Merchant Banking Fin

8/3/2019 Merchant Banking Fin

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Meaning:

The word merchant bank does not have a f ixed def ini t ion as

this term is used di f ferent ly in di f ferent countr ies . In Uni ted

States these are cal led as Inv estment Banks and in UK they

are cal led as accept ing and i ssuing houses.

The not i f icat ion of Minis t ry Of Finance in India def ines

Merchant Banker as any person who is engaged in the

business of i ssue management ei ther by making ar rangements

regarding sel l ing, buying, or subscr ibing to the secur i t ies as

manager , consul tant , adviser in relat ion to such an i ssue

management . In general the merchant banks are the f inancial

inst i tut ion which provides f inancial services , solut ions , &

advice to corporate houses. Some of the wor ld famous

merchant banks are Goldman Sachs, Credi t Suisse & Mo rgan

Stanley etc . In India there are many banks which are into the

f ield of merchant banking some of the banks are ICICI , State

Bank Of India , Punjab Nat ional Bank etc .

Merchant banking an overview:-

Company raises capi tal by i ssuing secur i t ies in market .

Merchant bankers at as intermediar ies between the i ssuer of

capi tal and the ul t imate investor who purchase these secu r i t ies .

Merchant banking. is the f inancial in termediat ion

that matches the ent i t ies that need capi tal and those that have

capi tal? I t i s funct ion that faci l i ta tes the f low of capi tal in the

market .


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DEFINITION:

In banking , a merchant bank i s a f inancial inst i tut ion

pr imar i ly engaged in of fer ing f inancial services and advice to

corporat ions and weal thy individuals on how to use thei r

money. The term can also be used to descr ibe the pr ivate equi ty

act ivi t ies of banking.

According to Cox, D. merchant banking is def ined as ,

merchant banks are the f inancial inst i tu t ions providing

special i s t services which general ly include the acceptance of

bi l l s of exchange, corporate f inance, por t fol io management and

other banking services.

The Not i f icat ion of the Minis t ry of Finance def ines a merchant

banker as , any person who is engaged in the business of

i ssue management ei ther by making arrangements regarding

sel l ing, buying or subscribing to securi t ies as manager,

consultant , advisor or rendering corporate advisory service

in re lat ion to such issue management.

In short , merchant bankers assis t in rais ing capi tal and advice

on related i ssues.
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History and Origin of Merchant Banking In Ind ia

ORIGIN

Merchant banking or iginated through the enter ing of London merchants in foreign t rade through acceptance

of bi l l . Later , the merchants assis ted the Government of

under developed countr ies in rais ing long terms

through f loatat ion of bonds in London money market .

Over a per iod they extended thei r act ivi t ies to domest ic

business of syndicat ion of long term and shor t term

finance, underwri t ing of new issues, act ing as regis t rars

and share t ransfer agents , debenture t rustees , por t fol io

managers , negot iat ing agents for mergers , takeovers

etc .

Merchant Banking in India Historical Perspective:

Til l 18 t h century moneylenders , moneychangers , vi l lage

merchants (maharanis) , & saucers per formed the funct ion of

banks & merchant banks. They also i ssued & discounted bi l l sof exchange (handiest ) & bank draf t . They gave loans on

mutual t rust , on mor tgage of lands, ornaments & other

proper ty. JAGAT SHETH (1720-1773AD, BENGAL) HABIB &

SONS which i s now HABIB BANK (founded in 1941, now is in

PAKISTAN). These were the organized merchant bankers in

recent his tory of INDIA.


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Merchant Banking is an act ivi ty that includes corporate

f inance act ivi t ies , such as advice on complex f inancings,

merger and acquisi t ion advice ( internat ional or domest ic) ,

and at t imes direct equity investments in corporat ions by

the banks.

Merchant banks are pr ivate f inancial inst i tut ion. Thei r pr imary

sources of income are PIPE f inancings and internat ional t rade.

Thei r secondary income sources are consul t ing, Mergers &

Acquisi t ions help and f inancial market speculat ion. Because

they do not invest against col la teral , they take far greater r i sks

than t radi t ional banks. Because they are pr ivate , do not take

money f rom the publ ic and are internat ional in scope, they are

not regulated.

Anyone considering deal ing with any merchant bank should

invest igate the bank and i ts managers before seeking their

help .

The reason that businesses should develop a working

relat ionship wi th a merchant bank is that they have more

money than venture capi tal i s t s . Thei r advice tends to be more

pragmat ic than venture capi tal i s t s . I t i s rare for a merchantbank to fai l . The last major fai lure was Bar ings Bank (199 2) . I t

fa i led because of unsupervised t rading of copper futures

contracts and buybacks. When the Dot Com Bubble burst in

2001, scores of venture capi tal f i rms fai led. The greatest

merchant bank fai lure in his tory was the Knights Templar .

Af ter the Crusades, the Order became immensely weal thycontrol l ing and funding the t rade between the Middle East and


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Western Europe. They fool ishly loaned money to the French

Government . To avoid repaying the money, King Louie had the

Pope declare the Order heret ics . Thousands of monks lost thei r

l ives , but France balanced i t s budget .

To understand Merchant Banks, you should know something of

thei r his tory. Modern merchant banking s tar ted in I ta ly dur ing

the 7th Century. The banking pract ices evolved f rom the

f inancing s t ructure of the Si lk Road Trading that predates the

Roman Empire.

The basic f inancing s t ructure was the advance payment for

goods by merchant bankers at a great discount to the del ivery

value of those goods. In the case of I ta ly and then Germany,

wheat was the product . The merchant banks purchased the

wheat soon af ter plant ing. They accepted the r i sk of crop

fai lure .

They prof i ted when they sold the wheat . In most countr ies

today, the nat ional government accepts the r i sk through

government crop insurance.

As the Br i t i sh Empire expanded in the 18th and 19th Centur ies ,

merchant banks prospered in London. For instance, merchant

bankers funded Canadas Hudson Bay Company. This per iod

saw the r i se of such merchant banks as Schroders , Warburgs or

Rothschi lds . Amsterdam benef i ted f rom the t rade created by

the Dutch East Indian Company. Since the 18th century, the


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role of the merchant banker has been considerably broadened to

include a composi te of modern day ski l l s . Such ski l l s are

inherent ly ent repreneur ial , manager ial , f inancial and

t ransact ional .

Today, Nor th American merchant banks have taken the form of

"bout iques"- whereby, each of fers i t s own special ized services .

The hal lmarks of these merchant bank bout iques are that they

typical ly charge fees payable in cash and/or the cl ient ' s s tock

for each service rendered. You can f ind a merchant bank that

meets any reasonable set of needs.


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Merchant Banking in India Post Independence:

In 1967, RBI i ssued i t s f i r s t merchant banking l icense to gr ind

lays s tar ted wi th management of capi tal i ssues, product ion

planning, system design and also market research. I t provides

management consul t ing services as wel l . Ci t ibank setup i t s

merchant banking divis ion in 1970. i t s scope includes assis t ing

new ent repreneur , evaluat ing new projects , ra is ing funds

through borrowing and issuing equi ty . Indian banks s tar ted

banking services as a par t of mul t iple services they of fered to

cl ients f rom 1972. State bank of India started the merchant

banking divis ion in 1972. In the ini t ia l years the object ive was

to render corporate advice and assistance to smal l and

medium entrepreneurs. Merchant banking act ivi t ies are

organized and under taken in several forms. Commercial banks

and foreign development f inance inst i tut ions have organized

them through format ion of divis ion; nat ional ized banks have

formed subsidiar ies companies and share brokers and

consul tancies const i tuted themselves into publ ic l td . Co. or

regis tered themselves as pr ivate l td . companies . Some of them

have equi ty s take of foreign merchant bankers .


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Main Objectives Of Merchant Bankers

Merchant bankers render their special ized assistance in

achieving the main object ives which are presented below :

1. To car ry on the business of merchant banking, assis t inthe capi tal format ion, manage advice, underwri te , provide

standby assis tance, secur i t ies and al l kinds of investments

issued, to be i ssued or guaranteed by any company,

corporat ion, society, f i rm, t rust person, government ,

municipal i ty , c ivi l body, publ ic author i ty establ ished in India .

2 . The main object of merchant banker i s to create secondarymarket for bi l l s and discount or re-discount bi l l s and acts as an

acceptance house.

3 .

Merchant bankers another object ive i s to set up andprovide services for the venture capi tal technology funds.

4 . They also provide services to the f inance housing schemesfor the const ruct ion of houses and buying of land.

5 . They render the services l ike foreign exchange dealer ,money exchange, and author ized dealer and to buy and sel l

foreign exchange in al l lawful ways in compl iance wi th the

relevant laws of India .

6 . They wi l l invest in buying and sel l ing of t ransfers ,hypothecate and deal wi th dispose of shares , s tocks,

debentures , secur i t ies and proper t ies of any other co mpany.


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Functions of a merchant banker..

The fol lowing comprise the main funct ions of a merchant

banker :

1. Management of debt and equity of ferings: -This forms the main funct ion of the merchan t banker .

He assis ts the companies in rais ing funds f rom the market .

The main areas of work in this regard includes :

inst rument designing, pr icing the i ssue, regis t rat ion of th e

offer document , underwri t ing suppor t , and market ing of

the i ssue, a l lotment and refund, l i s t ing on s tock

exchanges.

2. Placement and distribut ion:-the merchant banker helps in dis t r ibut ing var ious

secur i t ies l ike equi ty shares ,debt inst rument , mutual fund

product , f ixed deposi t , insurance products , commercial

paper to name a few. The dis t r ibut ion network of the

merchant banker can be classi f ied as inst i tut ional and

retai l in nature. the inst i tut ional network consis t of

mutual fund, foreign inst i tut ional investor , pr ivate equi ty

funds, pension fund, f inancial inst i tut ion etc . the s ize of such a network represents the wholesale reach of the

merchant banker . The retai l network depends on

networking wi th investors .


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3. Corporate advisory services: -Merchant bankers of fer customized solut ions to thei r

cl ient s f inancial problems. The fol lowing are the main

areas in which thei r advice i s sought .

4. Financial structuring:-Includes determining the debt -equi ty rat io and

gear ing rat io for the cl ient : the appropr iate capi tal

s t ructure theory i s a lso f ramed. Merchant banker also

explores the ref inancing al ternat ives of the cl ient andevaluate cheaper source of fund. Anoth er area of advice i s

habi l i ta t ion and turnaround management . In case of s ick

uni ts , merchant banker may design a revival package in

coordinat ion wi th banks and f inancial inst i tut ion. Risk

management i s another area where adv ice f rom a merchant

banker i s sought . He advice the cl ient on di f ferenthedging s t rategies and suggest the approp r iate s t rategy.

5. Project advisory service: -Merchant banker help thei r c l ients in var ious s tage

of project under taken by the cl ients . They assis t them in

conceptual izing the project idea in the ini t ia l s tage. Once

the idea i s formed, they conduct feasibi l i ty s tudies to

examine the viabi l i ty of the proposed project . They also

assis t the cl ient in prepar ing di f ferent document l ike the

detai l project repor t .


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6. Loan syndicat ion:-Merchant banker ar ranges to t ie up loans for thei r

cl ients . This take place in a ser ies of s tep. Fi rs t ly they

analyze the pat tern of the cl ients cash f lows, based on

which the terms of borrowing can be def ined. Then the

merchant banker prepares a detai led loan memorandum,

which i s c i rculate to var ious banks and f inancial

inst i tut ion and they are invi ted to par t ic ipate in the

syndicate . The banks then negot iate the terms of lending

on the basis of wi tch the f inal a l locat ion i s done.


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Importance and Need of merchant banking

Impor tant reason for the growth of merchant banking has been

developmental act ivi ty throughout the country, exer t ing excess

demand on the sources of funds for ever expanding

indust ry and t rade, thus, leaving a widening gap under

br idged between the supply and demand of invent ible funds.

Al l Indian f inancial inst i tut ions and exper ienced resources

const raint to meet the ever increasing demands for funds f rom

the corporate sector enterpr ises . In the ci rcumstances corporate

sector had the only al ternat ive to avai l of the capi tal market

services for meet ing thei r long- term f inancial requirements

through capi tal i ssues of equi ty and debentures . With the

growing demand for funds there was pressure on capi tal market

that enthused the commercial banks, share brokers and

f inancial consul tant f i rms to enter into the f ie ld of merchant

banking and share the growing capi tal markets . With the resul t ,

a l l the commercial banks in nat ional ized and publ ic sector as

wel l as in pr ivate sector including the foreign banks in India

have opened thei r merchant banking windows and are

compet ing in this f ie ld . There has been a mushroom growth of

f inancial consul tancy f i rms and broker f i rms doing advisory

funct ions as wel l as managing publ ic i ssues in syndicat ion wi th

other merchant bankers .

Notwi thstanding the above facts , the need of merchant banking

inst i tut ions i s fe l t in the wake of huge publ ic savings lying

st i l l untapped. Merchant banks can play highly s igni f icant role

in mobi l iz ing funds of savers to invest ible channels assur ing


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promising return on investments and thus can help in meet ing

the widening demand for invest ible funds for economic

act ivi ty .

With the growth of merchant banking profession corporate

enterpr ises in both publ ic and pr ivate sectors would be able to

raise required amount of funds annual ly f rom the capi tal

market to meet the growing requirements for funds for

establ ishing new enterpr ises , under taking

expansion/modernizat ion/diversi f icat ion of the exis t ing

enterpr ises . This reinforces the need for a vigorous role to be

played by merchant banks.

Merchant banks have been procuring impressive support

from capital market for the corporate sector for f inancing

their projects . This i s evidenced f rom the increasing amount

raised form the capi tal market by the corporate enterpr ises year

af ter year .

In view of mul t i tude of enactments , rules and regulat ions,

guidel ines and of fshoot press release inst ruct ions brought out

by the government f rom t ime to t ime imposing s tatutory

obl igat ions upon the corporate sector to comply wi th al l those

requirements prescr ibed therein, the need of ski l led agency

existed which could provide counsel ing in these mat ters in a

package form. Merchant bankers , wi th thei r ski l l s , updated

informat ion and knowledge, provide this service to the

corporate uni ts and advise them on such requirements to be

compl ied wi th for rais ing funds f rom the capi tal market under

di f ferent enactments viz . Companies Act , Income- tax Act ,


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Foreign Exchange Regulat ion Act , Secur i t ies Contracts

(Regulat ion) Act and var ious other corporate laws and

regulat ions. Merchant bankers advise the investors of the

incent ives avai lable in the form of tax re l iefs , o ther s ta tutory

relaxat ions, good return on investment and capi tal appreciat ion

in such investment to mot ivate them to invest thei r savings in

secur i t ies of the corporate sector .


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Scope for merchant banking in India:-

Scope for merchant banking depends upon size of the

market , restrict ion- l iberat ion, banking pol ic ies , corporate

culture, and corporate dynamics.

1 . Size and dynamics of the market : Indian market i sgrowing. In fact India i s one of the largest emerging

markets . Obviously, publ ic i ssues, FDI , debt rais ing are on

r ise . Lots of new and green f r ied projects are happening.

Merchant bankers have lots space to contr ibute .

2 . Restrict ions- l iberal izat ion : more l iberal the market i s ,more the things lef t to be decided by the corporate .

Merchant bankers assis t in decis ion making and hence

thei r scope increases . With s igni f icant market f reedom,

merchant bankers work has increased many folds .

3 . Banking pol ic ies : RBI prefers that commercial banks donot indulge in merchant banking business di rect ly . They

should setup a subsidiary for the purpose. This l imi ts

scope of commercial banks and gives space to merchant

bankers . This pol icy also resul ts in fai r business

pract ices . Some countr ies a l low commercial bankers to get

involved in IPOs, placement of debentures , e tc . Indian

scenar io i s favorable to merchant bankers .


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4 . Corporate cul ture: corporate can do project appraisal ,s t rategic rest ructur ing in house as wel l . I f the corporate

prefer thi rd-par ty independent assessment , then only they

wil l engage merchant bankers . Otherwise merchant

bankers role i s on ly s ta tu tory as in i ssue management .

India inc. apparent ly prefers and is happy wi th merchant

bankers work.

5 . Corporate dynamics : more happening in business givesmore oppor tuni t ies to merchant bankers . Mergers ,

takeover acquisi t ion, new Greenf ield projects , fund

rais ing for government inst i tut ions, act ive money market

are al l providing bet ter business prospectus to merchant

bankers .

6 . Growth of Primary market : I f the pr imary market growsand number of i ssues increases , the scope of merchant

banking wi l l be enhanced.

7 . Entry of Foreign Investors: Now India capi tal marketdi rect ly taps foreign capi tal through euro i ssues.FDI i s

increased in capi tal market . So Merchant bankers are

required to advice them for thei r inv estment in India . The

increasing number of joint ventures also requires exper t

services of Merchant Bankers . I f more and more NRIs

par t ic ipate in capi tal market , there wi l l be great demand

for merchant banker services .


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8 . Changing pol icy of Financial Inst i tut ions: Now thelending pol icies of f inancial inst i tut ions are based on

project or ientat ion, So the merchant banker services wi l l

be needed by corporate enterpr ise to provide exper t

guidance.

9 . Development of debt markets: I f the debt market i senhanced, there wi l l be t remendous scope for Merchant

bankers . Now NSE and OTCEI are planned to raise thei r

fund through debt inst ruments .


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REGISTRATION PROCESS OF

MERCHANT BANKING

MERCHANT BANKER without holding a cer t i f icate of

regis t rat ion granted by the Secur i t ies and Exchange Board of

India cannot act as a merchant banker .

SEBI wi l l grant cer t i f icate to Merchant banker i f i t

fol lows the fol lowing condi t ion: -

Merchant banker should be a body corporate and should notbe non banking f inance company

They must have a necessary inf rast ructure for maintaining anoff ice

They must have employed a minimum of 2 persons wi thexper ience in merchant banking business .

They should not be connected wi th any company di rect ly orindi rect ly .


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Procedure for get t ing registrat ion

An application should be submitted to

SEBI in Form A of the SEBI (Merchant

Bankers) Regulations, 1992.

SEBI shall consider the application and on being satisfied

issue a certificate of registration in Form B of the SEBI

(Merchant Bankers) Regulations, 1992

Rs. 5 lakhs should be paid within 15 days of date of receipt of

intimation regarding grant of certificate

t he certificate is valid only for a period of 3 years

Three months before the expiry period, an application should

be submitted to SEBI in Form A of the SEBI (MerchantBankers) Regulations, 1992. SEBI shall consider the

application and on being satisfied renew certificate of

registration for a further period of 3 years.

Rs. 2.5 lakhs which should be paid within 15 days of date of

receipt of intimation regarding renewal of certificate.

Failing to payregistration

fees

Cancellation

of certificate


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CAPITAL STRUCTURE DECISION:-The capi tal requi rement depends upon the category. The

minimum net wor th requirement for act ing as merchant banker

is given below:

Category I Rs. 5 crores Category I I Rs, 50 lakhs Category I I I Rs. 20 lakhs Category IV Nil

The categor ies for which regis t rat ion may be granted are given

below

Category I to car ry on the act ivi ty of i ssue managementand to act as adviser , consul tant , manager ,

underwri ter , por t fol io manager .

Category I I - to act as adviser , consul tant , co-manager ,underwri ter , por t fol io manager .

Category I I I - to act as underwri ter , adviser or consul tantto an i ssue

Category IV to act only as adviser or consul tant to ani ssue


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Obligations and responsibil ities

Code of conduct: -Every merchant banker has to abide by the code

of conduct as speci f ied below. A merchant banker in the

conduct of his business has to observe s tandards of integr i ty

and fai rness of a l l his deal ings wi th the cl ients and other

merchant bankers . He ought to render at a l l t imes high

standards of service, exercise due di l igence, ensure proper care

and exercise independent professional judgment . He has to ,

wherever necessary, disclose to his c l ients , the possible

sources of conf l ic t of dut ies and interest , whi le providing

services . He cannot made any s tatement o r become pr ivy to any

act , pract ice unfai r compet i t ion, which i s l ikely to be harmful

to interest of other merchant bankers or i s l ikely to place such

other merchant banker in a disadvantageous posi t ion in relat ion

to him, whi le compet ing for , or execut ing, any assignment . He

should not make any exaggerated s tatement , whether oral or

wr i t ten, to the cl ient e i ther about his qual i f icat ion or his

capabi l i ty to other c l ients . A merchant banker always to

endeavors to:

1) Render the best possible advice to the cl ients regardingcl ients the needs and requirements , and his own professional

ski l l ; and

2) Ensure that a l l professional deal ing are af fected inprompt , ef f ic ient and cost ef fect ive manner


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He should not : -1) Divulge to other c l ients , press or any other par ty anyother par ty conf ident ial informat ion about his c l ient , which

has come to his knowledge; and

2) Deal in the secur i t ies of any cl ient company wi thoutmaking disclosure to the SEBI as per the regulat ions and

also the Board of Directors of the cl ient company.

He should endeavor to ensure that : -1) The investors are provided wi th t rue and adequateinformat ion wi thout making any misguided or exaggerated

claims, and are made aware of a t tendant r i sks before any

investment decis ion i s taken by them;

2) The copies of prospectus , memorandum and relatedl i terature are made avai lable to the investors

3) Adequate s teps are taken for the fai r a l lotment of secur i t ies and refund of appl icat ion money wi thout delay;

and

A merchant banker should not general ly and par t icular ly in

respect of the i ssue of any secur i t ies be par t to

a) Creat ion of false market ;

b) Pr ice r igging or manipulat ions; and

c) Passing of pr ice sensi t ive informat ion to brokers ,

members of s tock exchanges and other players in the capi tal


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market or take any other act ion which i s unethical or unfai r

to the investors .

Final ly , he has to avoid by the provis ions

of the SEBI Act , i t s rules and regulat ions which may be

appl icable and relevant to the act ivi t ies car r ied on by the

merchant banker .

Res tr ict ion on Business: -No merchant banker , other than a bank/publ ic

f inancial inst i tut ion (PFI) i s permi t ted to car ryon business

other than that just in the secur i t ies market wi th ef fect f rom

December 9, 1997.

However , a merchant banker who is regis tered wi th RBI

as a Pr imary Dealer /Satel l i te Dealer may car ry on such

business as may be permit ted by RBI wi th ef fect f rom

November 1999.

Maximum Number of Lead Managers : -The maximum number of lead manager i s re lated

to the s ize of the i ssue. For an i ssue of s ize less than Rs.50

crore, two managers are appointed. For s ize groups of Rs.50

crore to Rs.100 crore and Rs.100 corer to Rs.200 crore, the

maximum permissible lead managers are three and four

respect ively. A company can appoint f ive and f ive or more (as

approved by the SEBI) lead managers in case of i ssues between

Rs.200 corer and above Rs.400 crore respect ively.


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Responsib i l i t ies of Merchant Banker: -Every lead manager has to enter into an

agreement wi th the i ssuing companies set t ing out thei r mutual

r ights , l iabi l i t ies , and obl igat ion relat ing to i ssue and in

par t icular to disclosures , a l lotment and refund. A statement

speci fying these i s to be furnished to SEBI at least one month

before the opening of the i ssue for subscr ipt ion. In case of

more than one- lead manager /Merchant banker , the s tatement of

has to provide detai l s about thei r respect ive responsibi l i t ies . A

lead merchant banker cannot manage an i ssue i f the i ssuing

company is i t s associate . He can also not associate wi th a

merchant banker who does not hold a cer t i f icate of regis t rat ion

with the SEBI . I t i s necessary for a lead manager to accept a

minimum underwri t ing obl igat ion of 5% of the total

underwri t ing commitment or Rs.25 lakh whichever i s less . I f he

is unable to do so, he has to make ar rangements for an

underwri t ing of an, equal amount by a merchant banker

associated wi th that i ssue under int imat ion to SEBI .

Due Di l igence cer t if icate: -The lead manager i s responsible far the

ver i f icat ion of the content of a prospectus/ le t ter of of fer in

respect of an i ssue and the reasonableness of the views

expressed in them. He has to submit to the SEBI at least two

weeks before the opening of the i ssue far subscr ipt ion a due

di l igence cer t i f icate to the ef fect that


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a) The prospectus/ le t ter of af ter i s in conformity wi th thedocuments/mater ials and papers relevant to the i ssue,

b) All legal requirements connected wi th the i ssue havebeen ful ly compl ied wi th, and

c) The disclosure i s t rue, fa i r and adequate to enable theinvestors to make a wel l - informed decis ion as to the

investment in the proposed issue.

Submiss ion of Documents: -The lead managers(s) to an i ssue has (have) to .

Submit a t least two weeks before the date of f i l ing wi th the

regis t rar of companies/ regional s tock exchange or both

par t iculars of the i ssue, draf t prospectus/ le t ter of of fer , other

l i terature to be ci rculated to the investors/shareholders , and so

an to the SEBI . They have to ensure that the

modif icat ions/suggest ion made by i t wi th respect to the

informat ion to be given to the investors i s duly incorporated.

The draf t prospectus/draf t le t ter of of fer should be submit ted

to the SEBI along wi th the prescr ibed fee speci f ied below: -


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Issue s ize including

premium and intended

retent ion oversubscript ion

Fee per document

Up to Rs.5 crore Rs 10,000

Rs 5 crore- Rs 10 crore Rs 15,000

Rs 50 crore- Rs 50 corer Rs 25,000

Rs 10 crore- Rs 100 corer Rs 50,000

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

More than Rs 500 corer Rs 5,00,000

They have to cont inue to be associated wi th the

issue t i l l the subscr ibers have received the share debentures

cer t i f icate or the refund of excess appl icat ion money.

Acquisi t ion of shares a merchant banker i s

prohibi ted f rom acquir ing secur i t ies of any company on the

basis of unpubl ished pr ice sensi t ive informat ion obtained

dur ing the course of any professional assignment ei ther f rom

the cl ient or otherwise. He has to submit to the SEBI the

complete par t iculars of any acquisi t ion of secur i t ies of a


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company whose i ssue i s being managed by him wi thin 15 days

f rom the date of the t ransact ion.

Disclosures to SEBI: -As and when required, a merchant banker has to

disclose to the SEBI:

I ) His responsibi l i t ies wi th regard to the managementof the i ssue,

I I) Any changes in the informat ion/par t icularspreviously furnished which have a bear ing and the

cer t i f icate of regis t rat ions granted to i t .

I I I ) The names of the companies whose i ssues he hasmanaged or has been associated wi th,

IV) The par t iculars relat ing to breach of capi taladequacy requirements and

V) Informat ion relat ing to his act ivi t ies as manager ,under wr i ter , consul tant or adviser to an i ssue.


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Qualities of a Good Merchant Banker

Merchant Bankers are individual s experts who

organize and manage the merchant banks . The operat ion of a

merchant bank is inf luenced by the personal i ty , t ra i t s of i t s

merchant bankers . Thei r qual i t ies are:

1) Leadership:-In order to interact wi th thei r c l ients and communicate

ef fect ively merchant bankers should possess al l re levant ski l l s

and update knowledge.

2) Aggressive act ion:-Merchant bankers always looking for new business

oppor tuni t ies . On locat ing a business opp or tuni ty and af ter

obtaining the assignment f rom the cl ients , a merchant banker

has to be prompt in grasping the c l ient s p roblems and to

provide a bet ter choice amongst a l ternat ive solut ions. A good

merchant banker i s one who do es not a l low his c l ients to think

anything outs ide except what has been advis ed and thus

holding the cl ients interest for the pres ent as wel l as for the

future.

3) Co-operat ion and Friendl iness: -Co-operat ion and f r iendl iness coupled wi th persuasiveness

must f low as natural t ra i t s in the merchant banker in order to

win over the t rust of thei r c l ients just l ike a doctor or a lawyer

who retains thei r c l ients permanent ly. A good merchant banker


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has to share the thoughts of his c l ients wi th sympathet ic

gestures and of fer suggest ions wi thout any greed or favo rs .

4) Contacts: -A merchant banking business mainly depends upon the sociable

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

banker covers:

a . His own organizat ionb . Central and State Government Off ices (c) Banks,c . Financial Inst i tut ions,d . Promoters/Directors/Owners/Chief Execut ives of the

publ ic and pr ivate

e . enterpr ises ,f . (e) Pr inters ,g . ( f ) Adver t i s ing Agencies ,h . (g) Brokers and Stock Exchange Dealers ,i . (h) Advocates and Sol ici tors

Members of the press , e tc .

j . Merchant bankers have to widen the contacts andcont inue to maintain them by meet ing people in

personal , in special gather ings and through wr i t ing

to them.

5) Att i tude towards problem solving:-A good qual i ty of a merchant banker i s to be ski l led i n human

relat ions par t icular ly in the inter -person al behavior . A

merchant banker should have a posi t ive approach to understand

the di f f icul t ies , adverse ci rcumstances and the viewpoin ts of


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others . Effect ive communicat ion and proper feedback are the

pre- requis i tes for creat ing a posi t ive at t i tude towards problem

solving which could be gained par t ly through the learning

process and par t ly as an inborn personal i ty t ra i t .

6) Inquisi t iveness for acquiring new s ki l l s , informationand knowledge:-

Merchant bankers survive by providing the informat ion

required by thei r needy cl ients . Therefore they must keep

themselves updated wi th the la test informat ion in the area of

the service product which they market .

7) Knowledge: Thorough understanding of technical i ssues related to

business , understanding of legal and s tatutory requirements ,

appreciat ion of business acumen; f inancial ex per t i se i s a key

thing a merchant banker must know. Del ivery of his services

depends on his basic understanding of these i ssues.

8) Capital market famil iari ty: Merchant banker should be wel l versed wi th s tock markets ,

thei r movements . He should t rack imp happenings in the

market on ongoing basis .

9) Liasioning abi l i ty: Merchant bankers are required to l ia ison wi th SEBI , RBI , the

stock exchanges , deposi tor ies and other government

author i t ies for publ ic i ssue related dut ies . I t i s imperat ive


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that a merchant bank maintains excel lent rappor t wi th al l of

them and also close relat ions even at informal levels . This

only can see speedy and favorable clearances by the

author i t ies .

10) Innovat ion: Corporate may approach wi th unique requirements . Standard

solut ions and products may not solve problems somet imes.

Merchant bankers should do out of box thinking and b e able

to do f inancial engineer ing. They can device new f inancial

inst ruments and get approved f rom the author i t ies .

Innovat ion i s required even to address s t r ingent legal

requirements .

11) Integri ty: Merchant banker has valuable and conf ident ial informat ion

of i t s customers . Merchants bankers should take utmost care

that the informat ion i s not leaked and also not consumed for

the purpose other than for which i t was disclosed to the

merchant banker .


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SERVICES PROVIDED BY MERCHANT BANKS: ( in

detail)

The development act ivi ty through the country had exer ted

excess demand on the sources of funds by the ever expanding

indust ry and t rade which could not be met by the Al l India

Financial Inst i tut ions. In these ci rcumstances, the corporate

sector enterpr ises had the only al ternat ive to avai l themselves

of the capi tal market services for meet ing the long- term fund

requirements through capi tal i ssues of equi ty and debentures .

The growing demand for funds f rom capi tal market has

enthused many organizat ions to en ter into the f ie ld of merchant

banking for managing the publ ic i ssues.

The need of merchant banker i s a lso fel t in the wake of huge

untapped publ ic savings as merchant bankers can play a highly

signi f icant role in mobi l iz ing funds f rom savers to invest in

channels assur ing promising return on investments and thus

narrow down the gap between demand for and supply of

invest ible funds.

Merchant bankers not only provide advisory services to

corporate enterprises but also advise the investors of the

incent ives avai lable in the form of tax rel ief and other

statutory obl igat ions. Thus, the merchant bankers help

industry and trade to raise funds, and the investors to

invest their saved money in sound and healthy concerns with

conf idence, safety and expectat ion of higher yields.


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Broadly a merchant banker can provide the fol lowing

services:

1 . Corporate Counsel ing2. Project Counsel ing And Pre- Investment Studies3. Credi t Syndicat ion And Project Finance4. Issue Management5. Underwri t ing6. Bankers7. Por t fol io Management8. Venture Capi tal Financing9. Leasing10. Non-Resident Investment Counsel ing And

Management

11. Acceptance Credi t And Bi l l Discount ing12. Advising On Mergers , Amalgamat ions And

Take-Over

13. Arranging Offshore Finance14. Fixed Deposi t Broking15. Rel ief To Sick Indust r ies

Lets take a br ief look at each of these funct ions:


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Corporate Counseling

Corporate counsel ing denotes the advice provided by

the Merchant Banking to the corporate uni t to ensure bet ter

corporate per formance in terms of image bui lding among

investors , s teady growth through good working and

appreciat ion in market value of i t s equi ty shares . The scope

of corporate counsel ing, capi tal rest ructur ing and, por t fol io

management and the ful l range of f inancial engineer ing

includes venture capi tal , publ ic i ssue management , and loan

syndicat ion, working capi tal , f ixed deposi t , lease f inancing,

acceptance credi t , e tc . However counsel ing i s l imi ted to only

opinions and suggest ions and any detai led analysis would

form par t of a speci f ic service.

The scope of corporate counsel ing i s rest r ic ted to the

explanat ions of concepts , procedures and laws to be

observed by the cl ient company. Requirement of any act ion

to be taken or compl iance of s ta tutory formal i t ies to be made

for implementat ion of those suggest ions would mean the

demand for a speci f ic type of service other than corporate

counsel ing being of fered by the merchant bankers . An

academic analysis of corporate counsel ing present a

di f ferent picture than that t ranspi res f rom the l i terature of

the merchant bankers Fi rs t ly corporate counsel ing i s the

beginning of the merchant banking service which every

cl ients whether new or exis t ing has got to avai l a di f ferent

mat ter whether a merchant bank charges i t s c l ient separately

for render ing the corporate counsel ing service or includes

the element of fee in the other heads of services but f ro the


35/68

angle of pr ior i ty . Corporate counsel ing i s f i r s t in l ine of the

services which a merchant banker of fers and than other

services .

Secondly the scope of the corporate counsel ing i s very

vast . I t s coverage ranges f rom the manager ial economies,

investments and f inancial management to Corporate Laws

and the related legal aspects of the organizat ional goals ,

locat ions factors , organizat ional s ize and operat ional scale ,

choice of product and market survey, forecast ing of product ,

cost reduct ion and cost analysis , a l locat ion of resources,

investment decis ions, capi tal management and expendi ture

control , pr icing methods and market ing s t rategy, e tc . As

f inancial and l i ivestment exper ts , a merchant banker has to

guide the corporate cl ients in areas cover ing f inancial

repor t ing, project measurements , working capi tal

management , f inancial requirements and the sources of

f inance, evaluat ing f inancial a l ternat ives , ra te of returns and

cost of capi tal besides basic corporate changes of f inancial

rear rangement , Reorganizat ion, mergers and acquisi t ions,

etc . are the areas to be covered.

Corporate laws should basical ly cover the legal aspects

including the var ious legal formal i t ies involved in areas of

corporate f inance being raised f rom the f inancial

inst i tut ions, banks and the general pubic in the form of loan,

new issues of equi ty or debentures respect ively


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Project Counseling

Project counsel ing services may be rendered

independent ly or maybe, i t re lates to project f inance and

broadly covers the s tudy of the project and o f fer ing advisory

assis tance on the project viabi l i ty and procedural s teps for

i t s implementat ion broadly including fol lowing aspects : -

general review of he project ideas / project prof i le , advice on

procedural aspects of project implementat ion, review of

technical feasibi l i ty of the project on the basis of the repor t

prepared by own exper ts r by the outs ide consul tants ,

select ing Technical consul tancy Organizat ion (TCO) for

prepar ing project repor ts and market surve y, or review of the

project repor ts or market survey repor t prepared by the TCO,

prepar ing project repor t form f inancial angle , and advice and

act on var ious procedural s teps including obtaining

government consents for implementat ion of projects . This

assis tance can include obtaining of the fol lowing

approvals / l icenses/permission/grants e tc form the govt .

agencies viz . le t ter of intent , indust r ia l l icense and DGTD

regist rat ion and government approval for foreign

col laborat ion.

In addi t ion to above, the faci l i ty providing guidance to

Indian ent repreneurs for making investment projects in India

and in Indian joint ventures overseas i s a lso covered under

this act ivi ty .

Besides the above services , project counsel ing may

include ident i f icat ion of potent ial investments avenues,

precise capi tal s t ructur ing shaping the pat tern of f inancing,


37/68

arranging and negot iat ing foreign col laborat ions,

amalgamat ions, mergers and takeover , f inancial s tudy of the

project and preparat ion of viabi l i ty repor ts , to advice on the

f ramework of inst i tut ional guidel ines and laws governing

corporate f inance, assis tance in the preparat ion of project

prof i les and feasibi l i ty s tudies based on prel iminary project

ideas in order to indicate the potent ial . These repor ts would

cover the technical , f inancial and economic aspects of the

project f rom the point of view of thei r acceptance by the

f inancial inst i tut ions and banks; advis ing and assis t ing

cl ients in prepar ing the appl icat ions for obtaining le t ters of

intent , indust r ia l l icense and DGTD regis t rat ions etc ,

seeking approvals form the government of India for foreign

technical and f inancial col laborat ion agreements , guidance

on investment oppor tuni t ies for ent repreneurs coming to

India .Pre- investment s tudies are di rected mainly for the

prospect ive investor . These are the object ive and detai led

feasibi l i ty explanat ion of which the pr incipal a im is to arm

the cl ients wi th the sound foundat ion of facts and f igures to

evaluate the al ternat ive avenues open for cap i tal investments

form the pint of view of growth and prof i t prospects . Someof the cr i t ical i ssues that a s tudy of this genre deals wi l l

include an in-depth invest igat ion of environment and

regulatory factors , locat ion of raw mater ial , suppl ies ,

demand project ions and f inancial requirements . Such a s tudy

would assess the f inancial and economic viabi l i ty of a given

project and help the cl ients to ident i fy and shor t l i s t those


38/68

projects that are bui l t upon his inherent s t rength son as to

accentuate corporate prof i tabi l i ty and growth in long run.

Gr ind lays bank has special izat ion in pre investment

studies and i t conducts such s tudies for foreign companies

whishing to par t ic ipate in joint ventures in India and of fers

a package of services including advice on the extent of

par t ic ipat ion, government regulatory factors and an

environmental scan of par t icular indust r ies in India


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Credit Syndication

Credi t syndicat ion also known as credi t procurement and

project f inance services . The main task involved in credi t

syndicat ion i s to raise to rupee and foreign currency loans wi th

the banks and f inancial inst i tut ions both in India and abroad. I t

a lso ar ranges the br idge f inance and the resources for cost

escalat ions or cost Overruns.

Broadly, the credi t syndicat ions include the fol lowing

act s ;

(a) Est imat ing the total costs(b) Drawing a f inancing plan for the total project cost -conforming to the requirements of the promoters and thei r

col laborators . Financial inst i tut ions and banks, government

agencies and underwri ters .

(c) Prepar ing loan appl icat ion for f inancial assis tance f romterm lenders/ f inancial inst i tut ions/banks and moni tor ing thei r

progress including the pre-sanct ion negot iat ions.

(d) Select ing the inst i tut ions and banks for par t ic ipat ion inf inancing.

(e) Fol low-up of the term loan appl icat ion wi th the f inancialinst i tut ions and banks and obtaining the sat i sfact ion for thei r

respect ive share of par t ic ipat ion.

( f) Arranging br idge f inance.(g) Assis t ing in complet ion of formal i t ies for drawl of termfinance sanct ioned by inst i tut ion expedi t ing legal

documentat ion formal i t ies drawing up inter -se agreements etc .

prescr ibed by the par t ic ipat ing f inancial inst i tut ions and

banks.


40/68

(h) Assessing the working capi tal requi rements .Prepar ing the necessary appl icat ion for a successful i ssue

management the close l ia ison and coordinat ion wi th the var ious

const i tuents of the publ ic i ssue i s an essent ial condi t ion that

warrants ful l cooperat ion of a l l the par t ies af fect ing the cost

and prospects f the i ssue. Merchant banks, act ing as Manager

to the i ssue has to set t le the fee for Advocate/sol ic i tors

advice, accountants cer t i f icat ion, brokers and banks charges,

underwri ters commission, pr inters charges and advert i s ing

and publ ici ty expenses and coordinates wi th syndicated

merchant bankers and pr incipal brokers , s tock exchanges, e tc .

The responsibi l i ty for a l l this rests upon the merchant banker .

I f proper coordinat ion i s not done, the success of the i ssue may

be rendered unassured.


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Management OF Capital ISSUES:-

The capi tal i ssue are managed are category-1 merchant

banker and const i tutes the most impor tant aspects of thei r

services . The publ ic i ssue of corporate secur i t ies involves

market ing of capi tal i ssues of new and exis t ing companies ,

addi t ional i ssues of exis t ing companies including r ights

issue and di lut ion of shares by le t ter of of fer , . The publ ic

issues are managed by the involvement of var ious agencies

i .e . underwri ters , brokers , bankers , adver t i s ing agency,

pr inters , audi tors , legal advisers , regis t rar to the i ssue and

merchant bankers providing special ized services to make the

issue of the success . However merchant banker i s the agency

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

ent i re i ssue act ivi ty and di rect di f ferent agencies to

contr ibute to the successful market ing of secur i t ies . The

procedure of the managing a publ ic i ssue by a merchant

banker i s divided into two phases , viz;

(A) Pre- issue management(B) Post - i ssue management

(A) Pre-Issue Management:-

Steps required to be taken to manage pre- issue act ivi ty i s as

fol lows:-

(1) Obtaining s tock exchange approvals to memorandumand ar t ic les of associat ions.

(2) Taking act ion as per SEBI guide l ines


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(3) Final izing the appointments of the fol lowing agencies: Co-manager /Advisers to the i ssue Underwri ters to the i ssue Brokers to the i ssue Bankers to the i ssue and refund Banker Adver t i s ing agency Printers and Regist rar to the i ssue

(4)

Advise the company to appoint audi tors , legal advisersand broad base Board of Directors

(5) Draf t ing of prospectus(6) Obtaining approvals of draf t prospectus f rom the

companys legal advisers , underwri t ing f inancial

inst i tut ions/Banks

(7)

Obtaining consent f rom par t ies and agencies act ing forthe i ssue to be enclosed wi th the prospectus .

(8) Approval of prospectus f rom Secur i t ies and ExchangeBoard of India .

(9) Fi l ing of the prospectus wi th Regist rar of Companies .(10) Making an appl icat ion for enl is tment wi th Stock

Exchange along, wi th copy of the prospectus .(11) Publ ici ty of the i ssue wi th adver t i sement and

conferences.

(12) Open subscr ipt ion l i s t .

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


43/68

(1) To ver i fy and conf i rm that the i ssue i s subscr ibed tothe extent of 90% including devolvement f rom

underwri ters in case of under subscr ipt ion

(2) To supervise and co-ordinate the al lotment procedureof regis t rar to the i ssue as per prescr ibed Stock

Exchange guidel ines

(3) To ensure i ssue of refund order , a l lotment le t ters / cer t i f icates wi thin the prescr ibed t ime l imi t of10

weeks af ter the closure of subscr ipt ion l i s t

(4) To repor t per iodical ly to SEBI about the progress inthe mat ters related to al lotment and refunds

(5) To ensure he l i s t ing of secur i t ies a t Stock Exchanges.(6) To at tend the investors gr ievances regarding the

publ ic i ssue

The Merchant Bankers for managing publ ic i ssue can

negot iate a fee subject to a cei l ing. This fee i s to be shared

by al l lead managers , advisers e tc .

0 .5% of the amount of publ ic i ssues up to Rs.25 crores 0 .2%

of the amount exceeding Rs.25crores , i f more than one

Merchant bankers are managing the i ssue.


44/68

Under writ ing of publ ic issue

A ful ly underwri t ten publ ic i ssue spel l s conf idence to the

invest ing publ ic , which ensures a good response to the i ssue.

Keeping this in view companies , which f loat a publ ic i ssue

usual ly , desi re a ful l underwri t ing of the i ssue.

Underwri t ing i s only the guarantee given by the underwri ter

that in the event of under subscr ipt ion, the amount

underwri t ten would be subscr ibed in propor t ion by the

underwri ter . An underwri ter of the i ssue gets the fol lowing

benef i t s :

I t earns a commission of the commitment given . I t earns the r ight to be appointed as bankers of that i ssue. I t expands i t s c l ientele by underwri t ing more and moreissues.


45/68

Bankers to the Issue

The merchant banker can automat ical ly become the banker to

the i ssue in the fol lowing cases:

The bank is a broker to the company I t has given underwri t ing commitments . I t acts as a manger to the i ssue The funct ion of a banker to the i ssue i s to acceptappl icat ion forms f rom the publ ic together wi th subscr ipt ion

money and t ransfer them to the account of the control l ing

branch.


46/68

Portfolio Management

Por t fol io refers to investment in di f ferent types of marketable

secur i t ies or investment papers l ike shared, debentures and

debenture s tocks, bonds etc . f rom di f ferent companies or

inst i tut ions held by individuals f i rm or corporate uni ts .

Por t fol io management refers to managing ef f ic ient ly the

investment in the secur i t ies held by professionals to others .

Merchant bankers take up management of a por t fol io of

secur i t ies on behal f of thei r c l ients , providing special services

wi th a view to ensure maximum return by such investments

wi th a minimum r isk of loss o f return on the money invested in

secur i t ies .

A merchant banker whi le per forming the services of por t fol io

management has to enquire of the investment needs of the

cl ient , the tax bracket , abi l i ty to bare r i sk, l iquidi ty

requirements , e tc . they should s tudy the economic environment

af fect ing the capi tal market , s tudy the secur i t ies market and

ident i fy blue chip companies in which money can be invested.

They should keep record of la test amendment in government

guidel ines , s tock exchange regulat ions, RBI regulat ions, e tc .


47/68

Advisory Services Relating To Mergers and Takeovers

A merger i s def ined as a combinat ion of two or more

companies into a s ingle company where one services and other

looses thei r corporate exis tence. A merger i s a lso def ied as an

amalgamat ion wherein the shareholders of the combining

companies become substant ial ly the shareholders of the

company formed.

A takeover i s refer red to as an acquisi t ion, which i s the

purchase, by one company of a control l ing interest in the share

capi tal of another exis t ing company.

Merchant bankers are the middlemen set t l ing negot iat ions

between the of fered and the of feror . Thei r role i s speci f ic and

special ized in handl ing the mergers and taker over

assignments . Being a professional exper t , the merchant banker

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

companies and as such his assis tance i s useful for both the

companies , i .e . the acquirer as wel l as the acquired company.

Based on the purpose of business object ive, the search of the

acquirer company wi l l s tar t for a merger par tner company. I f

the object ive of merger i s growth or iented i .e . seeking

expansion in product ion and market segments , ut i l izat ion of

exis t ing companies or opt imum ut i l izat ion of resources, then

the acquirer company wi l l select a business related company as

a merger par tner .


48/68

I f the object ive i s diversi f icat ion in product ion l ine or business

act ivi t ies , then i t wi l l select a non-related company as a merger

par tner .

Once the merger par tner i s proposed the merchant banker has to

appraise the merger / takeover proposal wi th respect to f inancial

viabi l i ty and technical feasibi l i ty . He has to negot iate wi th the

par t ies and decide the purchase considerat ion and mode of

payment . He has to co mply wi th the leg al formal i t ies l ike

get t ing approval f rom the Government / RBI; draf t ing the

scheme of amalgamat ion; get t ing approval of company Board,

f inancial inst i tut ion, high cour t i f requi red; ar ranging for the

meet ing etc .


49/68

Venture Capital Financing

Financing an emerging high-r isk project i s cal led venture

capi tal f inancing. Many merchant bankers are enter ing into this

area by also f inancing viable upcoming projects . The f inancing

is by subscr ipt ion to the equi ty capi tal , whi le repayment i s by

sel l ing the equi ty through s tock market when the shares are

l i s ted.

Leasing

Is there another lucrat ive area of f inancing where merchant

bankers are turning? Leasing i s a viable source of f inancing

whi le acquir ing capi tal assets . The services include

arrangement for lease f inance faci l i t ies for leasing companies ,

legal ; documents and tax consul tancy.

Non Resident Investment

To at t ract NRI investments in the pr imary and secondary

markets , the merchant bankers provide investment advisory

services to the NRIs in terms of ident i f icat ion of investment

oppor tuni t ies , select ion of secur i t ies , por t fol io management ,

etc . they also take care of operat ional detai l s l ike purchase and

sale of secur i t ies secur ing the necessary clearance f rom RBI

under FERA for repat r ia t ion of dividends and interest , e tc .


50/68

Acceptance Credit and Bil l Discounting

Though merchant bankers wor ld over special ize in acceptance

credi t and bi l l discount ing, these services are not current ly

provided by merchant bankers in India the pr incipal reasoning

being the lack of an act ive market for commercial bi l l s .

Arranging Offshore Finance

The merchant bankers also help thei r c l ients in the fol lowing

areas involving foreign currency f inancing:

1 . Financing Of Expor ts And Impor ts2 . Long Term Foreign Currency Loans3 . Joint Ventures Abroad4. Foreign Col laborat ion ArrangementsThe assis tance rendered as in the case of f inancial services

covers appraisals , negot iat ions, compl iance wi th proceduraland legal aspects e tc .

Management of Fixed Deposits of Companies

Recent ly , merchant s bankers have begun to s t ructure and

mobi l ize f ixed deposi t s for thei r corporate cl ients . They take

care of the procedural and legal aspects , and also mange thecol lect ion and subsequent servicing of the deposi t s . Advice

wi th regard to the amount to be raised, interest charges, terms

of deposi t s and other related i ssues are also of fered to the

cl ient .


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Relief to Sick Industries

The services of fered by merchant bankers to s ick industries

can be summarized as fol lows :

1 . Assessment of capi tal requi rements and counsel ing oncapi tal rest ructur ing;

2 . Appraisal of technological , envi ronmental , f inancial andother factors causing s ickness;

3 . Preparat ions of programs and packages for rehabi l i ta t ionof s ick uni ts ;

4 . Providing necessary assis tance where the rehabi l i ta t ionpackage involves mergers or amalgamat ion;

5 . Obtaining necessary approval for implementat ion therehabi l i ta t ion package f rom the s tatutory author i t ies ;

6 . Monitor ing the implementat ion of the scheme of rehabi l i ta t ion.


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REGULATORY AUTHORITY

Guidelines of SEBI

After the obl igat ions of the CCI , the place was occupied by a

legal organ cal led as Securi t ies and Exchange Board of India.

The issue of capi tal and pr icing of i ssues by companies has

become f ree of pr ior approval . The SEBI has i ssued guidel ines

for the i ssue of capi tal by the companies . The guidel ines

broadly covers the requirement of the f i r s t i ssue by a new or

the f i r s t i ssue of a new company set up by the exis t ing

company, the f i r s t i ssue by the exis t ing pr ivate companies and

publ ic i ssues by the exis t ing l i s t ing companies . The SEBI i s

the most powerful organizat ion to control and lead both the

pr imary market and secondary market .

The SEBI has announced the new guidel ines for the

disclosures by the Companies leading to the investor

protect ion. They are presented below:

a) If any Companys other income exceeds 10 per cent of thetotal income, the detai l s should be disclosed.

b) The Company should disclose any adverse s i tuat ion whichaffects the operat ions of the Company and occurs wi thin one

year pr ior to the date f i l ing of the of fer document wi th the

Regist rar of Companies or Stock Exchange.

c) The Company should also disclose the informat ionregarding the capaci ty ut i l izat ion of the plant for the las t 3

years .

d) The Promoters of the Company must maintain thei rholding at least a t 20 per cent of the expanded capi tal .


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e) The minimum appl icat ion money payable should not beless than 25 per cent of the i ss ue pr ice.

f ) The company should disclose the t ime normal ly taken forthe disposal of var ious types of investors gr ievances.

g ) The Company can make f i rm al lotments in publ ic i ss ues asfol lows:

Indian mutual funds (20%), FIIS (24%), Regular employees of the company (10%), Financial inst i tut ion (20%).

h) The Company should disclose the safety net scheme orbuy back ar rangements of the shares proposed in publ ic i ssue.

This scheme is appl icable to a l imi ted number of 500 shares

per al lot tee and the of fer should be val id for a per iod of a t

least 6 months f rom the date of dispatch of secur i t ies .

i ) According to the guidel ines , in case of the publ ic i ssues,at least 30 mandatory col lect ion cent res should be es tabl ished.

j ) According to the SEBI guidel ines regarding r ights i ssue,the Company should give adver t i sements in not less than two

news-papers about the dispatch of le t ters of of fer . No

preferent ial a l lotment may be made along wi th any r ights i ssue.

k) The Company should also disclose about the fee agreedbetween the lead managers and the Company in the

memorandum of understanding.


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About AMBI:

In the ear ly 1990s, the merchant banking indust ry in India

wi tnessed a phenomenal growth wi th over 1 ,500 merchant

bankers regis tered wi th SEBI . In order to ensure the wel l being

of the indust ry and for promot ing heal thy business pract ices , i t

became necessary to set up a Sel f Regulatory Organizat ion

within the indust ry. This led to the bi r th of the Associat ion of

Merchant Bankers of India (AMBI) . I t was promoted to

exercise overal l supervis ion over i t s members in the mat ters of

compl iance wi th s tatutory rules and regulat ions per taining to

merchant banking and other act ivi t ies .

AMBI was granted recogni t ion by SEBI to set up professional

s tandards, for providing ef f ic ient services and to establ ish

standard pract ices in merchant banking and f inancial services .

AMBI, in consul tat ion wi th SEBI , i s working towards

improving the compl iance of s ta tutory requirement in a

systemat ic manner . AMBI 's pr imary object ive i s to ensure that

i t s members render services to al l i t s const i tuents wi thin an

agreed f ramework of e thical pr inciples and pract ices . I t a l so

works as a t rade body promot ing the interests of the indust ryand of i t s members .

The spect rum of AMBI 's act ivi t ies i s wide. I t i s the nodal point

for the assimi lat ion and disseminat ion of informat ion relat ing

to the merchant banking indust ry. Thus AMBI ensures that i t s

members are aware of the la test rules/guidel ines i ssued byvar ious s tatutory author i t ies , as a lso other mat ters of interest .


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AMBI is the merchant banking indust ry 's sole representat ive to

al l s ta tutory author i t ies , in par t icular , SEBI . The Chairman of

AMBI is on the Pr imary Market Advisory Commit tee of SEBI .

To ensure heal thy compet i t ion wi thin the indust ry, AMBI has

publ ished i t s Code of Conduct for Merchant Bankers . This

document sets out the broad parameters and the spi r i t in which

the members of AMBI should conduct business . AMBI has also

produced a Due Di l igence Handbook, which has proved to be a

useful tool for merchant bankers . This handbook is cur rent ly

under revis ion. For the benef i t of investors , AMBI has brought

out an Investor ' s Educat ion Handbook

Concurrent wi th the act ivi ty of educat ing investors , AMBI

regular ly conducts /sponsors ta lks and seminars on f inancial

mat ters . AMBI regular ly submits a Pre-Budget Memorandum tothe Finance Minis t ry. This memorandum expresses the concerns

of the indust ry and requests speci f ic changes in var ious

f inancial legis lat ions that would help bet ter the range of

services and oppor tuni t ies provided by the indust ry.

AMBI is a lso the int ra- indust ry arbi t rator on al l mat ters ar i s ingbetween i t s members .


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EXAMPLE:-

STATE BANK OF INDIA

SBIs Merchant Banking Group is s t rongly posi t ioned to of fer

perfect f inancial solut ions to your business . They special ize in

the ar rangement of var ious forms of Foreign Currency Credi ts

for Corporate .

They provide the resources, convenience and services to meet

your needs by ar ranging Foreign Currency credi ts through:

Commercial loans

Syndicated loans

Lines of Credi t f rom Foreign Banks and Financial Inst i tut ions

FCNR loans

Loans f rom Expor t Credi t Agencies

Financing of Impor ts .

They are internat ional ly the most Prefer red Bank by Expor t

Credi t Agencies for Guarantees in case of the Indian Cl ients or

Projects .

SBI being an Indian ent i ty has no India exposure cei l ing. Thei r

Primary focus i s On Indian Cl ients . SBIs seasoned Team of

professionals provides you wi th Insight ful credi t Informat ion

and helps you Maximize the Value f rom the t ransact ion.
http://images.google.co.in/imgres?imgurl=http://im.in.com/connect/images/profile/aug2009/State_Bank_of_India_300.jpg&imgrefurl=http://connect.in.com/state-bank-of-india/profile-538742.html&usg=__IElLNaKCz2ZkFXl4mhMScWt82Lw=&h=360&w=300&sz=19&hl=en&start=38&tbnid=EEAP50y_Z181RM:&tbnh=121&tbnw=101&prev=/images?q=state+bank+of+india+logo&gbv=2&ndsp=20&hl=en&sa=X&start=20


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PRODUCTS AND SERVICES

1] Arranging External Commercial Borrowings (ECB)

2] Arranging and par t ic ipat ing in internat ional loan syndicat ion

3] Loans backed by Expo r t Credi t Agencies

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

5] Impor t Finance for Indian corporates .


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Organizational setup of merchant bankers in India

In India a common organizat ional setup of merchant bankers to

operate i s in the form of divis ions of Indian and foreign banks

and f inancial inst i tut ions, subsidiary companies establ ished by

bankers l ike SBI , Canara Bank, Punjab Nat ional Bank, Bank of

India , e tc . Some f i rms are also organized by f inancial and

technical consul tants and professionals . Secur i t ies and

Exchange Board of India has divided the merchant bankers into

four categor ies based on thei r capi tal adequacy. Each category

is author ized to per form cer tain funct ions. From the point of

organizat ional setup Indias merchant banking organizat ions

can be categor ized into four groups on the basis of thei r

l inkage wi th parent act ivi ty . They are:

(A) Inst i tut ional Base

Where merchant banks funct ion as an independent wing or as

subsidiary of var ious pr ivate/Central Governments/State

Governments f inancial inst i tut ions. Most of the f inancial

inst i tut ions in India are in publ ic sector and therefore such

setup plays a role on the l ines of government pr ior i t ies and

pol icies .

(B) Banker Base

These merchant bankers funct ion as divis ion/subsidiary of

banking organizat ion. The parent banks are ei ther nat ional ized

commercial bank or the foreign banks operat ing in India . These

organizat ions have brought


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professional ism in merchant banking sector and they help thei r

parent organizat ion to make a presence in capi tal market .

(C) Broker Base

In the recent past there has been an inf low of qual i f ied and

professional ly ski l led brokers in var ious s tock exchanges of

India . These brokers under take merchant banking related

operat ions also l ike providing investment and por t fol io

management services .

(D) Private Base

These merchant banking f i rms are or iginated in pr ivate sector .

These organizat ions are the outcome of oppo r tuni t ies and scope

in merchant banking business and they are providing ski l l -

or iented special ized services to thei r c l ients . Some foreign

merchant bankers are also enter ing ei ther independent ly or

through some col laborat ion wi th thei r Indian counterpar ts .

Pr ivate sector merchant banking f i rms have come up ei ther as

the sole propr ietorship or publ ic l imi ted companies . Many of

these f i rms were in exis tence for qui te some t imes before they

added a new act ivi ty in the form of merchant banking services

by opening new divis ions on the l ines of commercial banks and

All India Financial Inst i tut ions.


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Development stages of Merchant Banking firms

In the merchant banking organizat ion in the

fol lowing char t , the f i rm of merchant banker and individual

s tock broker have been included as they have been contr ibut ing

join t ly to the growth of the profess ion of merchant banking .

But most of these f i rms are not wel l developed to show stage of

matur i ty . Most of them are s t i l l in the s tar t -up and ear ly

growth s tages. This i s easi ly dissemble f rom the fol lowing

project ion of the development s tages


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Un it

S ta g es in

d ev e lo p men t o f

merch a n t b a n k in g

Org a n iza t io n a l

se tu p

Prin c ip a l

f in a n c in g so u rce

1 S ta rt -u p

Very lo o se

o rg a n iza t io n ,

fo u n d ers a n d

a sso c ia tes in v o lv ed

in th e ma n a g emen t

Own in v es tmen t

2 Ea r ly g ro wth

Emerg in g fo rma l

o rg a n iza t io n ,

fo u n d ers , o r

p ro fess io n a l

ma n a g er in

ma n a g emen t

In d iv id u a l

in v es tmen t

3Acce lera t in g

g ro wth

Fo rma l

o rg a n iza t io n w i th

p ro fess io n a l ,

ma n a g er o r fo u n d er

F irms in v es tmen t

wi th b a n k s

b a ck in g in terms

o f lo a n

4 S u sta in in g g ro wth

Co mp lex

o rg a n iza t io n w i th

p ro fess io n a l

ma n a g er

Co rp o ra te f in a n ce

fro m b a n k p lu s

eq u i ty fu n d s fro m

p u b l ic

5 ma tu r i ty

Mu l t i la y er co mp lex

ma n a g emen t

o rg a n iza t io n

Ma tch in g f in a n ce

a v a i la b le f ro m a l l

p o ss ib le so u rces


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Level of Competition

The rapid growth in the pr imary capi tal market has led

to an even greater prol i ferat ion of Merchant Bankers . The

number of Merchant Bankers has increased f rom only 33 in the

year 1989-90 to 405 in 1993-94. Present ly , the number of

Merchant Bankers in di f ferent categor ies regis tered wi th SEBI

is 501 (August 1994) . Consider ing a total number of publ ic

issues in the year 1994-95, a Merchant Banker on average

viedlor 3 .5 i ssues. Therefore a tough compet i t ion exis ts in the

l ine of f i ssue management . The high level of compet i t ion in

Merchant Banking business especial ly i ssue management i s

evident f rom the fact that out of 140 Category-I merchant

Bankers in 1992-93 only 66 were able to manage an i ssue.

Merchant Banking business i s handled by a few

establ ished players and for the others there i s a heavy

compet i t ion. Therefore, thei r survival dependent on innovat ive

capi tal i ssue s t ructur ing and other income generat ing act ivi t ies

l ike leasing, high-purchase, investments and deal ings in

secondary market operat ions.

As a resul t of l iberal izat ion and global izat ion,

compet i t ion in corporate sector i s becoming intense. For thei r

survival and growth, companies are reviewing thei r s t rategies ,

s t ructures and funct ioning. This had led to corporate

rest ructur ing including mergers , acquisi t ions, spl i t s ,

divestments and f inancial rest ructur ing. This area of corporate

advisory services which i s largely in the hands of pr ivate


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consul tancy f i rms, a lso of fers good oppor tuni ty to Merchant

Bankers to extend the area of operat ions.

CURRENT AFFAIRS

RBI allows cash withdrawal from merchant banker terminalsBesides ATMs, customers can now also withdraw cash up to Rs1000 from

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

step towards enhancing the customer convenience in using the plastic money, it

has been decided to permit cash withdrawals at POS (point of sale) terminals.

To start with, this facility will be available for all debit cards issued in India, up

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

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

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

cards issued in India.

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

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

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

This facility may be made available at any merchant establishment designated

by the bank and would be available whether the card holder makes a purchase

or not.

Morgan Stanley makes i-banking comebackThe joint venture between JM Financial and Morgan Stanley was inked in 1997

and formalized in 1999. The JV had investment banking operations other than

equity broking, research, wealth management and advisory and securities

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

banking company together with its subsidiaries, which were engaged in fixed

income, equity broking, wealth management, advisory and distribution

businesses of $ 20 million. The Indian partner sold its 49% holding in JM


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Morgan Stanley Securities (JMSPL), the institutional equity broking company

to Morgan Stanley for $ 445 million.

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

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

its former Indian partner.

PNB aims profit of 7,500crore by 2013The country's second largest public sector lender Punjab National Bankaims to

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

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

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

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

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

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

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

merchant banking subsidiary.PNB Investment Services aims to provide investment consultancy and merchant

banking services and would be operational in the next three months. Currently,

these operations are run by a division of the bank.

ICICI Bank to oversee mergers and acquisitionsICICI bank and its merchant banking arm, ICICI Securities (I-Sec), haveentered into an agreement, whereby all M&A deals will be done out of ICICI

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

change in management control.

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

working together on M&A deals. Since a predominant number of people, who

wish to be advised on M&A, also look for acquisition finance, it was decided
http://economictimes.indiatimes.com/News/News-By-Industry/Banking/Finance-/Banking/PNB-aims-profit-of-7500-cr-by-2013/articleshow/4654620.cmshttp://economictimes.indiatimes.com/News/News-By-Industry/Banking/Finance-/Banking/PNB-aims-profit-of-7500-cr-by-2013/articleshow/4654620.cms


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that the business should be housed in the bank, I-Sec MD Madhabi Puri Buch

told ET. Now, if a corporate is seeking a sell mandate or a buy mandate, where

the transfer of controlling interest takes place, the deal will be done by ICICI

Bank.

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

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

The new deal has taken into effect between both the entities from April 1.

Birla Capital and Financial Services gets SEBI merchant bankinglicense

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

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

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

underwriting services in the Indian market.

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

concentrate on regulated services like initial public offerings, takeover,

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

Syndication, M&A Advisory and other corporate advisory.

Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash BirlaGroup that has diversified interest in sectors like auto & engineering, textiles &

chemicals and power & electrical, education & IT.

Primary market slowdown, affects merchant bankers walletThe recent slowdown in the primary market has impacted not only investors but

merchant bankers as well, as there has been a significant decline of nearly 60


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per cent in their percentage fees so far this year.

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

comparison to Rs. 771crore for the calendar year 2007, indicating a drop of 57.9

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

brokerage firm SMC Global Securities.

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

manage the issue.

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

2.24 per cent in 2007, the report added.

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

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

Merchant Banking Fin

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