Definition of a Merchant Banker

_ The merchant bankers are those financial intermediaries involved with the activity of transferring capital funds to
those borrowers who are interested in borrowing.
_ They guarantee the success of issues by underwriting them.
_ Merchant Banks are popularly known as “issuing and accepting houses”.

Role of merchant banker in a primary market issue management

Merchant banker is the intermediary appointed by companies in the primary market issue. It has to look at the entire
issue management and work as the Manager to the Public Issue.
Principal steps that Merchant bankers have to perform in a bringing up a Public issue are as follows :

Vetting of Prospects: The prospectus is a document to communicate information about the company and the
proposed security issue to the investing public. The draft prospectus containing the disclosures has to be vetted by
SEBI before a public issue is made.

Appointment of Underwriters: An underwriter agrees to subscribe to a given number of shares in the event the
public do not subscribe to them. The underwriter, in essence, stands guarantee for public subscription in
consideration for the underwriting commission.

Appointment of bankers: The bankers to the issue collect money on behalf of the company from the applicants.

Appointment of Registrars: The registrars to issue perform a series of tasks from the time the
subscription is closed to the time the allotment is made.

Appointment of Brokers and Principal Brokers: The brokers to the issue facilitate its subscription. Filing of the
Prospectus with the Registrar of Companies

Printing and dispatch of prospectus and application form: After the prospectus is filed with the
Registrar of Companies, the company should print the prospectus and the application form.

Filing of Initial Listing Application: Within ten days of filing the prospectus, the initial listing
application must be made to the concerned stock exchanges, along with the initial listing fees.

Promotion of the Issue: The promotional campaign typically commences with the filing of the
prospectus with the Registrar of Companies and ends with the release of the statutory announcement of the issue.

Statutory Announcement: The statutory announcement of the issue must be made after seeking the approval of the
lead stock exchange. This must be published at least ten days before the opening of the subscription list.

Collection of Applications: The statutory announcement (as well as the prospectus) specifies when the subscription
would open when it would close, and the banks where the applications can be made.

Processing of Applications: The application forms received by the bankers are transmitted to the registrars to the
issue for processing. Establishing the Liability Underwriters: If the issue is undersubscribed, the liability of the
underwritershas to be established.

Allotment of Shares: If the issue is under-subscribed or just fully subscribed, the company may allot shares applied
for by the applicants after securing the formal approval of the concerned stock
exchanges(s)

Listing of the Issue: The detailed listing application should be submitted to the concerned stock

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exchanges along with the listing agreement and the listing fee.

Costs of Public Issue: The cost of public issue is normally between 8 and 12 per cent depending on the size of the
issue and the level of marketing effort. The important expenses incurred for a public issue are Underwriting
Expenses, Brokerage, Fees to the Managers of the Issue, Fees for Registrars to the Issue,Printing Expenses, Postage
Expenses, Advertising and Publicity Expenses, Listing fees, Stamp duty. In addition to the above procedural matter,
the most important issue relates to the pricing of the issue. The merchant banker has to see that the issue is priced
properly.

The following comprise the main functions of a merchant banker:

Management of debt and equity offerings- This forms the main function of the merchant banker. He assists the
companies in raising funds from the market. The main areas of work in this regard include: instrument designing,
pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and
refund, listing on stock exchanges.

Placement and distribution- The merchant banker helps in distributing various securities like equity shares, debt
instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The
distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional
network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial
institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail
network depends on networking with investors.

Corporate advisory services- Merchant bankers offer customised solutions to their clients financial problems. The
following are the main areas in which their advice is sought:
Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate
capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and
evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of
sick units, merchant bankers may design a revival package in coordination with banks and financial institutions.
Risk management is another area where advice from a merchant banker is sought. He advises the client on different
hedging strategies and suggests the appropriate strategy.

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

Loan syndication- Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps.
Firstly they analyse the pattern of the client’s cash flows, based on which the terms of borrowings can be defined.
Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial
institutions and they are invited to participate in the syndicate.
The banks then negotiate the terms of lending on the basis of which the final allocation is done.

Providing venture capital and mezzanine financing- Merchant bankers help companies in obtaining venture capital
financing for financing their new and innovative strategies.

Underwriting of Public Issue:- Underwriting is a guarantee given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot
underwrite more than 15% of any issue.

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issue Management:

Management of issue involves marketing of corporate securities viz. equity shares, preference shares and debentures
or bonds by offering them to public. Merchant banks act as an intermediary whose main job is to transfer capital
from those who own it to those who need it. After taking action as per SEBI guidelines, the merchant banker
arranges a meeting with company representatives and advertising agents to finalise arrangements relating to date of
opening and closing of issue, registration of prospectus, launching publicity campaign and fixing date of board
meeting to approve and sign prospectus and pass the necessary resolutions. Pricing of issues is done by the
companies in consultant with the merchant bankers.

Project Counselling:

Project counselling includes preparation of project reports, deciding upon the financing pattern to finance the cost of
the project and appraising the project report with the financial institutions or banks. It also includes filling up of
application forms with relevant information for obtaining funds from financial institutions and obtaining
government approval.