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Services/Functions of Merchant banking

(i) Corporate counseling: Corporate counseling covers counseling in the form of

project counseling, capital restructuring, project management, public issue
management, loan syndication, working capital fixed deposit, lease financing,
acceptance credit etc., The scope of corporate counseling is limited to giving
suggestions and opinions to the client and help taking actions to solve their problems.
It is provided to a corporate unit with a view to ensure better performance, maintain
steady growth and create better image among investors.

(ii) Project counseling Project counseling is a part of corporate counseling and

relates to project finance. It broadly covers the study of the project, offering advisory
assistance on the viability and procedural steps for its implementation.

a. Identification of potential investment avenues.

b. A general view of the project ideas or project profiles.

c. Advising on procedural aspects of project implementation d. Reviewing the

technical feasibility of the project

e. Assisting in the(TechnicalselectionConsultancyOrganizations)of
forTCOspreparing project reports

f. Assisting in the preparation of project report

g. Assisting in obtaining approvals, licenses, grants, foreign collaboration etc., from


h. Capital structuring

i. Arranging and negotiating foreign collaborations, amalgamations, mergers and


j. Assisting clients in preparing applications for financial assistance to various

national and state level institutions banks etc.,

k. Providing assistance to entrepreneurs coming to India in seeking approvals from

the Government of India.
(iii) Capital Structure Here the Capital Structure is worked out i.e., the capital
required, raising of the capital, debt-equity ratio, issue of shares and debentures,
working capital, fixed capital requirements, etc.,

(iv) Portfolio Management It refers to the effective management of Securities

i.e., the merchant banker helps the investor in matters pertaining to investment
decisions. Taxation and inflation are taken into account while advising on
investment in different securities. The merchant banker also undertakes the function
of buying and selling of securities on behalf of their client companies. Investments
are done in such a way that it ensures maximum returns and minimum risks.

(v) Issue Management: Management of issues refers to effective marketing of

corporate securities viz., equity shares, preference shares and debentures or bonds
by offering them to public. Merchant banks act as intermediary whose main job is
to transfer capital from those who own it to those who need it. The issue function
may be broadly divided in to pre issue and post issue management.

a. Issue through prospectus, offer for sale and private placement. b. Marketing and

c. pricing of issues

(vi) Credit Syndication: Credit Syndication refers to obtaining of loans from

single development finance institution or a syndicate or consortium. Merchant
Banks help corporate clients to raise syndicated loans from commercials banks.
Merchant banks helps in identifying which financial institution should be
approached for term loans. The merchant bankers follow certain steps before
assisting the clients approach the appropriate financial institutions. a.

Merchant banker first makes an appraisal of the project to satisfy that it is viable b.
He ensures that the project adheres to the guidelines for financing industrial projects.
c. It helps in designing capital structure, determining the promoters amount of term
loan to be raised. d. After verifications of the project, the Merchant Banker arranges
for a preliminary meeting with financial institution. e. If the financial institution
agrees to consider the proposal, the application is filled and submitted along with
other documents.

offshore fincance
The merchant bankers help their clients in the following areas involving foreign
Long term foreign currency loans
Joint ventures abroad
Financing exports and imports
Foreign collaboration arrangements

Non-resident investment
The services of merchcant banker includes investment advisory services to NRI in
terms of identification of investment opportunities, selection of securities,
investment management, and operational services like purchase and sale of

(vii) Working Capital: The Companies are given Working Capital finance,
depending upon their earning capacities in relation to the interest rate prevailing in
the market.

(viii)Venture Capital: Venture Capital is a kind of capital requirement which

carries more risks and hence only few institutions come forward to finance. The
merchant banker looks in to the technical competency of the entrepreneur for venture
capital finance.

(ix). Fixed Deposit: Merchant bankers assist the companies to raise finance by way
of fixed deposits from the public. However such companies should fulfill credit
rating requirements.

Stock Underwriting
This is one of the most common functions of a merchant bank. When owners of a large
company want to raise capital through investors on the stock market, they can acquire
the services of a merchant bank to take care of the job. The bank will determine the
amount of stocks that are to be issued as well as their price, and when to issue the new
stock. The merchant bank will file all of the necessary paperwork with the proper market
division and may also market the stock. If theres a large stock offering, a few merchant
banks might work on the project together. However, one of the banks will typically act as
the head underwriter on the job.

(x)Other Functions
Treasury Management- Management of short term fund requirements by client

Stock broking- helping the investors through a network of service units

Servicing of issues- servicing the shareholders and debenture holders in

distributing dividends, debenture interest.

Small Scale industry counseling- counseling SSI units on marketing and finance

Equity research and investment counseling merchant banker plays an important

role in providing equity research and investment counseling because the investor is
not in a position to take appropriate investment decision.

Assistance to NRI investors - the NRI investors are brought to the notice of the
various investment opportunities in the country.

Foreign Collaboration: Foreign collaboration arrangements are made by the

Merchant bankers.

Guidelines for Venture Capital

4.4 Regulatory Framework for VC in India

The following are the guidelines issued by the Government of India.

1. The public sector financial institutions, State Bank of India, scheduled banks, foreign banks
and their subsidiaries are eligible for setting the venture capital funds with a minimum size
of Rs.10 crore and a debt equity ratio of 1:15 they desire to raise funds from the public,
promoters will be required to contribute a minimum of 40 percent of capital. Foreign equity
upto 25 percent subject to certain conditions would be permitted.

The guideline provided for Non-Resident Indians investment upto 74 percent on a

reportorial basis and 25 percent to 40 percent on non repatriable basis. It should invest 60
percent of its funds in venture capital activity. The balance amount can be invested in new
issue of any existing or new company in equity, cumulative convertible performance
shares, debenture bonds or any other security approved by controller of Capital issues.

2. The venture capital companies and venture capital funds can be set up as joint venture
between stipulated agencies and non institutional promoters but the equity holding of such
programmes should not exceed 20 percent and should not be largest single holder.

3. The venture capital assistance should go to enterprises with a total investment of not more
than Rs. 10 crore.

4. The venture capital company (VCC) /Venture Capital Fund (VCF) should be managed by
professionals and should be independent of the parent organization.

5. The VCC/VCF will not be allowed to undertake activities such trading, brooking money
market, bills discounting, inter corporate lending. They will be allowed to invest in leasing
to the extent 15 percent of the total funds development. The investment on revival of risk
units will be treated as a part of venture capital activity.

6. Listing of VCCs/VCF can be according to the prescribed norms and underwriting of issues
at the promoter's discretion.

7. A person holding a position of full time chairman/president, chief executive, managing

director or executive director/whole time director in a company will not be allowed to hold
the same position simultaneously in the VCC/VCF.

8. The venture Capital assistance should be extended to

The enterprise having investment upto Rs. 10 crores in the project.

The technology involved should be new and untried or it should incorporate
significant improvement over the existing technology in India.,
The promoters should be new, professional or technically qualified with inadequate
The enterprise should be established in the company form employing professionally
qualified person for maintenance accounts.

9. Share practicing at the time of disinvestments by a public issue or general sale offer by the
company or fund may be done subject to this being calculated an objective criteria and the
basis disclosed adequately to the public.

Methods of Venture Financing In India


All Venture Capital Firms(VCF) provide equity.Their contribution may not exceed 49% of
the total equity capital.The effective control and majority ownership of the firm may remain
with the entrepreneur.The Venture capitalist becomes entitled to a share in the firms profits
as much as he is liable for the losses.The advantage to the VCF is that it can share in the
high value of the venture and make capital gains if the venture succeeds.

This is a form of loan finance without any pre-determined repayment schedule or interest rate.A
conditional loan is repayable in the form of a royalty after the venture is able to generate sales.
No interest is paid on such loans.In India , VCFs charge royalty ranging from 2% to 15% ,the
actual rate depends on factors of the venture such as gestation period, cost-flow patterns, risk
involved.Some VCFs give a choice to the enterprise of paying a high rate of interest(above 20%)
instead of royalty on sales once it becomes commercially sound.Some funds recover only half of
the loan if the venture fails.

Conventional loans carry lower interest initially which increases after commercial production
commences.A small royalty is additionally charged to cover the interest foregone during the
initial years.The repayment of the principal is based on a pre-stipulated schedule, Venture
Capital Institutions usually do not insist upon mortgage/other security.


Income notes are instruments which carry a uniform low rate of interest plus a royalty on
It combines the features of both conventional and conditional loan.
The principle is repaid according to a stipulated schedule.

These carry a fixed rate of interest. Redeemable at par/premium.
Secured and can be cumulative or non-cumulative.
A convertible portion converted into equity shares at par/premium.
A non-convertible portion earns interest till redemption.
These can be either convertible or non-convertible with zero/no interest rate.
These are secured, redeemable at premium in lumpsome/instalments, have zero interest
and carry a warrant against which equity shares can be acquired.
Components of Financial System
A financial system refers to a system which enables the transfer of money
between investors and borrowers. A financial system could be defined at an
international, regional or organization level. The term system in Financial
System indicates a group of complex and closely linked institutions, agents,
procedures, markets, transactions, claims and liabilities within a economy.
Five Basic Components of Financial System
Financial Institutions
Financial Markets
Financial Instruments (Assets or Securities)
Financial Services
Financial Institutions
Financial institutions facilitate smooth working of the financial system by making
investors and borrowers meet. They mobilize the savings of investors either
directly or indirectly via financial markets, by making use of different financial
instruments as well as in the process using the services of numerous financial
services providers.
They could be categorized into Regulatory, Intermediaries, Non-intermediaries
and Others. They offer services to organizations looking for advises on different
problems including restructuring to diversification strategies. They offer complete
array of services to the organizations who want to raise funds from the markets
and take care of financial assets for example deposits, securities, loans, etc.

Figure 1: Five Basic Components of Financial System

Financial Markets
A financial market is the place where financial assets are created or transferred. It
can be broadly categorized into money markets and capital markets. Money
market handles short-term financial assets (less than a year) whereas capital
markets take care of those financial assets that have maturity period of more than
a year. The key functions are:
1. Assist in creation and allocation of credit and liquidity.
2. Serve as intermediaries for mobilization of savings.
3. Help achieve balanced economic growth.
4. Offer financial convenience.
One more classification is possible: primary markets and secondary markets.
Primary markets handles new issue of securities in contrast secondary markets
take care of securities that are presently available in the stock market.
Financial markets catch the attention of investors and make it possible for
companies to finance their operations and attain growth. Money markets make it
possible for businesses to gain access to funds on a short term basis, while capital
markets allow businesses to gain long-term funding to aid expansion. Without
financial markets, borrowers would have problems finding lenders. Intermediaries
like banks assist in this procedure. Banks take deposits from investors and lend
money from this pool of deposited money to people who need loan. Banks
commonly provide money in the form of loans.
Financial Instruments
This is an important component of financial system. The products which are traded
in a financial market are financial assets, securities or other type of financial
instruments. There is a wide range of securities in the markets since the needs of
investors and credit seekers are different. They indicate a claim on the settlement
of principal down the road or payment of a regular amount by means of interest or
dividend. Equity shares, debentures, bonds, etc are some examples.

Financial Services
Financial services consist of services provided by Asset Management and Liability
Management Companies. They help to get the necessary funds and also make
sure that they are efficiently deployed. They assist to determine the financing
combination and extend their professional services upto the stage of servicing of
lenders. They help with borrowing, selling and purchasing securities, lending and
investing, making and allowing payments and settlements and taking care of risk
exposures in financial markets. These range from the leasing companies, mutual
fund houses, merchant bankers, portfolio managers, bill discounting and
acceptance houses.
The financial services sector offers a number of professional services like credit
rating, venture capital financing, mutual funds, merchant banking, depository
services, book building, etc. Financial institutions and financial markets help in the
working of the financial system by means of financial instruments. To be able to
carry out the jobs given, they need several services of financial nature. Therefore,
Financial services are considered as the 4th major component of the financial

Money is understood to be anything that is accepted for payment of products and
services or for the repayment of debt. It is a medium of exchange and acts as a
store of value.

Guidelines for merchant banking :

A merchant banker will require authorization by SEBI to carry out the business.

SEBI has classified the merchant bankers into four categories based on the nature and
range of the activities and the responsibilities.

Category I: It consists of merchant bankers who carry on the business of issue

management which consists of preparation of issue management which consists of
preparation of prospectus, determining the financial structure, tie-up of the financiers
and final allotment/refund of subscription and to act in the capacity of managers,
advisors or consultants to an issue, portfolio manager and underwriter.
Minimum networth required is Rs. 1 crore.

Category II: It consists of those authorized to act in the capacity of co-manger/advisor,

consultant underwriter to an issue.
The Minimum networth required is Rs. 50 Lakhs.

Category III: It consists of those authorized to act as underwriter, advisor or consultant

to an issue.
The Minimum networth required is Rs. 20 Lakhs.

Category IV: It consists of Merchant Banker who act as advisor or consultant to an

There is no Minimum networth required.

Every merchant banker should maintain copies of balance sheet,Profit and loss
account,statement of financial position

Half-yearly unaudited result should be submitted to SEBI

SEBI has been vested with the power to suspend or cancel the authorization in case of
violation of the guidelines
Every merchant banker shall appoint a Compliance Officer to monitor compliance of
the Act

SEBI has the right to send inspecting authority to inspect books of accounts,records
etc of merchant bankers

Inspections will be conducted by SEBI to ensure that provisions of the regulations are
properly complied.

An initial authorization fee,an annual fee and renewal fee may be collected by SEBI.

A lead manager holding a certificate under category I shall accept a minimum

underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less

Mechanism/Procedure of Forfeiting

Forfaiting is a mechanism of financing exports:

a. By discounting export receivables.

b. Evidenced by bills of exchange or promissory notes.

c. Without recourse to the seller (such as the exporter).

d. Carrying medium to long-term maturities.

e. On a fixed rate basis (discount).

f. Up to 100% of the contract value.

In a forfaiting transaction, the exporter surrenders his rights to claim for payment on
goods delivered to an importer, in return for immediate cash payment from a forfaiting
Agency. As a result, an exporter can convert a credit sale into a cash sale, with no
recourse either to him or his banker.

Process details:
1. Exporter initiates negotiations with prospective overseas buyer, finalizes the contract
and the importer opens an LC through his Bank in favor of the seller (exporter).

2. Exporter Ships the goods as per the schedule agreed with the buyer.
3. The exporter draws a series of bills of exchange and sends them along with the
shipping documents, to his banker for presentation to importer for acceptance through
latters bank. Bank returns avalised and accepted bills of exchange to his client (the

4. Exporter informs the Importers Bank about assignment of proceeds of transaction to

the Forfaiting bank.

5. Exporter endorses avalised Bill of Exchange (BOE) with the words Without recourse
and forwards them to the Forfaiting Agency (FA) through his bank.

6. The FA effects payments of discounted value after verifying the Avals signature and
other particulars.

7. Exporters Bank credits Exporters a/c.

8. On maturity of BOE/Promissory notes, the Forfaiting Agency presents the

instruments to the Aval (Importers Bank) for payment.