Merchant Viru

8/11/2019 Merchant Viru

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PROJECT ON

MERCH NT

B NKING


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PREPARED BY:

VIRENDRA JHA 16

KAMALESH KHARAT 21

SUSHANT GAIKWAD 07

GANESH MORE 34

VINAY KHANDAGLE 20SURYAPRATAB SING 49

CLASS: T Y BBI

SUBJECT: F.S.M

SUBMITED TO: RAHUL SIR

SUBMITED DATE: 20-09-2010


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INDEX

SR NO CONTENTS

1

Introduction

2

Definition & Meaning

3

History of Merchant Banking

4

Growth of Merchant Banking in India

5

Registration Of Merchant Bankers

6

Objectives Of Merchant banking in Prevailing Economy

7

Need and Importance of Merchant Bankers

8

Role of Merchant Banker

9

Problems of Merchant Bankers

10

Organizational setup of Merchant Banking in India

11

Qualities of good Merchant Banker

12

Responsibilities of Merchant Banker

13

Services rendered by Merchant Bankers

14

Merchant Banking-Future Development15

Conclusion


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Introduction

Merchant banking

The dictionary meaning of merchant bank refers to an organization that

underwrites corporate securities and advises such clients on issues like corporate

mergers, etc. involved in the ownership of commercial ventures. This organization

may be a bank, corporate body, firm or proprietary concern.

Merchant banking started with the management of public issues and loan

syndication and has been slowly and gradually covering activities like project

counseling, portfolio management, investment counseling and mergers and

amalgamation of the corporate firms. Although, merchant banking organizations

present a long list of services they contemplate to render to their clients but the

main services so far being rendered by them are those as authorized by the SEBI.


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Definition

The first authoritative definition for the term Merchant Banker has been given in

the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, A

Merchant Banker means any person who is engaged in the business of Issue

Management either by making arrangements regarding selling, buying or

subscribing to Securities as Manager, Consultant, Adviser of rendering Corporate

Advisory Service in relation to such Issue Management.

Sec/5 (b) of the Banking Regulation Act, 1949 defines Banking as accepting, forthe purpose of lending or investment of deposits of money from the public,

repayable on demand or otherwise and withdraw able by cheque, draft, order or

otherwise.

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

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

arrangements regarding selling, buying or subscribing to the securities as manager,

consult, adviser or rendering corporate advisory service in relation to such issue

management.

Meaning

Merchant banking is an activity that includes corporate finance activites, such as

advice in complex financing mergers and acquisition advice, and at times direct

equity investment in corporation by banks.

Merchant banking implies investment management. Companies raise capital by

issuing securities in the market. Merchant bankers act as intermediaries between


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the issuers of capital and the investors who purchased securities. Merchant banking

is the financial intermediation that matches entities that need capital and those that

have capital for investment.

History of Merchant Banking

Origin of merchant banking

The origin of merchant banking can be traced back to the 13 thcentury when the

development of international trade and finance took place. The early merchant

bankers were traders of commodities. These bankers also acted as bankers to the

kings of European States and financed continental wars and coastal trades. The

earlier merchant bankers used to lend their name to the lesser known traders by

accepting bills through which they guaranteed that the holder of the bill would

receive full value on the date of payment. Although merchant banking activity was

ushered in two decades ago, it was only in 1992 after the formation of Securities

and Exchange Board of India that it is defined and a set of rules and regulations in

place. Hence the name merchant was used because of its roots in merchant trade.

The Growth of merchant banking in India

In India prior to the enactment of Indian Companies Act, 1956,managing agents

acted as issue houses for securities, evaluated project reports, planned capital

structure and to some extent provided venture capital for new firms. Few share

broking firms also functioned as merchant bankers.

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

banking division setup by the Grind lays Bank, the largest foreign bank in the


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

merchant banks included the management of public issues and some aspects of

financial consultancy. Following Grind lays Bank, Citibank set up its merchant

banking division in 1970.The division took up the task of assisting new

entrepreneurs and existing units in the evaluation of new projects and raising funds

through borrowing and equity issues. Management consultancy services were also

offered. Merchant bankers are permitted to carry on activities of primary dealers in

government securities. Consequent to the recommendations of Banking

Commission in 1972, that Indian banks should offer merchant banking services as

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

started the Merchant Banking Division in 1972. In the initial years the SBIs

objective was to render corporate advice and assistance to small and medium

entrepreneurs.

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

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

Chartered Bank and Mercantile Bank in 1978 and United Bank of India, UnitedCommercial Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank

in late 70s and early 80s. Among the development banks, ICICI started merchant

banking activities in 1973 followed by IFCI (1986) and IDBI (1991).

Registration of merchant bankers

Registration with SEBI is mandatory to carry out the business of merchant

Banking in India. An applicant should comply with the following norms:

The applicant should be a body corporate


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capital market services for meeting their long-term financial requirements

through capital issues of equity and debentures.

3. With the growing demand for funds there was pressure on capital market

that enthused the commercial banks, share brokers and financial consultant

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

capital markets.

4. With the result, all the commercial banks in nationalized and public sector as

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

their merchant banking windows and are competing in this field.

5. There has been a mushroom growth of financial consultancy firms and

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

syndication with other merchant bankers.

6. The need of merchant banking institutions is felt in the wake of huge public

savings lying still untapped.

7. Merchant banks can play highly significant role in mobilizing funds of

savers to investible channels assuring promising return on investments and

thus can help in meeting the widening demand for investible funds for

economic activity.

8. Merchant banks have been procuring impressive support from capital market

for the corporate sector for financing their projects. This is evidenced from

the increasing amount raised form the capital market by the corporate

enterprises year after year.

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

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

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

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


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

other corporate laws and regulations.

10.Thus, the merchant bankers help the industry and trade to raise funds and

the investors to invest their saved money in sound and healthy concerns with

confidence, safety and expectation for higher yields.


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

banking services.

1) Merchant bankers dynamism lies in promptly attending to the corporate

problems and suggests ways and means to solve it. The nature of merchant banking

services is development oriented and promotional to help the industry and trade to

grow and survive. Merchant banker is, therefore, dedicated to achieve this

objective through his dynamism. He is always awake to renew his skills, develop

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

deal with emerging new problems of corporate business world.

2) He has to keep pace with the changing environment where government rules,

regulations and politics affecting business conditions frequently change; where

science and technology create new innovations in production processes of

industries envisaging immediate renovations, diversifications, modernizations or

replacements of existing plant and machinery or other equipments putting new

demands for finances and necessitating overhauling of the capital structure of the

firms.


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3) Merchant banker has to think and devise new instruments of financing industrial

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

money to invest in corporate securities and other productive investment channels.

4) He has to help the industry in different forms to ensure that it runs risk free and

devoid of uncertainty by assisting the promoters with his knowledge and skills to

resolve the problems being faced by them. He has to watch the interest and win

over the confidence of the government, its agencies, along with the entrepreneurs,

the investors and the whole community.

5) He must bridge the communication gap between different sections and resolve

the problem being faced in different areas concerned with the business world.

To discharge the above role, a merchant banker has to be dynamic. In the days

ahead, merchant bankers have very significant role to play tuning their activities to

the requirements of the growth pattern of the corporate sector, the industry and the

economy as a whole which is, in it, a challenging task and to meet these challenges

merchant bankers will have to be more vigorous and strategic in playing their role.They will have also to adopt new ways and means in discharging their role.

Problems of Merchant Bankers

1. SEBI guidelines have authorized merchant bankers to undertake issue related

activities only with an exception of portfolio management. These guidelines havemade the merchant bankers either to restrict their activities or think of separating

these activities from the present one and float new subsidiary and enlarge the scope

of its activities.


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2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization

of merchant bankers. Small but professional and specialized merchant bankers who

do not have a net worth of Rs.1 crore may have to close down their business. The

entry is denied to young, specialized professionals into merchant banking business.

3. Non co-operation of the issuing companies in timely allotment of securities and

refund of application money is another problem of merchant bankers. The

guidelines have put the responsibility on the merchant bankers. They have to seek

the co-operation of the issuing company to shoulder the responsibility.

Organizational setup of merchant bankers in India

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

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

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

Bank of India, etc. Some firms are also organized by financial and technical

consultants and professionals. Securities and Exchange Board of India has divided

the merchant bankers into four categories based on their capital adequacy. Each

category is authorized to perform certain functions. From the point of

organizational setup Indias merchant banking organizations can be categorized

into four groups on the basis of their linkage with parent activity. They are:

(A) Institutional Base

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

private/Central Governments/State Governments financial institutions. Most of the

financial institutions in India are in public sector and therefore such setup plays a

role on the lines of government priorities and policies.


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(B) Banker Base

These merchant bankers function as division/subsidiary of banking organization.

The parent banks are either nationalized commercial bank or the foreign banks

operating in India. These organizations have brought professionalism in merchant

banking sector and they help their parent organization to make a presence in capital

market.

(C) Broker Base

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

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

banking related operations also like providing investment and portfolio

management services.

(D) Private Base

These merchant banking firms are originated in private sector. These organizations

are the outcome of opportunities and scope in merchant banking business and theyare providing skill-oriented specialized services to their clients. Some foreign

merchant bankers are also entering either independently or through some

collaboration with their Indian counterparts. Private sector merchant banking firms

have come up either as the sole proprietorship or public limited companies. Many

of these firms were in existence for quite some times before they added a new

activity in the form of merchant banking services by opening new divisions on the

lines of commercial banks and All India Financial Institutions.


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Qualities of good merchant bankers

Merchant bankers are individual experts who organize and manage the merchant

banks. The operations of merchant banks are, therefore, influenced by the

personality trait of these individuals. For the success of merchant banks

operations, the qualities which merchant bankers should have are discussed

below:-

1. Leadership Merchant banker should posses all relevant skills, updated

knowledge to interact with the clients and effectively communicate.

Leadership is synonymous with followers who follow the one who leads.

2. Aggressive action Aggressiveness is a personality trait of a good leader

but in merchant banking it has a wider connotation. Aggressive merchant

bankers are always looking for new business. Once a business opportunity

has been located, the merchant banker has got to obtain the mandate for the

merchant banking assignment from the clients at once which will depend

upon his own communication skills, persuasiveness and the background of

the organization to which he belongs. A good merchant banker is one who

does not allow his client to think anything outside except what has been

advised. Therefore, promptness in grasping the clients problems and

providing better choice amongst alternative solutions evidence aggressive

approach in the profession to hold the clients interest in entirety for the

present as well as the future.

3. Co-operation and friendliness No doubt, these two characteristics are the

symbols of good leadership but it hardly needs to be stressed that

cooperation and friendliness coupled with persuasiveness are the main

instruments with which a merchant banker mixes with the people, gathers


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information, obtains business mandate and renders satisfactory services to

the clients. Business of an honest merchant banker spreads with geometrical

propagation when he shares the thoughts of his clients with sympathetic

gestures and offers pragmatic suggestions without greed or favors. Very

often, rude, intemperate and indifferent disposition or blunt out burst

withdraw fortunate business opportunities forever. These are the vices

unbecoming of a merchant banker and should be eschewed. Friendliness and

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

the trust of the clients like a doctor or lawyer who retain their clients

permanently.

4. Contacts Success of a merchant banker depends upon his sociable nature

and the richness of wider contacts. A merchant banker is supposed to be

acquainted deeply with all the constituents of merchant banking. The scope

of contact encompasses intimate contiguity and acquaintances within his

own organization, Central and State Government Offices where compliances

under various relevant enactments are to be reported, Indian and foreignbanks, financial institutions at Central and State levels,

promoters/directors/owners and chief executives of the private and public

enterprises which would be prospective beneficiaries of merchant banking

services, printers, advertising agencies, brokers and stock exchange dealers,

advocates and solicitors and members of the press whose services are

availed of in executing merchant banking assignments. Merchant banker

should widen contacts and references and continue to maintain them in

goodness, honour and humour by meeting people in person, through writing

and in special gatherings.


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5. Attitude towards problem solving The most important personality trait

of a merchant banker is his attitude towards problem solving. Positive

approach to understand the view point of others, their difficulties and their

adverse circumstances is possible only when a person is skilled in human

relations particularly the inter-personal and intra-personal behavior.

Effective communication and proper feedback are the pre-requisites for

creating a positive attitude towards problem solving which could be gains

partly through learning process and partly as an in-born quality. This trait is

a subject matter of personality development but is so important that it must

be treated as a separate objective quality of a good merchant banker.

6. Inquisitiveness for acquiring new skills, information and knowledge

Merchant bankers live on the wits they earn by giving information to needy

clients. Therefore, they should keep abreast with latest information in the

area of the service product, they market. This is possible if merchant bankers

posses the quality of inquisitiveness.

The above qualities of a merchant banker are only illustrative. All good qualities in

merchant bankers are difficult to be defined so elaborately. Nevertheless, merchant

banker should possess super business acumen, managerial abilities, administrative

capacities and salesmanship so as to understand the problems of trade and industry,

devise ways and means to sort out and resolve those problems and sell the service

product to the needy clients.


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Responsibility of Merchant Banker

To the Investors

Investor protection is fundamental to a healthy growth of the Capital Market.

Protection is not to be conceived as that of compensating for the losses suffered.

The responsibility of the Merchant Banker in ensuring the completeness of the

disclosures is of paramount importance in view of the fact that entire reliance is

based on offer Document either Prospectus or Letter of Offer because an

independent agency like a Merchant Banker has done the scrutiny.

Capital structuring

The Merchant Bankers while designing the capital structure take into account

the various factors such as Leverage effect on earnings per share, the project

cost and the gestation period, cash flow ability of the company, the cost of

capital, the considerations of management control, size of the company, and

general economic factors. These exercise are done mainly in order to meet the

fund requirement of the company taking due cognizance of the investors

preference.

Project Evaluation and due Diligence

Due diligence and project evaluation is another major responsibility of the

Merchant Banker. Where the project has already been appraised by a

bank/financial institution, the Merchant Banker relies on the said appraisal

before accepting an assignment. However, where the project has not been

appraised by as bank/financial institution, the Merchant Bank undertakes a

detailed evaluation of the project before taking up an assignment for issue

management.


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Legal aspect

The factors that are looked into in case of the legal aspects are:

a) Compliance with the SEBI guidelines and the various guidelines issued by

the Ministry of Finance and Department of Company Affairs.

b) Pending litigations towards tax liabilities or any criminal/civil prosecution

any of the directors for any offenses.

c) Fair and adequate disclosures in the prospectus.

Pricing of the IssueThe Merchant Banker looks into the various factors while pricing the issue.

Some of the factors are past financial performance of the company, Book value

per share, stock market performance of the shares. The Merchant Banker has a

vital role to play in pricing of the instrument.

Marketing of the Issue

Marketing of the issue is a vital responsibility of the Merchant Banker. The

first stage is Pre-issue marketing for placement of the issue with the financial

institutions, banks, mutual funds, FIIs and NRIs. The second stage is the

marketing of the issue to the general public through various vehicles such as

press, brokers, etc.

Bought out Deals

The concept of wholesale but out of public offerings by the Merchant Bankers

started off with over the Counter Exchange of India where a Merchant banker

acts also as a sponsor and either takes up the entire issue to be offered wholly of

jointly with other co-investors and off-loads the same to the public at a later


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date by an offer for sale. Major amendments were made to the SEBI regulations

regarding Merchant Bankers. The duration of this transaction period has not

officially been announced.

Services Rendered By Merchant Bankers

Among the important financial intermediaries are the merchant bankers. The

services of Merchant bankers have been identified in India with just issue

management. It is quite common to come across reference to merchant banking

and financial services as though they are distinct categories. The services provided

by merchant banks depend on their inclination and resources - technical and

financial. Merchant bankers (Category 1) are mandated by SEBI to manage public

issues (as lead managers) and open offers in take-overs. These two activities have

major implications for the integrity of the market. They affect investors' interest

and, therefore, transparency has to be ensured. These are also areas where

compliance can be monitored and enforced.

Merchant banks are rendering diverse services and functions, which are as

follows:-

1. Issue Management

2. Corporate Advisory Services Relating To Issue

3. Underwritings

4. Dealing In Mergers & Acquisition Activity

5. Project counseling

6. Loan Syndication

7. Restructuring services

8. Capital assistance


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9. Corporate advisory Services

10.Factoring service

11.Asset Securitization

12.Forex Services

13.Hire-Purchase Service

14.Lease Finance Companies

15.Venture capital


Merchant Bankers assist ventures proposals of technocrats, with high

technology, which are new, and high risk. To seek assistance from venture

capital funds or companies.

They also provide technical, financial & managerial services & help the

company to set up a track record. The assistance should mainly be for equity support; through loan support to

supplement this may be extended.

Merchant Banking-Future Development

Time and again the Merchant banking Industry in India witnessed experienced and

underwent significant changes. The very purpose for which these firms are

commences their services should be taken care of and they should mould their

policy decision and activities to move in tune with the main objectives of

Investors protection and to create healthy environment in capital markets. No

doubt, Merchant Banking firms are subject to a host of control measures,


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regulations and rules framed and guided by SEBI. To some extent, frequent

changes and /or amendments to policies and control measures, though needed for

smooth working of the securities Industry, proves to be detrimental to the very

existence of the Merchant Banking system in the country. The SEBIs Act 1992

confers power upon SEBI to supervise and control the affairs of the Merchant

Banking firms in India.

The various studies which had been undertaken in India for evaluating the

performance of Merchant Banking firms and the implications of these on securities

industry. No single study has been emerged so far pertaining to the evaluation of

Merchant Banking firms and in-depth study on their activities as well as

operational and financial performance in the light of changing regulatory

environment.

In recent past, the small investor has turned his back on the primary capital market.

Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and

reinforce his faith. He has lost all hopes of appreciation of his investment. And this

when all these years millions have though capital market, ate capital market and

dreamt capital market. It needed an extraordinary effort and skill the drive the

small investor away! High premiums, false premiums and gray market operations.

The professed protector of his interests first laid down the dictum of proportionate

allotment, then of minimum subscription, all working against his interests. This

would make an observant student of the stock market infer that there is some game

plan afoot to dethrone the small investor from his prominent; he was believed to be

the king.

With the coming to SEBI, an organization that was ostensibly brought into

existence to guard the interest of the small investor, hopes ran high that the small


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investor would now have a safe playing field. But these hopes were soon belied.

Far from guarding the interests of the investing public, SEBI embarked on a course

of action, which has positively hurt them. The latest fiat of EBI bans corporate

advertising after the receipt of acknowledgement card by a company wanting to go

public. SEBIs this action has caused the closure of an information window. Now

50 million potential investors are deprived of official and authentic information

given by the Issuer. It is hard to understand reasons for this drastic and totally

uncalled for action. While there has been no official explanation for this fiat, there

is reason to believe that it may be based on a wrong perception of the role for

corporate advertising.

All this has been done perhaps because the corporate and intermediaries is to

follow the practices of Western capital markets here, oblivious of the fact that our

capital markets are altogether different in structure, in systems and in the number

of participants Freedom of commercial expression could be exploited by some to

serve their own ends, just a s freedom of speech and expression could be abused

but this has not led our Government to put arbitrary restrictions on our freedom.

Merchant Bankers have reason to believe they will be handicapped without the

marketing support. But the worst sufferer would be the investor, especially the

small investor it is this class, which forms the backbone of the capital market. As a

result of the ban, the small investor would be deprived of the opportunity to study

the corporate profile of the Issuer. In the absence of adequate information, they

will have to depend on manipulated facts and information fed by unreliable

sources.

The Indian primary capital market is basically a retail market. It consists of

innumerable investors who take own individual investment decisions. Whatever,


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the system, it is this market that will bring in the funds. If these markets

destabilized, the investors will look for alternative avenues to invest their funds.

SEBI in its one of the first documents on SEBI and Investor Protection,

Development and Regulation of Securities Market clearly specifies significance

of regulating capital market and its future plans for fulfilling the twin objectives

viz., Development of capital market and investor protection are explained in

introductory paragraphs. It speak out that, The decade of the 1980 witnessed a

phenomenal growth and development of the securities market, demonstrated its

potential not only to mobilize the savings of the household sector but also to

allocate it with some degree of efficiency for industrial development. The dilution

of the holdings of the multinational companies at affordable prices in the latter part

of the 1970s had generated considerable interest, which was, carries well into the

next decade. Several companies came in the early part of the 1980s and

successfully raised large resources from the market especially through debt

instruments, which further sustained investor interest. There were several changes

in Government policy, which significantly influenced industry and aided the

market. India was then entering the phase of liberalization and decontrol which

was to accelerate and gather momentum in the 1980s.

By the end of the decade, the securities market in India came to be firmly

integrated with the financial system of the country. With the corporate sector

increasingly relying on the securities market for meeting their long-term

requirement of funds, the securities market their long-term requirement of funds;

the securities market competed on equal terms with the Development Financial

Institutions, which were the traditional purveyors of long-term capital. The

emergence of the securities markets into the main stream of the financial system of

the country was thus one of the major economic processes of the 1980s an


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inevitable outcome of the maturing process of the financial system. They brought

about notable changes in the capital structure of the companies across industries,

gave birth to new intermediaries and institutions in the securities market and

created a new awareness and interest in investment opportunities in the securities

market among investor. In spite market, its quality lagged far behind and there

was absence of adequate professionalism and fair competition among the various

players in the market. Besides, the regulatory framework then prevailing was

fragmented difficult, if not effective.


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CONCLUSION

The merchant banker plays a vital role in channelizing the financial surplus of the

society into productive investment avenues. Hence before selecting a merchant

banker, one must decide what the services for which he is being approached are.

Selecting the right intermediary who has the necessary skills to meet the

requirements of the client will ensure success.

It can be said that this project helped me to understand every details about

Merchant Banking and in future how its going to get emerged in the Indian

economy. Hence, Merchant Banking can be considered as essential financial body

in Indian financial system.

Market development is predicated on a sound, fair and transparent regulatory

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

awareness and interest into a committed, discerning and growing awareness and

interest into an essential to remove the trading malpractice and structural

inadequacies prevailing in the market, and provide the investors an organized, well

regulated market place in future.


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Merchant Viru

Documents

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