Abstract

The objective of this article is to lay the groundwork for a theory of merchant
banking. One of the most significant business events in the last decade is the
restructuring of American corporations. Modern merchant banks evolved in response
to the new demand. They step in and provide their own capital (equity, bridge loans,
and junk bonds) to resolve the magnified financing problem due to the large relative
and absolute amount of debt involved.

1
 INTRODUCTION

financial system of a country is a complex and closely integrated set of sub

systems of financial institutions, markets, instruments and financial services which
facilitate the transfer and allocation of funds efficiently and effectively. The Indian
financial system consists of both organized (formal) and unorganized (informal)
segments. The formal financial system comes under the purview of Ministry of Finance,
Reserve Bank of India, Securities and Exchange Board of India and other regulatory
bodies. Financial institutions are the intermediaries who facilitate in mobilizing savings
and allocation of funds in an efficient manner and include banking and non banking
institutions. Financial markets provide the transmission mechanism whereby various
participants’ demands and requirements interact to set a price for financial claims. The
main financial markets in India include the market for short term securities (money
market) and for long term securities (capital market). Financial markets are also
classified as primary and secondary markets. While the primary market deals in new
issue of securities, the secondary market is meant for trading in existing securities (stock
exchange and over the counter market).

The Indian 2 economy, as a matter of fact, has experienced the last decade of 20th
century as the decade of financial services. There has been a major shift from bank
finance to capital market for meeting the financial requirements of the corporate sector
during this period. The emergence of different financial institutions and regulatory
agencies has transformed the financial service sector from being a conservative industry
to a very dynamic one. The financial service today is emerging as a strong industry
world over and is termed as a ‘Sunrise’ industry. One of the oldest and specialized
financial services in the Indian capital market has been merchant banking service.

1.1 Origin of Merchant Banking The origin of merchant banking is traceable to the
developments of foreign trade and finance during the 13th century. During this period, a
few firms engaged in coastal trade and finance spread throughout the European
continent were engaged both in commercial activities and banking activities. These
firms also acted as the bankers to the Kings of the European States, financial coastal
trade among European nations, bore exchange risk and security risk in financing the
Kings, Monarchs and Governments engaged in continental wars.

Meaning of Merchant Banking The term merchant banking is easier to understand

than to define because one can only make an attempt to identify the services and
activities coming within its purview. Very commonly, the merchant banking has been
defined as to what a merchant banker does.1 As stated by Sir Edward Reid, the term
merchant bank is sometimes applied to banks who are not merchants, sometimes to
merchants who are not banks, and sometimes to houses who are neither merchants nor
banks2 . According to Michael T. Skully, “Merchant banking within the same country

2
may cover wide range of financial activities and in process include a number of different
financial institutions3 .” John Dick was of the view that due to the dynamic nature of
functions of merchant banks, the meaning and definition of merchant banking has been
changing.

3
 Objectives
 TO understand the scope and evolution of merchant banking.
 To study the working of merchant banking.
 To study the services provided by the merchant banking.
 To study the importance of merchant banking in issue of securities.

4
 Literature review
Banking is a prime mover in the economic development of a nation and research
is so essential to improve its working results. The management without any right policy
is like "building a house on sand". It means an effective management always needs a
thorough and continuous search into the nature of the reasons for, and the consequences
of organization. In line with this, some related earlier studies conducted by individuals
and institutions are reviewed to have an in-depth insight into the problem and exploring
the reformation of banking policy. The main theme and essence of few relevant studies
are presented below

Domar and Timbergen (1946)^'', measured the profitability of banks for the
economic development purpose and settled the theoretical framework in expanded form
which was first introduced by Jorgenson and Nishimizudin for international economic
growth comparison and development.

Sharma (1974)^^ said, "The expansion of banking facilities was uneven and
lopsided and banks were concentrating their operations in metropolitan cities and towns.
A fairly large number of rural and semi urban centre with reasonable potentialities of
growth failed to attract the attention of commercial banks.

5
 Research Methodology
The study will be conducted with reference to the data related to State Bank of India
and ICICI Bank. These banks have been studied with the belief that they hold the largest
market share of banking business in India, in their respective sectors. This study covers a
periods of twelve years from 2000-2001 to 2011-2012.

Tools for data collection:

The study is purely based on secondary data. The data required for the study will be
collected from annual reports of respective banks, journals and reports on trends,
newspapers, magazines, and progress of Banking of India, government publications,
books and website.

Tools for data analysis:

Different scales will be used for data analysis. Various financial ratios, bar charts are
used to know financial performance and business model of ICICI Bank.

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 ANALYSIS

EVOLUTION & EMERGENCE OF MERCHANT BANKING

India has entered the 21st century as one of the Asia’s most dynamic economies.
This is the part of the assessment made by International Financial and Capital Market
Institutions based on India’s economic and financial reforms initiated in 1991 and
brought to fruition in various budget.

The progress of any economy mainly depends on the efficient financial system of the
country. Indian economy is no exception financial system of the country. The
importance of the financial sector reforms affirms an effective means for solving the
problems of economic, financial and social in India and elsewhere in the developing
nations of the world. The progress of the Securities Industry of any country depends
mainly on the flow of funds.

India’s capital market is among the largest in the developing world. The market is
comprised of 24 stock exchanges transacting long-term debt; debentures and equity
shares both electronic and physical forms.

The capital market of the country, however, underwent dramatic changes since the
beginning of 1980s basically because of a progressive realization that the command
economy on which the emphasis was placed could not lead to higher levels of economic
development and that a slant towards a market-oriented economy is necessary.

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 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.

The need for specialized merchant banking services was felt in India with the
rapid growth in the number and size of the issues made in the primary market. The
merchant banking services were started by foreign banks, namely the National
Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in its
report in 1972 recommended the setting up of merchant banking institutions. This
marked the beginning of specialized merchant banking in India.

To begin with, merchant banking services were offered along with other
traditional banking services. In the mid-Eighties, the Banking Regulation Act was
amended permitting commercial banks to offer a wide range of financial services
through the subsidy rule. The State Bank of India was the first India Bank to set up
merchant Banking division in 1972. Later ICICI set up its Merchant Banking division
followed by Bank of India, Bank of Baroda, Canada Bank, Punjab National Bank and
UCO Bank. The merchant banking gained prominence during 1983-84 due to new issue
boom.

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 MERCHANT BANKING: PAST AND PRESENT

Many banks entered merchant banking in the 1960s to take advantage of the
economies of scope produced when private equity investing is added to other bank
services, particularly commercial lending. As lenders to small and medium-sized
companies, banks become knowledgeable about individual firms’ products and
prospects and consequently are natural providers of direct private equity investment to
these firms. As mentioned above, commercial banks were the largest providers of
venture capital in the 1960s.

Also at about that time, most commercial banks began refocusing their private
equity investments to middle-market and public companies (often low-tech, already
profitable companies) and, rather than providing seed capital, financed expansion or
changes in capital structure and ownership. Most particularly, they took equity positions
in LBOs, takeovers, or recapitalizations or provided subordinated debt in the form of
bridge loans to facilitate the transaction. Often they did both. Commercial banks
financed much of the LBO activity of the 1980s.Then, in the mid-1990s, major
commercial banks began once again focusing on venture capital, where they had
substantial expertise from their previous exposure to this kind of investment.

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 NEED & IMPORTANCE IN INDIA

 Important reason for the growth of merchant banking is due to exerting excess
demand on the sources of funds forever expanding industry and trade.

 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 consultancy firms to
enter into the field of merchant banking and share the growing capital market.

 In India have opened their merchant banking windows and are competing in this
field, and also doing advisory functions as merchant bankers as well as managing
public issues in syndication with other merchant bankers.

 Merchant banks can play highly significant role in mobilizing funds of savers to
investible channels assuring promising return on investments. activity.

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 ROLE OF MERCHANT BANKERS

The role of merchant banker is dynamic in the wake of diverse nature of merchant
banking services. Merchant banker’s 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.

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 set up industrially backward areas to eliminate 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.

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 ROLE IN THE MARKET

The Securities and Exchange Board of India (SEBI) has stated that merchant
bankers must be involved more closely in the market making process as share brokers do
not have the requisite expertise to evaluate the fundamentals of the scrips before taking
over the role of market makers. Further, share brokers generally being partnership; firms
do not have the financial clout which is necessary for market making activity.

The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate
greater movement, which could only be achieved through the institution of market
makers. Market makers would also create a market for the scrips by offering two way
quotes to the investors. A minimum of ten scrips has been proposed by SEBI for the
market makers.

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 MERCHANT BANKERS COMMISSION

As determined by the Finance Ministry, Government of India, Merchant Bankers are

eligible to charge commission / fee from their clients as detailed below :

(i) A Merchant Banker can charge 0.5% as the maximum as commission for whole of
the issue.
(ii) They can charge project appraisal fees.

(iii) A lead manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in
excess of Rs.25 crore.
(iv) Underwriting Commission.
On amount On amount
Devolving on subscribed by
Type of Security
underwriters public

1.Equity shares 2.50 2.50

2.Preference share/debentures

(a) Upto Rs. 5 lakh 2.50 1.50

(b) Excess of Rs. 5 lakh 2.00 1.00

(v) Brokerage commission 1.5%.

(vi) Other expenses like advertising, printing, Registrar’s expenses, stamp duty etc., in
connection with the issue can be reimbursed from its clients.

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 COMMERCIAL BANKS
 Basically deal in debt related finance 
and their activities are appropriately
arrayed around credit proposals,
credit appraisal and loan sanctions.
 Are asset oriented and their lending 
decisions are based on detailed credit
analysis of loan proposals and the
value of security offered against
loans. They generally avoid risks.
 They are merely finanaciers.
MERCHANT BANKS
Basically they deal with mainly
funds raised through money market
and capital market and the area of
activity is ‘equity and equity
related finance’.
Are management oriented. They
generally are willing to accept risks
of business.
 There activities include project
counseling, corporate counseling in
areas of capital restructuring,
amalgamations, mergers, takeovers
etc., discounting and rediscounting
of short term paper in money
markets, managing, underwriting
and supporting public issues and
new issue market and acting as
brokers and advisers on portfolio
management in stock exchange. This
activities have impact on growth,
stability and liquidity of money
markets.
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 GROWTH OF MERCHANT BANKING IN INDIA

Formal merchant banking activity in India was originated in 1969 with Merchant
Banking Division set up by the Grindlays Bank, the largest foreign bank in the 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.
Other foreign banks like Citi Bank, Chartered Bank also assumed the merchant banking
activity in India. State Bank of India started merchant banking in 1973 followed by
ICICI in 1974. Both these Indian merchant bankers emerged as leaders in merchant
banking.

The early growth of merchant banking in the country is assigned to the Foreign
Exchange Regulation Act, 1973 (FERA) where under large number of foreign
companies operating in India were required to dilute their foreign holdings in order to
continue business in the country. This had caused two-pronged effect viz.

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 PROBLEMS OF MERCHANT BANKERS

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

activities only with an exception of portfolio management.

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. .

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.

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 CURRENT SCENARIO

 Merchant banking is an area that we need to build and grow in the years to come.
As India forms part of the global village, it becomes increasingly necessary for
us to look at this business in a more holistic manner.
 Obviously, international players with strong domestic partners such as DSP
Merrill Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with
experienced organisations like Enam and institutional backed investment bankers
such as ICICI Securities, etc.
 The red hot economy is the obvious starting point. India is likely to end the year
with GDP growth in excess of 7 percent. Companies and private equity investors
are sitting on large piles of cash.
 Thus, while there is a steady flow of deals, there is now a shortage of talent to do
the job.

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 MERCHANT BANKING: INDIAN SCENARIO

Merchant Banking activity was formally initiated into the Indian capital markets
when Grindlays Bank received the license from Reserve Bank in 1967. Grindlays which
started with management of capital issues, recognized the needs of emerging class of
entrepreneurs for diverse financial services ranging from production planning and
system design to market research. Apart from meeting specially, the needs of small-
scale units it provided management constancy services to large and medium sized
companies. Following Grindlays Bank, Citi Bank set-up its Merchant Banking division
in 1970. The division took up the task of assisting new entrepreneur and existing units
in the evaluation of new projects and raising funds through borrowing and issue of
equity. Management consultant services were also offered. Consequent to the
recommendations of Banking Commission in1972, that Indian bank should start
Merchant Banking Division in 1972.

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 MERCHANT BANKING: INTERNATIONAL SCENARIO

The Merchant Banking scenario in developed countries like USA and UK are different
from Indian Merchant Banking activities. The Merchant banker is also called as
Investment Bankers. A brief outline of Merchant Banking in USA and UK has shown in
the following paragraphs.

Merchant Banks in UK

In United Kingdom, Merchant Banks came on the scene in the late eighteenth
century and early nineteenth century. Industrial revolution made England into a
powerful trading nation. Rich merchant houses that made their fortunes in a colonial
trade diversified into banking. Their principle activity started with the acceptance of
commercial bills pertaining to domestic as well as international trade. The acceptance of
the trade bills and their discounting gave rise to acceptance houses, discount houses, and
issue houses. Merchant Bankers initially included acceptance houses, discount houses
and issue houses. A Merchant Banker was primarily a merchant rather than his
customers entrusted banker but him with funds. Merchant Banks in UK:

 Finance foreign trade,

 Issue capital,
 Manage individual funds,
 Undertake foreign security business, and
 Foreign loan business.

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 MERCHANT BANKING ORGANISATIONS

In India, merchant banks operate in the form of Divisions of Indian and Foreign banks
and financial institutions, subsidiary companies established by banks like SBI Capital
Markets Ltd., can Bank Financial Services Ltd., PNB Capital Services Ltd., Indian Bank
Merchant Banking services Ltd., etc., the firm organized by the stock brokers, stock
exchange dealers, the financial and technical consultants and chartered accountants.
Securities and Exchange Board of India (SEBI) has divided merchant bankers into four
categories, which are as follows: -

CATEGORIES ACTIVITIES NETWORTH

Category I To carry on the activity of issue management and to Rs.1crore

act as adviser, consultant, manager, underwriter,
portfolio manager.

Category II To act as adviser, consultant, co-manager, Rs.50 lakhs

underwriter, portfolio manager.

Category III To act as underwriter, adviser or consultant to an Rs. 20 lakhs

issue.

Category IV To act only as adviser or consultant to an issue Nil

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 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 bank’s operations, the qualities which
merchant bankers should have are discussed below:-

 LEADERSHIP:– merchant banker should possess all relevant skills, update knowledge
to interact with the clients and effectively communicate. Leadership is synonymous with
followers who follow the one who leads.

 AGGRESSIVE ACTION:- aggressiveness is a personality trait of a good leader but in

merchant banking it has a wider connotation. A good merchant banker is one who does
not allow his client to think anything outside except what has been advised.

 COOPERATION AND FRIENDLINESS:- 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 information, obtains business mandate and renders
satisfactory services to the clients.

 CONTACTS :– success of 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

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 contiguity and acquaintances within his own organization, Central and State
Government Offices where compliances under various relevant enactments are to be
reported, Indian and foreign banks, 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

 INQUISITINESS FOR ACQUIRING NEW SKILLS, INFORMATION AND

KNOLEDGE: – merchant bankers lice on their 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 possess the
quality of inquisitiveness.

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RESPONSIBILITIES OF MERCHANT BANKER

 To the Investors
Investor protection is fundamental to a healthy growth of the Capital Maerket.
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 investor’s 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
instituion, 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:

 Compliance with the SEBI guidelinesand the various guidelines issued by the
Ministry of Finance and Department of CompanyAffairs.
 Pending litigation’s towards tax liabilities or any criminal/civil prosecution any of
the directors for any offenses.
 Pricing of the Issue
The 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, FII’s and NRI’s. 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 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.

Merchant Banking in USA

Merchant banks make the primary markets in USA, arrange mergers and acquisitions,
undertake global, custody, proprietary trading and market making, niche business, fund
management and advisory services to governments and firms.

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The increased regulation and control of domestic operations gave a fillip to large US
banks to undertake Merchant Banking functions in international capital markets. The
US investments Banks have extended their operations to the international level. They
are largely responsible for the development of the Euro-dollar market in the securities
and globalisation of capital markets. They have a prominent presence in London and
other European financial centers. Merchant Banks have today a strong parent, a strong
balance sheet and a strong international network to play a global role.

REGISTRATION OF MERCHANT BANKER

The term ‘Merchant Banking’ originated in the 18th and early 19th centuries in
the United Kingdom when trade between countries was financed by bills of exchange
drawn on the principal merchant houses. With the increase in international trade, the
established merchants started the practice of lending their names to the new comers and
accepting the bills of exchange on their behalf. They would charge a commission for the
purpose and thus acceptance business became the hallmark of Merchant Bankers. Once
these banks had gained the confidence of the government, they also entrusted with the
job of issuing bonds in the London market.

Although Merchant Banking activity ushered in two decades ago, it was only in
1992, in India, after the formation of SEBI that is defined and a set of rules and
regulations governing it are in place. In fact, the origin of Merchant Banking is to be
traced to Italy in late medieval times and France during the seventeenth and eighteenth
centuries. Merchant Banker invested accumulated profits in all kinds of promising
activities. Since they added banking business into the profession of Merchant activities
and became a Merchant Banker. A distinction was existed in banking systems between
moneychanger and exchanger. Moneychangers concentrate on the mutual exchange of
different currencies, operated locally and later accepted deposits for security reasons.
Passage of time money changers evolved into public or deposit banks whereas
exchangers, who operated internationally, engaged in bill-broking that raising foreign
exchange and provision of long-term capital for public borrowers. The exchanges were
remitters and Merchant Bankers. In the seventeenth century, a Merchant Banker was a
25
dealer in bills of exchange who operated with correspondents abroad and speculated on
the rate of exchange. Initially, Merchant Bankers were not banks at all and a distinction
was drawn between banks, Merchant Banks and other Financial Institutions. Among all
these, Institutions it was only banks that accepted deposits from public. No person s
allowed carrying out any activity as a Merchant Banker unless he or she holds a
certificate grated by SEBI. 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

 The applicant should not carry on any business other than those connected with the
securities market
 The applicant should have necessary infrastructure like office space, equipment,
manpower etc.
 The applicant must have at least two employees with prior experience in merchant
banking
 Any associate company, group company, subsidiary or interconnected company of
the applicant should not have been a registered merchant banker
 The applicant should not have been involved in any securities scam or proved guilt
for any offence
 The applicant should have a minimum net worth of Rs.5 crores

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 MERCHANT BANKING SERVICES: SCOPE

In the present dynamic environment where public money is playing a vital role in
financing a large number of projects, both in the public and private sectors, Merchant
Banking has a significant role in managing the show and meeting the growing demands
for funds by the corporate sector. Merchant Banking includes a whole gamut of
activities which meet the needs of both corporate and individual investors and which
range from identification, evaluation, promoting and financing of projects (both
domestic and overseas) by raising resources in the equity and long-term loans, to
organize and participate in international consortia, to raise foreign currency loans and to
offer advisory services on various matters related to finance, investment, capital
management, structure, mergers, amalgamation, takeovers and acquisitions. They also
play a useful role in the portfolio management, money market operations, venture
capital, leasing, etc. Merchant bankers act as a guide for the entrepreneurs who are
unaware, or have little knowledge or experience, of the complexities involved in the
above spheres.

In addition to the above, the scope of Merchant Banking services has extended to
providing advisory services to companies to increase or divest their stakes, public sector
undertaking disinvestments, international issues, etc. With the OTCEI being operation
now, Merchant Bankers will have a key role to play in terms of appraising the projects
and offering two-way quotes for market making in case of entrepreneur going for listing
in the above exchange.

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 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.

 ISSUE MANAGEMENT:

The public issue of securities is the core of merchant banking function. At one time

it was constructed as the sole function. Merchant bankers were identified as issue

houses. It was later perceived that they provide other financial services. When

companies seek to raise resources for implementation of a new project or finance

expansion or modernization or diversification of an existing unit or fund long term

working capital requirement, they retain the services of a merchant banker. To a

large extent the type of issue would vary with the purpose for which funds are raised.

Merchant bankers when retained as managers to issue will have to assist the

company in all the stages connected with public issue. The merchant bankers help

corporate to raise money from the markets through the issue of shares, debentures,

bonds etc. They are designated as managers to the issue. Their main business is to

attract public money to capital issues.

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 They usually render the following services:

 Drafting of prospectus and getting it approves from the stock exchanges.

 Obtaining consent/acknowledgement from SEBI.
 Appointing bankers, underwriters, brokers, advertisers, printers etc.
 Obtaining the consent of all the agencies involved in the public issue.
 Holding road shows, to sell the issue. These shows are held for the analysts, brokers
& institutional investors. The purpose of these shows is to answer queries from
these people about the company and the project for which the funds are being raised.
 Deciding the pattern of advertising.
 Deciding the branches where application money should be collected.
 Deciding the dates of opening and closing of the issue.
 Obtaining the daily report of application money collected at various branches.
 Obtaining subscription to the issue.
 After the close of the issue, obtaining consent of stock exchange for deciding basis
of allotment etc.

 CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE

In India, the pricing of issues is now freely decided by the company, with valuable

inputs from the merchant bankers, who have to sell the issue at the decided price.

The pricing of the issue especially in a public issue is very important. The pricing

has to be such, that the investors will be attracted to invest in the issue at that price,

at the same time the company should get the premium that it is looking for. After

all, the premium can play a very role in deciding the company’s capital structure, as

larger the premium lesser will be the requirement for borrowed funds. The promoter

also needs to decide whether to go in for a fresh issue or to go for a rights issue.

However this will depend mainly on the quantum of funds that the company needs to

29
 raise. The success of the issue is dependent on the selection of the right type of

security.

In this matter, the expert advice of merchant bankers is of immense importance. In

the issue management the merchant bankers have to coordinate the various agencies

to the issue. The success of the issue depends on the cooperation of all the agencies

involved.

The merchant bankers offer following services during the public issues:

 Preparing an action plan and budget for the total expenses for the issue.
 Preparation of application to SEBI and assistance in obtaining the consent from
SEBI.
 Drafting of the prospectus.
 Selection of underwriters, Brokers etc.
 Selection of bankers to the issue.
 Selection of advertising agency for publicity.
 Obtaining approval of the institutional underwriters and stock exchanges for
publication of the prospectus.
Companies are free to appoint one or more agencies as Managers to an issue. SEBI

guidelines insist that all issues should be managed by at least one authorized merchant

banker, functioning either as the sole or lead manager to the issue. Ordinarily, not more

than two merchant bankers should be associated as lead managers, advisors and

consultants to a public issue. In issues of over Rs. 100 crores, the number could be up to

a maximum of four.

The responsibilities of merchant bankers in management of public issues are many.

Some of these are:

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The merchant banker should act as the custodians of the investors money and this puts a

lot of responsibility on them. To discharge this function the merchant bankers have to

exercise due diligence independent by verifying the contents of the prospectus and the

reasonableness of the views expressed therein.

It is the responsibility of the merchant bankers to get the securities listed on all the stock

exchanges mentioned in the prospectus. With the introduction of Demat accounts the

complaints about allotment have surely gone down. It is the responsibility of the

merchant bankers to ensure timely refunds and allotment of securities to the investors.

 The merchant bankers have to certify that they verified everything and that they

believe it to be true. This assures the investing public about the safety of their

investment. The precautions by the merchant bankers would ensure that all the

fake companies, whose intention is to defraud the investors, don’t have access to

the market.

UNDERWRITING
Underwriting is like insurance against the failure of an issue. It is a guarantee to the

issuing the company, that the money that it requires for its project will definitely be

raised. It means that even if the issue is not fully subscribed to by the public, the

underwriters will make up the short fall.

Underwriters on their part need to satisfy themselves about the viability of the

project and also about the integrity of the promoters of the company. It must be

noted that when an issue is under subscribed, the underwriters will pick the shares

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 and only if the project is good enough, then in future they can sell the shares in the

market and get not only their money back, but can also make a decent profit as well.

It is obligatory for the merchant bankers to accept a minimum 5% underwriting in the

issue subject to a ceiling. By taking underwriting in an issue managed by them, they

show their full commitment to the issue that they are managing.

 MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the
corporate finance world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form larger ones. When
they're not creating big companies from smaller ones, corporate finance deals do the
reverse and break up companies through spin-offs, carve-outs or tracking stocks.

Role of Merchant Banker

Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in

negotiating on one with corporate interested in hiving of divisions/companies which
are not with in the purview of the long-term business strategy of the group/company,
and on the other hand for Corporate interested in non organic growth by acquiring
companies/units for reason strategic or non strategic in nature. Mergers can be
beneficial for both the entities, as due to competition the companies unable to
survive or prosper on their own may like to merge and face competition and achieve
growth targets. Takeovers may be hostile or friendly in nature, hostile takeovers are
without the consent of the company and company being takeover may work out an
anti takeover strategy to counter the threat. Merchant Bankers provide following
services in M&A: -

 Identification of potential takeover targets.

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  Financial & Technical appraisal of the merger/takeover proposal.
 Negotiation with the parties for arriving at the suitable price or exchange ratio.
 Assistance in obtaining necessary approval & addressing procedural & legal
issues.

 PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking services which

only very few merchant bankers having advantages of knowledge, skills and

experience over others are able to render satisfactorily. The corporate seek advice in

respect of identification of profitable investment opportunities in the related business

areas (like forward/backward integration) or as part of diversification process. The

merchant bankers carry out detailed studies on product demand patterns, cost

structures, etc., to enable the corporate in preparation of feasibility study may

involve arrangement of a foreign collaboration, advice on technical parameters and

also legal issues.

 Scope of services
Project counseling services are needed by industrial entrepreneurs in India in the

following areas: -

 Preparation of project report

 Deciding upon the financing pattern to finance the cost of the project.
 Aspects of project appraisal with financial institutions/banks.

 Project report

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 Project report consists of technical process, location, management profile, means of

financing, reports on market surveys and market explorations. Merchant bankers

advise the clients on project preparation. Merchant bankers, on behalf of their

clients, engage technical consultants specialized in the specific area, and marketing

experts to prepare technical feasibility report and market survey reports. Merchant

bankers maintain the list of such experts approves by financial institutions and assign

the work to these experts.

 Project report purpose

Project report about the proposed activity is prepared to obtain government

approvals particularly in the following areas:

 Grant of industrial license to undertake specified industrial activity.

 Foreign investment and technology tie-up.
 Grant import license for importing raw material, plant, machinery and
equipments.
 Grant of foreign exchange allocation for import of capital goods or raw
materials, etc.
 Grant of subsidies and other concessions from the government at center or state
levels or from government sponsored agencies, etc.

 LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term loans for

projects. Such loans may be obtained from a single development finance institution

or a syndicate or consortium as in the case of large term loans. Merchant banks can

also help corporate clients to raise syndicated loans from commercial banks.

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 Scope of service
Once the client company has decided about the project proposed to be undertaken,

the next step is looking for the sources wherefrom funds could be procured to

implement the project. The responsibility of locating the sources of finance,

approaching these sources by putting in requisite prescribed applications and

complying with all the formalities involved in the sanction and disbursal of loan rests

with the merchant bankers who provide the service of loan/credit syndication.

Loan syndication in the case of domestic borrowing is undertaken with the

institutional lenders and the banks. Amongst institutional lenders the following
institutions are the main suppliers of the long and medium term funds with which the
merchant bankers contact, liaison and arrange loans working for and on behalf of
their clients.

1. All India financial institutions

i. Industrial Finance Corporation of India (IFCI)
ii. Industrial Development Bank of India (IDBI)
iii. Industrial Credit & Investment Corporation of India Ltd (ICICI)
2. State level financial bodies
i. State Financial Corporations (SFCs)
ii. State Industrial Development Corporations (SIDCs)
iii. State Industrial & Investment Corporations (SIICs)
3. All India level investment institutions
i. Life Insurance Corporation of India (LIC)
ii. Unit Trust of India (UTI)
iii. General Insurance Corporation of India (GIC) & its subsidiary companies.

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 4. Commercial banks: Commercial banks join in consortium loan being provided
by the above institutions.
5. Mutual Funds & Venture Capital Funds: these funds generally invest in equity
but mutual funds contribute to the issues of Debentures/Bonds on private
placement basis as well as subscribe to public issues.

 RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to successfully

restructure various activities, which include mergers and acquisitions, divestitures,

management buyouts, joint venture among others.To help companies achieve the

objectives of these restructuring strategies, the merchant banker participates in

different activities at various stages which include understanding the objectives

behind the strategy (objectives could be either to obtain financial, marketing, or

production benefits), and help in searching for the right partner in the strategic

decision and financial valuation of the proposal.

 CAPITAL ASSISTANCE

In providing financial assistance, merchant banks offer a full understanding of all

facets of the capital markets. This includes all types of debt and equity financing
available from both the domestic and international markets.

It should be understood that interest rates are not the only definition of capital costs.
Restrictions on availability, prepayment terms, and operating effectiveness can often
outweigh what might appear to be inexpensive capital with low interest rates. Too
often, capital includes costs, which force an entrepreneur or a business to undertake
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 undesirable actions. In the short-run, some actions might be necessary, but often in
the long run are detrimental. The traditional merchant banker understands these
capital limitations and can structure a transaction, which is beneficial to all sides of
the table -- not just the capital source.

 CORPORATE ADVISORY SERVICES

Merchant bankers offer customised solutions to solve the financial problems of their
clients. Advice is sought in areas of financial structuring (as shown in the Modern
Manufacturing case above). Merchant bankers study the working capital practices
that exist within the company and suggest alternative policies. They also advise the
company on rehabilitation and turnaround strategies, which would help companies to
recover from their current position.

 FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a client (the
exporter or manufacturer) transfers his/her ownership of the accounts to a factor (an
organization, firm). The factor buys all the client’s outstanding invoices and takes over all
the subsequent dealings with the buyer/importer/customer. It is short-term debt financing.
Here three parties are involved

1. The factoring organization /firms

2. The manufacturer/exporter/seller
3. The importer/customer/buyer

Role Of Merchant Banker In Factoring

The merchant banker may act as factor organization with a view to earning a great amount
of commission. The factor provides the following services:

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 (a) Financing

(b) Advisory services if necessary

(c) Collection of bills/Account Receivable against sales proceeds.

(d) Maintenance of sales ledger

(e) Provide further if necessary

(f) Covering losses if there are any

 ASSET SECURITIZATION

It is a process through which some inactive assets (mortgage assets) are converted
into cash/active assets. It is long-term debt financing. Here assets are converted into
long-term bonds. The whole process is done by the Special Purpose Vehicle (SPV).
In this approach, the merchant banker for issuance of security bonds against the
assets with a matching of time and terms between mortgage property and security
bonds. Here the selection of asset is generally considered on the basis of the
following:
(I) Quality of assets

(ii) Certainty of repayment

(iii) Good ranking from the credit rating agency.

The process of asset securitization takes place in the following firms:

 Originating Institutions/Firm
 Special Purpose Vehicle (SPV)
 Merchant Banker (MB)

 FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex flow in the
country is increasing and the international markets are funding the operations of the
corporate in India. The success of any business is measured by the fund
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 management; this makes treasury management as a very critical finance function.
Management of treasury profit center requires a wide variety of knowledge in the
area of global money markets and financial instruments such as deposit certificates,
treasury bills, forecasting, source evaluation and cost of domestic and foreign
currency funds. Treasury and risk management ensures cost effectiveness in
planning strategies in this era of deregulation.

Role of merchant banker in Forex function

The currency values, interest rates, share index and commodities affect the financial
derivatives like futures, swaps and other tools of risk management. Corporates
therefore employ well-trained professionals to manage treasury and forex functions
so that they can ensure competent management. Thus, this service is provided to
Corporates through merchant bankers. Merchant bankers assess various markets to
advice Corporates or other banks that needs currency. Merchant bankers constantly
update about the policies of the regulatory bodies, monitors the current prices, makes
predictions based on the analysis of trends etc

 HIRE PURCHASE SERVICE

It involves a system under which term loans for purchases of goods and services are
advanced to be liquidated in stages through a contractual obligation. The goods
whose purchases are thus financed may be consumer goods or producer goods or
they may be simply services such as air travel. Hire purchase credit may be provided
by the seller himself or by any financial institution. However, unlike in other
countries, the emphasis in India is on the provision of instalment credit for
productive goods and services rather than for purely consumer goods.

Role of Merchant Banker

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 Merchant Banker undertakes the activity of financing for hire-purchase activities.
The merchant banker looks more to the credit-worthiness and business morality of
the buyer than the value of security

 LEASE FINANCE COMPANIES

Lease finance companies provide finance to acquire the use of assets for a stipulated
period of time without owning them. The user of the asset is known as the lessee,
and the owner of the asset is known as the Lessor. Leasing is medium-term
arrangement for finance.

Role of Merchant Banker

Merchant Bankers helps in assessing the credit risk of industrial borrowers. The
merchant bankers provide help in evaluating lease proposals. He analyse the merits
and demerits of lease finance with reference to a given proposal and leave it to their
clients to decide on the appropriate source and type of finance, thus enlarging their
range of choices and the variety of services available to them.

 VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to develop
into significant economic contributors. Venture capital is an important source of
equity for start-up companies. Professionally managed venture capital firms
generally are private partnerships or closely-held corporations funded by private and
public pension funds, endowment funds, foundations, corporations, wealthy
individuals, foreign investors, and the venture capitalists themselves.

Role of Merchant Banker

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 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.

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 PLAYERS IN MERCHANT BANKING

1. ENAM

ENAM was founded in1984 to provide knowledge-driven financial services at the time
when Indian economy investors faced a bewildering array of options. ENAM is the one
of the largest underwriters in India. ENAM offers promising & exciting companies the
opportunity of assessing the public market equity finances. ENAM’s long-term
association with capital markets & primary markets has provided it with deep insights of
the functioning of Indian financial institutions.

The merchant banking services provided by ENAM are: -

 Equity debt/syndication: Raising capital through a private placement of a company’s

securities is an effective & timely offering to a public offering. ENAM represents
the clients in the private placement of debt and equity with institutional & high net
worth investors.
 Corporate Restructuring: - ENAM provides client with strategic and practical
solutions to financial challenges. Their restructuring services includes Mergers &
Acquisitions, Takeovers, Debt restructuring, Buyers services etc.
 ENAM also provide the seed stage services, value creation services and IPO’s
advisory services which are represented below:

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2. ICICI SECURITIES

ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are
experienced in every aspect of the business from domestic and international capital
markets advisory, to M&A advisory, Private Equity syndication, Restructuring and
infrastructure advisory. Our investment banking team, based across key cities in India
and New York, London, and Singapore consists of professionals with expertise across a
range of industries.

ICICI SECURITIES provide following services:

 Mergers and Acquisitions: - ICICI Securities Limited is amongst the first Indian
investment Banks to form a dedicated M&A practice and continues to be a leader by
providing innovative and unique solutions to achieve varied objectives of the client.
They offer a full range of advisory services, which include joint ventures, mergers,
acquisitions, and divestitures.
 Equity Capital Markets: - ICICI Securities Limited is at the forefront of capital
markets advisory having been involved in most major book building and fixed price
offerings over the last decade. It is amongst the leading underwriters of Indian equity
and equity-linked offerings.
 Infrastructure Advisory: - ICICI Securities Limited has a dedicated infrastructure
vertical focused on assisting clients in identifying and capitalising on the
opportunities thrown up by the all pervasive boom in the Indian infrastructure sector.

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 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 Investor’s protection
and to create healthy environment in capital markets. No doubt, Merchant Banking
firms are subject to a host of control measures, 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
SEBI’s 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.

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 Findings

The researcher has analyzed the various aspects relevant to the objectives of the
study. The testing tools were also applied to examine the level of significance of the
results obtained with the help of analytical and statistical tools like chi-square,
proportion test, t-test, rank correlation test and percentage analysis etc. The main
findings are delineated here as under:

1. After applying appropriate statistical tool researcher found the difference between
mean values of per issue amount of public issues managed by merchant bankers during
pre and post reform period was significant (refer table 4.6) due to the acceptance of Hi it
is concluded that growth of public issues managed by merchant bankers after reform
period (1998 onwards) is considerably higher than pre-reform period (1989 to 1997).

2. In case ofRight issues managed by merchant bankers difference in growth of

prereforms (1990 to 1997) and post reforms (1998 onwards) is not statistically
significant, as calculated value of t is .04, which is less than critical value of t ie.1.96
(refer table 4.9) in spite of the fact that the difference of amount is more than Rs. 177
crores.

3. When growth of merchant banking business of handling international capital market

offerings was tested of two time slots ie: Pre-reform period and Postreform period,
difference was not found significant (refer table 4.12).

4. Except delisting offers managed by merchant bankers, all the merchant banking
business like international capital market offerings, substantial acquisition and takeover
and buy back offers managed by merchant bankers have shown increasing trends which
once again affirms the growth of merchant banking industry’s business.

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 Suggestions

1. On the basis of findings regarding results of public issues managed by merchant

bankers in pre-reform and post-reform periods, It may be suggested that the merchant
bankers need further constructive changes in the easy and transparent mechanism of
public issues in particular and right issues in general. These changes in shape of quick
settlement of price-bands, green-shoe options, stouter depository services and the
number of securities issued to the different categories ofinvestors

2. Capital adequacy norms for a merchant banker were also found where merchant
banker industry (private organizations in particular) is not happy. Capital required for
starting merchant banking operations now is INR 5cr which is quite a deterrent for a new
entrant

3. Puzzled attitude over separate licensing for certain functions also has created
problems for merchant bankers. In 1997 amendments, SEBI initiated parameters like
separate license for underwriting and portfolio management. At one side merchant
banker is supposed to perform all the activities in security market according to the needs
of clients but on the other hand these two important functions need separate licensing

4. The regulatory environment of capital market in India is in developing phase. Actions

are followed by the happenings. According to he analysis almost 27% merchant bankers
are not happy with frequent interruptions from SEBI.

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 CONCLUSION

The merchant banker plays a vital role in channelising the financial surplus of the
society into productive investment avenues. Hence before selecting a merchant banker,
one must decide what are the services for which he is being approached. 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 a
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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 BIBLIOGRAPHY

BOOKS REFFERED
 Merchant Banker – H.R. SUNEJA

 Merchant Banking Principles & Practices- H.R.MACHIRAJU

 Merchant Banking in India-

B.C. LAKSHMANNA & C.N. KRISHNA NAIK

 Merchant Banking – J.C.VERMA (3rd & 4th Edition)

WEBSITES

 www.google.co.in
 www.yahoo.com
 www.economictimes.com
 www.jmmorgansranley.com
 www.dspml.com
 www.sebi.com

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