1 Merchant Banking

MERCHANT BANKING
1.1 Introduction The dictionary meaning of merchant bank refers to an organization that underwrites corporate securities and advises such clients on issues like corporate mergers, etc. involved in the ownership of commercial ventures. This organization may be a bank, corporate body, firm or proprietary concern. Merchant banking started with the management of public issues and loan syndication and has been slowly and gradually covering activities like project counseling, portfolio management, investment counseling and mergers and amalgamation of the corporate firms. Although, merchant banking organizations present a long list of services they contemplate to render to their clients but the main services so far being rendered by them are those as authorized by the SEBI.

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1.2 Definition The first authoritative definition for the term Merchant Banker has been given in the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, A Merchant Banker means any person who is engaged in the business of Issue Management either by making arrangements regarding selling, buying or subscribing to Securities as Manager, Consultant, Adviser of rendering Corporate Advisory Service in relation to such Issue Management. Sec/5 (b) of the Banking Regulation Act, 1949 defines Banking as accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, and order or otherwise. The Notification of the Ministry of Finance defines a merchant banker as, any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consult, adviser or rendering corporate advisory service in relation to such issue management. 1.3 Meaning Merchant banking is an activity that includes corporate finance activites, such as advice in complex financing mergers and acquisition advice, and at times direct equity investment in corporation by banks. Merchant banking implies investment management. Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the investors who purchased securities. Merchant banking is the financial intermediation that matches entities that need capital and those that have capital for investment.

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1.4 History & Origin of Merchant Banking The origin of merchant banking can be traced back to the 13th century when the development of international trade and finance took place. The early merchant bankers were traders of commodities. These bankers also acted as bankers to the kings of European States and financed continental wars and coastal trades. The earlier merchant bankers used to lend their name to the lesser known traders by accepting bills through which they guaranteed that the holder of the bill would receive full value on the date of payment. Although merchant banking activity was ushered in two decades ago, it was only in 1992 after the formation of Securities and Exchange Board of India that it is defined and a set of rules and regulations in place. Hence the name merchant was used because of its roots in merchant trade.

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The Growth of 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. Formal merchant activity in India was originated in 1969 with the merchant banking division setup by the Grind lays 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. Following Grind lays 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 as 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 SBIs 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, 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 in late 70s and early 80s. Among the development banks, ICICI started merchant banking activities in 1973 followed by IFCI (1986) and IDBI (1991).

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Registration Of Merchant Bankers

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.

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Objectives Of Merchant Banking In Prevailing Economy:

To study the significance of Merchant Banking towards the development of securities industry. To analyze issue management regulations. To analyze the functions of Merchant Banking in relation to rules and regulations of SEBI. To evaluate the performance of Merchant Bankers, both activity performance and operational and financial performance.

To draw a conclusion and suggestions based on the analysis and experiences.

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Needs and Importance of Merchant Bankers

Followings are the needs and importance of merchant banking:
1. Important reason for the growth of merchant banking has been

developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap unabridged between the supply and demand of inventible funds. 2. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for funds from the corporate sector enterprises. In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their longterm financial requirements through capital issues of equity and debentures. 3. With the growing demand for funds there was pressure on capital market that enthused the commercial banks, share brokers and financial consultant firms to enter into the field of merchant banking and share the growing capital markets. 4. With the result, all the commercial banks in nationalized and public sector as well as in private sector including the foreign banks in India have opened their merchant banking windows and are competing in this field. 5. There has been a mushroom growth of financial consultancy firms and broker firms doing advisory functions as well as managing public issues in syndication with other merchant bankers. 6. The need of merchant banking institutions is felt in the wake of huge public savings lying still untapped. 7. Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments

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and thus can help in meeting the widening demand for investible funds for economic activity. 8. Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. This is evidenced from the increasing amount raised form the capital market by the corporate enterprises year after year. 9. Merchant bankers, with their skills, updated information and knowledge, provide this service to the corporate units and advise them on such requirements to be complied with for raising funds from the capital market under different enactments viz. Companies Act, Incometax Act, Foreign Exchange Regulation Act, Securities Contracts (Regulation) Act and various other corporate laws and regulations. 10. Thus, the merchant bankers help the industry and trade to raise funds and the investors to invest their saved money in sound and healthy concerns with confidence, safety and expectation for higher yields.

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Role of Merchant Banker

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. 1) Merchant bankers 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. 2) He has to keep pace with the changing environment where government rules, regulations and politics affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversifications, modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. 3) Merchant banker has to think and devise new instruments of financing industrial projects. He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. 4) He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the promoters with his knowledge and skills to resolve the problems being faced by them. He has to watch the interest

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and win over the confidence of the government, its agencies, along with the entrepreneurs, the investors and the whole community. 5) He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has to be dynamic. In the days ahead, merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of the corporate sector, the industry and the economy as a whole which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

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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. These guidelines have made the merchant bankers either to restrict their activities or think of separating these activities from the present one and float new subsidiary and enlarge the scope of its activities.

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. The entry is denied to young, specialized professionals into merchant banking 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. They have to seek the co-operation of the issuing company to shoulder the responsibility.

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Organizational setup of merchant bankers in India

In India a common organizational setup of merchant bankers to operate is in the form of divisions of Indian and foreign banks and financial institutions, subsidiary companies established by bankers like SBI, Canara Bank, Punjab National Bank, Bank of India, etc. Some firms are also organized by financial and technical consultants and professionals. Securities and Exchange Board of India has divided the merchant bankers into four categories based on their capital adequacy. Each category is authorized to perform certain functions. From the point of organizational setup Indias merchant banking organizations can be categorized into four groups on the basis of their linkage with parent activity. They are: (A) Institutional Base Where merchant banks function as an independent wing or as subsidiary of various private/Central Governments/State Governments financial institutions. Most of the financial institutions in India are in public sector and therefore such setup plays a role on the lines of government priorities and policies. (B) Banker Base These merchant bankers function as division/subsidiary of banking

organization. The parent banks are either nationalized commercial bank or the foreign banks operating in India. These organizations have brought professionalism in merchant banking sector and they help their parent organization to make a presence in capital market. (C) Broker Base In the recent past there has been an inflow of qualified and professionally skilled brokers in various stock exchanges of India. These brokers undertake

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merchant banking related operations also like providing investment and portfolio management services. (D) Private Base These merchant banking firms are originated in private sector. These organizations are the outcome of opportunities and scope in merchant banking business and they are providing skill-oriented specialized services to their clients. Some foreign merchant bankers are also entering either independently or through some collaboration with their Indian counterparts. Private sector merchant banking firms have come up either as the sole proprietorship or public limited companies. Many of these firms were in existence for quite some times before they added a new activity in the form of merchant banking services by opening new divisions on the lines of commercial banks and All India Financial Institutions.

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Qualities 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 banks operations, the qualities which merchant bankers should have are discussed below:1. Leadership Merchant banker should posses all relevant skills, updated

knowledge to interact with the clients and effectively communicate. Leadership is synonymous with followers who follow the one who leads.
2. Aggressive action Aggressiveness is a personality trait of a good leader

but in merchant banking it has a wider connotation. Aggressive merchant bankers are always looking for new business. Once a business opportunity has been located, the merchant banker has got to obtain the mandate for the merchant banking assignment from the clients at once which will depend upon his own communication skills, persuasiveness and the background of the organization to which he belongs. A good merchant banker is one who does not allow his client to think anything outside except what has been advised. Therefore, promptness in grasping the clients problems and providing better choice amongst alternative solutions evidence aggressive approach in the profession to hold the clients interest in entirety for the present as well as the future.
3. Co-operation and friendliness No doubt, 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

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to the clients. Business of an honest merchant banker spreads with geometrical propagation when he shares the thoughts of his clients with sympathetic gestures and offers pragmatic suggestions without greed or favors. Very often, rude, intemperate and indifferent disposition or blunt out burst withdraw fortunate business opportunities forever. These are the vices unbecoming of a merchant banker and should be eschewed. Friendliness and cooperation must flow as natural traits in the merchant banker to win over the trust of the clients like a doctor or lawyer who retain their clients permanently.
4. Contacts Success of a 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 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. Merchant banker should widen contacts and references and continue to maintain them in goodness, honour and humour by meeting people in person, through writing and in special gatherings.
5. Attitude towards problem solving The most important personality

trait of a merchant banker is his attitude towards problem solving. Positive approach to understand the view point of others, their difficulties

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and their adverse circumstances is possible only when a person is skilled in human relations particularly the inter-personal and intra-personal behavior. Effective communication and proper feedback are the prerequisites for creating a positive attitude towards problem solving which could be gains partly through learning process and partly as an in-born quality. This trait is a subject matter of personality development but is so important that it must be treated as a separate objective quality of a good merchant banker.
6. Inquisitiveness for acquiring new skills, information and knowledge

Merchant bankers live on the 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 posses the quality of inquisitiveness. The above qualities of a merchant banker are only illustrative. All good qualities in merchant bankers are difficult to be defined so elaborately. Nevertheless, merchant banker should possess super business acumen, managerial abilities, administrative capacities and salesmanship so as to understand the problems of trade and industry, devise ways and means to sort out and resolve those problems and sell the service product to the needy clients.

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Responsibility of Merchant Banker

1. To the Investors Investor protection is fundamental to a healthy growth of the Capital Market. 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. 2. 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 investors preference. 3. 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 institution, the Merchant Bank undertakes a detailed evaluation of the project before taking up an assignment for issue management.

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4. Legal aspect The factors that are looked into in case of the legal aspects are: a) Compliance with the SEBI guidelines and the various guidelines issued by the Ministry of Finance and Department of Company Affairs. b) Pending litigations towards tax liabilities or any criminal/civil prosecution any of the directors for any offenses. c) Fair and adequate disclosures in the prospectus. 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, FIIs and NRIs. 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.

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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. Merchant banks are rendering diverse services and functions, which are as follows:1. Issue Management 2. Corporate Advisory Services Relating To Issue 3. Underwritings 4. Dealing In Mergers & Acquisition Activity 5. Project counseling 6. Loan Syndication 7. Restructuring services 8. Capital assistance 9. Corporate advisory Services 10.Factoring service 11.Asset Securitization 12.Forex Services 13.Hire-Purchase Service 14.Lease Finance Companies

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15.Venture capital

Service rendered by merchant banker in details

1. 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. They usually render the following services: a. Drafting of prospectus and getting it approves from the stock exchanges. b. Obtaining consent/acknowledgement from SEBI. c. Appointing bankers, underwriters, brokers, advertisers, printers etc. d. Obtaining the consent of all the agencies involved in the public issue. e. Holding road shows, to sell the issue. These shows are held for the analysts, brokers & institutional investors. The purpose of these

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shows is to answer queries from these people about the company and the project for which the funds are being raised. f. Deciding the pattern of advertising. g. Deciding the branches where application money should be collected. h. Deciding the dates of opening and closing of the issue. i. Obtaining the daily report of application money collected at various branches. j. Obtaining subscription to the issue. k. After the close of the issue, obtaining consent of stock exchange for deciding basis of allotment etc. 2. 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 companys 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 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.

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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: We have seen that many unscrupulous promoters have raised money from the market. This has hurt the investors a lot and has also made investors nervous about stock market investments. This in turn affects the functioning of stock markets both the primary and the secondary markets. It is therefore

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necessary that merchant bankers are satisfied with the viability of the project, which they can then sell to the investors with confidence. It is therefore important for the reputation of merchant bankers, to only associate themselves with good issues. 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, dont have access to the market. 3. 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.

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Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription for the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter takes, he is paid commission. New companies entering the markets for the first time, always face number of problems in raising funds from the market. One of the biggest problems of course that the company is not well known to the investors and many of them will be unwilling to invest their money in such ventures. Many a times even existing companies may find it difficult to raise money, due to some reasons. Issuing companies therefore approach different underwriters with a request to underwrite the issue. 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 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. 4. Dealing in MERGERS AND ACQUISITIONS Activity 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

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larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, 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. 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.

5. PROJECT COUNSELLING

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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: a. Preparation of project report b. Deciding upon the financing pattern to finance the cost of the project. c. Aspects of project appraisal with financial institutions/banks. Project report 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

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Project report about the proposed activity is prepared to obtain government approvals particularly in the following areas: a. Grant of industrial license to undertake specified industrial activity. b. Foreign investment and technology tie-up. c. Grant import license for importing raw material, plant, machinery and equipments. d. Grant of foreign exchange allocation for import of capital goods or raw materials, etc. e. Grant of subsidies and other concessions from the government at center or state levels or from government sponsored agencies, etc. 6. 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. 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.

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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. ii. iii. i. ii. iii. State Financial Corporations (SFCs) State Industrial Development Corporations (SIDCs) State Industrial & Investment Corporations (SIICs) Life Insurance Corporation of India (LIC) Unit Trust of India (UTI) General Insurance Corporation of India (GIC) & its subsidiary companies.
4. Commercial banks: Commercial banks join in consortium loan being

3. All India level investment institutions

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. 7. 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.

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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.

8. 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 undesirable actions. In the shortrun, 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. He also knows how to substitute one type of capital for another, sometimes utilizing internal sources from asset repositioning or cash creation from improvements in working capital. He understands fully the risk versus return elements necessary to complete the capital procurement process.

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9. 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.

10. 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 clients 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: (a) Financing

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(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

11. 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: a) Originating Institutions/Firm b) Special Purpose Vehicle (SPV) c) Merchant Banker (MB) 12.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

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by the fund 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. Corporate therefore employ well-trained professionals to manage treasury and forex functions so that they can ensure competent management. Thus, this service is provided to Corporate through merchant bankers. Merchant bankers assess various markets to advice Corporate 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. 13.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.

33 Merchant Banking

Role of Merchant Banker

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.

14.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

15.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. Professionally managed venture capital firms generally are private partnerships or closely held

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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

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.

35 Merchant Banking

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 Investors 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 SEBIs 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.

36 Merchant Banking

In recent past, the small investor has turned his back on the primary capital market. Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and reinforce his faith. He has lost all hopes of appreciation of his investment. And this when all these years millions have though capital market, ate capital market and dreamt capital market. It needed an extraordinary effort and skill the drive the small investor away! High premiums, false premiums and gray market operations. The professed protector of his interests first laid down the dictum of proportionate allotment, then of minimum subscription, all working against his interests. This would make an observant student of the stock market infer that there is some game plan afoot to dethrone the small investor from his prominent; he was believed to be the king. With the coming to SEBI, an organization that was ostensibly brought into existence to guard the interest of the small investor, hopes ran high that the small investor would now have a safe playing field. But these hopes were soon belied. Far from guarding the interests of the investing public, SEBI embarked on a course of action, which has positively hurt them. The latest fiat of EBI bans corporate advertising after the receipt of acknowledgement card by a company wanting to go public. SEBIs this action has caused the closure of an information window. Now 50 million potential investors are deprived of official and authentic information given by the Issuer. It is hard to understand reasons for this drastic and totally uncalled for action. While there has been no official explanation for this fiat, there is reason to believe that it may be based on a wrong perception of the role for corporate advertising. All this has been done perhaps because the corporate and intermediaries is to follow the practices of Western capital markets here, oblivious of the fact that our capital markets are altogether different in structure, in systems and in the number of participants Freedom of commercial expression could be exploited

37 Merchant Banking

by some to serve their own ends, just a s freedom of speech and expression could be abused but this has not led our Government to put arbitrary restrictions on our freedom. Merchant Bankers have reason to believe they will be handicapped without the marketing support. But the worst sufferer would be the investor, especially the small investor it is this class, which forms the backbone of the capital market. As a result of the ban, the small investor would be deprived of the opportunity to study the corporate profile of the Issuer. by unreliable sources. The Indian primary capital market is basically a retail market. It consists of innumerable investors who take own individual investment decisions. Whatever, the system, it is this market that will bring in the funds. If these markets destabilized, the investors will look for alternative avenues to invest their funds. SEBI in its one of the first documents on SEBI and Investor Protection, Development and Regulation of Securities Market clearly specifies significance of regulating capital market and its future plans for fulfilling the twin objectives viz., Development of capital market and investor protection are explained in introductory paragraphs. It speak out that, The decade of the 1980 witnessed a phenomenal growth and development of the securities market, demonstrated its potential not only to mobilize the savings of the household sector but also to allocate it with some degree of efficiency for industrial development. The dilution of the holdings of the multinational companies at affordable prices in the latter part of the 1970s had generated considerable interest, which was, carries well into the next decade. Several companies came in the early part of the 1980s and successfully raised large resources from the market especially through debt instruments, which further sustained investor In the absence of adequate information, they will have to depend on manipulated facts and information fed

38 Merchant Banking

interest. There were several changes in Government policy, which significantly influenced industry and aided the market. India was then entering the phase of liberalization and decontrol which was to accelerate and gather momentum in the 1980s. By the end of the decade, the securities market in India came to be firmly integrated with the financial system of the country. With the corporate sector increasingly relying on the securities market for meeting their long-term requirement of funds, the securities market their long-term requirement of funds; the securities market competed on equal terms with the Development Financial Institutions, which were the traditional purveyors of long-term capital. The emergence of the securities markets into the main stream of the financial system of the country was thus one of the major economic processes of the 1980s an inevitable outcome of the maturing process of the financial system. They brought about notable changes in the capital structure of the companies across industries, gave birth to new intermediaries and institutions in the securities market and created a new awareness and interest in investment opportunities in the securities market among investor. In spite market, its quality lagged far behind and there was absence of adequate professionalism and fair competition among the various players in the market. Besides, the regulatory framework then prevailing was fragmented difficult, if not effective.

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Merchant Banks And Commercial Banks -:

There are differences in approach, attitude and areas of operations

between Commercial banks and merchant banks. The differences between merchant Banks and commercial banks are summarized below.

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No 1

Commercial banks Merchant banking Commercial banks basically deal in The area of activity of merchant debt around related credit finance and their bankers is equity and related activities are appropriately arrayed finance. they deal with mainly funds proposals, credit raised through money market and bankers They are are appraisal and loan sanctions. capital market. Commercial banks are asset oriented The merchant and their lending decisions are based management proposal and the value of security offered against loans. They generally avoid risk. Commercial financiers.

oriented.

on detailed credit analysis of loan willing to accept risks of business.

bankers

are

merely Merchant bankers include project counseling, corporate counseling in areas of capital restructuring amalgamations, mergers, takeover etc.discountin and rediscounting of short-term paper in money markets, managing underwriting and supporting public issues in new issue market and acting as brokers and advisers on portfolio management in stock exchange.

SURVEY FORM
The word survey means to verify. This is the form issued by me to know the view of general public in India. Q.1) Do you know what merchant banking is?

No

Yes

Cant say

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Q.2) Do you know any of the services rendered by merchant banker?

No

Yes

Cant say

Q.3) Do you know who are the players in merchant banking?

No

Yes

Cant say

Q.4) Merchant Bankers provides services to?

Corporates

Individuals

Q.5) who controls the working of merchant banking?

RBI

SEBI

IRDA

Q.6) SBICAP is related to which of the following bank?

SBI
Name: Occupation: Signature:

ICICI

Cant say

Project Guide: Place: Mumbai

Survey Report

42 Merchant Banking East

Can't say 10% 10%

30% Yes 30%

60 No 60%

General Comment/opinion: The above Pie Diagram depicts the result of a survey which was conducted by me among 100 people from the age group of 20 to 50 years comprising of students, business professionals and people from corporate sector. The diagram is derived from the three question of the survey form: 1. Do you know what merchant banking is? 2. Do you know any of the services rendered by merchant banker? 3. Do you know who the players in merchant banking are? Thus, the result was clear that most of the people are unaware about the concept of merchant banking which was not very surprising for me. Statistically 60% of the people in the overall survey dont know anything about merchant banking. Only 30% of the people who know about this concept where the people from the corporate sector. Thus I can conclude from my survey that most of the people dont know anything about merchant banking and should be made aware of.

Suggestion On The Project & Self Evolution

1.1 Self Evolution

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Form the above survey report, my personal view is that in India the people are not awareing about the merchant banking service. The only 30% of people know about these services, and that includes the people or person like companies owner, chairperson, director, industrialist etc. But the general public and small business man or un-educated people are not awaring about this service. From the above survey report, I come to know the two things which affecting to India to become a developed country they are as follow-: 16.Education
17. Awareness

From the above my personal view is that the banks should improve their marketing skills for the merchant banking services. So general public also can use this service and enjoy their life.

1.2 Suggestion on the Project

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From the above project my personal suggestion are as follows-: The bank should improve their marketing skills. They have to attract their regular customers by providing these services. They have to launch new products & schemes to attract the customer.

The bank should provide good facilities to their employees & fulfil their needs.

The banks have improved their network connection with customers by providing different-different services.

The banks have to improve their network connection not only in India but also with outsider countries in the world.

The banks have to provide better NRIs services to NRIs people.

Visit to Bank

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Bank visited: ICICI Bank Limited Date- 27th Sep, 2011 Person Interviewed: Anand.Gunediwal (Branch Manager) Bhayandar (w) Question asked: 1. What is merchant banking? Ans. Merchant banking is a part of banking services provided to corporate sector. 2. What is the need for merchant banking in India? Ans. Business world in India is growing day-by-day .So merchant banking services are highly required by them. 3. What is the importance of merchant banking? Ans. People enjoy those services which are not provided to them by commercial banks. 4. Do SBI undertake merchant banking services? Ans. SBI is the first bank to take up merchant banking services in 1986.SBI has won the Best Merchant Banker Award 2004by outlook money.
5. What Which activities does your bank undertakes?

Ans. Loans, deposits, credit-debit card, ATMs etc. 6. What are the services provided? And why your service is better than the other banks? Ans. Our service is best because our bank is providing 24 hours services and we have better network connection according to areas in all over world.

CONCLUSION

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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 what the services for which he is being approached are. 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 an 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:

Manual of Merchant Banking J. C. Verma (3rd & 4th Edition).

Merchant Banking Principles & Practices- H.R.MACHIRAJU SEBI Manual for Merchant Bankers Websites:

www.google.com http://en.wikipedia.org/wiki/Merchant_bank

www.economictimes.com

www.sbicaps.com