Merchant Banking in India

Merchant Banking in India

MERCHANT BANKING IN INDIA

INTRODUCTION

Financial services are an important component of financial system. The

smooth functioning of financial system depends upon the range of financial

services extended by the providers. Financial services in India have

witnessed remarkable changes in the recent past after the implementation of

“Liberalization, privatization and globalization”.

Funds are tapped from the capital market to finance various mega industrial

projects. In attracting public savings, merchant bankers play a vital role as

specialized agencies. The resources raising functions remains to be the

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

rapid capital formation, growth in industrial productions and exports. There

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

increase in the number of issues and amount raised the number of merchant

bankers. Therefore, the field became highly competitive market where it

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

have a social responsibility to in building an industrial structure in India.

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

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

funds.

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

Projects scrutinize & persuade merger proposals.

In BRITAIN merchant bankers & investment bankers are synonymous.

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

equipped to handle multinational corporations.

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

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

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

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

official category in investment banking.

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DEFINITION:

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

offering financial services and advice to corporations and wealthy

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

describe the private equity activities of banking.

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

the financial institutions providing specialist services which generally

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

management and other banking services”.

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

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

by making arrangements regarding selling, buying or subscribing to

securities as manager, consultant, advisor or rendering corporate

advisory service in relation to such issue management”.

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

issues.

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History and Origin of Merchant Banking In India

ORIGIN

Merchant banking originated through the entering of London merchants in

foreign trade through acceptance of bill. Later, the merchants assisted the

Government of under developed countries in raising long – terms through

floatation of bonds in London money market. Over a period they extended

their activities to domestic business of syndication of long term and short

term finance, underwriting of new issues, acting as registrars and share

transfer agents, debenture trustees, portfolio managers, negotiating agents

for mergers, takeovers etc.

Merchant Banking in India – Historical Perspective:

Till 18th century moneylenders, moneychangers, village merchants

(maharanis), & saucers performed the function of banks & merchant banks.

They also issued & discounted bills of exchange (handiest) & bank draft.

They gave loans on mutual trust, on mortgage of lands, ornaments & other

property. JAGAT SHETH (1720-1773AD, BENGAL) HABIB & SONS

which is now HABIB BANK (founded in 1941, now is in PAKISTAN).

These were the organized merchant bankers in recent history of INDIA.

Merchant Banking is an activity that includes corporate finance

activities, such as advice on complex financings, merger and acquisition

advice (international or domestic), and at times direct equity

investments in corporations by the banks.

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Merchant banks are private financial institution. Their primary sources of

income are PIPE financings and international trade. Their secondary income

sources are consulting, Mergers & Acquisitions help and financial market

speculation. Because they do not invest against collateral, they take far

greater risks than traditional banks. Because they are private, do not take

money from the public and are international in scope, they are not regulated.

Anyone considering dealing with any merchant bank should investigate

the bank and its managers before seeking their help.

The reason that businesses should develop a working relationship with a

merchant bank is that they have more money than venture capitalists. Their

advice tends to be more pragmatic than venture capitalists. It is rare for a

merchant bank to fail. The last major failure was Barings Bank (1992). It

failed because of unsupervised trading of copper futures contracts and

buybacks. When the Dot Com Bubble burst in 2001, scores of venture

capital firms failed. The greatest merchant bank failure in history was the

Knights Templar. After the Crusades, the Order became immensely wealthy

controlling and funding the trade between the Middle East and Western

Europe. They foolishly loaned money to the French Government. To avoid

repaying the money, King Louie had the Pope declare the Order heretics.

Thousands of monks lost their lives, but France balanced its budget.

To understand Merchant Banks, you should know something of their history.

Modern merchant banking started in Italy during the 7th Century. The

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banking practices evolved from the financing structure of the Silk Road

Trading that predates the Roman Empire.

The basic financing structure was the advance payment for goods by

merchant bankers at a great discount to the delivery value of those goods. In

the case of Italy and then Germany, wheat was the product. The merchant

banks purchased the wheat soon after planting. They accepted the risk of

crop failure.

They profited when they sold the wheat. In most countries today, the

national government accepts the risk through government crop insurance.

As the British Empire expanded in the 18th and 19th Centuries, merchant

banks prospered in London. For instance, merchant bankers funded

Canada’s Hudson Bay Company. This period saw the rise of such merchant

banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from

the trade created by the Dutch East Indian Company. Since the 18th century,

the role of the merchant banker has been considerably broadened to include

a composite of modern day skills. Such skills are inherently entrepreneurial,

managerial, financial and transactional.

Today, North American merchant banks have taken the form of "boutiques"-

whereby, each offers its own specialized services. The hallmarks of these

merchant bank boutiques are that they typically charge fees payable in cash

and/or the client's stock for each service rendered. You can find a merchant

bank that meets any reasonable set of needs.

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Merchant Banking in India – Post Independence:

In 1967, RBI issued its first merchant banking license to grind lays started

with management of capital issues, production planning, system design and

also market research. It provides management consulting services as well.

Citibank setup its merchant banking division in 1970. its scope includes

assisting new entrepreneur, evaluating new projects, raising funds through

borrowing and issuing equity. Indian banks started banking services as a part

of multiple services they offered to clients from 1972. State bank of India

started the merchant banking division in 1972. In the initial years the

objective was to render corporate advice and assistance to small and

medium entrepreneurs. Merchant banking activities are organized and

undertaken in several forms. Commercial banks and foreign development

finance institutions have organized them through formation of division;

nationalized banks have formed subsidiaries companies and share brokers

and consultancies constituted themselves into public ltd. Co. or registered

themselves as private ltd. companies. Some of them have equity stake of

foreign merchant bankers.

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Merchant Bank

A merchant bank deals with the commercial banking needs of international

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

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

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

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

deal primarily with other merchant banks and other large financial

institutions.

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

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

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

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

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

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

various market authorities, and is also frequently responsible for marketing

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

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

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

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


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

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

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

finance.

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

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

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

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

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

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

behind the scenes and away from the spotlight.

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Importance and Need of merchant banking

Important reason for the growth of merchant banking has been

developmental activity throughout the country, exerting excess demand on

the sources of funds for ever expanding industry and trade, thus, leaving a

widening gap under bridged between the supply and demand of

inventible funds. All Indian financial institutions and experienced resources

constraint to meet the ever increasing demands for funds from the corporate

sector enterprises. In the circumstances 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 consultant firms

to enter into the field of merchant banking and share the growing capital

markets. With the result, all the commercial banks in nationalized and public

sector as well as in private sector including the foreign banks in India have

opened their merchant banking windows and are competing in this field.

There has been a mushroom growth of financial consultancy firms and

broker firms doing advisory functions as well as managing public issues in

syndication with other merchant bankers.

Notwithstanding the above facts, the need of merchant banking institutions

is felt in the wake of huge public savings lying still untapped. Merchant

banks can play highly significant role in mobilizing funds of savers to

investible channels assuring promising return on investments and thus can

help in meeting the widening demand for investible funds for economic

activity.

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With the growth of merchant banking profession corporate enterprises in

both public and private sectors would be able to raise required amount of

funds annually from the capital market to meet the growing requirements for

funds for establishing new enterprises, undertaking

expansion/modernization/diversification of the existing enterprises. This

reinforces the need for a vigorous role to be played by merchant banks.

Merchant banks have been procuring impressive support from capital

market for the corporate sector for financing their projects. This is

evidenced from the increasing amount raised form the capital market by the

corporate enterprises year after year.

In view of multitude of enactments, rules and regulations, guidelines and

offshoot press release instructions brought out by the government from time

to time imposing statutory obligations upon the corporate sector to comply

with all those requirements prescribed therein, the need of skilled agency

existed which could provide counseling in these matters in a package form.

Merchant bankers, with their skills, updated information and knowledge,

provide this service to the corporate units and advise them on such

requirements to be complied with for raising funds from the capital market

under different enactments viz. Companies Act, Income-tax Act, Foreign

Exchange Regulation Act, Securities Contracts (Regulation) Act and various

other corporate laws and regulations. Merchant bankers advise the investors

of the incentives available in the form of tax relief’s, other statutory

relaxations, good return on investment and capital appreciation in such

investment to motivate them to invest their savings in securities of the

corporate sector.

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Role of Merchant Banker

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

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

promptly attending to the corporate problems and suggest ways and means

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

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

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

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

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

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

pace with the changing environment where government rules, regulations

and politics affecting business conditions frequently change; where science

and technology create new innovations in production processes of industries

envisaging immediate renovations, diversifications, modernizations or

replacements of existing plant and machinery or other equipments putting

new demands for finances and necessitating overhauling of the capital

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

instruments of financing industrial projects. He has to assume wider

responsibilities of saving industrial units from going sick and guiding

industries to be setup in industrially backward areas to eliminate regional

imbalances in industrial development of the country.

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

money to invest in corporate securities and other productive investment

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

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

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

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

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

community. He must bridge the communication gap between different

sections and resolve the problem being faced in different areas concerned

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

to be dynamic.

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

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

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

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

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

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

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The growth of Merchant banking in India

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

banking division setup by the Grindlays Bank, the largest foreign bank in the

country. The main service offered at that time to the corporate enterprises by

the merchant banks included the management of public issues and some

aspects of financial consultancy. Following Grindlays Bank, Citibank set up

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

assisting new entrepreneurs and existing units in the evaluation of new

projects and raising funds through borrowing and equity issues.

Management consultancy services were also offered. Merchant bankers are

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

Consequent to the recommendations of Banking Commission in 1972, that

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

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

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

was to render corporate advice and assistance to small and medium

entrepreneurs.

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

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

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

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

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

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

(1986) and IDBI (1991).

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Organizational setup of merchant bankers in India

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

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

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

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

financial and technical consultants and professionals. Securities and

Exchange Board of India has divided the merchant bankers into four

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

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

merchant banking organizations can be categorized into four groups on the

basis of their linkage with parent activity. They are:

(A) Institutional Base

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

various private/Central Governments/State Governments financial

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

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

and policies.

(B) Banker Base

These merchant bankers function as division/subsidiary of banking

organization. The parent banks are either nationalized commercial bank or

the foreign banks operating in India. These organizations have brought

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professionalism in merchant banking sector and they help their parent

organization to make a presence in capital market.

(C) Broker Base

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

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

merchant banking related operations also like providing investment and

portfolio management services.

(D) Private Base

These merchant banking firms are originated in private sector. These

organizations are the outcome of opportunities and scope in merchant

banking business and they are providing skill-oriented specialized services

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

independently or through some collaboration with their Indian counterparts.

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

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

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

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

commercial banks and All India Financial Institutions.

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Requirements for setting up a merchant banking outfit

1. Formation of the Business Organization

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

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

types of organizations are listed below:

a. Sole proprietorship

b. Partnership firm

c. Hindu Undivided Family (HUF)

d. Corporate Enterprises

e. Co-operative Society

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

company. Merchant Banks are generally setup as subsidiary companies of

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

2. Adoption of a viable business plan

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

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

adequacy, profitability, growth opportunities and current market size are

some of the factors which need to be looked into.

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3. Registration of Merchant Bankers

a. Application for grant of certificate

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

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

merchant banker namely:-

Category I, that is –

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

consist of preparation of prospectus and other information relating to the

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

and refund of the subscription; and

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

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

underwriter, portfolio manager;

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

issue;

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

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

certificate of registration needs to be obtained from SEBI.

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b. Application to conform to the requirements

The application should conform to all the requirements under the SEBI

guidelines, otherwise it may be rejected.

c. Furnishing of information, clarification and personal

representation

The Board may require the applicant to furnish further information or

clarification regarding matters relevant to the activity of a merchant banker

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

officer may appear before the Board for personal representation.

d. Consideration of application

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

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

and in particular the applicant complies with the following requirements,

namely: -

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

financial company

the merchant banker who has been granted registration by the Reserve

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

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

the applicant has the necessary infrastructure like adequate office

space, equipments, and manpower to effectively discharge his activities

the applicant has in his employment minimum of two persons who

have the experience to conduct the business of the merchant banker

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a person directly or indirectly connected with the applicant has not

been granted registration by the Board;

the applicant fulfils the capital adequacy requirement is as follows:

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

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

shall be as follows,

Category Minimum Amount

Category I Rs. 5, 00, 00, 000

Category II Rs. 50, 00, 000

Category III Rs. 20, 00, 000

Category IV Nil

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

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

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

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

of any economic offence

the applicant has the professional qualification from an institution

recognised by the Government in finance, law or business management

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

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e. Procedure for Registration

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

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

the fees as prescribed.

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

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

manner and within the period specified.

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

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

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

banker for the period during which the suspension subsists.

The Merchant Bank can commence business on acquisition of a Certificate

of Registration from the SEBI after completion of the above mentioned

formalities.

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Main Objectives Of Merchant Bankers

Merchant bankers render their specialized assistance in achieving the

main objectives which are presented below:

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

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

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

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

civil body, public authority established in India.

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

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

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

for the venture capital technology funds.

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

construction of houses and buying of land.

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

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

lawful ways in compliance with the relevant laws of India.

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

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

any other company.

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Obligations and Responsibilites

Merchant bankers have the following obligations and responsibilities.

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

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

stipulated period of time.

2. No merchant banker should associate with another merchant banker

who is not registered in SEBI.

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

of unpublished information available to them in the course of their

professional assignment.

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

when required for and submit all the records.

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

requires any information from them.

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

for them.

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

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

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

refund etc.

Code of Conduct

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

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

conduct. They are:

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

his dealings.

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

diligence, exercise independent professional judgement.

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

conflict of duties and interests.

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

competition with other merchant bankers.

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

achievement.

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

prompt efficient and cost effective service.

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

received during the course of service to his client.

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

or manipulation.

Guidelines of SEBI

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

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

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

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

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

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

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

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

both the primary market and secondary market.

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

Companies leading to the investor protection. They are presented

below:

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

income, the details should be disclosed.

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

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

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

Exchange.

c) The Company should also disclose the information regarding the

capacity utilization of the plant for the last 3 years.

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

20 per cent of the expanded capital.

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

per cent of the issue price.

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

of various types of investor’s grievances.

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

Indian mutual funds (20%),

FIIS (24%),

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

Financial institution (20%).

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

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

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

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

securities.

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

mandatory collection centres should be established.

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

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

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

with any rights issue.

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

lead managers and the Company in the memorandum of understanding.

The Difference between

Investment banks and Merchant banks

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Merchant Banking in IndiaMerchant banks and investment banks, in their purest forms, are

different kinds of financial institutions that perform different services.

In practice, the fine lines that separate the functions of merchant banks and

investment banks tend to blur. Traditional merchant banks often expand into

the field of securities underwriting, while many investment banks participate

in trade financing activities.

In theory, investment banks and merchant banks perform different functions.

Pure investment banks raise funds for businesses and some

governments by registering and issuing debt or equity and selling it on a

market. Traditionally, investment banks only participated in underwriting

and selling securities in large blocks. Investment banks facilitate mergers

and acquisitions through share sales and provide research and financial

consulting to companies.

Traditionally, investment banks did not deal with the general public.

Traditional merchant banks primarily perform international financing

activities such as foreign corporate investing, foreign real estate

investment, trade finance and international transaction facilitation.

Some of the activities that a pure merchant bank is involved in may include

issuing letters of credit, transferring funds internationally, trade consulting

and co-investment in projects involving trade of one form or another.

The current offering of investment banks and merchant banks varies by the

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Merchant Banking in Indiainstitution offering the services, but there are a few characteristics that

most companies that offer both investment and merchant banking share.

As a general rule, investment banks focus on initial public offerings (IPO’s)

and large public and private share offerings. Merchant banks tend to operate

on small-scale companies and offer creative equity financing, bridge

financing, mezzanine financing and a number of corporate credit products.

While investment banks tend to focus on larger companies, merchant banks

offer their services to companies that are too big for venture capital firms to

serve properly, but are still too small to make a compelling public share

offering on a large exchange. In order to bridge the gap between venture

capital and a public offering, larger merchant banks tend to privately place

equity with other financial institutions, often taking on large portions of

ownership in companies that are believed to have strong growth potential.

Merchant banks still offer trade financing products to their clients.

Investment banks rarely offer trade financing because most investment

banking clients have already outgrown the need for trade financing and the

various credit products linked to it.

Merchant banks and Commercial banks

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Merchant banks Commercial banks

1) Assist in raising capital in the form of

equity, preference shares, and syndicated

loan working capital instruments.

Provide funds in the form of

term loan and working capital.

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

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

feature.

4) Mainly fees based business. Mainly fund based business

5) Being advisors, they are closer to the

customers and get to know risks of the

transaction s properly. They work on

risks shields i.e. mitigation measures

Being lenders, they are more

cautions, assess risks in lending

proposal and cannot afford to be

grossly relationship based and

close to the customer.

6) Most of work they get is about

management of equity issues in the

capacity of lead manager, underwriter,

piercing of issue, book running, and

liaisoning with SEBI.

Commercial banks majority

business is of terms lending and

bank deposits.

Services of Merchant Bankers In India:-

30

Merchant Banking in IndiaMerchant bankers provide services as follows:

Business planning stage: 1)project feasibility study

2)advice on capital structuring

Equity raising: 3)preparation of prospectus and

liaison with SEBI

4)pricing decisions

5)marketing in the capacity of lead

managers

6)underwriters to the issue

7)post issue management

8)assistance in ADR/GDR

Debt raising: 9)management of debenture issue

10)preparation of bankable proposal

and syndication of loan

Working capital raising: 11)assistance in arranging optimal

capital finance

Strategic advice: 12)advice on mergers and

acquisitions

13)corporate structuring advice

SERVICES PROVIDED BY MERCHANT BANKS: (in detail)

31

Merchant Banking in IndiaThe development activity through the country had exerted excess demand on

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

not be met by the All India Financial Institutions. In these circumstances, the

corporate sector enterprises had the only alternative to avail themselves of

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

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

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

field of merchant banking for managing the public issues.

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

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

mobilizing funds from savers to invest in channels assuring promising return

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

supply of investible funds.

Merchant bankers not only provide advisory services to corporate

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

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

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

invest their saved money in sound and healthy concerns with

confidence, safety and expectation of higher yields.

Broadly a merchant banker can provide the following services:

1. Corporate Counseling

32

Merchant Banking in India2. Project Counseling And Pre-Investment Studies

3. Credit Syndication And Project Finance

4. Issue Management

5. Underwriting

6. Bankers

7. Portfolio Management

8. Venture Capital Financing

9. Leasing

10.Non-Resident Investment Counseling And Management

11.Acceptance Credit And Bill Discounting

12.Advising On Mergers, Amalgamations And Take-Over

13.Arranging Offshore Finance

14.Fixed Deposit Broking

15.Relief To Sick Industries

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

33

Merchant Banking in IndiaCorporate Counseling

It includes a whole range of financial services provided by a merchant

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

steady growth and create a better image among investors.

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

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

financial engineering including venture capital, public issue management,

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

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

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

solving its corporate problems.

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

organizational goals for the enterprise, size of the organization and

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

means to solve those problems.

Project Counseling

34

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

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

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

institutions/banks.

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

for procuring financial assistance from financial institutions and banks, for

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

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

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

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

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

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

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

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

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

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

While rendering project counseling services, the merchant banker has to

ensure that the application forms for obtaining the funds from financial

institutions are filled in with relevant and appropriate information and before

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

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

technical, commercial and financial viability of the project.

35

Merchant Banking in IndiaCredit Syndication

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

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

could be procured to implement the project.

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

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

merchant banker in arranging and procuring credit from financial

institutions, banks and other lending and investment organizations for

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

referred to as loan syndication or credit syndication.

Credit syndication in case of domestic borrowings is with the institutional

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

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

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

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

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

working capital needs can be from internal sources like internal accruals

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

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

Issue Management and Underwriting

36

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

skilled and experienced merchant bankers. Previously, the managing agents

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

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

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

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

definite role in the management of public issues.

Public issue management involves marketing of corporate securities by

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

securities and offering securities to existing shareholders of the company.

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

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

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

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

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

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

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

finally advertise for the issue.

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

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

under subscription and complying the necessary statutory requirements for

listing of securities on the stock exchange.

Under writing of public issue

37

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

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

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

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

of under subscription, the amount underwritten would be subscribed in

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

benefits:

It earns a commission of the commitment given.

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

It expands its clientele by underwriting more and more issues.

Bankers to the Issue

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

the following cases:

The bank is a broker to the company

It has given underwriting commitments.

It acts as a manger to the issue

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

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

account of the controlling branch.

Portfolio Management

38

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

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

from different companies or institutions held by individuals firm or

corporate units.

Portfolio management refers to managing efficiently the investment in the

securities held by professionals to others.

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

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

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

money invested in securities.

A merchant banker while performing the services of portfolio management

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

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

environment affecting the capital market, study the securities market and

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

keep record of latest amendment in government guidelines, stock exchange

regulations, RBI regulations, etc.

Advisory Services Relating To Mergers and Takeovers

39

Merchant Banking in IndiaA merger is defined as a combination of two or more companies into a

single company where one services and other looses their corporate

existence. A merger is also defied as an amalgamation wherein the

shareholders of the combining companies become substantially the

shareholders of the company formed.

A takeover is referred to as an acquisition, which is the purchase, by one

company of a controlling interest in the share capital of another existing

company.

Merchant bankers are the middlemen settling negotiations between the

offered and the offeror. Their role is specific and specialized in handling the

mergers and taker over assignments. Being a professional expert, the

merchant banker is apt to safeguard the interest of the shareholders in both

the companies and as such his assistance is useful for both the companies,

i.e. the acquirer as well as the acquired company.

Based on the purpose of business objective, the search of the acquirer

company will start for a merger partner company. If the objective of merger

is growth oriented i.e. seeking expansion in production and market

segments, utilization of existing companies or optimum utilization of

resources, then the acquirer company will select a business related company

as a merger partner.

40

Merchant Banking in IndiaIf the objective is diversification in production line or business activities,

then it will select a non-related company as a merger partner.

Once the merger partner is proposed the merchant banker has to appraise the

merger/takeover proposal with respect to financial viability and technical

feasibility. He has to negotiate with the parties and decide the purchase

consideration and mode of payment. He has to comply with the legal

formalities like getting approval from the Government/ RBI; drafting the

scheme of amalgamation; getting approval of company Board, financial

institution, high court if required; arranging for the meeting etc.

Venture Capital Financing

Financing an emerging high-risk project is called venture capital financing.

Many merchant bankers are entering into this area by also financing viable

upcoming projects. The financing is by subscription to the equity capital,

while repayment is by selling the equity through stock market when the

shares are listed.

Leasing

Is there another lucrative area of financing where merchant bankers are

turning? Leasing is a viable source of financing while acquiring capital

assets. The services include arrangement for lease finance facilities for

leasing companies, legal; documents and tax consultancy.

41

Merchant Banking in IndiaNon Resident Investment

To attract NRI investments in the primary and secondary markets, the

merchant bankers provide investment advisory services to the NRIs in terms

of identification of investment opportunities, selection of securities, portfolio

management, etc. they also take care of operational details like purchase and

sale of securities securing the necessary clearance from RBI under FERA for

repatriation of dividends and interest, etc.

Acceptance Credit and Bill Discounting

Though merchant bankers world over specialize in acceptance credit and bill

discounting, these services are not currently provided by merchant bankers

in India the principal reasoning being the lack of an active market for

commercial bills.

Arranging Offshore Finance

The merchant bankers also help their clients in the following areas involving

foreign currency financing:

1. Financing Of Exports And Imports

2. Long Term Foreign Currency Loans

3. Joint Ventures Abroad

4. Foreign Collaboration Arrangements

The assistance rendered as in the case of financial services covers appraisals,

negotiations, compliance with procedural and legal aspects etc.

42

Merchant Banking in IndiaManagement of Fixed Deposits of Companies

Recently, merchant’s bankers have begun to structure and mobilize fixed

deposits for their corporate clients. They take care of the procedural and

legal aspects, and also mange the collection and subsequent servicing of the

deposits. Advice with regard to the amount to be raised, interest charges,

terms of deposits and other related issues are also offered to the client.

Relief to Sick Industries

The services offered by merchant bankers to sick industries can be

summarized as follows:

1. Assessment of capital requirements and counseling on capital

restructuring;

2. Appraisal of technological, environmental, financial and other factors

causing sickness;

3. Preparations of programs and packages for rehabilitation of sick units;

4. Providing necessary assistance where the rehabilitation package

involves mergers or amalgamation;

5. Obtaining necessary approval for implementation the rehabilitation

package from the statutory authorities;

6. Monitoring the implementation of the scheme of rehabilitation.

43


Qualities of merchant bankers:-

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

1. Knowledge: Thorough understanding of technical issues related to

business, understanding of legal and statutory requirements, appreciation of

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

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

issues.

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

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

market on ongoing basis.

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

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

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

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

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

44


4. Innovation: Corporate may approach with unique requirements.

Standard solutions and products may not solve problems sometimes.

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

engineering. They can device new financial instruments and get approved

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

requirements.

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

its customers. Merchants bankers should take utmost care that the

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

for which it was disclosed to the merchant banker.

45


Problems and hurdles:-

Not many but some problems are faced by Indian merchant bankers.

I. Industry compartmentalization : company which is in merchant banking

business would have expertise in underwriting, hire purchase, leasing, and

portfolio management, money-lending. But RBI does not permit merchant

banking firms to get into these activities. So the same promoters have to setup

different companies for different purposes. Management cost increases and

expertise pooling i.e. multiple use of same talent is not possible.

II. Malafide practices: India corporate culture is bettering. but still many

corporate have excessively friendly approach. Favored allotment of shares,

tampering with project appraisal report to bankers is common. Corporate

like to use merchant bankers for malafide intentions. This gives growth to

more boutique fly-by-day firms. Giant professional or multinational

merchant bankers are cautions in their approach to Indian market.

III. Regulations: though regulations are much better now, there is still scope

for further improvement. Merchant bankers can be made more accountable

and responsible. Professional qualification focused on merchant banking is

not available. Industry is not well organized and all the players do not play

the same tune. This is specifically evident in comparison with insurance

industry and mutual funds industry.

46


Scope for merchant banking in India:-

Scope for merchant banking depends upon size of the market,

restriction-liberation, banking policies, corporate culture, and

corporate dynamics.

1. Size and dynamics of the market : Indian market is growing. In fact

India is one of the largest emerging markets. Obviously, public issues, FDI,

debt raising are on rise. Lots of new and green fried projects are happening.

Merchant bankers have lots space to contribute.

2. Restrictions-liberalization : more liberal the market is, more the

things left to be decided by the corporate. Merchant bankers assist in

decision making and hence their scope increases. With significant market

freedom, merchant bankers work has increased many folds.

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

in merchant banking business directly. They should setup a subsidiary for

the purpose. This limits scope of commercial banks and gives space to

merchant bankers. This policy also results in fair business practices. Some

countries allow commercial bankers to get involved in IPO’s, placement of

debentures, etc. Indian scenario is favorable to merchant bankers.

47


4. Corporate culture: corporate can do project appraisal, strategic

restructuring in house as well. If the corporate prefer third-party independent

assessment, then only they will engage merchant bankers. Otherwise

merchant banker’s role is only statutory as in issue management. India inc.

apparently prefers and is happy with merchant bankers work.

5. Corporate dynamics : more happening in business gives more

opportunities to merchant bankers. Mergers, takeover acquisition, new

Greenfield projects, fund raising for government institutions, active money

market are all providing better business prospectus to merchant bankers.

48


Progress of Merchant Banking in India:-

Upto 1970, there were only two foreign banks which performed

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

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

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

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

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

of large stock broking firms and financial consultants also entered into

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

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

India financial institutions, and private firms. Merchant banking

functions of these institutions was related only to management of new

capital issues.

Merchant banking industry which remained almost stagnant and

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

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

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

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

bankers registered with SEBI under four different categories include 50

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

IRBI, Tourism Finance corporation of India, infrastructure Leasing and

Financial Services Ltd. and private merchant bankers.

In addition to Indian Merchant Bankers, a large number of reputed

international Merchant Bankers like Merrill Lynch, Morgan Stanley,

Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India

under authorization of SEBI. As a result of proliferation, Indian Merchant

49

Merchant Banking in IndiaBankers are faced with severe competition not only among themselves but

also with the well developed global players.

CURRENT AFFAIRS

RBI allows cash withdrawal from merchant banker terminals

Besides ATMs, customers can now also withdraw cash up to Rs1000 from

terminals at different merchant establishments, the Reserve Bank. As a

further step towards enhancing the customer convenience in using the plastic

money, it has been decided to permit cash withdrawals at POS (point of sale)

terminals. To start with, this facility will be available for all debit cards

issued in India, up to Rs1000 per day," RBI said in a statement issued here.

The use of debit cards at POS terminals at different merchant establishments

has been steadily increasing, it said. This facility is available only against

debit cards issued in India.

At present cash withdrawal facility using plastic cards is available only at

Automatic Teller Machines (ATMs) with the number of ATMs in the

country at 44,857. There are 4,70,237 POS terminals in the country.

This facility may be made available at any merchant establishment

designated by the bank and would be available whether the card holder

makes a purchase or not.

Morgan Stanley makes i-banking comeback

The joint venture between JM Financial and Morgan Stanley was inked in

1997 and formalized in 1999. The JV had investment banking operations

other than equity broking, research, wealth management and advisory and

securities distribution operations. Post the split, JM Financial acquired the

investment banking company together with its subsidiaries, which were

engaged in fixed income, equity broking, wealth management, advisory and

50

Merchant Banking in Indiadistribution businesses of $ 20 million. The Indian partner sold its 49%

holding in JM Morgan Stanley Securities (JMSPL), the institutional equity

broking company to Morgan Stanley for $ 445 million.

Bulge bracket investment banking major, Morgan Stanley has re-entered

investment banking business on its own, after parting ways with JM

Financial — its former Indian partner.

PNB aims profit of 7,500crore by 2013

The country's second largest public sector lender Punjab National Bank aims

to double its profit to Rs7,500 crore in the next four years.

"The bank has set a target to expand total business to Rs10crore and earn net

profit of Rs7,500 crore by 2013," said PNB Chairman and Managing

Director K C Chakrabarty, who is charge of Deputy Governor of RBI.

The growth driver would be better asset liability management, thrust on

recovery, focus on customers and financial inclusion, he had said. Besides,

the bank plans to open new line of businesses in the current fiscal including

merchant banking subsidiary.

PNB Investment Services aims to provide investment consultancy and

merchant banking services and would be operational in the next three

months. Currently, these operations are run by a division of the bank.

ICICI Bank to oversee mergers and acquisitions

ICICI bank and its merchant banking arm, ICICI Securities (I-Sec), have

entered into an agreement, whereby all M&A deals will be done out of

ICICI Bank. The agreement goes on to define an M&A deal as one which

involves change in management control.

This arrangement replaces the earlier practice of both I-Sec and ICICI Bank

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Merchant Banking in Indiaworking together on M&A deals. “Since a predominant number of people,

who wish to be advised on M&A, also look for acquisition finance, it was

decided that the business should be housed in the bank,” I-Sec MD Madhabi

Puri Buch told ET. “Now, if a corporate is seeking a sell mandate or a buy

mandate, where the transfer of controlling interest takes place, the deal will

be done by ICICI Bank.”

ICICI Bank had initially entered the investment banking space in 2006. Over

the past couple of years, both the bank and its subsidiary have been vying for

deals. The new deal has taken into effect between both the entities from

April 1.

Birla Capital and Financial Services gets SEBI merchant banking

license

Birla Capital & Financial Services Ltd has been granted a merchant-banking

license by the Securities and Exchange Board of India. The license will

enable the company to offer a wide range of on-shore investment banking

advisory and underwriting services in the Indian market.

The company, which is a part of the Yash Birla conglomerate, will initially

concentrate on regulated services like initial public offerings, takeover,

buybacks, delisting and valuations. It also offers non-regulated services like

PE Syndication, M&A Advisory and other corporate advisory.

Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash Birla

Group that has diversified interest in sectors like auto & engineering, textiles

& chemicals and power & electrical, education & IT.

52


Primary market slowdown, affects merchant bankers’ wallet

The recent slowdown in the primary market has impacted not only investors

but merchant bankers as well, as there has been a significant decline of

nearly 60 per cent in their percentage fees so far this year.

"There is a clear drop in the merchant banking fees to Rs 216crore in

comparison to Rs. 771crore for the calendar year 2007, indicating a drop of

57.9 per cent on annualized basis," Nexgen Capitals, the merchant-banking

arm of brokerage firm SMC Global Securities.

Merchant bankers are those who advise the issuer about the public offer and

manage the issue.

The average percentage fees has declined to 1.21 per cent so far this year

from 2.24 per cent in 2007, the report added.

Reliance Power IPO of Rs 11,563 crore during this year with the merchant

banking fee of Rs 50.6 crore, amounting to 0.44 per cent of the issue size

had a great bearing on this trend.

Nomura launches its investing banking operations in India

Nomura Financial Advisory and Securities (India) Private limited ('Nomura

India'), a wholly-owned subsidiary of Nomura Holdings, Inc. ('Nomura'), has

launched its equity sales and trading and investment banking operations in

India.

In October 2008, Nomura, a global investment bank, acquired the majority

of Lehman Brothers' employees in India, including the equities sales and

trading, equity research, fixed income liquid markets sales and trading, and

investment banking teams.

53


By integrating the former Lehman Brothers India franchise and obtaining its

merchant banking licence and stock exchange memberships, Nomura India

said in a statement it has significantly expanded its capabilities in India

through a wide range of onshore financial solutions spanning securities

brokerage, securities underwriting and advisory services.

54


Association of merchant bankers in India (AMBI):

Association of merchant bankers in India is a professional non-profit

company setup to represent the industry. It is expected to set code of ethics

and facilitate dialogue between the industry and regulatory bodies. Training

and awareness programs are also expected from AMBI. Because of lack of

support from the members and non-initiative from SEBI/government, AMBI

is dormant at present.

ARTICLES:-

AMBI-SEBI talks on SRO

ENS ECONOMIC BUREAU

MUMBAI, May 8: The Association of Merchant Bankers of India (AMBI)

is proposing to have an exhaustive dialogue with the Securities and

Exchange Board of India (SEBI) on its functioning as a self-regulatory

organization (SRO).

This follows a feeling among AMBI members that it is being sidestepped

when decisions relating to merchant bankers are being taken. AMBI was

given SRO status in 1995, but it has not really been officiating as one.

Recently the association was really piqued when SEBI asked one of its

members to stop taking up further assignments without so much as giving it

any notice. AMBI feels that the member should have been given a fair

55

Merchant Banking in Indiahearing and also feels that AMBI as the SRO should have been informed

about the decision. A committee has subsequently been set up by AMBI to

go into the matter. Then there was the issue of asking all merchant bankers

to furnish details of employees to SEBI. This was also demanded without

consulting/informing AMBI.

The association has already made its disappointment clear to SEBI and the

proposed dialogue is reportedly being undertaken to clear all

misunderstandings.

56


EXAMPLE:-

MERCHANT BANKING SERVICES

INTRODUCTION

Canara Bank is also one of the leading Merchant Bankers in India, offering

specialized services to Banks, PSUs, State owned Corporations, Local

Statutory bodies and corporate sector.

Its SEBI registered Category I Merchant Banker / Underwriter to carry on

Issue Management (Public / Rights / Private Placement Issues),

Underwriting, Consultancy and Corporate Advisory Services etc.

They also hold SEBI registration Certificate to act as "Bankers to an Issue"

with network of exclusive Capital Market Service Branches to handle

“Capital Market" related assignments.

They undertake "project appraisals" with resource raising plans from Capital

Market/ Debt Markets and facilitate tie-ups with Banks / Financial

Institutions and Potential Investors.

57

http://www.canarabank.com/English/Home.aspx


Their uniqueness is extending services under single window concept

covering the following areas:

1. Merchant Banking

2. Commercial Banking

3. Investments

4. Bankers to Issue - Escrow Bankers

5. Underwriting

6. Loan Syndication

As leading Merchant Bankers in India, they have associated with issues

ranging from Rs.1crore to Rs.1500 crores, involving various types of

industries, banks, statutory Bodies etc. and have an edge in handling Private

Placement issues – both retail & HNIs.

SPECTRUM OF SERVICES:-

1. Equity Issue (Public/Rights) Management

2. Debt Issue Management

3. Private Placements

4. Project Appraisals

5. Monitoring Agency Assignments

6. IPO Funding

58

Merchant Banking in India7. Security Trustee Services

8. Agriculture Consultancy Services

9. Corporate Advisory Services

10. Mergers and Acquisitions

11. Buy Back Assignments

12. Share Valuations

13. Syndication

ISSUE MANAGEMENT SERVICES:-

1. Project Appraisal

2. Capital structuring

3. Preparation of offer document

4. Tie Ups (placement)

5. Formalities with SEBI / Stock Exchange / ROC etc.,

6. Underwriting

7. Promotion /Marketing of Issues

8. Collecting Banker / Banker to an issue

9. Post Issue Management

10. Refund Bankers

11. Handling of Dividend Warrant/Interest Warrant Payments

12. Debenture Trusteeship

Investment Criteria:-

59

Merchant Banking in IndiaA wide range of later stage opportunities are considered. Targeted

companies include the following characteristics:

1. Having weathered the start-up process and established a core business

model that is sustainable;

2. Proven management team;

3. If not already profitable, visibility to profitability within a 12-month

period;

4. Having established business partnerships that give it a major position in a

market space;

5. Significant barriers to entry; and

6. Technology or business that is scalable with global applications.

They look for opportunities for synergistic consolidation and/or companies

that are on the verge of extraordinary growth.

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STATE BANK OF INDIA

SBI’s Merchant Banking Group is strongly positioned to offer perfect

financial solutions to your business. They specialize in the arrangement of

various forms of Foreign Currency Credits for Corporate.

They provide the resources, convenience and services to meet your needs by

arranging Foreign Currency credits through:

• Commercial loans

• Syndicated loans

• Lines of Credit from Foreign Banks and Financial Institutions

• FCNR loans

• Loans from Export Credit Agencies

• Financing of Imports.

They are internationally the most Preferred Bank by Export Credit Agencies

for Guarantees in case of the Indian Clients or Projects.

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Merchant Banking in IndiaSBI being an Indian entity has no India exposure ceiling. Their Primary

focus is On Indian Clients. SBI’s seasoned Team of professionals provides

you with Insightful credit Information and helps you Maximize the Value

from the transaction.

PRODUCTS AND SERVICES

1] Arranging External Commercial Borrowings (ECB)

2] Arranging and participating in international loan syndication

3] Loans backed by Export Credit Agencies

4] Foreign currency loans under the FCNR (B) scheme

5] Import Finance for Indian corporates.

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PUNJAB NATIONAL BANK

India’s one of the Leading Nationalized Bank established in 1895, serving

over 3.5crore customers through 4520 branches and 439 extension counters

is the largest amongst Nationalized Banks. The Bank has recently been

ranked 21st among top 500 companies and 9th among top 50 brands by the

Economic Times. All the Branches of the Bank have been computerized.

The Bank has a concept of "Any Time, Any Where Banking" through the

introduction of Centralized Banking Solution (CBS) and over 2511 offices

have already been brought under its ambit.

The Bank is registered with SEBI as Category – I Merchant Banker for

providing all the major Merchant Banking services. Our gamut of Merchant

Banking services includes:

Issue Management Services – to act as Book Running Lead

Manager/Lead Manager for the IPOs /FPOs/Right issues/Debt issues

Project appraisal

Corporate Advisory Services

Underwriting of equity issues

Banker to the Issue/Paying Banker

Refund Banker

Monitoring Agency

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Merchant Banking in India Debenture Trustee

Marketing of the issue through a strong network of

QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one of

the major investor in the market having a treasury of 45000 crores.

Their Software for handling the Refund Banker is one of the best systems in

the industry. Its unique features provides online payment of the instrument

by our 2470 branches in 733 centers, online status of paid instruments, 100%

reconciliation at any point of time etc.

The Bank has an exclusive and specialized Capital Market Service Branch at

New Delhi for providing Merchant Banking Services to the Corporate

CONCLUSION

64

Merchant Banking in IndiaThe 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, 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 it’s going to get emerged in the

Indian economy. Hence, Merchant Banking can be considered as essential

financial body in Indian financial system.

Market development is predicted on a sound, fair and transparent

regulatory framework. To sustain the growth of the market and crystallize

the growing awareness and interest into a committed, discerning and

growing awareness and interest into an essential to remove the trading

malpractice and structural inadequacies prevailing in the market, and

provide the investors an organized, well regulated market.

65

Date post:	18-Nov-2014
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Merchant Banking in India

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