Merchant Banking

Merchant BankingMerchant Banking

MERCHANT BANKINGMERCHANT BANKING

Dr. DivyaDr. Divya

Asst. ProfessorAsst. Professor

USMS, GGSIPUUSMS, GGSIPU



According to SEBI, “Merchant banker means a person who is According to SEBI, “Merchant banker means a person who is engaged in the business of issue management, either by engaged in the business of issue management, either by making arrangements regarding selling or by subscribing to making arrangements regarding selling or by subscribing to securities as managers, consultants, advisor or rendering securities as managers, consultants, advisor or rendering corporate advisory services in relation to issue management.”corporate advisory services in relation to issue management.”


ORIGIN OF MERCHANT BANKINGORIGIN OF MERCHANT BANKING

Merchant banking originated through entering of Merchant banking originated through entering of London merchants in financing foreign trade through London merchants in financing foreign trade through acceptance of bills. Later these merchants assisted acceptance of bills. Later these merchants assisted govt. in raising long term funds through flotation of govt. in raising long term funds through flotation of bonds. Later on they extended their activities to bonds. Later on they extended their activities to syndication of long term/short term finance, syndication of long term/short term finance, underwriting, acting as registrars, debenture trustees, underwriting, acting as registrars, debenture trustees, portfolio managers, negotiating agents for mergers portfolio managers, negotiating agents for mergers and takeovers. Thus the institution of merchant and takeovers. Thus the institution of merchant bankers came to stay.bankers came to stay.


MERCHANT BANKING IN INDIAMERCHANT BANKING IN INDIA

In India prior to enactment of Indian Companies Act 1956 managing In India prior to enactment of Indian Companies Act 1956 managing agency houses were issue houses for securities. Few share broking firms agency houses were issue houses for securities. Few share broking firms also functioned as merchant bankers.also functioned as merchant bankers.

The need for merchant bankers was felt when number of issues in primary The need for merchant bankers was felt when number of issues in primary market were increasing. Merchant banking services were started by foreign market were increasing. Merchant banking services were started by foreign banks –National Grindlays and City bank in 1967, the banking commission banks –National Grindlays and City bank in 1967, the banking commission in its report 1972 recommended that commercial banks and financial in its report 1972 recommended that commercial banks and financial institutions should start their merchant banking wing. This marked institutions should start their merchant banking wing. This marked specialised merchant banking divisions.specialised merchant banking divisions.

In 1972, SBI Merchant banking division started.In 1972, SBI Merchant banking division started. SBI was the first and then ICICI, Bank of India, Bank of Baroda,Canara SBI was the first and then ICICI, Bank of India, Bank of Baroda,Canara

bank, PNB, UCO bank followed. The merchant banking gained bank, PNB, UCO bank followed. The merchant banking gained prominence during 1983-84 due to new issues boom.prominence during 1983-84 due to new issues boom.


Contd…Contd…

At present merchant banking services in our country areAt present merchant banking services in our country areProvided by:Provided by: Commercial banks and their subsidiariesCommercial banks and their subsidiaries Foreign banks including National Grindlays banks, Citi bank, Foreign banks including National Grindlays banks, Citi bank,

Hongkong bank etc.Hongkong bank etc. All India Financial Institutions and Development bank such All India Financial Institutions and Development bank such

as ICICI, IFCI, IDBI.as ICICI, IFCI, IDBI. State level Financial Institutions such as State Industrial State level Financial Institutions such as State Industrial

Development Corporations and State Financial Corporations.Development Corporations and State Financial Corporations. Private Financial Consultancy Firms and Brokers such as Private Financial Consultancy Firms and Brokers such as

J.M. Financial and Investment services Ltd., DSP Financial J.M. Financial and Investment services Ltd., DSP Financial consultants consultants

Technical consultancy organization.Technical consultancy organization.


Factors Responsible for the GrowthFactors Responsible for the Growth

Globalization of Indian Economy Globalization of Indian Economy CompetitionCompetition Changing Customer Demographics Changing Customer Demographics Technology ImprovementsTechnology Improvements Government Reforms Government Reforms Revolution in Banking SectorRevolution in Banking Sector


The Main Functions of a Merchant The Main Functions of a Merchant BankerBanker

Corporate Advisory ServicesCorporate Advisory Services Project CounsellingProject Counselling Capital Restructuring servicesCapital Restructuring services Issue ManagementIssue Management Portfolio ManagementPortfolio Management Loan SyndicationLoan Syndication UnderwritingUnderwriting Leasing ServicesLeasing Services Venture Capital ServicesVenture Capital Services Public DepositsPublic Deposits


Corporate Advisory ServicesCorporate Advisory Services

Merchant bankers offer customized solutions to their clients Merchant bankers offer customized solutions to their clients financial problems. The main areas in which their advice is financial problems. The main areas in which their advice is sought include Financial structuring, refinancing alternatives sought include Financial structuring, refinancing alternatives of the client, rehabilitation and turnaround management. of the client, rehabilitation and turnaround management.

In case of sick units, merchant bankers may design a revival In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. package in coordination with banks and financial institutions.

Risk management is another area where advice from a Risk management is another area where advice from a merchant banker is sought. He advises the client on different merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy. hedging strategies and suggests the appropriate strategy.


Project CounsellingProject Counselling

Merchant bankers help their clients in various stages of Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in the project undertaken by the clients. They assist them in Conceptualizing the project idea in the initial stage. Once Conceptualizing the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They examine the viability of the proposed project. They alsoassist the client in preparing different documents like alsoassist the client in preparing different documents like the detailed project report.the detailed project report.

0.25% to 2% of the project cost is charged as fees.0.25% to 2% of the project cost is charged as fees.


Corporate RestructuringCorporate Restructuring

Helps in mergers, takeover advice, Helps in mergers, takeover advice, identifying areas of diversification, identifying areas of diversification, redesigning capital structure.redesigning capital structure.


Issue ManagementIssue ManagementUnder Issue management services provided include:Under Issue management services provided include: Preparation of the applicationPreparation of the application Preparation of a plan and budget to estimate total expenditure of the issuePreparation of a plan and budget to estimate total expenditure of the issue Preparation of Controller of Capital Issues applicationPreparation of Controller of Capital Issues application Appointment of Registrars, brokers and bankers to the issueAppointment of Registrars, brokers and bankers to the issue Selection of issue houseSelection of issue house Compliance of listing requirements of stocks exchangesCompliance of listing requirements of stocks exchanges Merchant banker advises the client whether to go for a fresh issue or additional issue or Merchant banker advises the client whether to go for a fresh issue or additional issue or

bonus issue or right issue of equity or preference or both.bonus issue or right issue of equity or preference or both. Drafting prospectusDrafting prospectus Filing of prospectus to registrar.Filing of prospectus to registrar. Opening and closing subscription list Opening and closing subscription list Allotment and refund procedureAllotment and refund procedure Actual listing of securitiesActual listing of securitiesFees- 0.5% of amount of public issue upto Rs. 25 crores.Fees- 0.5% of amount of public issue upto Rs. 25 crores.0.2% of amount of public issue more than Rs 25 crores.0.2% of amount of public issue more than Rs 25 crores.


Portfolio ManagementPortfolio ManagementMerchant banks advise their clients regarding investmentMerchant banks advise their clients regarding investmentdecisions as to the quantum of amount of security and the typedecisions as to the quantum of amount of security and the typeof security in which to invest.of security in which to invest.Merchant banks provide portfolio management services in theMerchant banks provide portfolio management services in theform of:form of: The sale and purchase of securitiesThe sale and purchase of securities Investing and purchase of securitiesInvesting and purchase of securities Investing and managing fixed depositsInvesting and managing fixed deposits Trust funds, pension funds and investments and their reviewTrust funds, pension funds and investments and their review Safe custody of securities in India and overseasSafe custody of securities in India and overseas Reinvesting the returns collected from investments in some Reinvesting the returns collected from investments in some

profitable avenues. profitable avenues.


Loan SyndicationLoan Syndication

Merchant bankers arrange to tie up loans for their clients.Merchant bankers arrange to tie up loans for their clients.This takes place in a series of steps.This takes place in a series of steps. Firstly they analyze the pattern of the client’s cash flows, based on Firstly they analyze the pattern of the client’s cash flows, based on

which the terms of borrowings can be defined.which the terms of borrowings can be defined. Preparing loan applicationPreparing loan application Then the merchant banker prepares a detailed loan memorandum, Then the merchant banker prepares a detailed loan memorandum,

which is circulated to various banks and financial institutions and which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. they are invited to participate in the syndicate.

The banks then negotiate the terms of lending on the basis ofThe banks then negotiate the terms of lending on the basis of which the final allocation is done. which the final allocation is done. Legal DocumentationLegal Documentation Fees – 1% of the loan amountFees – 1% of the loan amount


UnderwritingUnderwriting

Except category IV merchant bankers Except category IV merchant bankers everyone can perform underwriting everyone can perform underwriting role.role.

Fees – 2.5 % in case of equity sharesFees – 2.5 % in case of equity shares1.5% in case of debentures1.5% in case of debentures


Leasing ServicesLeasing Services

Merchant bankers also provide leasing and finance facilities toMerchant bankers also provide leasing and finance facilities to

their customers. Lease is a contract between the owner of thetheir customers. Lease is a contract between the owner of the

asset (lessor) and user of the asset called the lessee, whereby theasset (lessor) and user of the asset called the lessee, whereby the

lessor gives the right to use the asset to the lessee over an agreedlessor gives the right to use the asset to the lessee over an agreed

period of time for a consideration called the lease rental.period of time for a consideration called the lease rental.

Merchant bankers assist their clients by providing finance for theMerchant bankers assist their clients by providing finance for the

acquisition of asset taken on lease.acquisition of asset taken on lease.


Venture Capital ServicesVenture Capital Services

Many merchant bankers maintain venture capital funds to assistMany merchant bankers maintain venture capital funds to assist

the entrepreneurs who lack capital to be risked. Capital fundsthe entrepreneurs who lack capital to be risked. Capital funds

may be provided for unproven ideas, products technologymay be provided for unproven ideas, products technology

oriented or start-up funds. It is a form of equity financingoriented or start-up funds. It is a form of equity financing

especially designed for funding high risk and high rewardespecially designed for funding high risk and high reward

projects.projects.


Public DepositsPublic Deposits

Merchant bankers also help companies in raising finance by wayMerchant bankers also help companies in raising finance by way

of public deposits.of public deposits.


Merchant Banking RegulationMerchant Banking Regulation SEBI (Merchant Bankers) Regulation Act, 1992 defines a SEBI (Merchant Bankers) Regulation Act, 1992 defines a

‘merchant banker’ as “ any person who is engaged in the ‘merchant banker’ as “ any person who is engaged in the business of issue management either by making business of issue management either by making arrangements regarding selling, buying or subscribing to arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such rendering corporate advisory service in relation to such issue management.issue management.

No organization can act as a ‘merchant banker’ without No organization can act as a ‘merchant banker’ without obtaining a certificate of registration from the SEBI.obtaining a certificate of registration from the SEBI.

To obtain the certificate of registration, one had to apply in To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of normsthe prescribed form and fulfill two sets of norms

(i)(i) Operational capabilities andOperational capabilities and(ii)(ii) Capital adequacy norms.Capital adequacy norms.


Classification of Merchant BankersClassification of Merchant Bankers

The SEBI has classified ‘merchant bankers’ under fourThe SEBI has classified ‘merchant bankers’ under fourcategories for the purpose of registration:categories for the purpose of registration:1.1. Category I Merchant Bankers:- can act as issue manager, which will, Category I Merchant Bankers:- can act as issue manager, which will,

inter alia, consist of preparation of prospectus and other information inter alia, consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscriptions; and financiers and final allotment and refund of the subscriptions; and advisor, consultant, underwriter and portfolio manager.advisor, consultant, underwriter and portfolio manager.

2.2. Category II Merchant Bankers:- can act as advisor, consultant, Category II Merchant Bankers:- can act as advisor, consultant, underwriter and portfolio manager.underwriter and portfolio manager.

3.3. Category III Merchant Bankers:- can act as underwriter, advisor and Category III Merchant Bankers:- can act as underwriter, advisor and consultant only.consultant only.

4.4. Category IV Merchant Bankers:- can merely act as consultant or Category IV Merchant Bankers:- can merely act as consultant or advisor to an issue of capital. advisor to an issue of capital.


Capital Adequacy NormsCapital Adequacy Norms

The capital adequacy is expressed in terms of minimum netThe capital adequacy is expressed in terms of minimum networth, i.e., capital contributed to the business plus free reserves.worth, i.e., capital contributed to the business plus free reserves.

Capital Adequacy NormsCapital Adequacy Norms

Category of Merchant BankersCategory of Merchant Bankers Minimum Net WorthMinimum Net Worth

Category ICategory I

Category IICategory II

Category IIICategory III

Category IVCategory IV

Rs.5 crores Rs.5 crores

Rs.50 lakhsRs.50 lakhs

Rs.20 lakhsRs.20 lakhs

NilNil


Initial Licence feesInitial Licence fees

Category I- Rs. 2.5 lakhs for the Ist Category I- Rs. 2.5 lakhs for the Ist and 2and 2ndnd yr and 1 lakh for the third yr. yr and 1 lakh for the third yr.

Category II- Rs. 1.5 lakh for the 1&2Category II- Rs. 1.5 lakh for the 1&2ndnd yr and Rs.50,000 for the 3yr and Rs.50,000 for the 3rdrd yr. yr.

Category III- Rs. 1 lakh for the 1 & 2Category III- Rs. 1 lakh for the 1 & 2ndnd yr. and Rs.25,000 for the 3yr. and Rs.25,000 for the 3rdrd yr. yr.

Category IV- Rs. 5,000 for the 1 &2Category IV- Rs. 5,000 for the 1 &2ndnd yr and Rs.1,000 for the 3yr and Rs.1,000 for the 3rdrd yr. yr.


Registration of Merchant BankersRegistration of Merchant Bankers

Registration with SEBI is mandatory to carry out the businessRegistration with SEBI is mandatory to carry out the businessOf merchant banking in India. An applicant should complyOf merchant banking in India. An applicant should complywith the following norms:with the following norms: The applicant should be a body corporate The applicant should be a body corporate The applicant should not carry on any business other than The applicant should not carry on any business other than

those connected with the securities market those connected with the securities market The applicant should have necessary infrastructure like The applicant should have necessary infrastructure like

office space, equipment, manpower etc. office space, equipment, manpower etc. The applicant must have at least two employees with prior The applicant must have at least two employees with prior

experience in merchant banking experience in merchant banking


Contd…Contd…

Any associate company, group company, subsidiary or interconnected company of 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 a registered merchant banker

The applicant should not have been involved in any securities scam or proved guilt The applicant should not have been involved in any securities scam or proved guilt for any offence for any offence

The capital adequacy requirement referred to in clause (d) of regulation 6 shall be The capital adequacy requirement referred to in clause (d) of regulation 6 shall be a net worth of not less than five crore rupees.a net worth of not less than five crore rupees.

Explanation: Explanation: For the purposes of this regulation, “net worth” means the sum of For the purposes of this regulation, “net worth” means the sum of paidup capital and free reserves of the applicant at the time of making application paidup capital and free reserves of the applicant at the time of making application under sub-regulation (1) of regulation 3.under sub-regulation (1) of regulation 3.]]

The certificate of registration granted under regulation 8 and its renewal granted The certificate of registration granted under regulation 8 and its renewal granted under regulation 9, shall be valid for a period of three years from the date of its under regulation 9, shall be valid for a period of three years from the date of its issueto the applicant.]issueto the applicant.]


MERCHANT BANKERS AS LEAD MANAGERSMERCHANT BANKERS AS LEAD MANAGERS

As per SEBI guidelines it is mandatory that all public issues should be As per SEBI guidelines it is mandatory that all public issues should be managed by merchant bankers in the capacity of lead managers. Only in managed by merchant bankers in the capacity of lead managers. Only in case of rights issue not exceeding 50 lakhs such an obligation is not case of rights issue not exceeding 50 lakhs such an obligation is not necessary. The number of lead managers depends on size of the issue.necessary. The number of lead managers depends on size of the issue. Less than 50 crores—2, Less than 50 crores—2, 50 to 100 crores - 3,50 to 100 crores - 3, 100 to 200 crores - 4, 100 to 200 crores - 4, 200 crores to 400 crores- 5,200 crores to 400 crores- 5, above 500 crores –5 or more as prescribed by the SEBI.above 500 crores –5 or more as prescribed by the SEBI.

Duties and responsibilities of lead managers –Duties and responsibilities of lead managers – 1) ageement with issuing company- which is to be submitted to SEBI 1) ageement with issuing company- which is to be submitted to SEBI

at least one month before the issue opens.at least one month before the issue opens. 2) every merchant banker must have registration of SEBI2) every merchant banker must have registration of SEBI 3) lead manager cannot undertake work if the company is its associate.3) lead manager cannot undertake work if the company is its associate.


Duties and responsibilities of Duties and responsibilities of lead managerslead managers

4) if more than one lead managers then responsibilities of each must be 4) if more than one lead managers then responsibilities of each must be clearly defined in the agreementclearly defined in the agreement

5) the lead manager is under obligation to accept minimum underwriting 5) the lead manager is under obligation to accept minimum underwriting obligation of 5 % of the issue or 25 lakhs whichever is less.obligation of 5 % of the issue or 25 lakhs whichever is less.

6) lead manager has to give due diligence certificate that prospectus or 6) lead manager has to give due diligence certificate that prospectus or letter of offer is in conformity with documents relevant to issue, letter of offer is in conformity with documents relevant to issue, disclosures are true,fair, adequate and all legal requirements all duly disclosures are true,fair, adequate and all legal requirements all duly complied with..complied with..

7) every lead manager has to submit all particulars of issue, prospectus to 7) every lead manager has to submit all particulars of issue, prospectus to the SEBI at least two weeks before the date of filing with the registrar of the SEBI at least two weeks before the date of filing with the registrar of companies or regional stock exchange or bothcompanies or regional stock exchange or both

8) any suggestions made by SEBI must be properly incorporated 8) any suggestions made by SEBI must be properly incorporated 9) in case of development the lead manager has to ensure that underwriters 9) in case of development the lead manager has to ensure that underwriters

contribute the amount of their liabilitycontribute the amount of their liability 10) every lead manger is responsible for timely refund of any excess 10) every lead manger is responsible for timely refund of any excess

application moneyapplication money 11) it is his duty to mail; share/debenture certificate immediately on 11) it is his duty to mail; share/debenture certificate immediately on

allotment or inform it to the depository participant .allotment or inform it to the depository participant .


CODE OF CONDUCT FOR CODE OF CONDUCT FOR MERCHANT BANKERSMERCHANT BANKERS

A merchant banker shall make all efforts to protect the interests of investors.A merchant banker shall make all efforts to protect the interests of investors.

A merchant banker shall maintain high standards of integrity, dignity and fairness A merchant banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business.in the conduct of its business.

A merchant banker shall fulfil its obligations in a prompt, ethical, and professional A merchant banker shall fulfil its obligations in a prompt, ethical, and professional manner.manner.

A merchant banker shall at all times exercise due diligence, ensure proper care and A merchant banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.exercise independent professional judgment.

A merchant banker shall endeavour to ensure that—A merchant banker shall endeavour to ensure that—((aa) inquiries from investors are adequately dealt with;) inquiries from investors are adequately dealt with;((bb) grievances of investors are redressed in a timely and appropriate manner;) grievances of investors are redressed in a timely and appropriate manner;((cc) where a complaint is not remedied promptly, the investor is advised of any ) where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system.further steps which may be available to the investor under the regulatory system.

A merchant banker shall ensure that adequate disclosures are made to the investors A merchant banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision.as to enable them to make a balanced and informed decision.

A merchant banker shall endeavour to ensure that the investors are provided with A merchant banker shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision.taking any investment decision.



A merchant banker shall endeavour to ensure that copies of the prospectus, A merchant banker shall endeavour to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer.available to the investors at the time of issue or the offer.

A merchant banker shall not discriminate amongst its clients.A merchant banker shall not discriminate amongst its clients. A merchant banker shall not make any statement, either oral or written, A merchant banker shall not make any statement, either oral or written,

which would misrepresent the services that the merchant banker is capable which would misrepresent the services that the merchant banker is capable of performing for any client or has rendered to any client.of performing for any client or has rendered to any client.

A merchant banker shall avoid conflict of interest and make adequate A merchant banker shall avoid conflict of interest and make adequate disclosure of its interest.disclosure of its interest.

A merchant banker shall always endeavour to render the best possible A merchant banker shall always endeavour to render the best possible advice to the clients having regard to their needs.advice to the clients having regard to their needs.

A merchant banker shall not indulge in any unfair competition, such as A merchant banker shall not indulge in any unfair competition, such as weaning away the clients on assurance of higher premium or advantageous weaning away the clients on assurance of higher premium or advantageous offer price or which is likely to harm the interests of other merchant offer price or which is likely to harm the interests of other merchant bankers or investors or is likely to place such other merchant bankers in a bankers or investors or is likely to place such other merchant bankers in a disadvantageous position while competing for or executing any disadvantageous position while competing for or executing any assignment.assignment.



A merchant banker shall maintain arms length relationship between its merchant A merchant banker shall maintain arms length relationship between its merchant banking activity and any other activity.banking activity and any other activity.

A merchant banker shall have internal control procedures and financial and A merchant banker shall have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its operational capabilities which can be reasonably expected to protect its operations, its clients, investors and other registered entities from financial loss arising from theft, clients, investors and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.fraud, and other dishonest acts, professional misconduct or omissions.

A merchant banker shall ensure that the Board is promptly informed about any A merchant banker shall ensure that the Board is promptly informed about any action, legal proceedings, etc., initiated against it in respect of material breach or non-action, legal proceedings, etc., initiated against it in respect of material breach or non-compliance by it, of any law, rules, regulations, directions of the Board or of any compliance by it, of any law, rules, regulations, directions of the Board or of any other regulatory body.other regulatory body.

A merchant banker shall provide adequate freedom and powers to its compliance A merchant banker shall provide adequate freedom and powers to its compliance officer for the effective discharge of the compliance officer’s duties.officer for the effective discharge of the compliance officer’s duties.

A merchant banker shall develop its own internal code of conduct for governing its A merchant banker shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its internal operations and laying down its standards of appropriate conduct for its employees and officers in carrying out their duties. Such a code may extend to the employees and officers in carrying out their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict of interests, disclosure of objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings and interests, etc.shareholdings and interests, etc.


Thank YouThank You

Merchant Banking

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