and other material as for adequate disclosures
to the investor;
2. On the basis of such examination and the discussions with the company, its
directors and other officers, other agencies, independent verification of the statements
concerning objects of the issue the contents of the documents and other material
furnished by the company, WE CONFIRM that:
(a) the draft prospectus/letter of offer forwarded to SEBI is in conformity with the
documents, materials and papers relevant to the issue;
(b) all the legal requirements connected with the said issue have been duly complied
with; and
(c) the disclosures made in the draft prospectus/letter of offer are true, fair and
adequate to enable the investors to make a well informed decision as to the investment
in the proposed issue.
PLACE:
DATE:
LEAD MANAGER (S) TO THE ISSUE
N. B. A list of documents and materials examined may be forwarded along with this
certificate.
64
Merchant Banking
Foot notes
28. The figures "II/III/IV" after the word "Category I" and before the words "subject
to the conditions" in paragraph 1 in Form A of Schedule I were deleted by SEBI
(Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette
of India dated 06.06.1996.
29.
The words "3. Underwriting of Issue" and "4. Portfolio Manager Service" after
the words "1. Investment Adviser" in paragraph 1 in Form B of Schedule I were
deleted by the SEBI (Merchant Bankers) (Amendment) Regulations, 1996 published in
the Official Gazette of India dated 06.06.1996.
65
Merchant Banking
CONCLUSION
The merchant banker plays a vital role in channelising the financial surplus of
the society into productive investment avenues. Hence before selecting a merchant
banker, one must decide what are the services for which he is being approached.
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 details about
Merchant Banking and in future how its 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 predicated 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 a 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.
66
Merchant Banking
BIBLIOGRAPHY
BOOKS REFFERED

Merchant Banker – H.R. SUNEJA

Merchant Banking Principles & Practices- H.R.MACHIRAJU

Merchant Banking in IndiaB.C. LAKSHMANNA & C.N. KRISHNA
NAIK

Merchant Banking – J.C.VERMA (3rd & 4th Edition)






www.google.co.in
www.yahoo.com
www.economictimes.com
www.jmmorgansranley.com
www.dspml.com
www.sebi.com
WEBSITES
67