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Transcript of Chandni Final Project (Autosaved)41
1Merchant Banking
UNIVERSITY OF MUMBAI
PROJECT ON
MERCHANT BANKING
Bachelor of Commerce
Banking & Insurance
Semester -V
(2009-2010)
Submitted By
Chandni.H.Shah
Roll No.41
LAXMI CHARITABLE TRUST
SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS
ANDHERI (EAST) MUMBAI-400069
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2Merchant Banking
UNIVERSITY OF MUMBAI
PROJECT ON
MERCHANT BANKING
Bachelor of Commerce
Banking & Insurance
Semester V (2009-2010)
Submitted
In Partial Fulfillment of the requirements for the Award of
Degree of Bachelor of Commerce - Banking & Insurance
By
Chandni.H.Shah
Roll No.41
LAXMI CHARITABLE TRUST
SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICSANDHERI (EAST) MUMBAI-400069
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3Merchant Banking
Declaration
I -------------------------------------- student of T.Y.B.Com (Banking &
Insurance) Semester V (2009-2010) SHRI CHINAI COLLEGE OF COMMERCE
& ECONOMICS hereby declare that I have completed the project on
---------------------------------.
The information submitted is true and original to the best of my
knowledge.
----------------------
Signature of student
------------------ ----
Name of the Student
CERTIFICATE
This is to certify that Miss ---------------------------------- student of T.Y.B.Com
(Banking & Insurance) Semester V (2009-2010), SHRI CHINAI COLLEGE OF
COMMERCE & ECONOMICS, has successfully completed the project on
“MERCHANT BANKING” under the guidance of Prof. Nishikant Jha.
Course Co-ordinator Principal
Project Guide/Internal Examiner
External Examiner
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ACKNOWLEDGEMENT
This goes to all who have knowingly or unknowingly been a
great support for me to accomplish this piece of work.
Entrance, hard work, gradual progress and an exciting year, that is
how I have reached this level and now as I stand at the threshold of the aside
world, I take a look of the past year which I have spent in this college, our
performance with the devotion of the profession and all the fun I had was like a
beautiful dream come true.
First of all I would like to take this opportunity to thank the
Mumbai University for having projects as a part of the Banking and Insurance
curriculum.
Many people have influenced the shape and content of this project,
and many supported me through it. Secondly, I would like to thank my College
Principal Dr. MALINI JOHARI for supporting in everything and then our
Coordinator, Prof. NISHIKANT JHA for encouraging me in everything I did
and for supporting me. I express my sincere gratitude to Prof. NISHIKANT
JHA for being my Project Guide and for assigning me a project on Merchant
Banking which is an interesting and exhaustive subject. And also to the librarian
and working and non-working staff of our college for providing all kind of
support that was needed for the project.
Prof. NISHIKANT JHA has been an inspiration and role model
for this topic. Her guidance and active support has made it possible to complete
the assignment.
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EXECUTIVE SUMMARY
Although merchant banking activity was ushered in two decades ago, it was
only in 1992 after the formation of Securities and Exchange Board of India that
it is defined and a set of rules and regulations in place. Today a merchant
banker is who has the ability to merchandise that is, create or expand a need and
fulfill capital requirements.
I have given an overview about the financial markets and the role of merchant
bankers in the growth of these markets. My project covers how the merchant
banks works, rules & regulations laid by SEBI & its impact on the merchant
banking activities. Their importance in the economy is expected to grow even
further in the coming years with an increasing proportion of household savings
getting invested in corporate & other securities. I have covered several services
provided by Merchant Bankers & the role of Merchant bankers in providing
those services to the business world.
Finally, to get the practical knowledge about merchant banking activities I have
visited ICICI Bank.
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INDEX
SR.NO. CONTENTS PAGE NO.
1. Introduction 1
2. Definition & Meaning 2
3. History of Merchant Banking 44. Growth of Merchant Banking in India 5
5. Registration Of Merchant Bankers 6
6. Objectives Of Merchant banking in Prevailing Economy 7
7. Need and Importance of Merchant Bankers 8
8. Role of Merchant Banker 10
9. Problems of Merchant Bankers 12
10. Organizational setup of Merchant Banking in India 13
11. Qualities of good Merchant Banker 15
12. Responsibilities of Merchant Banker 18
13. Services rendered by Merchant Bankers 21
14.Merchant Banking-Future Development
37
15. Merchant Banks & Commercial Banks 4116. Survey Form 4317. Survey report 4418. Self Evolutions & suggestions 46-4719. Visit To Bank 4820. Conclusion 49
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21. Bibliography 50
Introduction
Merchant banking
The dictionary meaning of merchant bank refers to an organization that
underwrites corporate securities and advises such clients on issues like
corporate mergers, etc. involved in the ownership of commercial ventures. This
organization may be a bank, corporate body, firm or proprietary concern.
Merchant banking started with the management of public issues and loan
syndication and has been slowly and gradually covering activities like project
counseling, portfolio management, investment counseling and mergers and
amalgamation of the corporate firms. Although, merchant banking organizations
present a long list of services they contemplate to render to their clients but the
main services so far being rendered by them are those as authorized by the
SEBI.
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Definition
The first authoritative definition for the term ‘Merchant Banker’ has been given
in the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, “A
Merchant Banker means any person who is engaged in the business of Issue
Management either by making arrangements regarding selling, buying or
subscribing to Securities as Manager, Consultant, Adviser of rendering
Corporate Advisory Service in relation to such Issue Management”.
Sec/5 (b) of the Banking Regulation Act, 1949 defines Banking as “accepting,
for the purpose of lending or investment of deposits of money from the public,
repayable on demand or otherwise and withdraw able by cheque, draft, order or
otherwise”.
The Notification of the Ministry of Finance defines a merchant banker as, “any
person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as
manager, consult, adviser or rendering corporate advisory service in relation to
such issue management”.
Meaning
Merchant banking is an activity that includes corporate finance activites, such as
advice in complex financing mergers and acquisition advice, and at times direct
equity investment in corporation by banks.
Merchant banking implies investment management. Companies raise capital by
issuing securities in the market. Merchant bankers act as intermediaries between
the issuers of capital and the investors who purchased securities. Merchant
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banking is the financial intermediation that matches entities that need capital
and those that have capital for investment.
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History of Merchant Banking
Origin of merchant banking
The origin of merchant banking can be traced back to the 13 th century when the
development of international trade and finance took place. The early merchant
bankers were traders of commodities. These bankers also acted as bankers to the
kings of European States and financed continental wars and coastal trades. The
earlier merchant bankers used to lend their name to the lesser known traders by
accepting bills through which they guaranteed that the holder of the bill would
receive full value on the date of payment. Although merchant banking activity
was ushered in two decades ago, it was only in 1992 after the formation of
Securities and Exchange Board of India that it is defined and a set of rules and
regulations in place. Hence the name merchant was used because of its roots in
merchant trade.
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The Growth of merchant banking in India
In India prior to the enactment of Indian Companies Act, 1956,managing agents
acted as issue houses for securities, evaluated project reports, planned capital
structure and to some extent provided venture capital for new firms. Few share
broking firms also functioned as merchant bankers.
Formal merchant activity in India was originated in 1969 with the merchant
banking division setup by the Grind lays Bank, the largest foreign bank in the
country. The main service offered at that time to the corporate enterprises by the
merchant banks included the management of public issues and some aspects of
financial consultancy. Following Grind lays Bank, Citibank set up its merchant
banking division in 1970.The division took up the task of assisting new
entrepreneurs and existing units in the evaluation of new projects and raising
funds through borrowing and equity issues. Management consultancy services
were also offered. Merchant bankers are permitted to carry on activities of
primary dealers in government securities. Consequent to the recommendations
of Banking Commission in 1972, that Indian banks should offer merchant
banking services as part of the multiple services they could provide their clients,
State Bank of India started the Merchant Banking Division in 1972. In the initial
years the SBI’s objective was to render corporate advice and assistance to small
and medium entrepreneurs.
The commercial banks that followed State Bank of India were Central Bank of
India, Bank of India and Syndicate Bank in 1977.Bank of Baroda, Standard
Chartered Bank and Mercantile Bank in 1978 and United Bank of India, United
Commercial Bank, Punjab National Bank, Canara Bank and Indian Overseas
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Bank in late ‘70s and early ‘80s. Among the development banks, ICICI started
merchant banking activities in 1973 followed by IFCI (1986) and IDBI (1991).
Registration of merchant bankers
Registration with SEBI is mandatory to carry out the business of merchant
Banking in India. An applicant should comply with the following norms:
The applicant should be a body corporate
The applicant should not carry on any business other than those
connected with the securities market
The applicant should have necessary infrastructure like office space,
equipment, manpower etc.
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Objectives of Merchant Banking in Prevailing Economy:
* To study the significance of Merchant Banking towards the development of
securities industry.
* To analyze issue management regulations.
* To analyze the functions of Merchant Banking in relation to rules and
regulations of SEBI.
* To evaluate the performance of Merchant Bankers, both activity performance
and operational and financial performance.
* To draw a conclusion and suggestions based on the analysis and experiences.
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Needs and Importance of Merchant Bankers
Followings are the needs and importance of merchant banking:
1. Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand
on the sources of funds for ever expanding industry and trade, thus,
leaving a widening gap unabridged between the supply and demand of
inventible funds.
2. All Indian financial institutions and experienced resources constraint to
meet the ever increasing demands for funds from the corporate sector
enterprises. In the circumstances corporate sector had the only alternative
to avail of the capital market services for meeting their long-term
financial requirements through capital issues of equity and debentures.
3. With the growing demand for funds there was pressure on capital market
that enthused the commercial banks, share brokers and financial
consultant firms to enter into the field of merchant banking and share the
growing capital markets.
4. With the result, all the commercial banks in nationalized and public
sector as well as in private sector including the foreign banks in India
have opened their merchant banking windows and are competing in this
field.
5. There has been a mushroom growth of financial consultancy firms and
broker firms doing advisory functions as well as managing public issues
in syndication with other merchant bankers.
6. The need of merchant banking institutions is felt in the wake of huge
public savings lying still untapped.
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7. Merchant banks can play highly significant role in mobilizing funds of
savers to investible channels assuring promising return on investments
and thus can help in meeting the widening demand for investible funds
for economic activity.
8. Merchant banks have been procuring impressive support from capital
market for the corporate sector for financing their projects. This is
evidenced from the increasing amount raised form the capital market by
the corporate enterprises year after year.
9. Merchant bankers, with their skills, updated information and knowledge,
provide this service to the corporate units and advise them on such
requirements to be complied with for raising funds from the capital
market under different enactments viz. Companies Act, Income-tax Act,
Foreign Exchange Regulation Act, Securities Contracts (Regulation) Act
and various other corporate laws and regulations.
10. Thus, the merchant bankers help the industry and trade to raise funds and
the investors to invest their saved money in sound and healthy concerns
with confidence, safety and expectation for higher yields.
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Role of Merchant Banker
The role of merchant banker is dynamic in the wake of diverse nature of
merchant banking services.
1) Merchant banker’s dynamism lies in promptly attending to the corporate
problems and suggests ways and means to solve it. The nature of merchant
banking services is development oriented and promotional to help the industry
and trade to grow and survive. Merchant banker is, therefore, dedicated to
achieve this objective through his dynamism. He is always awake to renew his
skills, develop expertise in new areas so as to equip himself with the knowledge
and techniques to deal with emerging new problems of corporate business
world.
2) He has to keep pace with the changing environment where government rules,
regulations and politics affecting business conditions frequently change; where
science and technology create new innovations in production processes of
industries envisaging immediate renovations, diversifications, modernizations
or replacements of existing plant and machinery or other equipments putting
new demands for finances and necessitating overhauling of the capital structure
of the firms.
3) Merchant banker has to think and devise new instruments of financing
industrial projects. He has to guide the wider section of the community
possessing surplus money to invest in corporate securities and other productive
investment channels.
4) He has to help the industry in different forms to ensure that it runs risk free
and devoid of uncertainty by assisting the promoters with his knowledge and
skills to resolve the problems being faced by them. He has to watch the interest
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and win over the confidence of the government, its agencies, along with the
entrepreneurs, the investors and the whole community.
5) He must bridge the communication gap between different sections and
resolve the problem being faced in different areas concerned with the business
world.
To discharge the above role, a merchant banker has to be dynamic. In the days
ahead, merchant bankers have very significant role to play tuning their activities
to the requirements of the growth pattern of the corporate sector, the industry
and the economy as a whole which is, in it, a challenging task and to meet these
challenges merchant bankers will have to be more vigorous and strategic in
playing their role. They will have also to adopt new ways and means in
discharging their role.
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Problems of Merchant Bankers
1. SEBI guidelines have authorized merchant bankers to undertake issue related
activities only with an exception of portfolio management. These guidelines
have made the merchant bankers either to restrict their activities or think of
separating these activities from the present one and float new subsidiary and
enlarge the scope of its activities.
2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for
authorization of merchant bankers. Small but professional and specialized
merchant bankers who do not have a net worth of Rs.1 crore may have to close
down their business. The entry is denied to young, specialized professionals into
merchant banking business.
3. Non co-operation of the issuing companies in timely allotment of securities
and refund of application money is another problem of merchant bankers. The
guidelines have put the responsibility on the merchant bankers. They have to
seek the co-operation of the issuing company to shoulder the responsibility.
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Organizational setup of merchant bankers in India
In India a common organizational setup of merchant bankers to operate is in the
form of divisions of Indian and foreign banks and financial institutions,
subsidiary companies established by bankers like SBI, Canara Bank, Punjab
National Bank, Bank of India, etc. Some firms are also organized by financial
and technical consultants and professionals. Securities and Exchange Board of
India has divided the merchant bankers into four categories based on their
capital adequacy. Each category is authorized to perform certain functions.
From the point of organizational setup India’s merchant banking organizations
can be categorized into four groups on the basis of their linkage with parent
activity. They are:
(A) Institutional Base
Where merchant banks function as an independent wing or as subsidiary of
various private/Central Governments/State Governments financial institutions.
Most of the financial institutions in India are in public sector and therefore such
setup plays a role on the lines of government priorities and policies.
(B) Banker Base
These merchant bankers function as division/subsidiary of banking
organization. The parent banks are either nationalized commercial bank or the
foreign banks operating in India. These organizations have brought
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
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merchant banking related operations also like providing investment and
portfolio management services.
(D) Private Base
These merchant banking firms are originated in private sector. These
organizations are the outcome of opportunities and scope in merchant banking
business and they are providing skill-oriented specialized services to their
clients. Some foreign merchant bankers are also entering either independently
or through some collaboration with their Indian counterparts. Private sector
merchant banking firms have come up either as the sole proprietorship or public
limited companies. Many of these firms were in existence for quite some times
before they added a new activity in the form of merchant banking services by
opening new divisions on the lines of commercial banks and All India Financial
Institutions.
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Qualities of good merchant bankers
Merchant bankers are individual experts who organize and manage the
merchant banks. The operations of merchant banks are, therefore, influenced by
the personality trait of these individuals. For the success of merchant banks’
operations, the qualities which merchant bankers should have are discussed
below:-
1. Leadership – Merchant banker should posses all relevant skills, updated
knowledge to interact with the clients and effectively communicate.
Leadership is synonymous with followers who follow the one who leads.
2. Aggressive action – Aggressiveness is a personality trait of a good leader
but in merchant banking it has a wider connotation. Aggressive merchant
bankers are always looking for new business. Once a business
opportunity has been located, the merchant banker has got to obtain the
mandate for the merchant banking assignment from the clients at once
which will depend upon his own communication skills, persuasiveness
and the background of the organization to which he belongs. A good
merchant banker is one who does not allow his client to think anything
outside except what has been advised. Therefore, promptness in grasping
the clients’ problems and providing better choice amongst alternative
solutions evidence aggressive approach in the profession to hold the
client’s interest in entirety for the present as well as the future.
3. Co-operation and friendliness – No doubt, these two characteristics are
the symbols of good leadership but it hardly needs to be stressed that
cooperation and friendliness coupled with persuasiveness are the main
instruments with which a merchant banker mixes with the people, gathers
information, obtains business mandate and renders satisfactory services to
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the clients. Business of an honest merchant banker spreads with
geometrical propagation when he shares the thoughts of his clients with
sympathetic gestures and offers pragmatic suggestions without greed or
favors. Very often, rude, intemperate and indifferent disposition or blunt
out burst withdraw fortunate business opportunities forever. These are the
vices unbecoming of a merchant banker and should be eschewed.
Friendliness and cooperation must flow as natural traits in the merchant
banker to win over the trust of the clients like a doctor or lawyer who
retain their clients permanently.
4. Contacts – Success of a merchant banker depends upon his sociable
nature and the richness of wider contacts. A merchant banker is supposed
to be acquainted deeply with all the constituents of merchant banking.
The scope of contact encompasses intimate contiguity and acquaintances
within his own organization, Central and State Government Offices
where compliances under various relevant enactments are to be reported,
Indian and foreign banks, financial institutions at Central and State levels,
promoters/directors/owners and chief executives of the private and public
enterprises which would be prospective beneficiaries of merchant
banking services, printers, advertising agencies, brokers and stock
exchange dealers, advocates and solicitors and members of the press
whose services are availed of in executing merchant banking
assignments. Merchant banker should widen contacts and references and
continue to maintain them in goodness, honour and humour by meeting
people in person, through writing and in special gatherings.
5. Attitude towards problem solving – The most important personality
trait of a merchant banker is his attitude towards problem solving.
Positive approach to understand the view point of others, their difficulties
and their adverse circumstances is possible only when a person is skilled
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in human relations particularly the inter-personal and intra-personal
behavior. Effective communication and proper feedback are the pre-
requisites for creating a positive attitude towards problem solving which
could be gains partly through learning process and partly as an in-born
quality. This trait is a subject matter of personality development but is so
important that it must be treated as a separate objective quality of a good
merchant banker.
6. Inquisitiveness for acquiring new skills, information and knowledge –
Merchant bankers live on the wits they earn by giving information to
needy clients. Therefore, they should keep abreast with latest information
in the area of the service product, they market. This is possible if
merchant bankers posses the quality of inquisitiveness.
The above qualities of a merchant banker are only illustrative. All good
qualities in merchant bankers are difficult to be defined so elaborately.
Nevertheless, merchant banker should possess super business acumen,
managerial abilities, administrative capacities and salesmanship so as to
understand the problems of trade and industry, devise ways and means to sort
out and resolve those problems and sell the service product to the needy clients.
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Responsibility of Merchant Banker
To the Investors
Investor protection is fundamental to a healthy growth of the Capital Market.
Protection is not to be conceived as that of compensating for the losses
suffered. The responsibility of the Merchant Banker in ensuring the
completeness of the disclosures is of paramount importance in view of the
fact that entire reliance is based on offer Document either Prospectus or
Letter of Offer because an independent agency like a Merchant Banker has
done the scrutiny.
Capital structuring
The Merchant Bankers while designing the capital structure take into
account the various factors such as Leverage effect on earnings per share, the
project cost and the gestation period, cash flow ability of the company, the
cost of capital, the considerations of management control, size of the
company, and general economic factors. These exercise are done mainly in
order to meet the fund requirement of the company taking due cognizance of
the investor’s preference.
Project Evaluation and due Diligence
Due diligence and project evaluation is another major responsibility of the
Merchant Banker. Where the project has already been appraised by a
bank/financial institution, the Merchant Banker relies on the said appraisal
before accepting an assignment. However, where the project has not been
appraised by as bank/financial institution, the Merchant Bank undertakes a
detailed evaluation of the project before taking up an assignment for issue
management.
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Legal aspect
The factors that are looked into in case of the legal aspects are:
a) Compliance with the SEBI guidelines and the various guidelines issued
by the Ministry of Finance and Department of Company Affairs.
b) Pending litigation’s towards tax liabilities or any criminal/civil
prosecution any of the directors for any offenses.
c) Fair and adequate disclosures in the prospectus.
Pricing of the Issue
The Merchant Banker looks into the various factors while pricing the issue.
Some of the factors are past financial performance of the company, Book
value per share, stock market performance of the shares. The Merchant
Banker has a vital role to play in pricing of the instrument.
Marketing of the Issue
Marketing of the issue is a vital responsibility of the Merchant Banker. The
first stage is Pre-issue marketing for placement of the issue with the financial
institutions, banks, mutual funds, FII’s and NRI’s. The second stage is the
marketing of the issue to the general public through various vehicles such as
press, brokers, etc.
Bought out Deals
The concept of wholesale but out of public offerings by the Merchant
Bankers started off with over the Counter Exchange of India where a
Merchant banker acts also as a sponsor and either takes up the entire issue to
be offered wholly of jointly with other co-investors and off-loads the same to
the public at a later date by an offer for sale. Major amendments were made
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to the SEBI regulations regarding Merchant Bankers. The duration of this
transaction period has not officially been announced.
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Services Rendered By Merchant Bankers
Among the important financial intermediaries are the merchant bankers. The
services of Merchant bankers have been identified in India with just issue
management. It is quite common to come across reference to merchant banking
and financial services as though they are distinct categories. The services
provided by merchant banks depend on their inclination and resources -
technical and financial. Merchant bankers (Category 1) are mandated by SEBI
to manage public issues (as lead managers) and open offers in take-overs. These
two activities have major implications for the integrity of the market. They
affect investors' interest and, therefore, transparency has to be ensured. These
are also areas where compliance can be monitored and enforced.
Merchant banks are rendering diverse services and functions, which are as
follows:-
1. Issue Management
2. Corporate Advisory Services Relating To Issue
3. Underwritings
4. Dealing In Mergers & Acquisition Activity
5. Project counseling
6. Loan Syndication
7. Restructuring services
8. Capital assistance
9. Corporate advisory Services
10.Factoring service
11.Asset Securitization
12.Forex Services
13.Hire-Purchase Service
14.Lease Finance Companies
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15.Venture capital
ISSUE MANAGEMENT:
The public issue of securities is the core of merchant banking function. At
one time it was constructed as the sole function. Merchant bankers were
identified as issue houses. It was later perceived that they provide other
financial services. When companies seek to raise resources for
implementation of a new project or finance expansion or modernization or
diversification of an existing unit or fund long term working capital
requirement, they retain the services of a merchant banker. To a large extent
the type of issue would vary with the purpose for which funds are raised.
Merchant bankers when retained as managers to issue will have to assist the
company in all the stages connected with public issue.
The merchant bankers help corporate to raise money from the markets
through the issue of shares, debentures, bonds etc. They are designated as
managers to the issue. Their main business is to attract public money to
capital issues.
They usually render the following services:
Drafting of prospectus and getting it approves from the stock exchanges.
Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers etc.
Obtaining the consent of all the agencies involved in the public issue.
Holding road shows, to sell the issue. These shows are held for the analysts,
brokers & institutional investors. The purpose of these shows is to answer
queries from these people about the company and the project for which the
funds are being raised.
Deciding the pattern of advertising.
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Deciding the branches where application money should be collected.
Deciding the dates of opening and closing of the issue.
Obtaining the daily report of application money collected at various
branches.
Obtaining subscription to the issue.
After the close of the issue, obtaining consent of stock exchange for deciding
basis of allotment etc.
CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE
In India, the pricing of issues is now freely decided by the company, with
valuable inputs from the merchant bankers, who have to sell the issue at the
decided price. The pricing of the issue especially in a public issue is very
important. The pricing has to be such that the investors will be attracted to
invest in the issue at that price, at the same time the company should get the
premium that it is looking for. After all, the premium can play a very role in
deciding the company’s capital structure, as larger the premium lesser will
be the requirement for borrowed funds.
The promoter also needs to decide whether to go in for a fresh issue or to go
for a rights issue. However this will depend mainly on the quantum of funds
that the company needs to raise. The success of the issue is dependent on the
selection of the right type of security. In this matter, the expert advice of
merchant bankers is of immense importance.
In the issue management the merchant bankers have to coordinate the
various agencies to the issue. The success of the issue depends on the
cooperation of all the agencies involved.
The merchant bankers offer following services during the public issues:
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Preparing an action plan and budget for the total expenses for the issue.
Preparation of application to SEBI and assistance in obtaining the consent
from SEBI.
Drafting of the prospectus.
Selection of underwriters, Brokers etc.
Selection of bankers to the issue.
Selection of advertising agency for publicity.
Obtaining approval of the institutional underwriters and stock exchanges for
publication of the prospectus.
Companies are free to appoint one or more agencies as Managers to an issue.
SEBI guidelines insist that all issues should be managed by at least one
authorized merchant banker, functioning either as the sole or lead manager to
the issue. Ordinarily, not more than two merchant bankers should be
associated as lead managers, advisors and consultants to a public issue. In
issues of over Rs. 100 crores, the number could be up to a maximum of four.
The responsibilities of merchant bankers in management of public issues are
many. Some of these are:
We have seen that many unscrupulous promoters have raised money from
the market. This has hurt the investors a lot and has also made investors
nervous about stock market investments. This in turn affects the functioning
of stock markets both the primary and the secondary markets. It is therefore
necessary that merchant bankers are satisfied with the viability of the project,
which they can then sell to the investors with confidence. It is therefore
important for the reputation of merchant bankers, to only associate
themselves with good issues.
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The merchant banker should act as the custodians of the investors money and
this puts a lot of responsibility on them. To discharge this function the
merchant bankers have to exercise due diligence independent by verifying
the contents of the prospectus and the reasonableness of the views expressed
therein.
It is the responsibility of the merchant bankers to get the securities listed on
all the stock exchanges mentioned in the prospectus. With the introduction of
Demat accounts the complaints about allotment have surely gone down. It is
the responsibility of the merchant bankers to ensure timely refunds and
allotment of securities to the investors.
The merchant bankers have to certify that they verified everything and that
they believe it to be true. This assures the investing public about the safety
of their investment. The precautions by the merchant bankers would ensure
that all the fake companies, whose intention is to defraud the investors, don’t
have access to the market.
UNDERWRITING
Underwriting is like insurance against the failure of an issue. It is a
guarantee to the issuing the company, that the money that it requires for its
project will definitely be raised. It means that even if the issue is not fully
subscribed to by the public, the underwriters will make up the short fall.
Underwriting involves the underwriter agreeing to subscribe directly, or to
procure subscription for the unsubscribe portion of the issue, which is not
taken up. For the risk that the underwriter takes, he is paid commission.
New companies entering the markets for the first time, always face number
of problems in raising funds from the market. One of the biggest problems of
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course that the company is not well known to the investors and many of
them will be unwilling to invest their money in such ventures. Many a times
even existing companies may find it difficult to raise money, due to some
reasons. Issuing companies therefore approach different underwriters with a
request to underwrite the issue.
Underwriters on their part need to satisfy themselves about the viability of
the project and also about the integrity of the promoters of the company. It
must be noted that when an issue is under subscribed, the underwriters will
pick the shares and only if the project is good enough, then in future they can
sell the shares in the market and get not only their money back, but can also
make a decent profit as well.
It is obligatory for the merchant bankers to accept a minimum 5%
underwriting in the issue subject to a ceiling. By taking underwriting in an
issue managed by them, they show their full commitment to the issue that
they are managing.
Dealing in MERGERS AND ACQUISITIONS activity
Mergers and acquisitions (M&A) and corporate restructuring are a big part
of the corporate finance world. Every day, Wall Street investment bankers
arrange M&A transactions, which bring separate companies together to form
larger ones. When they're not creating big companies from smaller ones,
corporate finance deals do the reverse and break up companies through spin-
offs, carve-outs or tracking stocks.
Role of Merchant Banker
Mergers & Acquisitions is an area where Merchant Bankers act as
intermediaries in negotiating on one with corporate interested in hiving of
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divisions/companies which are not with in the purview of the long-term
business strategy of the group/company, and on the other hand for Corporate
interested in non organic growth by acquiring companies/units for reason
strategic or non strategic in nature. Mergers can be beneficial for both the
entities, as due to competition the companies unable to survive or prosper on
their own may like to merge and face competition and achieve growth
targets. Takeovers may be hostile or friendly in nature, hostile takeovers are
without the consent of the company and company being takeover may work
out an anti takeover strategy to counter the threat. Merchant Bankers provide
following services in M&A: -
Identification of potential takeover targets.
Financial & Technical appraisal of the merger/takeover proposal.
Negotiation with the parties for arriving at the suitable price or
exchange ratio.
Assistance in obtaining necessary approval & addressing procedural &
legal issues.
PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking services
which only very few merchant bankers having advantages of knowledge,
skills and experience over others are able to render satisfactorily. The
corporate seek advice in respect of identification of profitable investment
opportunities in the related business areas (like forward/backward
integration) or as part of diversification process. The merchant bankers carry
out detailed studies on product demand patterns, cost structures, etc., to
enable the corporate in preparation of feasibility study may involve
arrangement of a foreign collaboration, advice on technical parameters and
also legal issues.
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Scope of services
Project counseling services are needed by industrial entrepreneurs in India in
the following areas: -
Preparation of project report
Deciding upon the financing pattern to finance the cost of the project.
Aspects of project appraisal with financial institutions/banks.
Project report
Project report consists of technical process, location, management profile,
means of financing, reports on market surveys and market explorations.
Merchant bankers advise the clients on project preparation. Merchant
bankers, on behalf of their clients, engage technical consultants specialized
in the specific area, and marketing experts to prepare technical feasibility
report and market survey reports. Merchant bankers maintain the list of such
experts approves by financial institutions and assign the work to these
experts.
Project report purpose
Project report about the proposed activity is prepared to obtain government
approvals particularly in the following areas:
Grant of industrial license to undertake specified industrial activity.
Foreign investment and technology tie-up.
Grant import license for importing raw material, plant, machinery and
equipments.
Grant of foreign exchange allocation for import of capital goods or raw
materials, etc.
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Grant of subsidies and other concessions from the government at center
or state levels or from government sponsored agencies, etc.
LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term loans
for projects. Such loans may be obtained from a single development finance
institution or a syndicate or consortium as in the case of large term loans.
Merchant banks can also help corporate clients to raise syndicated loans
from commercial banks.
Scope of service
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom funds could
be procured to implement the project. The responsibility of locating the
sources of finance, approaching these sources by putting in requisite
prescribed applications and complying with all the formalities involved in
the sanction and disbursal of loan rests with the merchant bankers who
provide the service of loan/credit syndication.
Loan syndication in the case of domestic borrowing is undertaken with the
institutional lenders and the banks. Amongst institutional lenders the
following institutions are the main suppliers of the long and medium term
funds with which the merchant bankers contact, liaison and arrange loans
working for and on behalf of their clients.
1. All India financial institutions
i. Industrial Finance Corporation of India (IFCI)
ii. Industrial Development Bank of India (IDBI)
iii. Industrial Credit & Investment Corporation of India Ltd (ICICI)
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2. State level financial bodies
i. State Financial Corporations (SFCs)
ii. State Industrial Development Corporations (SIDCs)
iii. State Industrial & Investment Corporations (SIICs)
3. All India level investment institutions
i. Life Insurance Corporation of India (LIC)
ii. Unit Trust of India (UTI)
iii. General Insurance Corporation of India (GIC) & its subsidiary
companies.
4. Commercial banks: Commercial banks join in consortium loan being
provided by the above institutions.
5. Mutual Funds & Venture Capital Funds: these funds generally invest in
equity but mutual funds contribute to the issues of Debentures/Bonds on
private placement basis as well as subscribe to public issues.
RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to
successfully restructure various activities, which include mergers and
acquisitions, divestitures, management buyouts, joint venture among others.
To help companies achieve the objectives of these restructuring strategies,
the merchant banker participates in different activities at various stages
which include understanding the objectives behind the strategy (objectives
could be either to obtain financial, marketing, or production benefits), and
help in searching for the right partner in the strategic decision and financial
valuation of the proposal.
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CAPITAL ASSISTANCE
In providing financial assistance, merchant banks offer a full understanding
of all facets of the capital markets. This includes all types of debt and equity
financing available from both the domestic and international markets.
It should be understood that interest rates are not the only definition of
capital costs. Restrictions on availability, prepayment terms, and operating
effectiveness can often outweigh what might appear to be inexpensive
capital with low interest rates. Too often, capital includes costs, which force
an entrepreneur or a business to undertake undesirable actions. In the short-
run, some actions might be necessary, but often in the long run are
detrimental. The traditional merchant banker understands these capital
limitations and can structure a transaction, which is beneficial to all sides of
the table -- not just the capital source.
He also knows how to substitute one type of capital for another, sometimes
utilizing internal sources from asset repositioning or cash creation from
improvements in working capital. He understands fully the risk versus return
elements necessary to complete the capital procurement process.
CORPORATE ADVISORY SERVICES
Merchant bankers offer customised solutions to solve the financial problems
of their clients. Advice is sought in areas of financial structuring (as shown
in the Modern Manufacturing case above). Merchant bankers study the
working capital practices that exist within the company and suggest
alternative policies. They also advise the company on rehabilitation and
turnaround strategies, which would help companies to recover from their
current position.
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FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a client
(the exporter or manufacturer) transfers his/her ownership of the accounts to a
factor (an organization, firm). The factor buys all the client’s outstanding
invoices and takes over all the subsequent dealings with the
buyer/importer/customer. It is short-term debt financing.
Here three parties are involved-:
1. The factoring organization /firms
2. The manufacturer/exporter/seller
3. The importer/customer/buyer
Role of Merchant Banker in Factoring
The merchant banker may act as factor organization with a view to earning a
great amount of commission. The factor provides the following services:
(a) Financing
(b) Advisory services if necessary
(c) Collection of bills/Account Receivable against sales proceeds.
(d) Maintenance of sales ledger
(e) Provide further if necessary
(f) Covering losses if there are any
ASSET SECURITIZATION
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It is a process through which some inactive assets (mortgage assets) are
converted into cash/active assets. It is long-term debt financing. Here assets
are converted into long-term bonds. The whole process is done by the
Special Purpose Vehicle (SPV). In this approach, the merchant banker for
issuance of security bonds against the assets with a matching of time and
terms between mortgage property and security bonds. Here the selection of
asset is generally considered on the basis of the following:
(I) Quality of assets
(ii) Certainty of repayment
(iii) Good ranking from the credit rating agency.
The process of asset securitization takes place in the following firms:
a) Originating Institutions/Firm
b) Special Purpose Vehicle (SPV)
c) Merchant Banker (MB)
FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex flow
in the country is increasing and the international markets are funding the
operations of the corporate in India. The success of any business is measured
by the fund management; this makes treasury management as a very critical
finance function. Management of treasury profit center requires a wide
variety of knowledge in the area of global money markets and financial
instruments such as deposit certificates, treasury bills, forecasting, source
evaluation and cost of domestic and foreign currency funds. Treasury and
risk management ensures cost effectiveness in planning strategies in this era
of deregulation.
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Role of merchant banker in Forex function
The currency values, interest rates, share index and commodities affect the
financial derivatives like futures, swaps and other tools of risk management.
Corporates therefore employ well-trained professionals to manage treasury
and forex functions so that they can ensure competent management. Thus,
this service is provided to Corporates through merchant bankers. Merchant
bankers assess various markets to advice Corporates or other banks that
needs currency. Merchant bankers constantly update about the policies of the
regulatory bodies, monitors the current prices, makes predictions based on
the analysis of trends etc.
HIRE PURCHASE SERVICE
It involves a system under which term loans for purchases of goods and
services are advanced to be liquidated in stages through a contractual
obligation. The goods whose purchases are thus financed may be consumer
goods or producer goods or they may be simply services such as air travel.
Hire purchase credit may be provided by the seller himself or by any
financial institution. However, unlike in other countries, the emphasis in
India is on the provision of instalment credit for productive goods and
services rather than for purely consumer goods.
Role of Merchant Banker
Merchant Banker undertakes the activity of financing for hire-purchase
Activities. The merchant banker looks more to the credit-worthiness and
Business morality of the buyer than the value of security.
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LEASE FINANCE COMPANIES
Lease finance companies provide finance to acquire the use of assets for a
stipulated period of time without owning them. The user of the asset is
known as the lessee, and the owner of the asset is known as the Lessor.
Leasing is medium-term arrangement for finance.
Role of Merchant Banker
Merchant Bankers helps in assessing the credit risk of industrial borrowers.
The merchant bankers provide help in evaluating lease proposals. He
analyse the merits and demerits of lease finance with reference to a given
proposal and leave it to their clients to decide on the appropriate source and
type of finance, thus enlarging their range of choices and the variety of
services available to them.
VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to
develop into significant economic contributors. Professionally managed
venture capital firms generally are private partnerships or closely-held
corporations funded by private and public pension funds, endowment funds,
foundations, corporations, wealthy individuals, foreign investors, and the
venture capitalists themselves.
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Role of Merchant Banker
Merchant Bankers assist ventures proposals of technocrats, with high
technology, which are new, and high risk. To seek assistance from venture
capital funds or companies.
They also provide technical, financial & managerial services & help the
company to set up a track record.
The assistance should mainly be for equity support; through loan support to
supplement this may be extended.
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Merchant Banking-Future Development
Time and again the Merchant banking Industry in India witnessed experienced
and underwent significant changes. The very purpose for which these firms are
commences their services should be taken care of and they should mould their
policy decision and activities to move in tune with the main objectives of
Investor’s protection and to create healthy environment in capital markets. No
doubt, Merchant Banking firms are subject to a host of control measures,
regulations and rules framed and guided by SEBI. To some extent, frequent
changes and /or amendments to policies and control measures, though needed
for smooth working of the securities Industry, proves to be detrimental to the
very existence of the Merchant Banking system in the country. The SEBI’s Act
1992 confers power upon SEBI to supervise and control the affairs of the
Merchant Banking firms in India.
The various studies which had been undertaken in India for evaluating the
performance of Merchant Banking firms and the implications of these on
securities industry. No single study has been emerged so far pertaining to the
evaluation of Merchant Banking firms and in-depth study on their activities as
well as operational and financial performance in the light of changing
regulatory environment.
In recent past, the small investor has turned his back on the primary capital
market. Issue after issue as failed to capture his imagination, rekindle his
enthusiasm, and reinforce his faith. He has lost all hopes of appreciation of his
investment. And this when all these years millions have though capital market,
ate capital market and dreamt capital market. It needed an extraordinary effort
and skill the drive the small investor away! High premiums, false premiums
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and gray market operations. The professed protector of his interests first laid
down the dictum of proportionate allotment, then of minimum subscription, all
working against his interests. This would make an observant student of the
stock market infer that there is some game plan afoot to dethrone the small
investor from his prominent; he was believed to be the king.
With the coming to SEBI, an organization that was ostensibly brought into
existence to guard the interest of the small investor, hopes ran high that the
small investor would now have a safe playing field. But these hopes were soon
belied. Far from guarding the interests of the investing public, SEBI embarked
on a course of action, which has positively hurt them. The latest fiat of EBI bans
corporate advertising after the receipt of acknowledgement card by a company
wanting to go public. SEBI’s this action has caused the closure of an
information window. Now 50 million potential investors are deprived of
official and authentic information given by the Issuer. It is hard to understand
reasons for this drastic and totally uncalled for action. While there has been no
official explanation for this fiat, there is reason to believe that it may be based
on a wrong perception of the role for corporate advertising.
All this has been done perhaps because the corporate and intermediaries is to
follow the practices of Western capital markets here, oblivious of the fact that
our capital markets are altogether different in structure, in systems and in the
number of participants Freedom of commercial expression could be exploited
by some to serve their own ends, just a s freedom of speech and expression
could be abused but this has not led our Government to put arbitrary restrictions
on our freedom.
Merchant Bankers have reason to believe they will be handicapped without the
marketing support. But the worst sufferer would be the investor, especially the
small investor it is this class, which forms the backbone of the capital market.
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As a result of the ban, the small investor would be deprived of the opportunity
to study the corporate profile of the Issuer. In the absence of adequate
information, they will have to depend on manipulated facts and information fed
by unreliable sources.
The Indian primary capital market is basically a retail market. It consists of
innumerable investors who take own individual investment decisions.
Whatever, the system, it is this market that will bring in the funds. If these
markets destabilized, the investors will look for alternative avenues to invest
their funds. SEBI in its one of the first documents on “SEBI and Investor
Protection, Development and Regulation of Securities Market” clearly specifies
significance of regulating capital market and its future plans for fulfilling the
twin objectives viz., Development of capital market and investor protection are
explained in introductory paragraphs. It speak out that, “The decade of the
1980 witnessed a phenomenal growth and development of the securities market,
demonstrated its potential not only to mobilize the savings of the household
sector but also to allocate it with some degree of efficiency for industrial
development. The dilution of the holdings of the multinational companies at
affordable prices in the latter part of the 1970s had generated considerable
interest, which was, carries well into the next decade. Several companies’ came
in the early part of the 1980s and successfully raised large resources from the
market especially through debt instruments, which further sustained investor
interest. There were several changes in Government policy, which significantly
influenced industry and aided the market. India was then entering the phase of
liberalization and decontrol which was to accelerate and gather momentum in
the 1980s.
By the end of the decade, the securities market in India came to be firmly
integrated with the financial system of the country. With the corporate sector
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increasingly relying on the securities market for meeting their long-term
requirement of funds, the securities market their long-term requirement of
funds; the securities market competed on equal terms with the Development
Financial Institutions, which were the traditional purveyors of long-term capital.
The emergence of the securities markets into the main stream of the financial
system of the country was thus one of the major economic processes of the
1980s – an inevitable outcome of the maturing process of the financial system.
They brought about notable changes in the capital structure of the companies
across industries, gave birth to new intermediaries and institutions in the
securities market and created a new awareness and interest in investment
opportunities in the securities market among investor. In spite market, its
quality lagged far behind and there was absence of adequate professionalism
and fair competition among the various players in the market. Besides, the
regulatory framework then prevailing was fragmented difficult, if not effective.
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Merchant banks and commercial banks -:
There are differences in approach, attitude and areas of operations between
Commercial banks and merchant banks. The differences between merchant
Banks and commercial banks are summarized below.
No Commercial banks Merchant banking
1 Commercial banks basically deal in
debt related finance and their
activities are appropriately arrayed
around credit proposals, credit
appraisal and loan sanctions.
The area of activity of merchant
bankers is equity and related finance.’
they deal with mainly funds raised
through money market and capital
market.
2 Commercial banks are asset oriented
and their lending decisions are based
on detailed credit analysis of loan
proposal and the value of security
offered against loans. They generally
avoid risk.
The merchant bankers are management
oriented. They are willing to accept
risks of business.
3 Commercial bankers are merely
financiers.
Merchant bankers include project
counseling, corporate counseling in
areas of capital restructuring
amalgamations, mergers, takeover
etc.discountin and rediscounting of
short-term paper in money markets,
managing underwriting and supporting
public issues in new issue market and
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acting as brokers and advisers on
portfolio management in stock
exchange. Merchant banking activities
have impact on growth, stability and
liquidity of money markets.
SURVEY FORM
The word survey means to verify. This is the form issued by me to know the
view of general public in India.
Q.1) Do you know what merchant banking is?
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No Yes Can’t say
Q.2) Do you know any of the services rendered by merchant banker?
No Yes Can‘t say
Q.3) Do you know who are the players in merchant banking?
No Yes Can‘t say
Q.4) Merchant Bankers provides services to?
Corporate’s Individual’s
Q.5) who controls the working of merchant banking?
RBI SEBI IRDA
Q.6) SBICAP is related to which of the following bank?
SBI ICICI Can‘t say
Name:
Occupation: Project Guide:
Signature: Place: Mumbai
Survey Report
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General Comment/opinion:
The above Pie Diagram depicts the result of a survey which was conducted by
me among 100 people from the age group of 20 to 50 years comprising of
students, business professionals and people from corporate sector.
The diagram is derived from the three question of the survey form:
1. Do you know what merchant banking is?
2. Do you know any of the services rendered by merchant banker?
3. Do you know who the players in merchant banking are?
Thus, the result was clear that most of the people are unaware about the concept
of merchant banking which was not very surprising for me. Statistically 60% of
the people in the overall survey don’t know anything about merchant banking.
Only 30% of the people who know about this concept where the people from
the corporate sector.
Thus I can conclude from my survey that most of the people don’t know
anything about merchant banking and should be made aware of.
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Form the above survey report, my personal view is that in India the people are
not awareing about the merchant banking service. The only 30% of people
know about these services, and that includes the people or person like
companies’ owner, chairperson, director, industrialist etc. But the general public
and small business man or un-educated people are not awaring about this
service.
From the above survey report, I come to know the two things which affecting to
India to become a developed country they are as follow-:
Education
Awareness
From the above my personal view is that the banks should improve their
marketing skills for the merchant banking services. So general public also
can use this service and enjoy their life.
Suggestion On The Project
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From the above project my personal suggestion are as follows-:
The bank should improve their marketing skills.
They have to attract their regular customers by providing these services.
They have to launch new products & schemes to attract the customer.
The bank should provide good facilities to their employees & fulfill their
needs.
The banks have improved their network connection with customers by
providing different-different services.
The banks have to improve their network connection not only in india but
also with outsider countries in the world.
The banks have to provide better NRI’s services to NRI’s people.
Visit to Bank
Bank visited: ICICI Bank Limited
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Date- 27 th Aug,2009
Person Interviewed: Anand.Gunediwal
(Branch Manager)
Bhayandar (w)
Question asked:
1. What is merchant banking?
Ans. Merchant banking is a part of banking services provided to
corporate sector.
2. What is the need for merchant banking in India?
Ans. Business world in India is growing day-by-day .So merchant banking
services are highly required by them.
3. What is the importance of merchant banking?
Ans. People enjoy those services which are not provided to them by
commercial banks.
4. Do SBI undertake merchant banking services?
Ans. SBI is the first bank to take up merchant banking services in 1986.SBI
has won the “Best Merchant Banker Award 2004”by outlook money.
5. What Which activities does your bank undertakes?
Ans. Loans, deposits, credit-debit card, ATM’s etc.
6. What are the services provided? And why your service is better than the
other banks?
Ans. Our service is best because our bank is providing 24 hours services and
we have better network connection according to areas in all over world.
CONCLUSION
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The merchant banker plays a vital role in channelizing the financial surplus of
the society into productive investment avenues. Hence before selecting a
merchant banker, one must decide what the services for which he is being
approached are. Selecting the right intermediary who has the necessary skills to
meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every details about
Merchant Banking and in future how it’s going to get emerged in the Indian
economy. Hence, Merchant Banking can be considered as essential financial
body in Indian financial system.
Market development is predicated on a sound, fair and transparent
regulatory framework. To sustain the growth of the market and crystallize the
growing awareness and interest into a committed, discerning and growing
awareness and interest into an essential to remove the trading malpractice and
structural inadequacies prevailing in the market, and provide the investors an
organized, well regulated market place in future.
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Bibliography
Books:
Manual of Merchant Banking – J. C. Verma (3rd & 4th Edition)
Merchant Banking Principles & Practices- H.R.MACHIRAJU
SEBI Manual for Merchant Bankers
Websites:
www.google.com
http://en.wikipedia.org/wiki/Merchant_bank
www.economictimes.com
www.sbicaps.com
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