T.Y.BBI.

INTRODUCTION
Financial services are important component of financial system. The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after implementation of Liberalization, privatization and globalization. Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role as specialized agencies. The resources raising functions remains to be the primary market holds the key to rapid capital formation, growth in industrial productions and exports. There has to be accountability to the end use of funds raised from the market. The increase in the number of issues and amount raised the number of merchant bankers. Therefore the field became highly competitive market where it requires skill in handling the situation. The merchant bankers have the social responsibility to in building an industrial structure in India. Merchant bankers assist corporate in raising capital. They assist in issue of shares, syndicating loans, public issue of debentures. They do not provide funds. They only assist. They also actively arrange working capital; appraisal projects scrutinize and persuade merger proposals.

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T.Y.BBI. In BRITIAN merchant bankers and investment bankers are synonymous. In U.S., merchant bank means as investment bank which is well equipped to the multinational corporations. In INDIA merchant bankers is a body corporate who carries on any activity of the issue management, which consist of preparing prospectus and other information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities to market. There is no official category in investment banking.

MERCHANT BANKING
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In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and to wealthy individuals. The term can also be used to describe the private equity activities of banking.[1] The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role. Both merchant banks and investment banks provide fee based corporate advisory services, including in relation to mergers and acquisitions.

ORIGIN
Merchant banking is originated through the entering of London merchants in foreign trade through acceptance of bill. Later, the merchants assisted the government of under developed countries in raising long terms through floatation of bonds in London money market. Over a period they extended their activities to domestic business of syndication of loan term and short term finance, underwriting of new issues, acting as registrars and share transfer agents, debentures trustees, portfolio managers, negotiating agents for mergers takeovers etc.

HISTORY OF MERCHANT BANKING

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T.Y.BBI. Till 18th century money lender, money chargers, village merchant banks. They also issued and discounted bills of exchange (handiest) and bank draft. They gave loans on mutual trust, on mortgage of lands, ornaments and other property. JAGAT SHETH (1720- 1733AD, BENGAL) HABIB AND SONS which is now HABIB BANK (founded in 1941, now is in PAKISTAN). There were the organized merchant bankers in recent history of INDIA. MERCHANT BANKING is an activity that includes corporate finance activities, such as advice on complex financings, mergers and acquisition advice (International or domestic), and at times direct equity investments in corporations by the banks. Merchant banks are private financial institution. Their primary sources are PIPE financings and international trade. Their secondary income sources are consulting, Mergers and acquisitions help and financial market speculation. Because they do not invest against collateral, they take far greater risks than traditional banks. Because they do not take money from the public and are international in scope, they are not regulated. Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help.

The reason that business should develop a working relationship with a merchant bank is they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists. It is rate for a merchant bank to fail. The last major failure was Barings bank (1992). It failed because Page 4

T.Y.BBI. of unsupervised trading of copper futures contracts and buybacks. When the dot com bubble burst in 2001, scores of venture capital firms failed. The greatest merchant bank failure in history was the knights templar. After the Crusades, the Order became immensely wealthy controlling and funding the trade between the Middle East and Western Europe. The foolishly loaned money to the French government. To avoid repaying the money, King Louie had the pope declare the Order heretics. Thousands of monks lost their lives, but France balanced its budget. To understand Merchant banks, you should know something of their history. Modern merchant banking started In ITALY during the 7th Century. The banking practices evolved from the financing structure was the advance payment for goods by merchant bankers at a great discount to the delivery to the delivery value of those goods. In the case of Italy and then Germany, wheat was the product. The merchant banks purchased the wheat soon after planting. They accepted the risk of crop failure. They profited when they sold the wheat. In most countries, merchant banks prospered in London. For instance, merchant bankers funded Canadas Hudson Bay Company. This period saw the rise of such merchant banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from the trade created by the Dutch East Indian Company. Since the 18 th century, the role of the merchant banker has been considerably broadened to include a composite of modern day skills. Such skills are inherently entrepreneurial; managerial, financial and transactional. Today, North American merchant banks have taken the form of boutiques-whereby, each offers its own specialized services. The hallmarks of these merchant bank boutiques are that they Page 5

T.Y.BBI. typically charge fees payable in cash and/or the clients stock for each service rendered. You can find a merchant bank that meets any reasonable set of needs.

MODERN PRACTICES OF MERCHANT BANKING

Merchant banking Known as accepting and issuing houses in the U.K. and investment banks in the U.S., modern merchant banks offer a wide range

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T.Y.BBI. of activities, including portfolio management, credit syndication, acceptance credit, counsel on mergers and acquisitions, insurance, etc. Of these two classes of merchant banks, the U.S. variant initiates loans and then sells them to investors. Even though these companies call themselves "merchant banks," they have few, if any, of the characteristics of former merchant banks "Merchant Banking is an important service provided by a number of financial institutions that helps in the growth of the corporate sector which ultimately reflects into the overall economic development of the country. Merchant banks were expected to perform several functions like issue management, underwriting, portfolio management, loan syndication, consultant, advisor and host of other activities. SEBI was also made all powerful to regulate the activities of merchant banks in the best interest of investors and economy. Apart, merchant banking was the necessity of banks themselves which were in need of non-fund based income so as to improve their profitability margins by all means in the changed economic scenario.

Now, it could be anybody's anxiety to know whether merchant banks are performing their duties honestly as they were expected to do. What duties they performs most and in what capacity. Whether merchant banking business helped banks them to improve their overall profitability. Does the socio, political and economic environment prevailing today sufficiently Page 7

T.Y.BBI. warrant the growth of merchant banking or otherwise? An honest attempt is being made to seek answer of these questions and also to suggest remedial measures wherever possible on the basis of empirical study done, the writing of which appears in the form of this book."

IMPORTANCE AND NEEDS OF MERCHANT BANKING

Important reason for the growth of merchant banking has been developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap under bridged between the supply and demand of inventible Page 8

T.Y.BBI. funds. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for fund from the corporate sector enterprises. In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures. 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. 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. 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.

Notwithstanding the above facts, the needs of merchant banking institutions are felt in the wake of huge public savings lying still untapped. 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.

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T.Y.BBI. With the growth of merchant banking profession corporate enterprises in both public and private sector sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirements for funds for stabling new enterprises, undertaking Expansion/Modernization/ Diversification of the existing enterprises. This reinforces the needs for a vigorous role to be played by merchant banks. Merchant banks have procuring impressive support from capital market for the corporate sector for financing their projects. This is evidenced from the increasing amount raised from the capital market by the corporate enterprises year after year. In view of multitude of enactments, rules and regulations, guidelines and offshoot press release instructions brought out by the government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the needs of skilled agency existed which could provide this service to the corporate units an advice them on such requirements to be complied with for raising funds from the capital market under different enactments viz. Companies Act, Income-tax Act, Foreign Exchange Regulation Act, Securities Contract (regulation) Act and various other corporate laws regulations. Merchant bankers advise the investors of the incentives available in the form of tax reliefs other statutory relaxations, good return on investment and capital to motivate them to invest their savings in securities of corporate sector.

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ROLE OF MERCHANT BANKER

The role of merchant banker is dynamic in the wake of diverse 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 area so as to equip himself with the knowledge and techniques to deal with Page 11

T.Y.BBI. emerging new problems of corporate business world. 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 and other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be setup in industrially backward areas to estimate regional imbalances in industrial development of the country.

He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. 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. He must bridge the communication gap between areas concerned with the business world. To discharge the above role, a merchant banker has to be dynamic. Page 12

T.Y.BBI. 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.

ORGANIZATIONAL SETUP OF MERCHANT BANKERS

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 consults and professionals. Securities and Exchange board of India has divided the merchant banking organizations can be categorized into 4 groups on the basis of their linkage with parent activity. They are:

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T.Y.BBI. 1. Institutional Base Where merchant banks functions 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. 2. 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.

3. Broker base In the recent past there has been an inflow of qualified and professionally skilled brokers in various stock exchanges in India. These brokers undertake merchant banking related operations also like providing investment and management services. These merchant banking firms are originated in private sector. These organizations are the outcome of opportunities and scope in merchant banking business and they are providing skill-oriented specialized services to their clients. Some foreign merchant bankers are also entering either independently or through some collaboration with their Indian counterparts. Page 14

T.Y.BBI. 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 divisions on the lines of commercial banks and All India Financial Institutions.

REQUIREMENTS FOR SETTING UP A MERCHANT BANKING OUTFIT

1. Formation of the business Organization. SEBI act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the types of organizations are listed below: A. Sole Proprietorship. B. Partnership firm.

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T.Y.BBI. C. Hindu Undivided Family (HUF). D. Corporate Enterprises. E. Co-operative Society. Generally it is preferred that the Merchant Banking outfit be a registered company. Merchant Banks are generally setup as subsidiary companies of banks (public or private). For example, SBI caps, ICICI Securities etc.

2. Adoption of a viable business plan All the basic tests required to find out whether the business to be undertaken is viable or not are also applicable to a Merchant Banking setup. Capital adequacy, profitability, growth opportunities and current market size are some of the factors which need to be looked into. 3. Registration for grant of certificate a) Application for grant of a certificate. An application for grant of a certificate needs to be made to SEBI. The application can be made for any one of the following categories of the merchant banker namely:Page 16

T.Y.BBI. Category I, that is (I) To carry on any activity of the

issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and
(II)

To act as adviser, consultant,

co-manager, underwriter, portfolio manager. Category II, that is, to act as adviser, consultant, co- manager, underwriter, portfolio manager;

Category III, that is, to act as underwriter, adviser, consultant to an issue; Category IV, that is to act as only as adviser or consultant to an issue. To carry on the activity as underwriter or portfolio manager a separate certificate of registration needs to be obtained from SEBI. b) Application to conform to the requirements under the SEBI guidelines, otherwise it may be rejected. c) Furnishing of information, clarification and personal representation. The Board may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker

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T.Y.BBI. for the purpose of disposal of the application. The applicant or its principal officer may appear before the Board personal representation. d) Consideration of application The Board shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely: The applicant shall be a body corporate other than non-banking financial company The merchant banker who has been granted registration by the Reserve Bank of India to act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit.

The

applicant

has

the

necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities. the business of the merchant banker

The

applicant

has

in

his

employment minimum of two persons who have the experience to conduct

A person directly or indirectly

connected with the applicant has not been granted registration by the board;

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T.Y.BBI. adequacy requirement is as follows: The capital adequacy requirement should not be less than net worth of the person making the application for grant of registration. The net worth shall be as follows, Category Category I Category II Category III Category IV Minimum Amount Rs. 5,00,00,000 Rs. 50,00,000 Rs. 20,00,000 Nil The applicant fulfils the capital

The applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant and have not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence. The applicant has the professional qualification from an institution recognized by the Government in finance, law or business management. Grant of certificate is in the interest of investors. e) Procedure for Registration. The board on being satisfied that the applicant is eligible shall grant a certificate. On the grant of a certificate the application shall be liable to pay the fees as prescribed. Page 19

T.Y.BBI. f) Payment of fees and the consequences of failure to pay fees. Every applicant eligible for grant of a certificate shall pay such fees in such manner and within the period specified. Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may suspend the registration certificate, whereupon the merchant banker shall cease to carry on activity as a merchant banker for the period during which the suspension subsists. The Merchant Bank can commence business on acquisition of a Certificate of Registration from the SEBI after completion of the above mentioned formalities.

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MAIN OBJEVTIVES OF MERCHANT BANKERS

Merchant bankers render their specialized assistance in achieving the main objectives which are presented below:
1.

To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, and provide standby assistance, securities and all kinds of investments issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India.

2.

The main object of merchant banker is to create secondary market for bills and discount or re-discount bills and acts as an acceptance house.

3.

Merchant bankers another objective is to set up and provide services for the venture capital technology funds.

4.

They also provide services to the finance housing schemes for the construction of houses and buying of land.

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5.

They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India.

6.

They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and proprieties of any other company.

OBLIGATIONS AND RESPONSIBILITIES

Merchant bankers have the following obligations and responsibilities. 1. Merchant banker should

maintain proper books of accounts, records and submit half/yearly/annual financial statements to the SEBI within stipulated period of time. 2. No merchant banker should

associate with another merchant banker who is not registered in SEBI.

3.

Merchant bankers should not

enter into any transactions on the basis of unpublished information available to them in the course of their professional assignment.
4.

Every merchant banker must

submit himself to the inspection by SEBI when required for and submit all the records.
5.

Every merchant banker must

disclose information to the SEBI when it requires any information from them. Page 22

T.Y.BBI. 6. All merchant bankers must

abide by the code of conduct prescribed for them. 7. Every merchant banker who

acts as lead manager must enter into an agreement with the issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular reference to disclosures allotment, refund etc.

CODE OF CONDUCT

The merchant banker must

observe high integrity and fairness in all his dealing.

He shall render at all times

high standard of services, exercise due diligence, exercise independent professional judgment. If necessary, he must disclose to his clients the possible source of conflict of duties and interests.

The merchant banker should

not indulge in unfair competition with other merchant bankers. He should not make any

exaggerated statement about his capacity or achievement.

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He should always Endeavour

to give the best possible advice and prompt efficient and cost effective service. client. He should not engage in the He should maintain the secrecy

of all the confidential information received during the course service to his

creation of a false market or price rigging or manipulation.

DIFFERENCE BETWEEN INVETMENT BANKS AND MERCHANT BANKS

Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks often expand into the field of securities underwriting, while many investment banks participate in trade financing activities. In Theory, investment banks raise funds for business and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated only in underwriting and selling securities in large blocks. Investment banks facilitate mergers and Page 24

T.Y.BBI. acquisitions through share sales and provide research and financial consulting to companies. Traditionally, investment banks did not deal with general public. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting and co-investment in projects involving trade of one form or another. The current offering of investment banks varies, but there are a few characteristics that most of the companies that offer both investment and merchant banking share. As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing, bridge financing, and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and public offerings, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that believed to have strong growth potential. Page 25

T.Y.BBI. Merchant banks still offer trade financing products to their clients have already outgrown the need for trade financing and the various credit products linked to it.

Merchant banks
1. Assist in raising capital in the form of equity, preference shares, and syndicated loan working capital instruments.
2.

Commercial banks
Provide funds in the form of term loan and working capital.

Financing business.

is

the

main

Advisor not financer.

3.

Demand deposits are the key feature.

Do not accept chequeable deposits.

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4.

Mainly fund based business

Mainly fees based business.

5.

Being leaders, they are advisors, they are more cautions assess risk in lending proposal based and and cannot afford to be grossly relationship closer to the customers. Commercial banks majority business is of terms and bank deposits.

Being

closer to the customers and get to know a risk of the transaction is properly. They work on risks shields i.e. mitigation measures.
6.

Cost of work they get is about management of equity issues in the capacity of lead manager, piercing SEBI. of underwriter, issue, book

running, and liaisoning with

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SERVICES OF MERCHANT BANKER IN INDIA

Merchant bankers provide services as follows: Business planning stage: 1. Project feasibility study 2. Advice on capital Equity raising: structuring 3. Preparation of prospectus and liaision with SEBI 4. Pricing decisions. 5. Marketing in the capacity of lead managers. 6. Underwriters to the issue. 7. Post issue management. 8. Assistance in ADR/GDR

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T.Y.BBI. Debt raising: 9. Management of debenture issue.

10. Preparation of bankable

proposal and syndication of loan Working capital raising: Strategic advice: 11.Assistance in arranging optimal capital finance. 12. Advice on mergers acquisitions.
13. Corporate structure advice.

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SERVICES PROVIDED BY MERCHANT BANKS: (in detail)

The development activity through the country had exerted excess demand on the sources of funds by the ever expanding industry and trade which could not be met by All India Financial Institutions. In the circumstances, the corporate sector enterprises had the only alternative to avail themselves of the capital market services for meeting the long-term fund requirements through capital issues of equity and debentures. The growing demands of funds from capital market has enthused many organizations to enter into the field of merchant banking for managing the public issues. The need of merchant banker is also felt in the wake of huge untapped public savings as merchant bankers can play a highly significant role in mobilizing funds from savers to invest in channels assuring promising return on investments and thus narrow down the gap between demands for supply of investible funds. Merchant bankers not only provide advisory services to corporate enterprises but also advice the investors of the incentives available in the form of tax relief and other statutory organizations. 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 confidence, safety and expectations of higher yields. Page 30

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Broadly a merchant banker can provide the following services:

1. 2. 3.

Corporate counseling. Project counseling and pre-investment studies. Credit syndications and project finance. Issue management. Underwriting. Bankers. Portfolio management. Venture capital financing. Leasing.

4.
5. 6.

7.
8. 9.

10. Non-resident investment counseling and management. 11. Acceptance credit and bill discounting. 12. 13. 14. 15.

Advising On mergers, Amalgamations And Take-over. Arranging offshore finance. Fixed deposit broking. Relief to sick industries.

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1.

Corporate Counseling. It includes a whole range of financial services provided by a merchant

banker to a corporate unit a view to ensure better performance, maintain steady growth and create a better image among investors. It covers the entire of merchant banking activities i.e., project counseling, capital restructuring, portfolio management and full range of financial engineering including venture capital, public issue management, loan syndication, working capital, fixed deposits, lease financing, acceptance credit, etc. however the scope of corporate counseling is limited to suggestions and opinion leaving to the client to take corrective actions for solving its corporate problems. A merchant banker finds out the problems of enterprise, which shall include organizational scales, choice of a product, pricing, etc, and suggests ways and means to solve those problems. Project counseling is an important merchant banking service which includes preparations of project reports, deciding upon the financing pattern to finance the cost of the project, appraising the project report with financial institutions/banks. Project reports are prepared to obtain government approval of the project, procuring financial assistance from financial institutions and banks, for ensuring market for the proposed product, for planning public issues, etc. Page 32

T.Y.BBI. Financing the project cost is an important aspects of project counseling. The two sources of funds available to finance the project cost are internal sources of funds (or owners funds) which includes promoters contribution and retained earnings; and external sources of funds which refers to the borrowed funds in the loan from banks, private investors and financial institutions and in the form of debentures from the public. Merchant banker has to decide the financing mix of the internal and external sources of funds keeping in view the rules, regulations norms prescribed by the government or followed by the term lending financial institutions. While rendering project counseling services the merchant banker has to ensure that the application forms for obtaining the funds from financial institutions are filled in with relevant and appropriate information and before submitting the application forms for obtaining the funds from financial institutions are filled in with relevant and appropriate information and before submitting the application, the merchant banker has to appraise the project considering the various aspects as to the type of the project, location, technical, commercial and financial viability of the project.
2.

Credit syndication. Once the client company has decided about the project proposed to be

undertaken, the next step is looking for the sources wherefrom the funds could be procured to implement the project.

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T.Y.BBI. Merchant banker has to locate the sources of funds and comply the formalities required to procure the funds. This service rendered by the merchant banker in arranging and procuring credit from financial institutions, banks and other lending and investment organizations for financing the clients project cost or meeting working capital requirement is referred to as loan syndication or credit syndication. Credit syndication is case of domestic borrowings is with the institutional lenders and banks. Long and medium term funds are obtained from the All India Financial Institutions like IFCI, IDBI etc., state level financial bodies like SFC, SIDC etc., commercial banks, mutual fund etc. short-term funds are also required by the firm for purchase of raw material, payment of wages, salaries etc. sources of financing these short term requirements or working capital needs can be from internal accruals from working or operations and short term loans from friends and relatives; or from external sources like short term borrowings from banks etc.
3.

Issue management and underwriting. Management of capital issues is a professional service rendered by the

skilled and experienced merchant bankers. Previously, the managing agents for a particular corporate used to manage public issues. The abolition of the managing agency system, the growth in the public limited companies in number and size, the imposition of new rules and regulations regarding the public issue of securities made it necessary for merchant bankers to play a definite role in the management of public issues.

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T.Y.BBI. Public issue management involves marketing of corporate securities by offering the securities to the public, procuring private subscription to the securities and offering securities to existing shareholders of the company. As a manager to the public issue, the merchant banker, before the public issue has to obtain the consent of the stock exchanges to the memorandum and articles of association, appoint other managers, bankers, underwriters, brokers etc., advice the company to appoint auditors, solicitors and board of directors, draft the prospectus and obtain consent from the companies legal advisors, board of directors and other concerned parties, file the prospectus with the registrar, make an application for enlistment with stock exchanges and finally advertise for the issue. A merchant bankers post issue activities include final allotment and/or refund of subscription amount, calculation of underwriters liability in case of under subscription and complying the necessary statutory requirements for listing of securities on stock exchange.
4.

Under writing of public issue. A fully underwritten public issue spells confidence to the investing

public, which ensures a good response to the issue. Keeping this in view companies, which float a public issue usually, desire a full underwriting of the issue.

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T.Y.BBI. Underwriting is only the guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed in proportion by the underwriter. An underwriter of the issue gets the following benefits: It earns a commission of the commitment given. It earns the right to be appointed as bankers of that issue. It expands its clientele by underwriting more and more issues. 5. Bankers to the issue. The merchant banker can automatically become the banker to the issue in the following cases:
The bank is a broker to the company. It acts as a manager to the issue.

The function of a banker to the issue is to accept application forms from the public together with subscription money and transfer them to the account of the controlling branch. 6. Portfolio management. Portfolio management refers to managing efficiently the investment in the securities held by professionals to others. Merchant bankers take up management of a portfolio of securities on behalf of their clients, providing special services with a view to ensure

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T.Y.BBI. maximum return by such investments with a minimum risk of loss of return on the money invested in securities. A merchant banker while performing the services of portfolio management has to enquire of the investment needs of the client, the tax bracket, ability to bare risk, liquidity requirements, etc. they should study the economic environment affecting the capital market, study the securities market and identify the blue chip companies in which money can be invested. They should keep the record of latest amendments in government guidelines, stock exchange regulations, RBI regulations, etc. 7. Advisory Services Relating To Mergers and Takeovers A merger is defined as a combination of two or more companies into a single company one service and other losses their corporate existence. A merger is also defined as amalgamation wherein the shareholders of the combining companies become substantially the shareholders of the company formed. A takeover is referred to as an acquisition, which is the purchase, by one company of a controlling interest in the share capital of another existing company. Merchant bankers are the middleman settling negotiations between the offered and the offeror. Their role is specific and specialized in handling the mergers and takeover the assignments. Being a professional expert, the merchant banker is apt to safeguard the interest of the shareholders in both

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T.Y.BBI. the companies and as such his assistance is useful for both the companies, i.e. the acquirer as well as the acquired company. Based on the purpose of business objective, the acquirer company will start for a merger partner company. If the objective of merger is growth oriented i.e. seeking expansion in production and market segments, utilization of existing companies or optimum utilization of resources, then the acquire company will select a business related company as a merger partner. If the objective is diversification in production line or business activities, then it will select a non-related company as a merger partner. Once the merger partner is proposed the merchant banker has to appraise the merger/takeover proposal with respect to financial viability and technical feasibility. He has to negotiate with the parties and decide the purchase consideration and mode of payment. He has to comply with the legal formalities like getting approval from the Government/RBI; drafting the scheme of amalgamation; getting approval of company board financial institution, high court if required, arranging for the meeting etc.
8.

Venture Capital Financing. Financing an emerging high-risk project is called venture capital

financing. Many merchant bankers are entering into this area by also financing viable upcoming projects. The financing is by subscription to the equity

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T.Y.BBI. capital, while repayment is by selling the equity through stock market when the shares are listed. 9. Leasing. Is there another lucrative area of financing where merchant bankers are turning? Leasing is a viable source of financing while acquiring capital assets. The services include arrangement for lease finance facilities for leasing companies, legal; documents and tax consultancy. 10. Non-resident investment. To attract NRI investments in the primary and secondary markets, the merchant bankers provides investment advisory services to the NRIs in terms of identification of investment opportunities, selection of securities, Portfolio management, etc. they also take care of operational details like purchase and sale of securities securing the necessary clearance from RBI under FERA for repatriation of dividends and interests, etc.
11.

Acceptance Credit and Bill Discounting. Through merchant bankers world over specialize in acceptance credit

and bill discounting, these services and not currently provide by merchant bankers in India the principal reasoning being the lack of an active market for commercial bills.

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12.

Arranging Offshore Finance. The merchant bankers also help their clients in the following area

involving foreign currency financing: 1. Financing Of Exports And Imports. 2. Long Term Foreign Currency Loans. 3. Joint Ventures Abroad 4. Foreign Collaboration Arrangements The assistance rendered as in the case of financing services covers appraisals, negotiations, compliance with procedural and legal aspects etc.
13.

Management of foxed Deposits of Companies. Recently, merchants bankers have begun to structure and mobilize fixed

deposits for their corporate clients. They take care of the procedural and legal aspects, and also manage the collection and subsequent servicing of the deposits. Advice with record to the amount to be raised, interest charges, terms of deposits and other related issues are also offered to the clients.
14.

Relief to Sick Industries. The services offered by merchant bankers to sick industries can be

summarized as follows; 1. Assessment of capital requirements and counseling on capital restructuring;

2.

Appraisal of technological, environmental, financial and other factors causing sickness; Page 40

T.Y.BBI. 3. Preparation of programs and packages for rehabilitation of sick units; 4. Providing necessary assistance where the rehabilitation package involves mergers or amalgamation; 5. Obtaining necessary approval for implementation the rehabilitation package from the statutory authorities; 6. Monitoring the implementation of the scheme of rehabilitation.

QUALITIES OF MERCHANT BANKERS

To be a successful merchant banker, following qualities are necessary:

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1.

Knowledge: Thorough understanding of technical issues related to

business, understanding of legal and statutory requirements, appreciation of business acumen; financial expertise is a key thing a merchant banker must know. Delivery of his services depends on his basic understanding of these issues.
2.

Capital market familiarity: Merchant banker should be well versed

with stock markets, their movements. He should track imp happenings in the market on ongoing basis.
3.

Liasioning ability: Merchant bankers are required to liaison with SEBI,

RBI, the stock exchanges, depositories and other government authorities for public issue related duties. It is imperative that a merchant bank maintains excellent rapport with all of them and also close relations even at informal levels. This only can see speedy and favorable clearances by the authorities.
4.

Innovation:

Corporate may approach with unique requirements.

Standard solutions and products may not solve problems sometimes. Merchant bankers should do out of box thinking and be able to do financial engineering. They can device new financial instruments and get approved from the authorities. Innovation is required even to address stringent legal requirements.
5.

Integrity:

Merchant banker has confidential information of its

customers. Merchant bankers should take utmost care that the information is not leaked and also not consumed for the purpose other than for which it was disclosed to the merchant banker.

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PROBLEMS AND HURDLES

Not many but some problems are faced by the Indian merchant bankers.
1.

Industry compartmentalization: Company which is in merchant

banking business would have expertise in underwriting, hire purchase, leasing, and portfolio management, money-lending. But RBI does not permit Page 43

T.Y.BBI. merchant banking firms to get into these activities. So the same promoters have to setup different companies for different purposes. Management cost increases and expertise pooling i.e. multiple use of same talent is not possible.
2.

Mollified practices: India corporate culture is bettering. But still many

corporate have excessively friendly approach. Favored allotment of shares, tampering with project appraisal report to bankers is common. Corporate like to use merchant bankers for mollified intentions. This gives growth to more boutique fly-by day firms. Giant professional r multinational merchant bankers are cautions in their approach to Indian market.
3.

Regulations: Through regulations are much better now, there is still

scope for further improvement. Merchant bankers can be made more accountable and responsible. Professional qualification focused on merchant banking is not available. Industry is not well organized and all the players do not play the same tune. This is specifically evident in comparison with insurance industry and mutual funds industry.

SCOPE FOR MERCHANT BANKING

Scope for merchant banking depends upon size of the market restrictionsliberation, banking policies, corporate culture, and corporate dynamics.
1.

Size and dynamics of the market: Indian market is growing. In fact

India is one of the latest emerging markets. Obviously, public issues, FDI, debt raising are on rise. Lots of new and green fried projects are happening. Merchant bankers have lost space to contribute. Page 44

T.Y.BBI.
2.

Restrictions-liberalizations: More liberal the market is, more the things

left to be decided by the corporate. Merchant bankers assist in decision making and hence their scope increases. With significant market freedom, merchant bankers work has increased many folds.
3.

Banking policies: RBI prefers that commercial banks do not indulge in

merchant banking business directly. They should setup a subsidiary for the purpose. This limits scope of commercial banks and gives space to merchant bankers. This policy also results in fair business practices. Some countries allow commercial bankers to get involved in IPOs, placement of debentures, etc. Indian scenario is favorable to merchant bankers.
4.

Corporate culture: Corporate can do project appraisal, strategic

restructuring in house as well. If the corporate prefer third-party independent assessment, then only they will engage merchant bankers. Otherwise merchant bankers role is only statutory as in issue management. India inc. apparently prefers and is happy with merchant bankers work.
5.

Corporate dynamics: more happenings in business gives more

opportunities to merchant bankers. Mergers, takeover acquisition, new Greenfield projects, fund raising for government institutions, active money market are all providing better business prospectus to merchant bankers.

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PROGRESS OF MERCHANT BANKING

Up to 1970, there were only two foreign banks which performed merchant banking operations in the country. SBI was the first Indian commercial bank and ICICI the first financial institution to take up the activities in 1972 and 1973 respectively. As a result of buoyancy in the country market in 1980s there were 33 merchant bankers belonging to three majors segments viz., commercial banks, all India financial institutions, and private firms. Merchant banking functions of these institutions was related only to management of new capital issues. Merchant banking industry which remained almost stagnant and stereotyped for over two decades, witnessed an astonishing growth after the Page 46

T.Y.BBI. process of economic reforms and deregulation for Indian economy in 1991. The number of merchant banks increased to 115 by the end of 1992-1993 300 by the end of 1993-1994 and 501 by the end of August 1994. All merchant bankers registered with SEBI under four different categories include 50 commercial banks 6 all Indian financial institutions ICICI, IFCI, IDBI, IRBI, Tourism Finance Corporation of India, infrastructure leasing and Financial Services Ltd. and private merchant bankers. In addition to Indian Merchant Bankers, a large number of reputed international Merchant bankers like Merrill lynch, Morgan Stanley, Golden Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India under authorization of SEBI. As a result of proliferation, Indian Merchant bankers are faced with severe competition not only among themselves but also with the well developed global players.

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CURRENT AFFAIRS
RBI allows cash withdrawal from merchant banker terminals. Besides ATMs, customers can now also withdraw cash up to Rs 1000 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 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. Page 48

T.Y.BBI. Morgan Stanley makes I-banking comeback The 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, advisory and distribution business of $ 20 million. The Indian partner sold its 49% holding in JM Financial- its former Indian partner. PNB aims profit of 7,500 crores by 2013. The countrys second largest public sector Punjab National Bank aims to double its profit to Rs 7,500 crores in the next four years. The bank has set a target to expand total business to Rs 10 crores and earn net profit of Rs 7500 crores 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, trust on recovery, focus on customers and financial inclusion, he had said. Besides, the bank plans to open new line of business 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 acquisitions. ICICI bank and its merchant banking arm, ICICI Securities (I-sec), have entered into an agreement, whereby all M&A deals will be done out of ICICI Page 49

T.Y.BBI. bank. The agreement goes o to define as M&A deal as one which involves change i8n 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 that the business should be housed in the banks, I-Sec MD Madhabi Puri Bush 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 banking license. Birla Capital & Finance Services Ltd has been granted merchant-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-crores Yash Birla Group that

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T.Y.BBI. has diversified interest in sectors like auto & engineering, textiles & chemicals and power & electrical, education & IT. Primary market slowdown, affects merchant bankers wallet The 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 percent in their percentage fees so far this year. there is a clear drop in the merchant banking fees to Rs.216 crores in comparison to Rs.771crore for the calendar year 2007, indicating a drop of 57.9 percent 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 offers and manage the issue. The average percentage fee has declined to 1.21 percent so far this year from 2.24 percent in 2007, the report added. Reliance power IPO of Rs 11,563 crores during this year with the merchant banking fee of Rs 50.6 crores, amounting to 0.44 percent of the issue size had a great bearing on this trend. Nomura launches its investing banking operations in India. Nomura Financial Advisory and Securities (India) Private limited (Nomura), has launched its equity sales and trading and investment banking operations in India. In October 2008, Nomura, a global investment bank, including the equities sales and trading, and investment banking teams.

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T.Y.BBI. By integrating the former lehman brothers India franchise and obtaining its merchant banking license and stock exchange its capabilities in India through a wide range of onshore financial solutions spanning securities brokerage, securities underwriting and advisory services.

Association of merchant bankers in India (AMBI): Association of merchant bankers in India is a professional non-profit company setup to represent the industry. It is expected to set code of ethics and facilitate dialogue between the industry and regulatory bodies. Training and awareness programs are also expected from AMBI. Because of lack of support from the members and non-initiative from SEBI/government, AMBI is dormant at present.

EXAMPLE:
Merchant Banking Services in Canara. Canara Bank is also one of the lending Merchant Bankers in India, offering specialized services to banks, PSUs state owned Corporations, Local Statutory bodies and corporate sector. Its SEBI registered category I Merchant Banker / Underwriter to carry on Issue management (public / rights / private placements Issues), Underwriting, consultancy and corporate Advisory services etc. Page 52

T.Y.BBI. They also hold SEBI registration Certificate to act as bankers to an issue with network of exclusive Capital Market Services Branches to handle Capital Market related assignments. They undertake projects appraisals with resource raising plans from Capital Market/ Debt Markets and facilitate tie-ups with Banks / Financial Institutions and potential investors. Their uniqueness is extending services under single window concept covering the following areas: 1. Merchant Banking 2. Commercial Banking 3. Investments
4. Bankers to Issue-Escrow Bankers

5. Underwriting 6. Loan Syndication As leading Merchant Bankers in India, they have associated with issues ranging from Rs. 1 crore to Rs.1500 crores, involving various types of industries, banks, statutory Bodies etc. and have an edge in handling Private placement issues both retail & HNIs. SPECTRUM OF SERVICES. 1. Equity Issue (public/Rights) management 2. Debt Issue Management 3. Private Placements Page 53

T.Y.BBI. 4. Project Appraisals 5. Monitoring Agency Assignments 6. IPO Funding 7. Security Trustee Services 8. Agriculture Consultancy Services 9. Corporate Advisory Services 10. 11. 12. 13. Mergers and Acquisitions Buy Back Assignments Share Valuations Syndication

ISSUE MANAGEMENT SERVICES:1. Project Appraisal 2. Capital Structuring 3. Preparation of offer document 4. Tie-Ups (placement) 5. Formalities with SEBI / Stock Exchange / ROC etc., 6. Underwriting 7. Promotions/Marketing of Issues 8. Collecting Banker / banker to an Issue 9. Post Issue Management 10. 11. 12. Refund Bankers Handling of Dividend Warrant/Interest Warrant Payments Debentures trusteeship

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Investment Criteria:A wide range of later stage opportunities are considered. Targeted companies include the following characteristics: 1. Having weathered the start-up Process and establishing a core business model that is sustainable; 2. Proven management team; 3. If not already profitable, visibility to profitability within a 12-monthy period; 4. Having established business partnerships that give it a major position in a market space; 5. Significant barriers to entry; and 6. Technology or business that is scalable with global applications. They look for opportunities for synergistic consolidation and/or companies that are on the extraordinary growth.

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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, the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the clients will ensure success. It can be said that this project helped me to understand every details about Merchant banking 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. Merchant development is predicted on a sound, fair and transparent regulatory framework. To sustain the growth of the market and crystallize the 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.

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BIBLOGRAPHY
http : //www.yahoo.com/wikipedia.org/merchant_banking http : //www.google.com/investopedia.com/merchant banking http : //www.rbi.org.com http : //www.scribd.com/merchant bank

BOOK: INTERNATIONAL BANKING AND FINANCE. DIPAK ABHYANKAR.

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