PROJECT REPORT ON

IMPORTANCE OF MERCHANT BANKING

SUBMITTED BY

SAGAR KATE

T.Y.B.M.S. FINANCE SEMESTER V

2016-17

UNDER THE GUIDANCE OF

PROF. VIJAY GAWDE

SUBMITTED TO

UNIVERSITY OF MUMBAI

VIDYALANKAR SCHOOL OF INFORMATION TECHNOLOGY

(AFFILIATED TO UNIVERSITY OF MUMBAI)

VIDYALANKAR MARG, WADALA (E),

MUMBAI 400 037

1
 VIDYALANKAR SCHOOL OF INFORMATION TECHNOLOGY
(Affiliated to Mumbai University)

Certificate
This is to certify that
Mr./Ms. _________________________________ of B.M.S in
Finance, Semester _____ has undertaken & completed the project work
titled
during the academic year under the guidance of
Mr./Ms. _______________ submitted on _________ to this college
in fulfillment of the curriculum of B.M.S in Finance, University of
Mumbai.
This is a bonafide project work & the information presented is
True & original to the best of our knowledge and belief.

PROJECT COURSE EXTERNAL PRINCIPAL

GUIDE CO-ORDINATOR EXAMINER
2
 ACKNOWLEDGMENT

I hereby acknowledge all those who directly or indirectly helped me in

drafting of this project report. It would not have been possible for me to
complete the task without their help and guidance.

First of all I would like to thank the principal Dr. Rohini Kelker

And the coordinator Prof. Vijay Gawde who gave me the opportunity to
do this project work. They also conveyed the important instructions from
the university time to time. Secondly, I am very much obliged of Prof.
Vijay Gawde for giving guidance for completing the project.

Last but not the least; I am thankful to the University of Mumbai

for offering the project in the syllabus. I must mention my hearty
gratitude towards my family, other faculties and friends who supported
me to go ahead with the project.

3
 DECLARATION

Vidyalankar School of Information Technology

(Affiliated to University of Mumbai)

Vidyalankar Marg, Wadala (E),

Mumbai 400 037

I Sagar Kate, student of T.Y.B.M.S. Finance Semester V, Vidyalankar

School of Information Technology, hereby declare that I have completed
the project on Importance of Merchant Banking in academic year
2016-17.

The information submitted is true and original to the best of my

knowledge.

Signature of the Student

SAGAR KATE

4
 Executive Summary

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 banker’s act as a guide for the entrepreneurs
who are unaware, or have little knowledge or experience, of the
complexities involved in the above spheres.

5
 INDEX

Sr. Chapter Topic Page

No No No
1. List of Tables / Figures 7
2. Scope of the study 8
3. Ch. 1 Introduction to the study 9
3.1 Objectives of the study 10
3.2 Limitations of the study 10
3.3 Methodology & Sources of Data 10
4. Ch.2 Introduction to the Topic 11
5. Ch. 3 Review of Literature 59
6. Ch. 4 DataAnalysis 62
7. Ch. 5 Findings 66
8. Ch. 6 Conclusions 75
9. Annexure 77
9.1 List of Abbreviations, Figure, Tables. 77
9.2 Questionnaire 78
10. Bibliography 81

6
 List of Tables/ Figures
Sr. Particulars Pg.
No No
1. Pie charts 66

7
 SCOPE OF THE STUDY
 There is a well proven link between the economic growth and
financial technologies.
 Economic growth requires specialist financial skills.

8
1. INTRODUCTION TO THE STUDY:
A merchant bank can be generally described as a financial services
company with a private equity investment arm offering investment
banking and ancillary services.
A merchant bank acts not only as an advisor and broker, but also as
a principal. It provides various financial services such as accepting
bills arising out of trade, providing advice on acquisitions, mergers,
foreign exchange, underwriting new issues and portfolio
management.
As defined by SEBI, “Any person who is engaged in the business of
issue management either by making arrangements regarding
selling, buying or subscribing to securities or acting as manager,
consultant, advisor or rendering corporate advisory services in
relation to issue management”.

9
A) OBJECTIVES:
 Create awareness.
 To find out the links of merchant banking in respect to
economic growth.
 To study the impact of merchant banking.
 To study the importance of merchant banking.

B) LIMITATIONS:
 Considering only recent merchant bank uplifts.
 Limited to Mumbai area.
 Time constraints.
 Data confidentiality

C) METHODOLOGY AND SOURCES OF DATA:

a) Sample Size: 50
b) Area of Research work: Mumbai
c) Methods of data collection:
 Primary Sources: a) Interview method.
b) Questionnaire method/ Survey.

 Secondary Sources: a) websites

b) Published articles

10
2. INTRODUCTION TO THE TOPIC:
A merchant bank is a financial institution providing capital to
companies in the form of share ownership instead of loans. A
merchant bank also provides advisory on corporate matters to the
firms in which they invest. In the United Kingdom, the historical term
"merchant bank" refers to an investment bank.

Today, according to the U.S. Federal Deposit Insurance Corporation

(FDIC), "the term merchant banking is generally understood to
mean negotiated private equity investment by financial institutions in
the unregistered securities of either privately or publicly held
companies." Both commercial banks and investment banks may
engage in merchant banking activities. Historically, merchant banks'
original purpose was to facilitate and/or finance production and
trade of commodities, hence the name "merchant". Few banks today
restrict their activities to such a narrow scope.

11
HISTORY:
Merchant banks are in fact the original modern banks. These were
invented in the Middle ages by Italian grain merchants. As
the Lombardy merchants and bankers grew in stature based on the
strength of the Lombard plains cereal crops, many
displaced Jews fleeing Spanish persecution were attracted to the
trade. They brought with them ancient practices from the Middle and
Far East silk routes. Originally intended for the finance of long
trading journeys, these methods were applied to finance the
production and trading of grain.

In France during the 17th and 18th century, a merchant banker

or marchand-banquier was not just considered a trader but also
received the status of being an entrepreneur par excellence.
Merchant banks in the United Kingdom came into existence in the
early 19th century, the oldest are being Barings Bank.

The Jews could not hold land in Italy, so they entered the great
trading piazzas and halls of Lombardy, alongside the local traders,
and set up their benches to trade in crops. They had one great
advantage over the locals. Christians were strictly forbidden the sin
of usury, defined as lending at interest (Islam makes similar
condemnations of usury). The Jewish newcomers, on the other
hand, could lend to farmers against crops in the field, a high-risk
loan at what would have been considered usurious rates by the
Church; but the Jews were not subject to the Church's dictate. In
this way they could secure the grain-sale rights against the eventual
harvest. They then began to advance payment against the future
delivery of grain shipped to distant ports. In both cases they made
their profit from the present discount against the future price. This

12
two-handed trade was time-consuming and soon there arose a
class of merchants who were trading grain debt instead of grain.

The Court Jew performed both financing (credit) and underwriting

(insurance) functions. Financing took the form of a crop loan at the
beginning of the growing season, which allowed a farmer to develop
and manufacture (through seeding, growing, weeding, and
harvesting) his annual crop. Underwriting in the form of a crop, or
commodity, insurance guaranteed the delivery of the crop to its
buyer, typically a merchant wholesaler. In addition, traders
performed the merchant function by making arrangements to supply
the buyer of the crop through alternative sources—grain stores or
alternate markets, for instance—in the event of crop failure. He
could also keep the farmer (or other commodity producer) in
business during a drought or other crop failure, through the
issuance of a crop (or commodity) insurance against the hazard of
failure of his crop.

Merchant banking progressed from financing trade on one's own

behalf to settling trades for others and then to holding deposits for
settlement of "billette" or notes written by the people who were still
brokering the actual grain. And so the merchant's "benches" (bank is
derived from the Italian for bench, banco, as in a counter) in the
great grain markets became centers for holding money against a
bill(billette, a note, a letter of formal exchange, later a bill of
exchange and later still a cheque).

These deposited funds were intended to be held for the settlement

of grain trades, but often were used for the bench's own trades in
the meantime. The term bankrupt is a corruption of the Italian banca
rotta, or broken bench, which is what happened when someone lost
his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against

13
what could be earned by employing their money in the trade of the
bench soon developed; in short, selling an "interest" to them in a
specific trade, thus overcoming the usury objection. Once again this
merely developed what was an ancient method of financing long-
distance transport of goods.

The medieval Italian markets were disrupted by wars and in any

case were limited by the fractured nature of the Italian states. And
so the next generation of bankers arose from migrant Jewish
merchants in the great wheat-growing areas of Germany and
Poland. Many of these merchants were from the same families who
had been part of the development of the banking process in Italy.
They also had links with family members who had, centuries before,
fled Spain for both Italy and England. As non-agricultural wealth
expanded, many families of goldsmiths (another business not
prohibited to Jews) also gradually moved into banking. This course
of events set the stage for the rise of Jewish family banking firms
whose names still resonate today, such as Warburgs and Roths
childs.

The rise of Protestantism, however, freed many European

Christians from Rome's dictates against usury. In the late 18th
century, Protestant merchant families began to move into banking to
an increasing degree, especially in trading countries such as the
United Kingdom (Barings), Germany (Schroders, Berenbergs) and
the Netherlands (Hope & Co.,Gulcher & Mulder) At the same time,
new types of financial activities broadened the scope of banking far
beyond its origins. The merchant-banking families dealt in
everything from underwriting bonds to originating foreign loans. For
instance, bullion trading and bond issuance were two of the
specialties of the Rothschilds. In 1803, Barings teamed with Hope &
Co. to facilitate the Louisiana Purchase.

14
In the 19th century, the rise of trade and industry in the US led to
powerful new private merchant banks, culminating in J.P. Morgan &
Co. During the 20th century, however, the financial world began to
outgrow the resources of family-owned and other forms of private-
equity banking. Corporations came to dominate the banking
business. For the same reasons, merchant banking activities
became just one area of interest for modern banks.

Importance and need of merchant banking in

India:
Important reasons for the growth of merchant banks has been
development activities throughout the country, exerting excess
demand on the sources of fund for ever expanding industries and
trade, thus leaving a widening gap unabridged between the supply
and demand of invisible funds. All financial institutions had
experienced constrain of resources to meet ever increasing
demands for demands for funds frame corporate sector enterprises.
In such circumstances corporate sector had the only alternative to
avail of the capital market service for meeting their long term
financial requirement through capital issue of equity shares and
debentures. Growing demand for funds put pressure on capital
market that enthused commercial banks, share brokers and
financial consultancy firms to enter into the field of merchant
banking and share the growing capital market. As a result all the
commercial banks in nationalized and public sector as well as in
private sector including foreign banks in India have opened their
merchant banking windows and competing in this field.
Need for merchant banking is felt in the wake of huge public saving
lying untapped. Merchant banker can play highly significant role in
15
mobilizing funds of savers to invisible channels assuring promising
returns on investment and thus can assist in meeting the widening
demand for invisible funds for economic activity. With growth of
merchant banking profession corporate enterprises in both private
sectors would be able to raise required amount of funds annually
from the capital market to meet the growing requirement for funds
for establishing new enterprises, undertaking expansion,
modernization and diversification of the existing enterprises. This
reinforces the need for a vigorous role to be played by merchant
banking.
In view of multitude of enactment, rules and regulation, gridlines and
offshoot press release instructions brought out the government from
time to time imposing statutory obligations upon the corporate
sector to comply with those entire requirement prescribed there in
the need of a skilled agency existed which could provide counselling
in these matters in a package form. A merchant banker with their
skills updated information and knowledge provide this service to the
corporate units and advice them on such requirement to be
complied with for raising funds from the capital market under
different enactment viz. companies act, income tax act, foreign
exchange regulation act, securities contracts corporate laws and
regulations. Merchant bank advice the investors of the incentives
available in the form of tax relief, other statutory relaxation, good
return on investment and capital appreciation in such investment to
motivate them to invest their savings securities of the corporate
sector. Thus merchant banks help industries and trade to rise and
the investors to invest their saved money in sound and healthy
concern with confidence, safety and expectation for higher yields.
Finance is the backbone of business activities. Merchant bankers
make available finance for business enterprises acting as
intermediaries between them raising demand for funds and the

16
supplies of funds besides rendering various other services.

The following are some of the reasons why specialist merchant

bank have a crucial role to play in India.

 Growing complexity in rules and procedures of the

government.
 Growing industrialization and increase of technologically
advanced industries.
 Need for encouragement of small and medium industrialists,
who require specialist services.
 Need to develop backward areas and states which require
different criteria.
 Exploring the possibility of joint ventures abroad and foreign
market.
 Promoting the role of new issue market in mobilizing saving
from.
Where merchant banks function as an independent wing or as
subsidiary of various private/central governments/ state government
financial institution. Most of the financial institution in India is in
public sector and therefore such setup plays a role on the lines of
governmental priorities and policies.

17
Merchant banking has been a very lucrative-and risky-endeavor for the small
number of bank holding companies and banks that have engaged in it under
existing law. Recent legislation has expanded the merchant-banking activity that
is permissible to commercial banks and is therefore likely to spur interest in this
lucrative specialty on the part of a greater number of such institutions. Although
for much of the past half-century commercial banks have been permitted (subject
to certain restrictions) to engage in merchant-banking activities, the
term merchant banking itself is undefined in U.S. banking and securities laws and
its exact meaning is not always clearly understood.

This article begins by defining merchant banking and provides a short history of
it. The article then looks at the private equity market in the United States,
examining that market in terms of its evolution, typical uses of funds, and forms
taken by the investments. (In examining the private equity market, one needs to
be aware that the private equity market is, in fact, private. Data are limited and
could be subject to error.) Discussed next is commercial bank involvement in
merchant banking: the structure of commercial bank involvement, the evolution of
that involvement, and the recent track record. The major provisions of the
Gramm-Leach-Bliley Act of 1999, legislation which authorizes financial holding
companies to engage in merchant banking, is looked at next. The final section
focuses on the relationship among merchant banking, risk, and the regulators.

1
Merchant banks first arose in the Italian states in the Middle Ages, when Italian

merchant houses-generally small, family-owned import-export and commodity

trading businesses-began to use their excess capital to finance foreign trade in
return for a share of the profits. This trade generally consisted of lengthy sea
voyages. Thus, the investments were very high risk: war, bad weather, and
piracy were constant threats, and by their nature the voyages were long-term and
illiquid.

18
Later, the center for merchant banking shifted from the Italian states to
Amsterdam and then, in the eighteenth century, to London, where immigrants
from Prussia, France, Ireland, Russia, and the Italian states formed the core of
early British merchant banking. Like the Italian and Dutch houses before them,
these British houses were generally small, family-owned partnerships, and most
of them continued both to trade for their own businesses and to finance the
trading by others. By the end of the eighteenth century, however, the British
merchant houses had increased in size and sophistication and began
specializing in trade, marketing, or finance. As the nineteenth century opened,
virtually no mercantile houses remained focused on both trade and finance.

The Private Equity Market in the United States

The private equity market in the United States has evolved over the years, with
financial institution involvement only becoming significant in the 1960s and
1970s. Where these funds are invested also has changed over time. Currently,
most private equity funding is used to fund start-up or early-stage companies or
to bring large public companies private. Private equity investments can be made
through limited partnerships or they can be direct investments. Subsidiaries of
banking organizations are probably the largest direct investors in this market.

Evolution of the Private Equity Market

Given its history, merchant banking is often thought of as a European, and

especially British, financial specialty, and British institutions continue to maintain
a major presence in this area. Since the 1800s and even earlier, however, U.S.
firms (such as J.P. Morgan) also have been active in merchant banking.
However, although both investment banks and commercial banks, as well as
other types of businesses, have been authorized to engage in private equity
investment in the United States, financial institutions have not been major
providers of private equity.

19
Until the 1950s, U.S. investors in private equity were primarily wealthy individuals
and families. In the 1960s and 1970s, corporations and financial institutions
joined them in this type of investment. (In the 1960s, commercial banks were the
major providers of one kind of private equity investing, venture-capital financing.)
Through the late 1970s, wealthy families, industrial corporations, and financial
institutions, for the most part investing directly in the issuing firms, constituted the
bulk of private equity investors.

In the late 1970s, changes in the Employee Retirement Income Security Act
(ERISA) regulations, in tax laws, and in securities laws brought new investors
into private equity. In particular, the Department of Labor's revised interpretation
of the "prudent man rule" spurred pension fund investment in private equity
capital. Currently, the major investors in private equity in the United States are
pension funds, endowments and foundations, corporations, and wealthy
investors; financial institutions-both commercial banks and investment banks-
represent approximately 20 percent of total private equity capital, divided
approximately equally between the two. The U.S. Department of the Treasury
(Treasury) estimates that at year-end 1999, commercial banks accounted for
approximately $35 billion to $40 billion, and investment banks for approximately
another $40 billion, of the $400 billion total investment in the private equity
market.

At $400 billion as of year-end 1999, the private equity market is approximately

one-quarter the size of the commercial and industrial bank-loan market and the
commercial-paper market. In recent years, funds raised through private equity
have approximately equaled and sometimes exceeded funds raised through
initial public offerings and public high-yield corporate bond issuance.The market
also has grown dramatically in recent years, increasing from approximately $4.7
billion in 1980 to its 1999 figure. Despite this tremendous growth, the private
equity market is extremely small compared with the public equity market, which
was approximately $17 trillion at year-end 1999.

20
Typical Uses of Private Equity

Private equity financing is an alternative to raising public equity, issuing public

debt, or arranging a private placement of debt or bank loan. The reasons
companies seek private equity financing are varied. For example, other forms of
financing may be unavailable or too expensive because the company's track
record is either nonexistent or poor (that is, the company is in financial distress).
Or a private company may want to expand or change its ownership but not go
public. Or a firm may not want to take on the fixed cost of debt financing.

Public firms may seek private equity financing when their capital needs are very
limited and do not warrant the expense, time, and regulatory paperwork required
for a public issue. They also may seek private equity to keep a planned
acquisition confidential or to avoid other public disclosures. They may use the
private equity market because the public market for new issues in general is bad
or because the public equity market is temporarily unimpressed with their
industry's prospects. Finally, very often in recent years, managements of large
public firms have felt their firms will benefit from a change in capital structure and
ownership and will choose to go private by means of a leveraged buyout (LBO).

Although companies seek private equity for all these reasons, most private equity
funding has been used for one of two purposes: to fund start-up or early-stage
companies (venture capital) or to bring large public companies private in LBOs.
Of the $400 billion in outstanding private equity investment at year-end 1999,
venture-capital investments accounted for approximately $125 billion and
nonventure-capital investments for approximately $275 billion. LBOs were by far
the most common use of nonventure-capital private equity.

Table 1 provides estimates of the private equity raised, and its uses, for each
year from 1993 to 1999. From the table one can see that private equity
investment increased substantially over this seven-year period, going from $22
billion raised in 1993 to over $108 billion raised in 1999. In 1999, for the first time

21
since 1985, venture-capital fundraising accounted for a larger percentage of total
private equity fundraising than buyout/mezzanine financing. Before the mid-
1980s, two-thirds of private equity investments were used to finance venture-
capital investments.

Forms Taken by Investments

Currently, more than 80 percent of private equity investments are made by

limited partnerships, with professional private equity managers acting on behalf
of institutional investors. In a limited partnership, the professional equity
managers serve as general partners, and the institutional investors serve as
limited partners. The general partners manage the investment and contribute an
insignificant part of the investment, generally approximately 1 percent. These
limited partnerships have a contractually fixed life, usually ten years. The
investments are highly illiquid over the partnership's life, with a return not
expected until the partnership's later years, when the business is sold through a
public offering or a private sale, or the shares are repurchased by the company.
Banks (through subsidiaries) often act as limited partners in private equity limited
partnerships, and infrequently as general partners.

Direct investments in private equity are made also. Through subsidiaries, bank
holding companies and banks are probably the largest direct investors in the
private equity market.

Commercial Bank Involvement in Merchant Banking

Commercial banks have historically utilized Small Business Investment

Corporations (SBICs) or "5 percent subs" (defined below) for their domestic
private equity investments, and Edge Act Corporations or foreign subsidiaries to
make their foreign private equity investments. Several very large bank holding
companies have come to dominate merchant banking, directing as much as 10

22
percent of their capital to these activities. For the most part, reported earnings
from these merchant-banking activities have been very good.

Structure

Before passage of the Gramm-Leach-Bliley Act (GLBA), commercial banks and

bank holding companies (BHCs) had two primary vehicles for making private
equity investments in domestic corporations. They could make these investments
through SBICs and/or through "5 percent subs." Typically, banks engaged in
domestic merchant banking have used both of these vehicles; for equity
investments in foreign companies, they have used foreign subsidiaries or Edge
Act Corporations. As mentioned above, although these subsidiaries have
sometimes organized limited partnerships in which they acted as general
partners, more often they have invested directly in private equity or have acted
as limited partners in a partnership.

Small Business Investment Corporations. SBICs were authorized by the

Small Business Investment Act of 1958 to promote small-business equity
funding. This act authorized BHCs and banks to provide equity capital to small
companies through SBICs, which can be subsidiaries of either BHCs or banks. A
very significant percentage of the largest SBICs are subsidiaries of banks rather
than of BHCs.

Investments in SBICs are direct and subject to certain limits. Banks are allowed
to invest only 5 percent of their capital and surplus in their SBICs; bank holding
company investments are capped at 5 percent of the BHC's interest in the capital
and surplus of its subsidiary banks. The investments of the SBICs also are
limited. Investments can be made only in companies with pre-investment net
worth of no more than $18 million, and each investment is capped at 50 percent
of the recipient's outstanding shares of stock.

23
5 Percent Subs. The Bank Holding Company Act of 1956 permitted bank
holding companies to make passive equity investments in nonfinancial
companies. Specifically, the legislation allowed bank holding companies to own a
maximum of 5 percent of the voting shares (hence the "5 percent sub"
designation) and a maximum of 25 percent of the total equity of companies
engaged in any activity. There is no limit on the total amount of equity that a BHC
can invest through all of its 5 percent subs.

Because these investments are passive equity interests only, bank holding
companies often have used unregulated independent general partners to
oversee them. And because of the 5 percent sub investment limits, in the case of
growing businesses 5 percent subs often have been forced to raise outside
capital and limit their role to that of a minority investor or agent.

Foreign Subsidiaries or Edge Act Corporations. As mentioned above, banks

have made private equity investments in foreign firms through foreign
subsidiaries of bank holding companies or through Edge Act Corporations, which
are generally organized as bank subsidiaries. Edge Act Corporations are
permitted to own up to 20 percent of the voting shares or 40 percent of the total
equity of a foreign company.

Evolution

A few very large BHCs dominate merchant banking, directing as much as 10

percent of their capital to these activities. Citigroup, Chase, Bank of America,
FleetBoston, and Wells Fargo have the largest presence in this area. In 1999,
Chase, FleetBoston, Wells Fargo, J.P. Morgan, and First Union reported an
aggregate investment of over $5 billion in venture-capital investments, and they
expect to continue to expand this area of their business.

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

24
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.

In the middle to late 1980s, the decision to enter merchant banking was thrust on
other banks and bank holding companies by unforeseen events. In those years,
as a result of the LDC (less-developed-country) debt crisis, many banks received
private equity from developing nations in return for their defaulted loans. At that
time, many of these banks set up merchant-banking subsidiaries to try to get
some value from this private equity.

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. Some of these recent venture-capital
investments have been spectacularly successful. For example, the Internet
search engine Lycos was a 1998 investment of Chase Manhattan's venture-
capital arm.

Recent Track Record

Commercial banks are permitted to report either realized or unrealized gains on

their merchant-banking portfolios, as long as they are consistent in the

25
reporting.This option makes it difficult for one to compare different entities'
financial results and could lead to an overly liberal reporting of profits. However,
the Federal Reserve Board (FRB) generally considers bank holding companies
that are engaged in merchant banking to have reported their earnings
conservatively on these equity investments.

These reported earnings have been good. The FRB estimates that revenue from
private equity investment for the small number of BHCs with a significant
presence in this field was approximately 12 percent to 13 percent of total BHC
net income in the three-year period from 1995 through 1997. The FRB further
estimates that rates of return on merchant-banking activities have averaged
approximately 30 percent annually over the past five years. Another source, the
National Venture Capital Association, estimates an overall 85 percent rate of
return for venture capital funds invested in early-stage companies in 1999. Most
bank subsidiaries' venture-capital investments have recently been averaging
returns of approximately 40 percent, compared with 10 percent to 15 percent on
commercial lending.

The merchant-banking subsidiaries of Chase, Wells Fargo, J.P. Morgan, First

Union, and FleetBoston reported in the aggregate $5 billion in net income for
1999. Chase's merchant-banking subsidiary Chase Capital Partners reported
$2.5 billion in net income in 1999-22 percent of Chase's total reported net
income. Wells Fargo's merchant-banking activities accounted for 13 percent of its
1999 reported income; J.P. Morgan's for 15 percent; First Union's for 8 percent;
and FleetBoston's for 9 percent.

These merchant-bank subsidiary returns are particularly good when one

considers that merchant banking requires very low overhead. For instance, Wells
Fargo has 92,000 employees, but only 14 partners ran its merchant-bank
subsidiary, which was responsible for 16 percent of Wells Fargo's total fourth-
quarter 1999 net income. Similarly, First Union has 70,000 employees, but only

26
16 people conducted its merchant- banking activities, which brought in 13
percent of First Union's fourth-quarter 1999 net income.

With the long bull market in stocks-and a particularly hot IPO market for
technology stocks in 1999- BHC merchant-banking subsidiaries have increased
their venture-capital investments in recent years. As already mentioned, Chase,
Wells Fargo, J.P. Morgan, First Union, and FleetBoston invested over $5 billion
in venture-capital investments in 1999 and plan to continue to expand this area of
their business. Chase alone has tripled its venture-capital investments since
1996.

The Gramm-Leach-Bliley Act of 1999

To some extent, commercial bank activities have been restricted throughout U.S.
history. Restrictions of particular importance to banks' merchant-banking
activities are contained in the 1933 Glass-Steagall Act, which formalized the
separation between commercial banking and certain investment-banking
activities. Blaming bank failures of the 1930s on the banks' speculative securities
activities, Congress passed this legislation to draw a firm line between
commercial and investment banking. Although there is little evidence that the
investment-banking activities of commercial bank affiliates actually were a major
factor in the bank failures of that time, differences of opinion have continued to
exist between those who seek to exclude commercial banks from investment-
banking activities and those who favor permitting such activities. GLBA, enacted
on November 12, 1999, specifically recognizes merchant banking as an activity
"financial in nature" and provides authority to financial holding companies (FHCs)
to provide merchant-banking services. (The legislation does not define merchant
banking.) To qualify as a financial holding company, a bank holding company
and all of its insured depository subsidiaries must be well-capitalized and well-
managed and its Community Reinvestment Act rating must be at least
satisfactory. According to the FRB, as of May 2000, 270 domestic banking

27
institutions and 17 foreign banking organizations had filed to become financial
holding companies.

GLBA specifically authorizes FHCs to "directly or indirectly acquire or control any

kind of ownership interest in an entity engaged in any kind of trade or business
whatsoever" if (1) the shares are purchased and held through a securities affiliate
or "an affiliate thereof" of the FHC; (2) the shares are held for the sole purpose of
appreciation and ultimate resale; and (3) the FHC does not routinely manage the
company in which it has invested except as necessary to obtain an ultimate
reasonable return on investment.

Maintaining the historical separation between banking and commerce, this

legislation specifically disallows routine management by the FHC subsidiary of
the nonfinancial company in which it has invested. These investments are for
investment purposes only and are not to be used as a back door for the holding
company to control or operate a commercial business. This legislation also
prohibits subsidiaries of banks from engaging in merchant-banking activities,
although that prohibition may be reexamined by the FRB and the Treasury in
2004.

Under the new law, FHCs' portfolio investments in nonfinancial companies are
not limited to the 5 percent sub limits restricting control of the portfolio company.
In a major departure from existing policy regarding 5 percent sub investments,
GLBA provides that investments made under the new law need not be passive;
FHCs may in fact purchase a controlling interest in a company. Nor does GLBA
restrict these merchant-banking subsidiaries to SBIC investment limits on the
size of the company in which the SBIC can invest, on the percentage of shares
that can be owned, and on the amount of BHC or bank capital devoted to these
investment

28
Role of Merchant Banking Services in Our
Economy:

Merchant banks found its origin in the early periods in the country of
Italy by the Italian merchants. The main function of the merchant
banking services include providing financial advice and services to
corporate as well as individuals. These banks act as a sort of
intermediary between capital issuers and the buyers of the
securities. These securities are issued by different companies in the
stock markets to raise funds.

29
The Necessity of Merchant Banking Services

The economy of the country is often afflicted with different

unpredictable conditions like inflation, unemployment, stagnation
and so forth. The need to sustain a steady growth is necessary for
corporations and individuals which is possible only with a long term
strategy and financial options. The merchant banking services
provide solutions and financial options.

These banks provide advisor services to clients based on a

particular fee. They also provide other financial services to mergers
and clients. It is the only financial institute that invests its capital in
the clients’ company. It acts as an intermediary between those who
possess capital and those who need capital.

To help their clients with a number of financial options, the merchant

banking services operate in a number of countries all over the world.
In this manner the clients have the opportunity to survey the
different financial options to ensure better growth.

30
Functions of the Merchant Banking Services

These banks have a number of functions and some of the most

important among them include:
Raise
funds: one
of the
main
functions
of this
banker
includes
helping
the clients’
company to raise funds from the markets. The banks help to
manage equity offerings and debt. This function further includes
underwriting support, pricing and marketing of the issue, stock
exchange listing, allotment and refund, offer document registration
and so forth.
Offer advisory services: these banks also offer advisory services to
its clients for a proposed fee.
Security distribution: the functions of these banking services also
include distribution of different types of securities like fixed deposits,
equity shares, mutual fund products, commercial paper
and debt instruments.
Aid in projects: these banks also provide aid in the projects
undertaken by the clients by helping them to visualise the concept of
the project. The feasibility of the project is also analysed by these
banks. The clients are also given support to prepare project reports.
Overall financial reconstruction: the merchant banking services
provide better financial options and solutions to the clients. They

31
help the clients to raise funds through cheaper resources. With the
aid of other financial institutions, these banks also help to revive the
sick units of the clients’ companies.
Offer advice on management of risks: another important function
performed by these banks includes providing timely advice on risk
management. The merchant banker provides advice on different
strategies adopted by the clients.

Today the merchant banking services provide a number of other

services like loan syndication, credit acceptance, counselling of
mergers and acquisitions, management of portfolio and so forth.
They also assist companies with short term liquidity funds. In a
nutshell, these banking services are indispensable as they support
individuals and corporate to expand their business ventures.

32
Merchant Banking in India:

 To manage the portfolio of Customers

 To manage the projects and counselling as well as appraisal
 To manage the underwriting of Shares and debentures
 To manage the process of interest and dividends
 To circumvention of the syndication of loan
 To manage customers securities

Registration of Merchant bankers with SEBI:-

It is mandatory for a merchant bank to register with SEBI. Without
holding certificate of origin granted by SEBI . Following are some
regulations which are given by SEBI in order to be a Merchant Banker:-

 Only a body corporate other than a non-banking financial company

shall be eligible to get registered as merchant banker.
 As a merchant banker, applicant can only perform the function that
are connected with Security market.
 Applicant should have proper infrastructure to set up Merchant
bank.
 Two employees with prior experience in merchant banking should
be there in merchant bank.
 Applicant should not be involved in any security scam or in any
proved guilt for offence.
 Minimum net worth of 5 crores should be there with applicant at all
the time

33
Categories of Merchant Bankers:
Merchant bankers are classified in following 4 categories:-

 Merchant Banks that provides all the functions related to

management of Issue, advisory/consultancy services, portfolio
managers, underwriters and Portfolio managers. This type of merchant
bankers comes under category 1
 Merchant banks that provides functions as underwriters, advisors
and consultants is comes under category 2
 Merchant banks that provides function of Underwriters, advisors
and Consultants these banks comes under category 3
 Merchant banks that can provide only advisers and consultancy
services to an issue comes under category 4.

Major Merchant Bankers in India:-

In India Merchant Banking is new Concept but still there are 135 banks
who register as Merchant Bank under SEBI. It includes Public Sector,
Private Sector and Foreign Bankers. Following are some examples of
these Bankers:-

Public sector Merchant Bankers:

 SBI CAPITAL MARKETS LTD

 PUNJAB NATIONAL BANK

34
 BANK OF MAHARASHTRA

 IFCI FINANCIAL SERVICES LTD

 KARUR VYSYA BANK LTD,

 STATE BANK OF BIKANER AND JAIPUR

35
Private Sector Merchant Bankers:

 ICICI SECURITIES LTD

 AXIS BANK LTD.(FORMERLY UTI BANK LTD.)

 BAJAJ CAPITAL LTD

 TATA CAPITAL MARKETS LTD

 ICICI BANK LTD
 RELIANCE SECURITIES LIMITED
 KOTAK MAHINDRA CAPITAL COMPANY LTD

36
 YES BANK LTD.

37
Foreign Players in Merchant Banking:

 GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD.

 MORGAN STANLEY INDIA COMPANY PVT LTD
 BARCLAYS SECURITIES (INDIA) PVT. LTD

 BANK OF AMERICA, N.A

38
 DEUTSCHE BANK

 DEUTSCHE EQUITIES INDIA PRIVATE LIMITED

 BARCLAYS BANK PLC
 CITIGROUP GLOBAL MARKETS INDIA PVT. LTD.
 DSP MERRILL LYNCH LTD
 FEDEX SECURITIES LTD

39
THE FACTORS ON WHICH GROWTH OF
MERCHANT BANKING DEPENDS:

1. Planning and industrial policy of the country i.e. India in this case
2. Prevailing Economic condition of the country
3. Regulatory system of the market and economy prevailing in India
4. Confidence of the people, traders, buyers, marketers, business
houses, financial institutions etc
5. The economic environment of the outside world.
6. Competition among the existing players and the upcoming entrants.

40
CURRENT SCENARIO OF MERCHANT BANKING
At present merchant banks following main services and major Merchant
Bankers in India is providing these services

 Portfolio Management

Credit Syndication

 Acceptance Credit.
 Counsel on mergers and acquisitions.
 Insurance, etc.

Indian merchant banks initiate loans and then sell them to investors.As
planning and industrial policy of the country envisaged the setting of up
of new industries and technology, greater financial sophistication and
financial services are required.

There is a well proven link between economic growth and financial

technology. Economic development requires specialist financial skills:
savings banks to marshal individual savings; finance companies for
consumer lending and mortgage finance; insurance companies for life
and property cover; agricultural banks for rural development; and a range
of specialized government or government sponsored institutions. As new
units have been set up and business is expanding, they require
additional financial services. A public equity or debt issue is the logical
source of fund in this situation and merchant banks can tap this
opportunity of growth. The areas of great scope could be,

 Growth of Primary market:

If the primary market grows and number of issues increases, the scope
of merchant banking will be enhanced.

41
 Entry of Foreign Investors:

Now India capital market directly taps foreign capital through euro
issues.FDI is increased in capital market. So Merchant bankers are
required to advice them for their investment in India. The increasing
number of joint ventures also requires expert services of Merchant
Bankers. If more and more NRIs participate in capital market, there will
be great demand for merchant banker services. Changing policy of
Financial Institutions: and the lending policies of financial institutions are
based on project orientation, so the merchant banker services will be
needed by corporate enterprise to provide expert guidance.

 Development of debt markets:

If the debt market is enhanced, there will be tremendous scope for

Merchant bankers. Now NSE and OTCEI are planned to raise their fund
through debt instruments.

 Corporate restructuring:

Due to liberalization and globalization Companies are facing lot of

competition. In order to compete, they have to go for restructuring,
merger, acquisitions or disinvestments. They may offer good
opportunities to merchant bankers

 The scope could be extended to

1. Advising the company on designing of its Capital Structure.

2. Advising the company on the instrument to be offered to the public.
3. Pricing of the instrument.
4. Advising the company on Legal/ regulatory matters and interaction
with SEBI/ ROC/ Stock
5. Exchanges and other regulatory authorities.

42
6. Assisting the company in marketing the issue.
7. In channelizing the financial surplus of the general public into
productive investment avenues.
8. To coordinate the activities of various intermediaries to the share
issue such as the registrar, bankers, advertising agency, printers,
underwriters, brokers etc.
9. To ensure the compliance with rules and regulations governing the
securities market

43
Examples of Best Merchant Banker:- ( BEST
MERCHANT BANKERS IN INDIA)
SBI CAPITAL MARKET: -According
to Business outlook magazines SBI
capital Markets, Subsidiary of SBI is
the oldest and best Merchant Banker
in 2009. It mainly offers services in
Mergers and Acquisition, it also offers
services in Publics and right offers,
private placements and buybacks and
it provides Project advisory in mainly
core sector i.e. Telecom and Power sector. SBI caps have got this
appreciation after successfully doing IPO in 2008.

KOTAK MAHINDRA BANK:- According to Business outlook magazine

Kotak Mahindra
Bank because this
bank manages 13
equity issue which
includes ONGC,
Biocon and Infosys ADR offerings.

44
How Merchant Banks Help In Launching an IPO:-
If we talk about the previous method of issuing IPO , in this method
merchant banker and issuer fixed the price and then investor's buy IPO
by filling the application form but this traditional method is changed due
to changing role of Merchant Banks and changing scenario in Indian
stock market. Recently Hughes software is used in order to launch an
IPO. Following are new method of launching an IPO now and how
Merchant Banks helps in doing that:-

 First of all Merchant bankers and Issuer fixed the price by using
Bidding Method, in India Price has been fixed which seems to be below
50% lower as compared to this price which should be fixed, so, IPO is
issued underpriced.
 Then Merchant Bankers Selects Syndicate members who help
them in selling the issue
 Orders were then collected by Merchant bankers and then they
submitted it to NSE by using the computerized IPO system
 Then in next step Investors could place, modify and delete orders in
book building period.
 Then NSE system revealed this information to Merchant Bankers.
Full database of the orders was passed on by NSE to Merchant Bankers.

45
 Major services of Merchant Banking in Detail:
 Project Counseling:- it is one f the important function of merchant banks, it
includes all the functions starting from taking decision whether the project
is feasible or not on the basis of financial cost and profitable scope of the
project and this function also includes giving financial help to these
projects with the help of government and financial institutions.
 Issue Management: - Now a days it is one of important of Merchant
Banks. Many companies issues there IPO, shares, debentures in order
to raise their funds and Merchant Banks act as a intermediary between
Public and cooperates helps in successfully issue of these securities.
Merchant Banker has to perform this function as per SEBI guidelines. All
the important decisions like date of opening and closing of issue,
registration of prospectus, launching publicity campaign, fixing date f
board meeting and all other major decisions are taken by Merchant
Banker.
 Managers, Consultants and Advisers: - Merchant banks act as a
consultants and advisors of corporate while issuing any type of
securities. They performed the functions like drafting of prospectus,
application forms and completion of formalities under Company Act
1956. Companies usually appoint one or two Merchant Banks for issuing
their securities.
 Underwriting of Public Issue: - By underwriting we mean guarantee given
by the underwriter in event of under subscription. Merchant banks
perform this function now days and cannot subscribe more than 15% of
any issue.
 Portfolio Management: - Portfolio management means to diversified the
investment of the investors or to plan their investment in different type of
securities like in shares, Mutual Fund, government securities etc. so has
to gain better returns at a minimum risk. This function is performed by all
the Merchant Banks now a days.

46
 Credit Syndication:- Credit syndication relates to activities connected with
credit procurement and project financing, aimed at raising Indian and
foreign currency loans from banks and financial institutions, are
collectively known as 'credit syndication'.
 Merger and Acquisition:-This is a specialized service provided by the
merchant banker who arranges for negotiating acquisitions and mergers
by offering expert valuation regarding the quantum and the nature of
considerations, and other related matters.

The various functions that form part of this activity are as follows:

1. Undertaking management audit to identify areas of corporate strength and

weakness in order to help formulate guidelines and directions for future
growth.
2. Conducting exploratory studies on a global basis to locate overseas
markets, foreign collaborations and prospective joint venture associates.
3. Obtaining approvals from shareholders, depositors, creditors, government,
and other authorities.
4. Monitoring the implementation of merger and amalgamation schemes.
5. Identifying organizations with matching characteristics.

Venture Financing:-Venture capital is the equity financing for high-risk

and high-reward projects. The concept of venture capital originated in the
USA in the 1950s, when business magnates like Rockefeller financed
new technology companies. The concept became more popular during
the sixties and seventies, when several private enterprises undertook the
financing of high-risk and high reward projects.

Lease Financing:-Leasing is an important alternative source of financing

a capital outlay. It involves letting out assets on lease for use by the
lessee for a particular period of time.

Following are the important services provided in regard to leasing:

47
1. Providing advice on the viability of leasing as an alternative source for
financing capital investment projects.
2. Providing advice on the choice of a favorable rental structure.

Off Shore Finance: - Following are the offshore functions performed by

Merchant bankers:-

 Long-term foreign currency loans

 Joint venture abroad
 Financing Imports and Exports
 Foreign Collaboration arrangements

Corporate Counseling
The set of activities that is undertaken to ensure the efficient running of a
corporate enterprise is known as corporate counseling. It may include the
rejuvenating of old line companies and ailing units, and guiding the
existing units in identifying the areas or activities for growth and
diversification. The merchant banker guides the clients on various
aspects like Location factors, organizational size, operational scale,
choice of product, market survey, cost analysis, cost reduction, allocation
of resources, investment decision, capital management and expenditure
control, pricing, etc.

48
What is the difference between investment
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 tend to blur. Traditional merchant
banks often expand into the field of securities underwriting, while
many investment banks participate in trade financing activities. In
theory, investment banks and merchant banks perform different
functions.

Pure investment banks raise funds for businesses and some

governments by registering and issuing debt or equity and selling it
on a market. Traditionally, investment banks only participated in
underwriting and selling securities in large blocks. Investment banks
facilitate mergers and acquisitions through share sales and provide
research and financial consulting to companies. Traditionally,
investment banks did not deal with the 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 offerings of investment banks and merchant banks

varies by the institution offering the services, but there are a few

49
characteristics that most 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, mezzanine 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 a public offering, larger merchant banks tend to
privately place equity with other financial institutions, often taking on
large portions of ownership in companies that are believed to have
strong growth potential.

Merchant banks still offer trade financing products to their clients.

Investment banks rarely offer trade financing because
most investment banking clients have already outgrown the need for
trade financing and the various credit products linked to it.

50
The growth of Merchant banking in India.
Formal merchant activity in India was originated in 1969 with the
merchant banking division setup 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
managemet of public issues and some aspects of financial
consultancy. Following Graindlays Bank, Citibank set up its
merchant banking division in 1970. The division took up the task of
assisting new entrepreneurs and existing units in the evaluation of
new projects and raising funds through borrowing and equity issues.
Management consultancy services were also offered. Merchant
bankers are permitted to carry on activities of primary dealers in
government securities. Consequent to the recommendations of
Banking Commission in 1972, that Indian banks should offer
merchant banking services s part of the multiple services they could
provide their clients, State Bank of India started the Merchant
Banking Division in 1972. In the initial years the SBI’s objective was
to render corporate advice and assistance to small and medium
entrepreneurs.
The commercial banks that followed State Bank of India were
central Bank of India were central Bank of India, Bank of India and
Syndicate Bank in 1977. Bank of Baroda, Standard Chartered Bank
and Mercantile Bank in 1978 And United Bank of India, United
Commercial Bank, Punjab National Bank, Canara Bank and Indian
Overseas Bank n late ‘70s and early ‘80s. Among the development
banks, ICICI started banking activities in 1973 followed by IFCI
(1986) and IDBI (1991).

51
Obligations and Responsibilities
1. Merchant banker should maintain proper books of accounts,
records and submit half yearly/annual financial statements
tothe 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.
6. All merchant bankers must abide by the code of conduct
prescribed or them.
7. Every merchant banker who acts as led manager must nter
into an agreement with the issuer setting out mutual rights,
liabilities, obligations, relating to such issues with particular
reference to disclosures allotment, refund etc.

52
Problems and Hurdles faced by Indian
Merchant Bankers.
1. Industry Compartmentalization: Companies which
are in merchant banking business would have expertise
in underwriting, hire purchase, and leasing and portfolio
management, money-lending. But RBI does not permit
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 that is multiple use of same talent is
not possible.
2. Malafide 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 in common.
Corporate like to use merchant bankers for malafide
intentions. This gives growth to more boutique fly-by-
day firms. Giant professional or multinational merchant
bankers are cautions in their approach to Indian market

3. Regulations: though 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

53
Progress of Merchant Banking in India.
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 capital market in 1980’s some commercial banks set-up their
subsidiaries to operate exclusively in merchant banking industry. In
addition, a number of large stock broking firms and financial
consultants also entered into business. Thus, by the end of 1980s
there were 33 merchant bankers belonging to three major 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.

54
Merchant banking industry which remained almost stagnant and
stereotyped for over two decades, witnessed an astonishing growth
after the process of economic reforms and deregulation of Indian
economy in 1991. The number of merchant banks increased to 115
by the end of 1992-93, 300 by the end of 1193-94 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,
Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are
operating in India under authorization of SEBI. As a result of
proliferation, Indian Merchant Bankers have faced severe
competition not only amongst themselves but als with the well
developed global players.

55
Guidelines for Merchant banking: SEBI
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 issue.
There is no Minimum networth required.

56
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

57
Difference between commercial banking and
merchant banking:
1. COMMERCIAL BANKING:
a) Deals with Debt and Debt related finance.
b) Asset oriented
c) Generally avoid risks.

2. MERCHANT BANKING:
a) Deals with Equity and Equity related finance.
b) Management oriented
c) Willing to accept risks.

58
3. REVIEW OF LITERATURE

Indian Merchant Networks Outside India in the Nineteenth and

Twentieth Century’s: A Preliminary Survey:

In spite of the recent flowering of studies on the South Asian diaspora,

we are nevertheless left with many gaps in our knowledge and many
unanswered questions. The bulk of existing work is still focused on the
migration of agricultural labour and the ‘Little Indias’ it spawned in various
corners of the world. The recent migrations of educated professionals to
the countries of the ‘First World’, particularly the USA, are also attracting
increasing attention. The whole field of migration and diaspora studies
remains, however, dominated by a host country perspective which tends
to obliterate the general picture from the point of view of South Asian
history.

Barclays Merchant Bank buys 30.56 lakh shares of Muthoot

finance.
On September 26, 2016 Barclays Merchant Bank (Singapore) Limited
bought 3056502 shares of Muthot finance at Rs 373 on the NSE.
However, Baring india private Equity Fund III Listed Investments Ltd sold
3056502 shares at Rs 373. On Monday, Muthoot Finance ended tRs
368.20, down Rs 6.80, or 1.81 percent on the NSE. The share touched
its 52- week high Rs 406.80 and 52- week low Rs 153.60 on 08 August,
2016 and 28 September, 2015 respectively.

59
IDFC Bank offers small retailers zero-balance a/c’s.

Mumbai: IDFC Bank is increasing business from small retailers by opening

current accounts without minimum balance requirements. It is also bringing them
onto the same level as large chains and e-commerce companies by offering
cloud-based billing solutions and credit card and online payment services.

SBI becomes top merchant acquiring bank in country.

Country's largest lender State Bank of India has become the top merchant
acquiring bank in the country with 2.96 lakh installed point-of-sale (PoS)
terminals as of February 2016.
SBI is followed by HDFC Bank (2.81 lakh), Axis Bank (2.58 lakh) and ICICI
Bank(2 lakh), the RBI data showed.
"Being 'Banker to Every Indian', we are committed to promoting electronic
payments in all parts of the country and provide strong push for achieving the
goal of less-cash economy envisaged by the government," SBI said in a
statement.
These four banks together contribute to more than three-fourths of the total 13.63
lakh PoS terminals deployed in the country.
As of April 30, 2016, SBI deployed 3.07 lakh PoS terminals at more than 3,800
centres. Out of the total, it has installed 44 per cent in metros, 30 per cent in
urban areas, 18 per cent in semi-urban geographies and 8 per cent in rural
areas.
During 2015-16, almost 40 per cent of the growth of acquiring industry in terms of
number of terminals was driven by SBI alone by deploying more than 1 lakh PoS
terminals.

60
There are no. of study done on merchant banking.

A few of literature are form of banking where the bank arranges credit
financing, but does not hold the loans in its investment portfolio to
maturity. A merchant bank invests its own capital in leveraged buyouts,
Corporate acquisitions, and other structured finance transactions.
Merchant banking is a fee based business, where the bank assumes
market risk but no long term credit risk. A common form of banking in
Euro pe, merchant banking is gaining acceptance in the United States, as
more banks originate commercial loans and then sell them to investors
rather than hold the loans as portfolio investments. A banque d’affaire is a
French merchant bank, which has more powers than its British
counterpart. The Gramm-Leach-Bliley Act allows financial holding
companies, a type of Bank Holding Company created by the act, to
engage in merchant banking activities.

61
4. DATA ANALYSIS

1. Do you take any financial services from banks?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 40 80%
2. NO 10 20%
TOTAL 50

2. Do you know about merchant banking?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 30 60%
2. NO 20 40%
TOTAL 50

3. Are you aware about the services provided by merchant bankers?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 30 60%
2. NO 15 30%
3. SOME OF THEM 5 10%
TOTAL 50

62
 4. What is the position of merchant banking in private sector?

SR.NO ANSWERS NO.s PERCENTAGE

1. GOOD 25 50%
2. NORMAL 15 30%
3. BAD 10 20%
TOTAL 50

5. What is the position of merchant banking in public sector?

SR.NO ANSWERS NO.s PERCENTAGE

1. GOOD 20 40%
2. NORMAL 20 40%
3. BAD 10 20%
TOTAL 50

6. Would you prefer merchant banks over normal banks?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 20 40%
2. NO 20 40%
3. NEITHER 10 20%
TOTAL 50

63
 7. Would you render services from a merchant bank?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 25 50%
2. NO 25 50%
TOTAL 50

8. Do you feel increase in availability of merchant banks can show

some growth in the economy?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 20 40%
2. NO 5 10%
3. MAYBE 20 40%
4. I DON’T KNOW 5 10%
TOTAL 50

64
 9. Would companies face any difficulty if merchants shut down?

SR.NO ANSWERS NO.s PERCENTAGE

1. YES 25 50%
2. NO 5 10%
3. MAYBE 10 20%
4. I DON’T KNOW 10 20%
TOTAL 50

65
 4. FINDINGS (RESULTS)

1. Do you take any financial services from

banks?

yes
no

INTERPRETATION:
 80% people do take financial services.
 20% do not take or are unaware about them.

66
 2. Do you know about merchant banking?

Yes
No

INTERPRETATION:
 60% people do know about merchant banking
 40% do not know about it.

67
 3. Are you aware about the services
provided by merchant bankers?

Yes
No
Some of Them

INTERPRETATION:

 60% people are aware about the services provided by merchant banks.
 30% have no clue.
 10% people have some idea about the services.

68
 4. What is the position of merchant banking
in private sector?

Good
Normal
Bad

INTERPRETATION;

 50% believe its in a good position.

 30% think maybe its normal.
 20% feel its in a bad position.

69
 5. What is the position of merchant banking
in public sector?

Good
Normal
Bad

INTERPRETATION:

 40% feel its in a good position

 40% believe its normal.
 20% think its in a bad position.

70
 6. Would you prefer merchant banks over
normal banks?

Yes
No
Neither

INTERPRETATION:

 40% would prefer merchant banking.

 40% disagreed and would prefer normal financial bank.
 20% were not sure

71
 7. Would you render services from a
merchant bank?

Yes
No

INTERPRETATION:

 5% people would use merchant bank srvies.

 50% would ignore.

72
 8. Do you feel increase in availability of
merchant banks can show some growth in
the economy?

Yes
No
Maybe
I dont know

INTERPRETATION:

 40% agree to the above statement

 10% disagree
 20% feel its neither and isn’t related
 10% have no clue

73
 9. Would companies face any difficulty if
merchants shut down?

Yes
No
Maybe
I dont know

INTERPRETATION:

 50% feel merchant banks are important for companies.

 10% disagree.
 20% may or may not be agreeing to the above statement.
 20% have no clue.

74
5. 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
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 it’s going to get emerged
in the Indian economy. Hence, Merchant Ba nking can be
considered as essential financial body in Indian financial system.
Market development is predicted on a sound, fair and
t r a n s p a r e n t regulatory framework. To sustain the growth of
the market and crystallize
the growing awareness and interest into a comm
i t t e d , d i s c e r n i n g a n d growing awareness and intere
st into an essential to remove the tradingmalpractice
and structural inadequacies prevailing in the market,
a n d provide the investors an organized, well regulated market.

75
 Long Standing client relationships
 Strong positions in high growth clients and product niches.
 Multiple revenue growth initiatives are in place with detailed
and concrete action plans, and with rigorous follow-up
mechanisms.
 Growth is controlled by a sound Risk mamnagement system
and disciplined cost management.
 Small and medium scale enterprise SMEs need immediate
attention from merchant bankers to get access to finance.
 SMEs are facing stiff competition from large scale companies.

76
 Annexure
1. List of Tables/ Figures

Sr. Particulars Pg.

No No
1. Pie Charts (Findings)

2. List of Abbreviations

Abbreviations Full Form

SME Small and medium sized enterprises

77
 Questionnaire
*Mandatory questions
Personal Details:*
1. Name:
2. Gender:
 Male
 Female
 other
3. Age:
 Below 25 years
 20 – 40 years
 Above 40 years
4. Occupation:
 Businessman
 Trader
 Financial Consultant
 Accountant
 Other (specify)

Other (specify): ___________________________________________________

5. Income (annually):
 Below 1 lakh
 1 lakh – 5 lakh
 5 lakh – 10 lakh
 Above 10 lakh

Questionnaire:*
 Do you take any financial services from banks?
 Yes
 No

78
 Do you know about merchant banking?
 Yes
 No

 Are you aware about the services provided by merchant bankers?

 Yes
 No
 Some of them

 What is the position of merchant banking in private sector?

 Good
 Normal
 Bad

 What is the position of merchant banking in public sector?

 Good
 Normal
 Bad

 Would you prefer merchant banks over normal banks?

 Yes
 No
 Neither

 Would you render services from a merchant bank?

 Yes
 No

79
 Do you feel increase in availability of merchant banks can show some
growth in the economy?
 Yes
 No
 Maybe
 I don’t know

 Would companies face any difficulty if merchants shut down?

 Yes
 No
 Maybe
 I don’t know

80
 BIBLIOGRAPHY
1. Coispeau, Olivier (Aug 2016): ‘Merchant Banking in India’.
Wikipedia.
2. Gaurav Akrani (Aug 2016): ‘Merchant Bank meaning and functions
of Merchant Banking’. Kalyan City blogspot.
3. Aditiya Kumar (Jan 2013): ‘Merchant Banking in India’. SlideShare.
4. Bob Renaud: ‘Difference between investment banks and merchant
banks’. Investopedia.
5. Nitish Marathe (Mar 2009): ‘Merchant Banking in India’. Scribd.
6. Claude Markovits (Oct 1999): ‘Indian Merchant Networks outside
India in the 19th and 20th centuries: A Preliminary survey’. Modern
Asian Studies, Volume33, Issue 4. Pg: 883-911.
7. MC (sept 2016): ‘Barclays Merchant Bank buys 30.56 lakh shares of
Muthoot finance’. MoneyControl.
8. Mayur Shetty, TNN (Sep 2016): 'IDFC Bank offers small retailers zero
balance ac’s’. Times of India.
9. Bhuril (May 2010): ‘Merchant Banking’. Scribd.

81