METHODOLOGY

Quantitative aspect:-

Primarily various books on merchant banking were read to know

various features and principle used in working of the industry. Moreover,

various magazines were read to know about the latest happening in this

field.

Websites were visited and information regarding different aspect, to

get a better knowledge on the topic was collected. Various websites were

visited so as to study the important of merchant banking in the ever rising

competition in today’s world.

Qualitative aspect:-

MR. NAVNEET (Anand rathi) was approached and interviewed, and

implementation and scope of merchant banking was understood through his

expertise in the field. Some analysis was done for different cases so as to

understand different strategies in different situation,

MR. Kotiyal (share khan) was also approached to give an insight on

the future of merchant banking in India and the current scenario

EXECUTIVE SUMMARY

Merchant banking an overview :-

Company raises capital by issuing securities in market. Merchant bankers at as

intermediaries between the issuer of capital and the ultimate investor who purchase these

securities.

Merchant banking……. is the financial intermediation that matches the entities that

need capital and those that have capital? It is function that facilitates the flow of capital in the

market.

Scope of merchant banking activities :-

Merchant banking activities helps:

• In channel sing the financial surplus of the general public into productive investment

avenues.

• To coordinate the activities of various intermediaries to the share issue such the

registrar, banker, advertising agency, printers, underwriters, brokers etc.

• To ensure the compliance with rules and registration governing the securities market.

Functions of a merchant banker…..

The following comprise the main functions of a merchant banker:

1. Management of debt and equity offerings:-

This forms the main function of the merchant banker. He assists

the companies in raising funds from the market. The main areas of

work in this regard includes : instrument designing, pricing the issue,

registration of the offer document, underwriting support, and

marketing of the issue, allotment and refund, listing on stock

exchanges.

2. Placement and distribution:-

the merchant banker helps in distributing various securities like

equity shares ,debt instrument, mutual fund product, fixed deposit,

insurance products, commercial paper to name a few. The distribution

network of the merchant banker can be classified as institutional and

retail in nature. the institutional network consist of mutual fund, foreign

institutional investor, private equity funds, pension fund, financial

institution etc. the size of such a network represents the wholesale

reach of the merchant banker. The retail network depends on

networking with investors.

3. Corporate advisory services:-

Merchant bankers offer customized solutions to their client’s

financial problems. The following are the main areas in which their

advice is sought.

4. Financial structuring:-

Includes determining the debt-equity ratio and gearing ratio for

the client: the appropriate capital structure theory is also framed.

Merchant banker also explores the refinancing alternatives of the client

and evaluate cheaper source of fund. Another area of advice is

habilitation and turnaround management. In case of sick units,

merchant banker may design a revival package in coordination with

banks and financial institution. Risk management is another area

where advice from a merchant banker is sought. He advice the client

on different hedging strategies and suggest the appropriate strategy.

5. Project advisory service:-

Merchant banker help their clients in various stage of project

undertaken by the clients. They assist them in conceptualizing the

project idea in the initial stage. Once the idea is formed, they conduct

feasibility studies to examine the viability of the proposed project. They

also assist the client in preparing different document like the detail

project report.

6. Loan syndication:-

Merchant banker arranges to tie up loans for their clients. This

take place in a series of step. Firstly they analyze the pattern of the

clients cash flows, based on which the terms of borrowing can be

defined. Then the merchant banker prepares a detailed loan

memorandum, which is circulate to various banks and financial

institution and they are invited to participate in the syndicate. The

banks then negotiate the terms of lending on the basis of witch the

final allocation is done.

Registration of merchant banker….

Registration with SEBI is mandatory to carry out the business of

merchant banking in India. An application should comply with the

following norms:

• The applicant should be a body corporate.

• The applicant should not carry on 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 cores

Introduction

The history of origin and growth of merchant banking

throughout the world, as discussed in the forgoing paragraphs, has

established, beyond doubts, the fact that the role of the merchant

banker had never been determined. They had followed strategy of

assuming different roles according to the need of need of time to

maintain their existence in the business environment. This is one of the

reasons that no fixed definition cold be ascribed to “MERCHANT

BANKING”.

Very commonly, the merchant banking has been defined

as to what a merchant banker does. This is well convinced definition

that could be given to any service oriented industry. The definition

given by different authors explaining the meaning of merchant banking

revolved around the role played by merchant banks. There role and

scope of such role have enlarged with the passage of time. The survey

of the existing literature in the foregoing pages reveals that merchant

banking is a non-banking financial activity resembling banking

originated, grown and sustain in European land, got enriched under

American patronage and now being rendered throughout the world by

both banking and non-banking institution. Some of the definitions are

discussed below to locate the practical meaning of the term “merchant

banking”. Dictionary meaning of merchant banking hints at merchant

banks as an organization that underwrites securities that underwrites

securities for corporations.

Dictionary meaning of merchant banking hints at merchant

banks as an organization that underwriters securities for operation

advises such clients on mergers and is involved in the ownership of

commercial venture. These organizations are sometimes banks which

are not merchants and sometimes merchants who are not banks and

sometimes houses which are neither merchants nor banks. These

definition reflects the historical formation of the merchant banking

profession as such, in which the merchants had assume banking role

and subsequently banks assume the merchant roles. Paul ferries

rightly states this phenomenon; the original label of ‘merchants and

bankers was replaced by merchant banker’s. There name lent

creditability involving the other people money.

In financial history of Western Europe, Charles P Kindle

Berger writes about merchant banking as the development of banking

from commerce frequently encountered a prolonged intermediate

stage known in England original as merchant banking. The merchant

banker was a banker was a merchant who lent his credit to others. This

was done in various ways viz. making advance to produces before

goods were sold, either the goods entrusted to merchant on

commission for sale abroad or received on consignment from abroad,

by issuing letters of credit under which merchants could draw bills of

exchange created by trade. Most merchant banks drifted from

generalized commerce into specified commerce and from specialized

commerce into finance.

Merchant Banks, thus, in essence, are financial institution

providing specialist services which generally include the acceptance of

bill of exchanges, corporate finance, portfolio management and other

banking services. It is not necessary that a merchant banker should do

all such activities to be called a merchant bankers, one merchant bank

may specialized in one activity only, and take up other activities also,

which may be complimentary or supportive to specialized activity. For

example, firms in England which are engaged in the business of

acceptance of bills are known as merchant bankers. Again, the firm

which are members of the issue House Committee in England (not

necessarily be engaged in the former activity) are also merchant

banks. Thus, merchant banks despite specialization in one activity

have different roles to play in different economic situation.

Merchant Banking is an emerging concept in the area of

financial services in India. The profession of Merchant Banking is

dedicated to fulfill the needs of trade and industries by acting as an

intermediary, consultant, liaison man and financer too. Merchant

banking is a result oriented profession commanding high degree of

skills and dexterity in solving business problems, assisting in

investments and financial decision making, assisting in laying

corporate strategies, assessing capital needs and helping in producing

the owed as well as borrowed funds for achieving balanced capital

structure of the client corporate un its. Merchant’s banker’s with the

confidence of investors and general public command high reputation

for passing on accurate, adequate and timely information which helps

and facilities in the functioning of capital markets, money markets &

international financial system. Merchant Bankers observe their skill as

personal possession for their comparative strengths in the profession.

Definition

“ A merchant bank is a defined as a financial institution or an

organization that underwrites corporate securities and advice such

clients on issue like corporate mergers etc involved in the ownership of

commercial venture, etc. this organization may be bank corporate

body, a firm or a priority concern”

Merchant banking in India started with management of

public issues and loan syndication and has been slowly and gradually

covering activities like “project counseling”, “portfolio management”

and mergers and amalgamation of corporate firm.

A merchant banker has been defined under the securities

and exchange board of India [merchant banker] rules,1992 as “any

person who is engaged in the business of issue management either by

making arrangements regarding selling, buying or subscribing

securities as manager, consultant, advisor or rendering corporate

advisory service in relation to such issue management.

Origin of Merchant Banking

The origin of merchant banking is traceable with the development of

inters a national trade and finance. Economic literature available on

international trade and finance contains lucid information on the evolution of

merchant banking and make a fascinating reading that provides the

historical background of origin of merchant banking.

During 13th century a few families owned and managed firms

engaged in coastal trade and finance were spread throughout the European

continent. The first known such firms were Ricardo of Lucca, Medici and

fogger. These firms besides their commercial activity involving sale and

purchase of commodities were engaged in banking activity also. These firms

had acted as the bankers to the kings of European status, financing costal

trade amongst European nation, borne exchange risk in the absence of any

international medium of exchange in addition to the security risk in financing

the king, monarchs and the state government engaged in the continental

wars. The motivation behind their banking activity was profit maximization

and to achieve this aim they invested their funds were they expected higher

return despite high degree of risk. For this reason ,merchant bankers used to

charge rate of return for financing , the highly risky venture .In turn , they

had to suffer ,very often , with heavy losses , closed down for reasons of

denial of , repayments ,denouncements of obligations by debtors , credits

losses and confiscations of their properties by the kings they financed .For

example , Riccardi of Lucca ,the Italian merchant banker, had opened an

office in England to serve the English Government of Edward-I of England and

had to succumb to closure when kings confiscate its properties on its refusal

to finance the war in 1924.similarly, the Medici bank of Florence was

liquidate in 1494, Fugger banker had to suffer in 1650 when Habsburg

Emperors Maximillan and Charles- V deflated in payments. There are

numerous instances likewise where, and then the existing merchant banker

had to collapse, leave the activity or started another activity or started the

same activity after strengthening the financing background. Thus, merchant

banking, with all the odds, survived and continued during thirteen and

sixteen centuries.

The main trading center for world trade and during the above period

had remained in Amsterdam where the Dutch trader relied, on the finance of

trade, upon the expertise of merchant banker, then knows as “commission

agent”. The important service they rendered including handling of the costal

trade and for their masters goods on commission basis, financing the owners

or suppliers of the goods and the shipping agencies by expounding their

payment obligations by accepting credit in addition to the direct financing.

These commission agents did big business by making small investment in

the goods manufactured by the sellers and thus accumulated huge wealth.

This gives a fillip to merchant banking activities and involves them in acts of

lending in addition to doing the jobs on commission basis. The main

borrowers of their funds were crowns, emperors and state government, as

started earlier, to whom these merchant banker continued lending for

reasons of patronage, recognition and higher expectation, despite the

suffering, at their hands and by their fellow trader. During the 17th centuries

also, the

Dutch trader and banker lent heavily to finance continental wars,

William of England borrowed huge sums in Amsterdam to fight the

continental wars. Many European states

Including Germany, Russia and Sweden had borrowed in Amsterdam

such huge sums during beginning of the 18th century. During Napoleonic war,

margrave of hassle, the richest merchant of Europe, had financed the

germane prince: jaws of Kassel and Frankfurt made loans to the rulers in the

name of, banker. This risky investment was made with the sole objective of

profit maximization by the merchant banker.

The industrial revolution in England gave further boost to the

merchant banking activity with the growth of the home industry made goods

like linen and paper. The scope of international trade and expanded to the

colonies of the new world. That is the North America and other continents.

Many more persons and firms were attracted to take up the merchant

banking activities particularly to transship the machine made goods from

European nations to other nations, developing colonies of the European

nation in other continents and bringing raw material from other nations and

colonies to Europe, and to finance such trade.

The founders of the several of the present day merchant banks who

started the business having the 18th century and early 19th century were the

merchants who traded overseas and earned reputation with their name.

These prominent merchants were requested to lend their name to the lesser

known traders by accepting a bills they guaranteed that the holder of bill will

receive the full value on the date of payment. This acceptance business has

grown with the expansion of the trade through the European nations and

continuous today the banks most activity engaged in it are the number of the

acceptance house committee of London.

The merchant banker traded for centuries and retained their names

and activities in different nations by expanding their activities. For example,

in Amsterdam, john & co. were bankers in 18th century and at the same time

engaged in trading of all commodities they could sell at a profit. In Frankfurt,

Meyer mashes Rothschild traded coffee, sugar, tobacco, along with the

British manufactures.

Growth of merchant banking in India

Merchant baking activities in India originated in 1969 with the

merchant banking division set up by the grind lay bank, the largest foreign

bank in the country, at the time. The main service offer to the corporate

enterprises by the merchant bank includes management public issue and

financial consultancy. Other forcing bank like city bank, chartered bank also

assumed the merchant banking activity in India. State bank of India started

merchant banking in 1973 followed by the ICICI in1974; both emerged as

leader in merchant banking with significance business during the period of

1974-1985 in comparison to forcing banks. Mid seventies witnessed a growth

of merchant banking organization in the country with various commercial

banks, financial institutions, broker firms entering in to the field of merchant

banking.

The growth in merchant banking business during the early

seventies was to forcing exchange regulation act 1973 [ FERA] where in large

number of forcing companies operating in India were required to dilute their

foreign holdings In order to continue business in the country his result in

expansion in the capital markets providing enough opportunities to merchant

bankers to established themselves. The change in Indian economy opened

new doors for merchant banking business enter in diversified area of

activities, but at the same time this brought competition in merchant

banking sector. This sector has traditionally been dominated by financial

institution, banks and their subsidiaries. Now, various private sectors

merchant bankers have emerged and some of them having international

reputation. Till the end of 1990, the merchant banking sector was almost

monopoly public sector institution and commercial banks, however since

1991 considerable number of private merchant banker have emerged on

same. Various existing corporate entities and non-banking finance

companies have also focused their activities in merchant banking business.

Before 1990 there were less than 40 merchant banking concerns while in 199

this number has exceeded to more than 400 firms.

Importance and need of Merchant Banking in India

Importance reasons for the growth of merchant banks has

been development activities throughout the country, exerting excess

demand on the sources of fund for ever expanding industries and trade, thus

leaving a widening gap unabridged between the supply and demand of

invisible funds. All India financial institution had experienced constrain of

resources to meet ever increasing demands for demands for funds frame

corporate sector enterprises. In such circumstances corporate sector had the

only alternative to avail of the capital market service for meeting their long

term financial requirement through capital issue of equity shares and

debentures. Growing demand for funds put pressure on capital market that

enthused commercial banks, share brokers and financial consultancy firms to

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

market. As a result all the commercial banks in nationalized and public sector

as well as in private sector including foreign banks in India have opened their

merchant banking windows and competing in this field.

Need for merchant banking is felt in the wake of huge public

saving lying untapped. Merchant banker can play highly significant role in

mobilizing funds of savers to invisible channels assuring promising returns on

investment and thus can assist in meeting the widening demand for invisible

funds for economic activity. With growth of merchant banking profession

corporate enterprises in both private sectors would be able to raise required

amount of funds annually from the capital market to meet the growing

requirement for funds for establishing new enterprises, undertaking

expansion, modernization and diversification of the existing enterprises. This

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

In view of multitude of enactment, rules and regulation, gridlines

and offshoot press release instructions brought out the government from

time to time imposing statutory obligations upon the corporate sector to

comply with those entire requirement prescribed there in the need of a

skilled agency existed which could provide counseling in these matters in a

package form. A merchant banker with their skills updated information and

knowledge provide this service to the corporate units and advice them on

such requirement to be complied with for raising funds from the capital

market under different enactment viz. companies act, income tax act,

foreign exchange regulation act, securities contracts corporate laws and

regulations. Merchant bank advice the investors of the incentives available in

the form of tax relief, other statutory relaxation, good return on investment

and capital appreciation in such investment to motivate them to invest their

savings securities of the corporate sector. Thus merchant banks help

industries and trade to rise and the investors to invest their saved money in

sound and healthy concern with confidence, safety and expectation for

higher yields. Finance is the backbone of business activities. Merchant

banker make available finance for business enterprises acting as

intermediaries between them raising demand for funds and the supplies of

funds besides rendering various other services.

The following are some of the reasons why specialist

merchant bank have a crucial role to play in India.

1. Growing complexity in rules and procedures of the government.

2. Growing industrialization and increase of technologically advanced industries.

3. Need for encouragement of small and medium industrialists, who require specialist services.

4. Need to develop backward areas and states which require different criteria.

5. Exploring the possibility of joint ventures abroad and foreign market.

6. Promoting the role of new issue market in mobilizing saving from.

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

private/central governments/ state government financial institution. Most of the financial

institution in India is in public sector and therefore such setup plays a role on the lines of

governmental priorities and policies.

REGISTRATION PROCESS OF MERCHANT BANKING

MERCHANT BANKER without holding a certificate of registration granted by the Securities and Exchange Board of India cannot act as a merchant banker.

SEBI will grant certificate to Merchant banker if it follows the following condition:- Merchant banker should be a body corporate and should not be non banking finance company

They must have a necessary infrastructure for maintaining an office

They must have employed a minimum of 2 persons with experience in merchant banking business.

They should not be connected with any company directly or indirectly.

Procedure for getting registration

CAPITAL STRUCTURE DECISION:-

The capital requirement depends upon the category. The minimum net

worth requirement for acting as merchant banker is given below:

Category I – Rs. 5 crores

Failing to pay registration fees

Cancellation of certificate

Category II – Rs, 50 lakhs

Category III – Rs. 20 lakhs

Category IV – Nil

The categories for which registration may be granted are given below

Category I – to carry on the activity of issue management and to act as

adviser, consultant, manager, underwriter, portfolio manager.

Category II - to act as adviser, consultant, co-manager, underwriter,

portfolio manager.

Category III - to act as underwriter, adviser or consultant to an issue

Category IV – to act only as adviser or consultant to an issue

Obligations and responsibilities Code of conduct:-

Every merchant banker has to abide by the code of conduct as

specified below. A merchant banker in the conduct of his business has to

observe standards of integrity and fairness of all his dealings with the clients

and other merchant bankers. He ought to render at all times high standards

of service, exercise due diligence, ensure proper care and exercise

independent professional judgment. He has to, wherever necessary, disclose

to his clients, the possible sources of conflict of duties and interest, while

providing services. He cannot made any statement or become privy to any

act, practice unfair competition, which is likely to be harmful to interest of

other merchant bankers or is likely to place such other merchant banker in a

disadvantageous position in relation to him, while competing for, or

executing, any assignment. He should not make any exaggerated statement,

whether oral or written, to the client either about his qualification or his

capability to other clients. A merchant banker always to endeavors to:

1) Render the best possible advice to the clients regarding clients the

needs and requirements, and his own professional skill; and

2) Ensure that all professional dealing are affected in prompt, efficient

and cost effective manner

He should not :-

1) Divulge to other clients, press or any other party any other party

confidential information about his client, which has come to his

knowledge; and

2) Deal in the securities of any client company without making disclosure

to the SEBI as per the regulations and also the Board of Directors of the

client company.

He should endeavor to ensure that:-

1) The investors are provided with true and adequate information

without making any misguided or exaggerated claims, and are made

aware of attendant risks before any investment decision is taken by

them;

2) The copies of prospectus, memorandum and related literature are

made available to the investors

3) Adequate steps are taken for the fair allotment of securities and

refund of application money without delay; and

A merchant banker should not generally and particularly

in respect of the issue of any securities be part to

a) Creation of false market;

b) Price rigging or manipulations; and

c) Passing of price sensitive information to brokers, members of

stock exchanges and other players in the capital market or take any

other action which is unethical or unfair to the investors.

Finally, he has to avoid by the provisions of the SEBI Act,

its rules and regulations which may be applicable and relevant to the

activities carried on by the merchant banker.

Restriction on Business:-

No merchant banker, other than a bank/public financial

institution (PFI) is permitted to carryon business other than that just in the

securities market with effect from December 9, 1997.

However, a merchant banker who is registered with RBI as a Primary

Dealer/Satellite Dealer may carry on such business as may be permitted

by RBI with effect from November 1999.

Maximum Number of Lead Managers :-

The maximum number of lead manager is related to the size

of the issue. For an issue of size less than Rs.50 crore, two managers are

appointed. For size groups of Rs.50 crore to Rs.100 crore and Rs.100 corer to

Rs.200 crore, the maximum permissible lead managers are three and four

respectively. A company can appoint five and five or more (as approved by

the SEBI) lead managers in case of issues between Rs.200 corer and above

Rs.400 crore respectively.

Responsibilities of Merchant Banker:-

Every lead manager has to enter into an agreement with the

issuing companies setting out their mutual rights, liabilities, and obligation

relating to issue and in particular to disclosures, allotment and refund. A

statement specifying these is to be furnished to SEBI at least one month

before the opening of the issue for subscription. In case of more than one-

lead manager/Merchant banker, the statement of has to provide details

about their respective responsibilities. A lead merchant banker cannot

manage an issue if the issuing company is its associate. He can also not

associate with a merchant banker who does not hold a certificate of

registration with the SEBI. It is necessary for a lead manager to accept a

minimum underwriting obligation of 5% of the total underwriting

commitment or Rs.25 lakh whichever is less. If he is unable to do so, he has

to make arrangements for an underwriting of an, equal amount by a

merchant banker associated with that issue under intimation to SEBI.

Due Diligence certificate:-

The lead manager is responsible far the verification of the

content of a prospectus/letter of offer in respect of an issue and the

reasonableness of the views expressed in them. He has to submit to the SEBI

at least two weeks before the opening of the issue far subscription a due

diligence certificate to the effect that

a) The prospectus/letter of after is in conformity with the

documents/materials and papers relevant to the issue,

b) All legal requirements connected with the issue have been fully

complied with, and

c) The disclosure is true, fair and adequate to enable the investors

to make a well-informed decision as to the investment in the

proposed issue.

Submission of Documents:-

The lead managers(s) to an issue has (have) to. Submit at

least two weeks before the date of filing with the registrar of

companies/regional stock exchange or both particulars of the issue, draft

prospectus/letter of offer, other literature to be circulated to the

investors/shareholders, and so an to the SEBI. They have to ensure that the

modifications/suggestion made by it with respect to the information to be

given to the investors is duly incorporated. The draft prospectus/draft letter

of offer should be submitted to the SEBI along with the prescribed fee

specified below:-

Issue size including premium and intended retention oversubscription

Fee per document

Up to Rs.5 crore Rs 10,000

Rs 5 crore- Rs 10 crore Rs 15,000

Rs 50 crore- Rs 50 corer Rs 25,000

Rs 10 crore- Rs 100 corer Rs 50,000

Rs 100 crore- Rs 500 corer Rs 2,50,000

More than Rs 500 corer Rs 5,00,000

They have to continue to be associated with the issue till the

subscribers have received the share debentures certificate or the refund of

excess application money.

Acquisition of shares a merchant banker is prohibited from

acquiring securities of any company on the basis of unpublished price

sensitive information obtained during the course of any professional

assignment either from the client or otherwise. He has to submit to the SEBI

the complete particulars of any acquisition of securities of a company whose

issue is being managed by him within 15 days from the date of the

transaction.

Disclosures to SEBI:-

As and when required, a merchant banker has to disclose to

the SEBI:

I) His responsibilities with regard to the management of the

issue,

II) Any changes in the information/particulars previously

furnished which have a bearing and the certificate of

registrations granted to it.

III) The names of the companies whose issues he has managed or

has been associated with,

IV) The particulars relating to breach of capital adequacy

requirements and

V) Information relating to his activities as manager, under writer,

consultant or adviser to an issue.

Procedure for Inspection:-

The SEBI can undertake the inspection of the books of accounts,

records, and documents of a merchant banker to ensure that the books are

maintained in the manner required, the provision of the SEBI Act, rules and

regulations are being camp lied with, and to investigate complaints from

investors/other merchant bankers/any other person or any matter having a

bearing on his activities, as a merchant banker and suo moto in the interest

of securities business/investors interest into the affairs of the merchant

banker.

The merchant banker has an obligation to furnish all the information

called for, allow a reasonable access to the premises, extend reasonable

facility for the examination of books/records/documents/computer data and

provide copies of the some and give all assistance to the inspecting

authority in connection with the inspection.

On the basis of the inspection report and after giving him an

opportunity to make an explanation, the SEBI can all upon the merchant

banker to take such measures as it deems fit in the interest of the securities

market and for due compliance with the provisions of the SEBI can appoint a

qualified auditor with the above powers of the inspection committee to

investigate into the books of accounts or the affairs and obligations of the

merchant banker.

Action in Case of Default:-

A merchant banker who fails to comply with any conditions subject

to which the certificate of registration has been granted has been granted,

by the SEBI and/or contravenes any of the provisions of the SEBI Act, rules or

regulations, is liable to any of the two penalties:

a) Suspension of registration or

b) Cancellation of registration

Suspension of Registration:-

A penalty of suspension of registration of merchant banker maybe

imposed where the merchant banker

1) violates the provisions of the SEBI Act, rules or regulations;

2) (a) Fails to furnish any information relating to his activity as

Merchant banker as require

(b) Furnishes wrong or false information;

(c) Does not submit periodical returns as required by the SEBI;

(d) Does not cooperate in any enquiry conducted by the SEBI;

3) Fails to resolve the complaints of the investors or fails to give a

satisfactory reply to the SEBI in this behalf;

4) Indulges in manipulating or price rigging or cornering activities;

5) Is guilty of misconduct or improper or unbusiness like or unprofessional

conducted which is not in accordance with the code of conduct under the

regulations;

6) Fails to maintain the capital adequacy requirement in accordance with the

provisions of the regulations;

7) Fails to pay the fees;

8) Violates the conditions of registration; and

9) Does not carry out his obligations-as specified in the regulation

Cancellation of Registration:-

A penalty of cancellation of registration of a merchant banker may

be imposed where:

1. The merchant banker indulges in deliberate manipulation or price rigging

or cornering activities affecting the securities market and the investor’s

interest

2. The financial position of the merchant banker deteriorates to such an

extent that SEBI is of the opinion that his continuance as merchant banker

is not in the interest of investors

3. The merchant banker is guilty of fraud, or is convicted of a criminal

offence and

4. In case of repeated defaults of the nature leading to suspension of

registration provided that the SEBI flourish reasons for cancellation in

writing.

On and from the date of suspension and cancellation of registration of the

merchant banker, he ceases to carryon any activity as a merchant banker.

The order of suspension of cancellation of certificate is published in at least

two daily newspapers by the SEBI.

Default by Merchant Bankers and Penalty Points:-

The SEBI imposes penalties for non-compliance for registration and

contravention of the regulations on the basis of which registration is

suspended/cancelled. The defaults are categorized into

(a) General,

(b) Minor,

(c) Major and

(d) Serious.

General defaults for the purpose of penalty points, the following activities

are classified under general defaults and attract one penalty point.

1)Non-receipt of draft prospectus/letter of offer from the lead manager by

SEBI, before filing with the registrar of companies/stock exchange

2)Non-receipt of interse allocation of responsibilities of lead managers in an

issue by SEBI prior to the opening of issue.

3)Non-receipt of due diligence certificate in the prescribed manner by SEBI,

before opening of the issue.

4)Failure to ensue the submission of certificate of minimum 90%

subscription to the issue.

5)Failure to ensure expediting of dispatch of refund orders,

shares/debentures certificate, filing of listing application by the issuer.

Minor Defaults:-

The following activities are categorized under minor defaults and attract two

penalty points.

a. Advertisement, circular, brochure, press release and other issue related

materials not being in conformity with the contents of prospectus.

b. Exaggerated information or information extraneous to the prospectus is

given by issuer or associated merchant baker in any press conference,

investor’s conference, broker’s conference or other such conference/meet

prior to the issue for marketing of the issue for marketing of the issue

arranged/participated by the merchant banker.

c. Failure to substantiate matters contained in highlights to the prospectus.

d. Violation of regulations relating to advertisement on capital issues.

e. Failure to exercise due diligence in verifying the contents of prospectus

letter of offer.

f. Failure to provide adequate and fair disclosure to investors and objective

information about risk factors in the prospectus and other issue literature.

g. Delay in refund/allurement of securities.

h. Non-handling of investors grievances promptly

Major Defaults:-

The following activities are categorized under major defaults and

attract three penalty points.

a) Mandatory underwriting not takes up by the managers

b) Excess number of lead managers than permissible.

c) Association of unauthorized merchant banker in an issue.

Serious Defaults:-

The following activities are categorized under serious defaults and

attract four penalty points:

1) Unethical practice by a merchant banker and/or violation of Code of

conduct.

2) Non-cooperation with SEBI in furnishing desired Information, documents,

evidence as may be called for.

A merchant banker on reaching cumulative penalty points of eight

attracts action from SEBI in terms of suspension/cancellation of

authorization. To enable a merchant banker to take corrective action, the

maximum penalty points awarded in a single issue managed by a merchant

banker are restricted to four. In the event of joint responsibility, the same

penalty point is awarded to all lead managers. In the absence of receipt of

inter se allocation of responsibilities, all lead managers to the issue are

awarded the penalty points.

Defaults in Prospectus:-

In the highlights are provided, the following deficiencies attract

negative points.

I. Absence of risk factors

II. Absence of listing

III. Extraneous contents to prospectus, if stated

The maximum grading points of prospectus can be 10 and

prospectuses scoring greater than or equal to 8 points are categorized

as A+, those with 6 or less than 8 points as A, those with 4 or less than

6 points as B and those with score of less than 4 points, the prospectus

falls in category C

General Negative Marks:-

If all highlights are provided in an issue

a) Risk factors should from part of highlights,-otherwise it attracts a

negative points of-1

b) Listing details, should form of part of highlights, otherwise it attracts a

negative point of-OS

c) Any matter extraneous to the contents of the prospectus, if stated in

highlights attracts a negative point of -0.5.

Organizational set up of Merchant Bankers in India

In India a common organizational set up 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, Canada

Bank, Punjab National Bank, Bank of India, etc. some firms are also organized

by financial and technical consultants and professionals. Securities and

exchanges 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 set up India’s

merchant banking organizations can be categorized into 4 group 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 set up plays a role on the lines of governmental

priorities and policies.

b) Banker Base :-

These merchant bankers function as division/ subsidiary of banking

organization. The parent banks are either nationalized commercial banks

or the foreign banks operating in India. These organizations have brought

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 baking related operating also like providing

investment and portfolio management services.

d) Private Base:-

These merchant banking firms are originated in private sectors.

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 Sectors merchant banking firms

have come up either as sole proprietorship, partnership, private limited

or public limited companies. Many of these firms were in existence for

quite some time before they added a new activity in the form of

merchant banking services by opening new division on the lines of

commercial banks and All India Financial Institution (AIFI).

Scope of merchant banking services in India

Merchant banking is a service oriented industry. The services rendered

by merchant banks to the corporate client in India are more or less the same

which are, being rendered traditionally in U.K and other European countries

by the merchant banks in U.S.A by the investment bankers to carter to the

needs of the business enterprises. India’s economy is in the state of

transition facing an entirely different environment than that faced by the

developed nations of the world. In view of these circumstances, a mark of

distinction is apt to be noted in the nature and the type of services being

offered by the merchant banks in India.

Following services provide by the merchant bankers in India:-

1. Corporate Counseling

2. Project Counseling

3. Loan Syndication

4. Management Of Capital Issues

5. Dealing In Secondary Market

6. Mutual Funds

7. Portfolio Management

8. Underwriters

9. Mergers / Amalgamations

Corporate Counseling:-

Corporate counseling denotes the advice provided by the Merchant

Banking to the corporate unit to ensure better corporate performance in

terms of image building among investors, steady growth through good

working and appreciation in market value of its equity shares. The scope

of corporate counseling, capital restructuring and, portfolio management

and the full range of financial engineering includes venture capital, public

issue management, and loan syndication, working capital, fixed deposit,

lease financing, acceptance credit, etc. However counseling is limited to

only opinions and suggestions and any detailed analysis would form part

of a specific service.

The scope of corporate counseling is restricted to the explanations

of concepts, procedures and laws to be observed by the client company.

Requirement of any action to be taken or compliance of statutory

formalities to be made for implementation of those suggestions would

mean the demand for a specific type of service other than corporate

counseling being offered by the merchant bankers. An academic analysis

of corporate counseling present a different picture than that transpires

from the literature of the merchant bankers Firstly corporate counseling is

the beginning of the merchant banking service which every clients

whether new or existing has got to avail a different matter whether a

merchant bank charges its client separately for rendering the corporate

counseling service or includes the element of fee in the other heads of

services but fro the angle of priority. Corporate counseling is first in line of

the services which a merchant banker offers and than other services.

Secondly the scope of the corporate counseling is very vast. Its

coverage ranges from the managerial economies, investments and

financial management to Corporate Laws and the related legal aspects of

the organizational goals, locations factors, organizational size and

operational scale, choice of product and market survey, forecasting of

product, cost reduction and cost analysis, allocation of resources,

investment decisions, capital management and expenditure control,

pricing methods and marketing strategy, etc. As financial and liivestment

experts, a merchant banker has to guide the corporate clients in areas

covering financial reporting, project measurements, working capital

management, financial requirements and the sources of finance,

evaluating financial alternatives, rate of returns and cost of capital

besides basic corporate changes of financial rearrangement,

Reorganization, mergers and acquisitions, etc. are the areas to be

covered.

Corporate laws should basically cover the legal aspects including

the various legal formalities involved in areas of corporate finance being

raised from the financial institutions, banks and the general pubic in the

form of loan, new issues of equity or debentures respectively

PROJECT COUNSELLING:-

Project counseling services may be rendered independently or

maybe, it relates to project finance and broadly covers the study of the

project and offering advisory assistance on the project viability and

procedural steps for its implementation broadly including following

aspects:- general review of he project ideas/ project profile, advice on

procedural aspects of project implementation, review of technical

feasibility of the project on the basis of the report prepared by own

experts r by the outside consultants, selecting Technical consultancy

Organization (TCO) for preparing project reports and market survey, or

review of the project reports or market survey report prepared by the

TCO, preparing project report form financial angle, and advice and act on

various procedural steps including obtaining government consents for

implementation of projects. This assistance can include obtaining of the

following approvals/licenses/permission/grants etc form the govt. agencies

viz. letter of intent, industrial license and DGTD registration and

government approval for foreign collaboration.

In addition to above, the facility providing guidance to Indian

entrepreneurs for making investment projects in India and in Indian joint

ventures overseas is also covered under this activity.

Besides the above services, project counseling may include

identification of potential investments avenues, precise capital structuring

shaping the pattern of financing, arranging and negotiating foreign

collaborations, amalgamations, mergers and takeover, financial study of

the project and preparation of viability reports, to advice on the

framework of institutional guidelines and laws governing corporate

finance, assistance in the preparation of project profiles and feasibility

studies based on preliminary project ideas in order to indicate the

potential. These reports would cover the technical, financial and economic

aspects of the project from the point of view of their acceptance by the

financial institutions and banks; advising and assisting clients in preparing

the applications for obtaining letters of intent, industrial license and DGTD

registrations etc, seeking approvals form the government of India for

foreign technical and financial collaboration agreements, guidance on

investment opportunities for entrepreneurs coming to India.

Pre-investment studies are directed mainly for the prospective

investor. These are the objective and detailed feasibility explanation of

which the principal aim is to arm the clients with the sound foundation of

facts and figures to evaluate the alternative avenues open for capital

investments form the pint of view of growth and profit prospects. Some of

the critical issues that a study of this genre deals will include an in-depth

investigation of environment and regulatory factors, location of raw

material, supplies, demand projections and financial requirements. Such a

study would assess the financial and economic viability of a given project

and help the clients to identify and short list those projects that are built

upon his inherent strength son as to accentuate corporate profitability and

growth in long run.

Grind lays bank has specialization in pre investment studies and it

conducts such studies for foreign companies’ whishing to participate in

joint ventures in India and offers a package of services including advice on

the extent of participation, government regulatory factors and an

environmental scan of particular industries in India

LOAN SYNDICATION:-

Credit syndication also known as credit procurement and project

finance services. The main task involved in credit syndication is to raise to

rupee and foreign currency loans with the banks and financial institutions

both in India and abroad. It also arranges the bridge finance and the

resources for cost escalations or cost Overruns.

Broadly, the credit syndications include the following acts;

(a) Estimating the total costs

(b) Drawing a financing plan for the total project cost-conforming to the

requirements of the promoters and their collaborators. Financial institutions

and banks, government agencies and underwriters.

(c) Preparing loan application for financial assistance from term

lenders/financial institutions/banks and monitoring their progress including

the pre-sanction negotiations.

(d) Selecting the institutions and banks for participation in financing.

(e) Follow-up of the term loan application with the financial institutions and

banks and obtaining the satisfaction for their respective share of

participation.

(f) Arranging bridge finance.

(g) Assisting in completion of formalities for drawl of term finance sanctioned

by institution expediting legal documentation formalities drawing up inter-

se agreements etc. prescribed by the participating financial institutions and

banks.

(h) Assessing the working capital requirements.

Preparing the necessary application for a successful issue management the

close liaison and coordination with the various constituents of the public

issue is an essential condition that warrants full cooperation of all the parties

affecting the cost and prospects f the issue. Merchant banks, acting as

‘Manager’ to the issue has to settle the fee for Advocate/solicitors’ advice,

accountants certification, broker’s and banks charges, underwriters’

commission, printers’ charges and advertising and publicity expenses and

coordinates with syndicated merchant bankers and principal brokers, stock

exchanges, etc. The responsibility for all this rests upon the merchant

banker. If proper coordination is not done, the success of the issue may be

rendered unassured.

Management OF Capital ISSUES:-

The capital issue are managed are category-1 merchant banker and

constitutes the most important aspects of their services. The public issue

of corporate securities involves marketing of capital issues of new and

existing companies, additional issues of existing companies including

rights issue and dilution of shares by letter of offer,. The public issues are

managed by the involvement of various agencies i.e. underwriters,

brokers, bankers, advertising agency, printers, auditors, legal advisers,

registrar to the issue and merchant bankers providing specialized services

to make the issue of the success. However merchant banker is the agency

at the apex level than that plan, coordinate and control the entire issue

activity and direct different agencies to contribute to the successful

marketing of securities. The procedure of the managing a public issue by

a merchant banker is divided into two phases, viz;

(A) Pre-issue management

(B) Post-issue management

(A) Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:-

(1) Obtaining stock exchange approvals to memorandum and articles

of associations.

(2) Taking action as per SEBI guide lines

(3) Finalizing the appointments of the following agencies:

• Co-manager/Advisers to the issue

• Underwriters to the issue

• Brokers to the issue

• Bankers to the issue and refund Banker

• Advertising agency

• Printers and Registrar to the issue

(4) Advise the company to appoint auditors, legal advisers and broad

base Board of Directors

(5) Drafting of prospectus

(6) Obtaining approvals of draft prospectus from the company’s legal

advisers, underwriting financial institutions/Banks

(7) Obtaining consent from parties and agencies acting for the issue to

be enclosed with the prospectus.

(8) Approval of prospectus from Securities and Exchange Board of

India.

(9) Filing of the prospectus with Registrar of Companies.

(10) Making an application for enlistment with Stock Exchange along,

with copy of the prospectus.

(11) Publicity of the issue with advertisement and conferences.

(12) Open subscription list.

(B) Post-issue Management:- Steps involved in post-issue management are:-

(1) To verify and confirm that the issue is subscribed to the extent of

90% including devolvement from underwriters in case of under

subscription

(2) To supervise and co-ordinate the allotment procedure of registrar

to the issue as per prescribed Stock Exchange guidelines

(3) To ensure issue of refund order, allotment letters / certificates

within the prescribed time limit of10 weeks after the closure of

subscription list

(4) To report periodically to SEBI about the progress in the matters

related to allotment and refunds

(5) To ensure he listing of securities at Stock Exchanges.

(6) To attend the investors grievances regarding the public issue

The Merchant Bankers for managing public issue can negotiate a fee

subject to a ceiling. This fee is to be shared by all lead managers,

advisers etc.

0.5% of the amount of public issues up to Rs.25 crores 0.2% of the

amount exceeding Rs.25crores, if more than one Merchant bankers are

managing the issue.

MUTUAL FUNDS

A Mutual Fund is a special type of investment institution which

collects or pools the savings of the community and invests large funds in

variety of Blue-chip Companies which are selected from a wide range of

industries with the objects of maximizing returns/incomes on

investments. E.g. Unit Trust of India (UTI), Sri Ram Mutual Fund, Morgan

Stanley Growth Fund (foreign mutual fund), etc. Mutual Funds are

basically a trust which mobilize savings from the people and invest them

in a mix of corporate and government securities. Money collected by the

investors is invested in various issues of primary and secondary markets

in order to gain profits on such investments

It is a Trust, which combines the investments of various investors

having similar financial goals. The Trust issues units to the investors in

the proportion of their investments. A fund manager then invests these

funds in different types of assets, which provide returns in the form of

dividends, interests, and capital appreciation. This is distributed to the

various investors in the proportion of their contribution to the pool funds.

Ordinary investors, who want to invest their savings, neither

understand the complexities of financial markets nor have the time to

watch, research, and analyse different equities, securities or any other

investments opportunities that are available in the market.

At present, all the markets viz. the debt market, the equity market,

the money market, real estates, derivatives, and the market dealing with

the other assets have now reached a stage where a minimal information

affect the markets. Besides this, the economy has opened up and global

events influence their performance.

It is very difficult for a lay person to keep track of various

investments, transactions, brokerages etc.

In the present scenario mutual funds are some of the most efficient

financial instruments as it offers above services like managing

investments at a very low cost.

What is NAV?

NAV of the Fund is the market value of all the assets of the Fund

subtracting the Liabilities. NAV reflects the Fund that will be available to

the shareholders if the Fund is liquidated and all the liabilities are paid. In

the mutual fund industry NAV refers to Net Asset Value per unit holder,

which NAV of the Fund divided by the outstanding number of the units. It

shows the performance of the Fund.

Calculation of NAV = Net Asset Value of the fund sum of

market value of shares/debentures + Liquid assets/cash

Dividends/interest accrued – All liabilities

Net asset value per unit =NAV of the fund / Outstanding

number of units

Market value of the shares and debentures is calculated by

multiplying the number of shares/units by the closing price of the

shares/debentures. The closing price will be of the previous day of the

stock exchange from where the shares have been purchased.

If the shares were not traded in the previous day in that

stock exchange, then the closing price of the shares of any other stock

exchange is taken where the shares were traded.

If the shares were not traded in any stock exchange the

previous day, then the closing price of the shares when they were last

traded is taken.

For untraded shares, the value has to be determined by the

other methods such as Book Value, comparable company approach, etc.

Value of the illiquid bond is estimated on the basis of yields

of comparable liquid bonds.

Benefits of Investing in Mutual Funds

1) Professional management of the investments:-

Each Mutual fund appoints an experienced and professional

funds manager and several research analyst, who research before

investing, thus adding value to the common investor. These

professional constantly keep track of the market changes and news,

predict the impact they will have on the investments and take quick

decision regarding the adjustments to be made in the portfolio.

2) Low costs of Investments:-

Due to the large amount of funds manages, very low costs

accrue per investor. Mutual fund achieves economics of scales in

research, transactions and investments. It lowers the cost of

brokerage, custodial and other charges.

3) Diversification :-

A common investor has limited money, which he can invest only

in a few securities and faces a great risk. If their values go down, the

investor loses all his money. Since Mutual Funds have huge amounts of

funds to invest, the Fund manager invests in the securities of many

industries and sectors; ( called diversifying the risk ). This

diversification reduces the risk involved because all the sectors and

industries will never go down at the same time. Investors get this

diversification by investing a small amount in Mutual Funds.

4) Convenient record keeping and administration: -

Mutual funds take care of all record keeping including

paperwork. It also deals with the problem of bad deliveries, broker’s

commission etc.

5) Various types of Schemes:-

Mutual Funds offer various types of schemes such as regular

income plan, growth plan, equity funds, debt Funds, and balanced

Funds. So an investors can select a plan according to his needs.

6) Flexibility:

mutual funds offers various schemes, giving the investor the

option to shift from one scheme to another at various times depending

on his needs, the risk he is willing to take, and the type of return the

wants.

7) Scope for good return:

mutual fund invest in various industries and sectors, therefore

the portfolio gets diversified, resulting in mutual funds generating

equitable return.

8) Enables investing in high value stocks:

the individual investors have less money to invest and cannot

invest in high value stocks such as Infosys. With Rs 12000 an investors

can purchase only 2 shares of infosis, which is like putting all his eggs

in one basket. Mutual funds have huge amount of funds and can invest

in these high value stocks. The benefits from this high value stock can

pass on to all the investors.

9) Easy liquidity:

mutual fund provides easy liquidity. In the case of open-ended

scheme units can be purchased/sold at NAV from/to the mutual fund on

any day. In the case of closed-ended funds units are traded on the

stock exchange at the market prices, or the investors can repurchase

the units from the mutual fund at the prevailing NAV related prices.

10) Tax benefits:

there are certain schemes that offer tax benefits o the

customers. So the investor also tax benefits from mutual fund.

11) Provides transparency:

mutual funds keep the customers informed about the

competition of all the investments in various asset classes from time to

time. During the launch of the mutual fund the offer document

provides information on the objective of the funds, cost to be incurred,

entry/exist load to be charged to the investor, risk associated with the

funds, & detail about the fund mariners, sponsors, members of trust

etc.

12) Regulated by SEBI:

just like equities, mutual funds are also regulated by the SEBI.

This is to safeguard the interests of investor.

Portfolio managerportfolio managers are defined as persons who, in pursuance of a

contract with client, advise/ direct undertake on their behalf the

management/ administration of portfolio of securities/ funds of clients. The

term portfolio means the total holding of securities belonging to any person.

The portfolio management can be…

• Discretionary: the first type of portfolio management permits the

exercise of discretion in regard to investment/ management of the

portfolio of the securities /funds.

• Non-discretionary: the non-discretionary portfolio manager should

manage the funds in accordance with the direction of client.

In order to carry on portfolio management services, a certificate of

registration from SEBI is mandatory. But for category 1 and 2 merchant

banker a separate registration is not required to act as a portfolio manager.

They have, however, To carry on the portfolio management activity within

the framework of SEBI regulations applicable to portfolio managers. The SEBI

regulation applicable to portfolio manager. The SEBI is authorized to grant

and renew certificate of registration as a prior permission to portfolio

managers on the payment of the requisite registration/renewal fee. A

certificate/ renewal of registration is valid for three years. An application for

renewal must be made three months before the expiry of the validity of the

certificate. The annual registration fee payable to SEBI was Rs 2.5 lakh for

the first two year and Rs. 1 lakh for the third year. The renewal fee was rs

75,000 per annum. After November 1999, the registration fee and renewal

fee after every three years in Rs. 5 lakh respectively. The portfolio manager

is also to give an undertaking to take adequate steps for the redresses of

grievance of clients within one month of the receipt of complaint, keep SEBI

informed about the number, nature, and other particular of complaints and

abide by its rules and regulations.

Procedure for Registration

While considering the application for registration made in the

prescribed form, the SEBI takes into accounts all matters relevant to the

activities relating to portfolio manger and in particular.

a) Necessary infrastructure like adequate office staff, equipment and

manpower to discharge his activities.

b) Has in employment a minimum of two persons with experience to conduct

portfolio management business.

c) A person directly/ indirectly connected with the applicant, that is,

associated/subsidiary/inter-connected pr Group Company has not been

granted registration;

d) Capital adequacy of not less than net worth of Rs. 50 lakh in term of

capital plus free reserves.

e) The applicant/ partner/ director/principal officer has not been convicted

for nay offence involving moral turpitude/ guilty of any economic offence;

f) The applicant/partner/director/partner/ principal officer is not involved in

any litigation connected with the securities market;

g) The applicant has professional qualification in

finance/law/accounting/business management; and

h) Grant of certificate is in the interest of the investors.

General Obligations and Responsibilities

Code of Conduct:-

A portfolio manger has to, in the conduct of business; observe high

standards of integrity and fairness in all his dealing with his clients and other

portfolio managers. The money received by him from a client for an

investment purpose should be deployed as soon as possible and money due

and payable to a client should be paid forthwith.

A portfolio manager has to render at all times high standards of

services, exercise due diligence, ensure proper-care and exercise

independent professional judgment. He should either avoid any conflict of

interest in his investment or disinvestment decision, or where any conflict of

interest arises; ensure fair treatment of all his customers. He must disclose

to the client, possible sources of conflict of duties and interest, while

providing unbiased services. A portfolio manger should not place his interest

above those of his clients.

He should not make any statement or become privy to any act,

practice or unfair competition, which i! Likely to be harmful to the interest of

other portfolio mangers or is likely to place them in a advantageous position

in relation to the portfolio manager himself, while competing for or executing

any assignment.

Any exaggerated statement, whether oral or written, should not be

made ‘by him to client other about the qualification or the capability to-

render certain services or his achievements in regards to services n rendered

to the other clients.

At the time of entering into contract, he should been in writing from

the clients his interest in various corporate bodies which enable him to

obtain unpublished price-sensitive information of the, body corporate.

A portfolio manger should not disclose to any clients or press any

confidential information about his clients, which has come in his knowledge.

Where necessary and in the interest of the clients, he should take

adequate’ steps for the registration of the transfer of the clients’ securities

and for claiming and receiving dividends, interest payment and other right

accruing to the client. He must also make necessary action for the

conversion of securities and subscription/ renunciation of/or rights in

accordance with the clients’ instruction.

• A portfolio manger has to endeavor to:-

a) Ensure that the investors are provided with true and adequate

information without making any misguiding or exaggerated claims and

are made aware of attendant risks before any investment decision is

taken by them;

b) Render the best possible advice to the client having regards to the

client’s needs and the environment and his own professional skills;

c) Ensure that all professional dealing are affected in prompt, efficient

and cost effective manager.

• A portfolio manger should not be party to:-

a) Creation of false market in securities;

b) Price rigging or manipulation of securities;

c) Passing of price sensitive information to brokers, members of the stock

COI exchanges and any other intermediaries in the capital market or

take any other action which in prejudicial to the interest of the

investors. No portfolio manager or any of its directors, partners or

managers should either on their respective accounts or through their

associates or family members, relatives enter into any transaction in

securities of the companies on the basis of published price sensitive

information obtained by them during the course of any professional

assignment.

• Contract with Clients:-

Every portfolio manger is required, before taking up an assignment of

management of portfolio on behalf of a client, is enter into an agreement

with such client clearly defining the inter se relationship, and setting out their

mutual rights, liabilities and obligation relating to the management of the

portfolio of the client. The contract should, inter alias, contain.

i. The investment objectives and the services to be provided

ii. Areas of investment and restrictions, if any, imposed by the client with

regards to investment in a particular company or industry;

iii. Attendant risks involved in the management of the portfolio;

iv. Period of the contract and provision of early termination, if any;

v. Amount to be invested;

vi. Procedure of setting the client’s accounts including the form of

repayment on maturity or early termination of contract;

vii. Fee payable to the portfolio manger;

viii. Custody of securities.

The funds of all clients must be placed by the portfolio manger in a

separates accounts to be maintained by him in a scheduled commercial

bank. He can charges an agreed fee from the client for rendering portfolio

management services without guaranteeing or assuring, either directly or

indirectly, any return and such fee should be independent of the returns

to the clients and should not be on return sharing basis.

General Responsibilities;-

The discretionary portfolio manager should individually and

independently manage the funds of each client in accordance with the

need of the client in a manner, which does not partake the character of a

mutual fund, whereas the non-discretionary portfolio manager should

manage the funds in accordance with the direction of client. He should act

in a fiduciary capacity with regard to the client funds and transact in

securities in within the limitation placed by the client himself with regard

to dealing to securities under the provisions of the reserve bank of India

act, 1934. He should not derive any direct or indirect benefit out of the

client funds or securities. he cannot pledge or give on loan securities held

on behalf of client to a third person, without obtaining a written

permission from his client. He should ensure proper timely handling of

complaints from his client and take appropriate action immediately.

Investment of clients money:-

The portfolio manager should not accept money of securities from

his client from his client for a period of less than one year. Any renewal of

portfolio funds the maturity of the indicial period is deemed as a fresh

placement for a minimum period of one year. The portfolio funds can be

withdrawn or taken back by the portfolio client at his risk before the

maturity date of the contract under the following circumstances..

• Voluntary or compulsory termination of portfolio management

service by the portfolio manager.

• Suspension or termination of registration of portfolio manager by

the SEBI.

• Bankruptcy or liquidation in case the portfolio manager is a body

corporate.

• Permanent disability, lunacy or insolvency in case the portfolio

manager is an individual.

The portfolio manager can invest funds of his clients in money market

instrument or as specified in the contract, but not in bill discounting,

bedlam financing or for the purpose of lending or placement with

corporate or non-corporate bodies.

While dealing with clients funds, he should not indulge in speculative

transaction, that is, not enter into any transaction for the purchase or sale

of any securities in which transaction is periodically or ultimately settled

otherwise than by actual delivery or transfer of security. He may enter

into transaction on behalf of the client for the specific purpose of meeting

margin requirements only if the contract so provides and the client is

made aware of, the attendant risk of such transaction.

He should ordinarily purchase all sell securities separately for each

client. However, in the event of aggregation of purchase or sales for

economy of scale, inter se allocation should be done on a pro rata basis

and at weighted average price of the days transaction. The portfolio

manager should not keep any position open in respect of allocation of

sales or purchase affected in a day.

Any transaction of purchase or sale including that between the

portfolio managers own account and client accounts or between two

clients account should at the prevailing market price. He should segregate

each clients fund and portfolio securities and keep them separately from

his own funds and securities and be responsible for the safekeeping of

clients fund and securities. He may hold the belonging to the portfolio

account in his own name on behalf of his client’s only if, the contract so

provides and in such an event his record and reports to the client should

clearly indicate that the securities are held by him on behalf of the

portfolio account.

Maintenance of book of accounts / records:

Every portfolio manager must keep am maintain the following book of

accounts, records and documents.

• A copy of balance sheet at the and of each accounting period.

• A copy of the profit and loss account for each accounting period.

• A copy of the auditor report on the account for each accounting

period.

• A statement of financial position and

• Record in support of every investment transaction or

recommendation which indicate the data, fact and opinion leading

to that investment decision.

After the end of each accounting period, copies of the balance sheet,

profit and loss account and such other documents for any other preceding

five accounting year when required must be submitted to the SEBI. Half

yearly unedited financial result, when required with a view to monitor the

capital adequacy have to be submitted to the SEBI the books of account

and other record and document must be preserved for a minimum period

off five years.

Disclosure to SEBI : A portfolio manager must disclose to SEBI a and when required the

following information.

• Particulars regarding the management of a portfolio.

• Any information or particulars previously furnished, which have a

bearing on the certificate granted to him.

• The name of the clients whose portfolio he has managed and

• Particulars relating to the capital adequacy requirement

Underwriters

Another important intermediary in the new issue/primary market is

the underwriters to the issues of capital who agree to take u securities

which are not fully, subscribed. They make a commitment to get the issue

subscribed either by other or by them. Through underwriting is not

mandatory after April 1995, its organization is an important element of

the primary market. Are appointed by the issuing companies in

consultation with the lead manager/ merchant banker to the issues. A

statement to the effect that in the opinion of the lead manager, the

underwriters asset are adequate to meet their obligation should be

incorporated in the prospectus certificate.

Registration

To act as underwriter, a certificate of registration must be obtained

from the SEBI in granting the registration, the SEBI considers all matters

relevant relating to the underwriting and in particular,

a. The necessary infrastructural like adequate office space, equipment and

manpower to effectively discharged the activity:

b. Past experience in underwriting/ employment of at least two persons with

experience in underwriting:

c. Any person directly/ indirectly connect with the applicant is not registered

with the SEBI as underwriter or previous application of any such person

has been rejected or any disciplinary action has been taken against such

person under the SEBI act/rules/regulation.

d. Capital adequacy requirement of not less than the net worth ( CAPITAL +

free reserve) of Rs. 20 lakh: and

e. The applicant/ director/ principle officer/ partner has been convicted of

offence involving moral turpitude or found guilty of any economic offence.

Fee underwriters, had to, for grant or renewal of registration, pay a fee to

the SEBI from the date of initial grant of certificate, Rs 2 lakh for the first

and second year and Rs 1 lakh for the third year. A fee of Rs 20,000 was

payable every year to keep the certificate in force or for its renewal. Since

1999 the registration fee has been raised to Rs 5 lakh. To keep the

registration in force, renewal fee of Rs 1 lakh. Every three years from the

forth year the date of initial registration is payable. Failure to pay the fee

would result in the suspension of the certificate of registration.

General obligations and responsibilities:

1) Code of conduct :

Every underwriter has at all time to abide by a code of conduct;

he has to maintain high standard of integrity, dignity and fairness in all

his dealings with his clients and, other underwriters in the conduct of

his business. He has to ensure that he and his personal act in an

ethical manner in all dealing with the issuers of capital. An underwriter

has to rendered high standard of service exercise due diligence, ensure

proper care and exercise independent professional judgment. He must

disclose to the issuer his possible source/ potential areas of conflict of

duties and interest of other underwriters to place them in a

disadvantageous position in relation to him while competing

for/carrying out any assignment. He must not make any written or oral

statement to misrepresent…

• The service that he to be capable of performing for the issuer/ or

has rendered to other issuer or

• He underwriting commitment

He should not divulge to other issuer/ any party any confidence

information about his issuer, which forms the come to his knowledge

and deal in securities of any issuer without disclosing to the SEBI or to

the board of director of the issuer. An underwriter should not willfully

make untrue statement/suppress material fact in any document,

reports, papers or information furnished to the SEBI.

a) Agreement with clients:

Every underwriter has to enter into an agreement with the

issuing company. The agreement, among others, provides for the

period during which the agreement is in for amount of underwriting

obligations, the period within which the underwriter has to subscribe to

the after being intimated by/on behalf of the issue, the amount of

commission/ brokerage, and detail of arrangement, If any , made by

the underwriter for fulfilling the underwriting obligations.

b) General responsibilities :

An underwriter cannot derive any direct or indirect benefit from

underwriting the issue other than by the underwriting commission. The

maximum obligation under all writing agreements of an underwriter

cannot exceed 20 times his net worth, underwriters have to subscribe

for securities under the agreement within 45 days of the receipt of

intimation from he issuer.

c) Inspection and disciplinary proceedings:

The framework of the SEBI right to undertake the inspection of

the book of account, other record documents of the underwriters, the

procedure for inspection and obligation of the underwriters is on the

same pattern as applicable to the lead manager

d) Action in case of default :

The liability for action in case of default arising out of

• Non-compliance with any conditions subject to which registration

was granted,

• Contravention of any provision of the SEBI act/rules/ regulation

underwriter involves the suspension/cancellation of registration: the effect

of suspension/ cancellation on the lines followed by the SEBI in case of

lead manager.

MERGERS /AMALGAMATION:

The terms merger and amalgamation are used interchangeably as a

form of business organization to seek external growth of business. A merger

is a combination of two or more firms in which only one firm would survive

and the other would cease to exist, its asset/ liabilities being taken over by

surviving firm. And amalgamation is an arrangement in which the

asset/liability of to or more firm to form a new entity or absorption of

one/more firm with another. The out come of this arrangement is that the

amalgamating firm is dissolved/wound-up and losses it identity and its

shareholders become shareholders of the amalgeted firm. Although the

merger/amalgamation of firm in India is governed by he provision of the

companies act, 1956, it does not defined this term. The income tax act ,

1961, stipulates to pre-requisite for amalgamation through which the

amalgeted company seeks to avail the benefit of set of / carry forward of

losses and unabsorbed depreciation of the amalgamating company against

its future profits u/s 72A ,namely,

1. All the property and liabilities of the amalgamated company / companies

immediately before amalgamation should vest with/ become the liabilities

of the amalgamated company and

2. The shareholders other than amalgamated company/its subsidiary holding

at list 90% value of shares/ voting power in the amalgamating company

should become shareholders of the amalgamated company by virtue of

amalgamation. The scheme of merger, income tax implications of

amalgamation and financial evaluation are discussed in the section.

Following the economic reforms in India in the post-1991 period, there

is a discernible trend among promoters and established corporate group

towards consolidation of market share and diversification into new areas

through acquisition/takeover of companies but in a more pronounced

manner through mergers/amalgamation. Although the economic

consideration in terms of motive and effect of these are similar, the legal

procedure involved are difficult. The merger and amalgamation of corporate

constitute a subject matter of the companies act, the courts and law and

there are well-laid down procedure for valuation of share and right of

investor. The acquisition/takeover bids fall under the purview of SEBI. The

terms merger and amalgamation on the one hand and acquisition and

takeover on the other are treated here synonymously. Section one of the

chapter covers the framework of merger/amalgamation including financial

evaluation. The regulatory framework governing acquisition/takeover is

described in section two.

Scheme of merger/amalgamation:

Whenever two or more companies agree to merge with each other,

they have to prepare a scheme of amalgamation. The acquiring company

should prepare the scheme in consultation with its merchant banker/

financial consultant. The main contents of a model scheme, are listed below

• Description of the transfer and the transfer company and the business

of transferor.

• Their authorized, issue and subscribed/ paid-up capital

• Basis of scheme; the main terms, of the scheme in self’-contained

paragraph on the recommendation of valuation report, covering

transfer of asset/liabilities, transfer date, reduction or consolidation of

capital, application to financial institution as lead institution for

permission and so on.

• Change of name, object clause and accounting year .

• Protection of employment

• Dividend position and prospectus

• Management: board of director banking their number and participation

and transfer company’s director on the board

• Application under section 391and 394 of the companies act, 1956, to

obtain high course approval

• Expenses of amalgamation

• Condition of the scheme to become effective and operative, effective

date of amalgamation

The basis of merger/ amalgamation in the scheme should be the

report of the value’s of asset of both the merger partner companies.

The scheme should be prepared on the basis of the values report;

reports of the charter accountant engaged for financial analysis and

fixation of exchange ratio, report of auditors and audited account of

both the companies prepared up to the appointed date. It should be

ensured that the scheme is just and equitable to the shareholders,

employees of each of the amalgamating company and to the public.

Qualities of a Good Merchant Banker Merchant Bankers are individual’s experts who organize and manage the

merchant banks. The operation of a merchant bank is influenced by the personality, traits of its

merchant bankers. Their qualities are:

1) Leadership:-

In order to interact with their clients and communicate

effectively merchant bankers should possess all relevant skills and update

knowledge.

2) Aggressive action:-

Merchant bankers always looking for new business

opportunities. On locating a business opportunity and after obtaining

the assignment from the clients, a merchant banker has to be prompt

in grasping the client’s problems and to provide a better choice

amongst alternative solutions. A good merchant banker is one who

does not allow his clients to think anything outside except what has

been advised and thus holding the clients interest for the present as

well as for the future.

3) Co-operation and Friendliness:-

Co-operation and friendliness coupled with persuasiveness

must flow as natural traits in the merchant banker in order to win over

the trust of their clients just like a doctor or a lawyer who retains their

clients permanently. A good merchant banker has to share the

thoughts of his clients with sympathetic gestures and offer suggestions

without any greed or favors.

4) Contacts:-

A merchant banking business mainly depends upon the

sociable nature and wider contacts. The scope of contact of a merchant

banker covers:

(a) His own organization

(b) Central and State Government Offices (c) Banks,

(c) Financial Institutions,

(d) Promoters/Directors/Owners/Chief Executives of the public and

private

enterprises,

(e) Printers,

(f) Advertising Agencies,

(g) Brokers and Stock Exchange Dealers,

(h) Advocates and Solicitors

(i) Members of the press, etc.

Merchant bankers have to widen the contacts and continue to maintain

them by meeting people in personal, in special gatherings and through

writing to them.

5) Attitude towards problem solving:-

A good quality of a merchant banker is to be skilled in human

relations particularly in the inter-personal behavior. A merchant

banker should have a positive approach to understand the difficulties,

adverse circumstances and the viewpoints of others. Effective

communication and proper feedback are the pre-requisites for creating

a positive attitude towards problem solving which could be gained

partly through the learning process and partly as an inborn personality

trait.

6) Inquisitiveness for acquiring new skills, information and knowledge:-

Merchant bankers survive by providing the information required

by their needy clients. Therefore they must keep themselves updated

with the latest information in the area of the service product which

they market.

Development stages of Merchant Banking firms

In the merchant banking organization in the following chart,

the firm of merchant banker and individual stock broker have been included

as they have been contributing jointly to the growth of the profession of

merchant banking. But most of these firms are not well developed to show

stage of maturity. Most of them are still in the start-up and early growth

stages. This is easily dissemble from the following projection of the

development stages

UnitStages in development of merchant banking

Organizational setupPrincipal financing

source

1 Start-up

Very loose organization, founders and associates involved in the management

Own investment

2 Early growth

Emerging formal organization, founders, or professional manager in management

Individual investment

3 Accelerating growth Formal organization with professional, manager or founder

Firms investment with banks backing in terms of loan

4 Sustaining growth Complex organization with professional manager

Corporate finance from bank plus equity funds from public

5 maturityMultilayer complex management organization

Matching finance available from all possible sources

Market potential of merchant banking services

Merchant banking in the country has come to be primarily

associated with the capital markets. With deregulation of Indian markets

there are several new sectors open to private investment which have

consequently created an opportunity for private financing. The need for this

banking is not currently met, by their commercial banks or the financial

institutions and hence there is a huge gap which needs to be filled. This gap

can be met through capital markets or a range of finance products and hence

a good scope exists for the various services offered by a merchant banker.

The establishment of SEBI and the abolition of the office of Controller of

Capital Issues (CCI) in 1992 heralded in area of free market pricing of equity

shares. Merchant bankers in particular have been assigned a greater

responsibility in the fixation of issue price & premium, if any. In the CCI

regime merchant bankers had restricted role to play in that regard. The role

was confined mainly to getting clearance from the CCI & to ensuring the

success of capital issue through marketing efforts. There were also no

disclosure norms. Merchant bankers were seldom held accountable for the

correctness of the information disclosed in the prospectus & letter of offer

but with issuance of comprehensive guidelines for free market pricing, code

of conduct for merchant bankers, etc. by SEBI role of merchant bankers has

considerably increased.

An outstanding development in history of Indian capital market

was opening up in 1992 by allowing financial institutions to invest in the

primary & secondary markets & also permitting Indian companies to directly

tape foreign capital markets through Euro Issues. The result was so

encouraging that within less than 2 years to march 1994 the total inflow of

foreign capital through these routes reached to about $5 billion. It was

estimated that this figure may go up to $35-$40 billion by the turn of the

century. Though, at the initial stage the Indian merchant banker have played

supportive role has almost all of the euro issue have been laid managed by

foreign merchant banker, but in future they may play major role by their

increasing participation as managers/lead managers. Foreign direct

investment (FDI) has also investments by NRI have risen considerably due to

number of incentives offered to them. They need the service of merchant

bankers to advice them for their investments in India. Further increasing

investments in joint ventures abroad by Indian corporations also require

expert service of merchant banker. For the first time in India the concept of

debt market has set to work through NSE & OTCI. Experts feel that the

estimated capital issues of Rs.4000 crores in 1994-95, a good portion may be

raised through debt instruments. The development of debt market will offer

tremendous opportunity to, Merchant Bankers. Recently, Indian Capital

Market has also witnessed innovations in the financial instruments such as

non-convertible debentures with detachable warrants, cumulative convertible

preference shares, zero coupon bonds, secured premium notes, suction rated

bonds, etc. This has further extended the role of Merchant bankers as market

makers for these instruments.

Level of Competition The rapid growth in the primary capital market has led to an even

greater proliferation of Merchant Bankers. The number of Merchant Bankers

has increased from only 33 in the year 1989-90 to 405 in 1993-94. Presently,

the number of Merchant Bankers in different categories registered with SEBI

is 501 (August 1994). Considering a total number of public issues in the year

1994-95, a Merchant Banker on average viedlor 3.5 issues. Therefore a tough

competition exists in the line off issue management. The high level of

competition in Merchant Banking business especially issue management is

evident from the fact that out of 140 Category-I merchant Bankers in 1992-

93 only 66 were able to manage an issue.

Merchant Banking business is handled by a few established

players and for the others there is a heavy competition. Therefore, their

survival dependent on innovative capital issue structuring and other income

generating activities like leasing, high-purchase, investments and dealings in

secondary market operations.

As a result of liberalization and globalization, competition in

corporate sector is becoming intense. For their survival and growth,

companies are reviewing their strategies, structures and functioning. This

had led to corporate restructuring including mergers, acquisitions, splits,

divestments and financial restructuring. This area of corporate advisory

services which is largely in the hands of private consultancy firms, also offers

good opportunity to Merchant Bankers to extend the area of operations.

Environmental factors affecting merchant

banking services

Schematic view of environmental factors

Affecting Merchant Banking Services

ENVIRONMENTAL FACTORS

-Open for change-

Merchant Banking Services

THE USERS OF SERVICES

GeneralEconomicConditions

TechnologyScientificInnovations

Legal AspectLaw &Regulations

Demand forServices

THE MERCHANT BANKERS-Open for entry-

The merchant bankers are a part of economics structure of the

nation and they function in an environment which is influenced inter alias by

the following important factors:

(1) The general economics condition, prevailing in the country presenting

an economics environment, affects the functioning of every economic or

social organization. These economic conditions assimilate the boom and

prosperity, the depression and recessionary impacts on industry trade and

commerce.

(2) The technology and scientific innovations are responsible for onward

shifting of the entire developmental process to a state of higher

development. Besides, the technological development also helps the

system to use information processing and communication techniques to

overcome limitations or restrictions of time and space, and provide better

services.

(3) The ‘law and regulations’ affect the functioning and relationship with

users of the services of the organization. Besides complying to various

legal formalities the merchant bankers exist the legal framework. Both

creation of law and regulation of law is the network within which the

government and merchant bankers have to abide by the legal norms

which have the characteristics of change depending upon the moods of

the public system. (I.e. the government) and public interest.

(4) Demand for merchant banking services is one of the environmental

factors that affect the merchant banking functioning in two respects viz.

the competitive forces exist for merchant banking units and there remains

a demand for the quality service to be provided to the users.

Demand will change subject to changes in others environment

factors, particularly under the influence of technological development taking

place. The coverage of rural areas and small business is the present day

need of environmental through geared professionalism. The merchant

banking professionalism requires new response in education and training

conforming to the dynamics of the change. Professional development

programs have got be reshaped to suggest merchant banks to render more

specialized services.

Conclusion

The merchant banking business has increased

over a short period of time and with continued economic

reforms. However, a stiff competition exists in this line and

survival will depend upon the financial skills and spectrum of

financial services and instruments offered by the Merchant

Banker. Hence, Merchant Banking Service is taking shape for

turbulent times.

Merchant banking is an activity initially

undertaken by a few large commercial banks in India, and it is

now being adopted or undertaken by a few large commercial

banks in India, and it is now being adopted or undertaken by

practically every commercial bank through its Merchant

Banking Department. The range of activities covered under

merchant banking very wide indeed. The merchant banks offer

a package of financial services. Unlike in the past, their

activities are now primarily non-fund based. Therefore, they do

not require much capital. One of the basic requirements of

merchant banking is a highly professional staff and worldwide

contacts. Merchant banking is usually international in

character.

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Mandar