What Is Merchant Banking?

Merchant banks invest their own capital in client companies and provide fee-based advice services for mergers and acquisitions, among other services they provide. Merchant banking practices take care of the needs of commercial international finance, stock underwriting, and long-term company loans. This type of bank primarily works with other merchant banks and financial institutions with its prominent role being that of stock underwriting, and the bank works in the realm of private equity where securities of a company are not available for public trading. Of the most common private equity investment strategies, these include venture capital, leveraged buyouts, distressed investments, growth capital, and mezzanine capital. Leveraged buyouts generally obtain majority control over existing or mature firms, whereas growth capital and venture gains invest in younger or emerging corporations without obtaining the majority of control. Merchant banking began practice during the Middle Ages in Italy and was introduced by grain merchants, making them the original banks. In todays world, merchant banking involves many activities to include credit syndication, portfolio management, mergers and acquisitions counseling, and acceptance credit, etc. Todays merchant banks do not have the same characteristics of their predecessors. Although historically merchant banks, as distinguished from commercial banks which deal with the general public, have been concerned with import and export trade, they have recently expanded their activities by raising finance, at home and abroad, for industry including high risk hire purchase financing. These banks also float new debentures and shares on behalf of companies, or underwrite them. They are increasingly involved in takeover bids and mergers, often tendering specialized advice to the bidders.

Definition A merchant bank is a defined as a financial institution or an organization that underwrites corporate securities and advice such clients on issue like corporate mergers etc involved in the ownership of commercial venture, etc. this organization may be bank corporate body, a firm or a priority concern Merchant banking in India started with management of public issues and loan syndication and has been slowly and gradually covering activities like project counseling, portfolio management and mergers and amalgamation of corporate firm. A merchant banker has been defined under the securities and exchange board of India [merchant banker] rules,1992 as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. History of Merchant Banking
The history of merchant bank can be dated back to 17 th & 18th centuries when it first started in Italy & France. This was started by the Italian grain merchants. It comprised of merchant bankers who intermediated or assisted in financing the transactions of other traders and their own trade too. With the passage of time the practices in evolved and the merchant banking in the modern era started from London where the merchants started to finance the foreign trade through acceptance of bill. Later they extended their services to the governments of under developed countries to raise the long term funds through the floatation of bonds in the London money market. Over the period they extended their services to loan syndication, underwriting the issues, portfolio management etc. The post war period witnessed huge increase in the merchant banking activities.

Merchant Banking in India

Merchant banking activity was officially commenced into the Indian capital Markets when Grindlays bank received the license from reserve bank in 1967. Grindlays started its operations with management of capital issues, recognized the requirements of upcoming class of Entrepreneurs for diverse financial services ranging from production planning and system design to market research. Apart from this it also provides management consulting services to meet the Requirements of small and medium sector rather than large sector. Citibank Setup its merchant banking division in Indian in 1970. Indian banks Started banking Services from 1972. State bank of India started the merchant banking division in 1972 After that there were many banks which set up the merchant bank division such as; ICICI Bank of India

 Bank of Baroda Canara Bank Punjab National Bank UCO Bank The Merchant Bank got more importance in the year 1983 when there was a huge boom in the primary market where the companies were going for new issue. Merchant banking activities are organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiary companies, share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited Companies. Some merchant banking companies have entered into collaboration with merchant bankers of foreign countries abroad with several branches.

Merchant Bankers in India

As of now there are 135 Merchant bankers who are registered with SEBI in India. It includes Public Sector, Private Sector and foreign players some of them are Public Sector Merchant Bankers SBI capital markets ltd Punjab national bank Bank of Maharashtra IFCI financial services ltd Karur Vysya bank ltd, State Bank of Bikaner and Jaipur 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 Yes Bank Ltd. 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 Deutsche Bank Deutsche Equities India Private Limited Barclays Bank Plc Citigroup Global Markets India Pvt. Ltd. DSP Merrill Lynch Ltd FEDEX Securities Ltd

Categories OF MERCHANT BANKER

In India, merchant banks operate in the form of Divisions of Indian and Foreign banks and financial institutions, subsidiary companies established by banks like SBI Capital Markets Ltd., can Bank Financial Services Ltd., PNB Capital Services Ltd., BOI Finance Ltd., Indian Bank Merchant Banking services Ltd., etc., the firm

organized by the stock brokers, stock exchange dealers, the financial and technical consultants and chartered accountants. Securities and Exchange Board of India (SEBI) has divided merchant bankers into four categories, which are as follows: -

categories Category 1

Activities To carry on the activity of issue management and to act as advisor ,consultant,manager,underwriter and portfolio manager.

Networth Rs. 1 crore

Category 2

To act as advisor,consultant,comanager,underwriter,portfolio manager.

Rs. 50lakhs

Category 3

To act as underwriter, advisor or consultant to an issue.

Rs. 20 lakhs

Category 4

To act only as advisor or consultant to an issue.

Nil

CATEGORIES ACTIVITIES NETWORTH

Category I Merchant

Bankers are classified into 4 categories as shown in the above table

having regard to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities. The minimum net worth and initial authorization fee depends on the category. The first category consists of merchant bankers who carry on any activity of issue management, determining financial structure, tie-up of financiers, advisor or consultant to an issue, portfolio manager and underwriter. The second category consists of those authorized to act in the capacity of co-manager/advisor, consultant, and underwriter to an issue or portfolio manager. The third category consists of those authorized to act as

underwriter, advisor or consultant to an issue. The fourth category consists of merchant bankers who act as advisor or consultant to an issue.
To carry on

Merchant Bank Vs Commercial Bank

Commercial banks are catering to the needs of the common man whereas the merchant banks cater to the needs of corporate firms. Any person can open a bank account in the commercial bank whereas it cannot be done in the merchant bank. Merchant bank deals with equities whereas the commercial bank deals with debt related finance which includes the activities like credit proposals, loan sanctions etc. The merchant bank is exposed to the market so it is more exposed to risk as compared to commercial banks. Merchant bank is related to the primary market whereas the commercial markets are more into secondary markets. Merchant banking activities are capital restructuring, underwriting, portfolio management etc whereas the commercial banks play the role of financers. The activities of merchant banks have a direct impact on the growth and liquidity of money markets. Merchant Bank is management oriented whereas the commercial banks are asset oriented The commercial banks generally avoid risks and on the other hand the merchant banks are willing to take the risks.

Services Provided by Merchant Banks

Below mentioned are the major services offered by Merchant Bankers; Project Counseling Management of debt and equity offerings Issue Management Managers, Consultants or Advisers to the Issue Underwriting of Public Issue Portfolio Management Restructuring strategies Off Shore Finance Non-resident Investment Loan Syndication Corporate Counseling and advisory services Placement and distribution Project Counseling Project counseling comprises preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions and banks. It also includes filling up of application forms with significant information for obtaining funds from financial institutions and obtaining government approval.

Management of Debt and Equity offerings This is the major function of the merchant banker. They assist the companies in raise funds from the market. The main areas of work in this regard include;

Instrument designing

Pricing the issue Registration of the offer document Underwriting support Marketing of the issue Allotment and refund Listing on stock exchanges. Issue Management Management of issue involves marketing of corporate securities like equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as an intermediary to transfer capital from those who own it to those who need it. After taking action as per SEBI guidelines, the merchant banker organizes a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issue, registration of prospectus, launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions. Pricing of issues is done by the companies in consultant with the merchant bankers. Managers, Consultants or Advisers to the Issue The managers to the issue assist in the drafting of prospectus, application forms and completion of formalities under the Companies Act, appointment of Registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies can appoint one or more agencies as managers to the issue. Underwriting of Public Issue Underwriting is a guarantee given by the underwriter that in the occurrence of under subscription, the amount underwritten would be subscribed by him. Banks/Merchant banking institutions cannot underwrite more than 15% of any issue. Portfolio Management Portfolio indicates investment in different types of securities such as shares, debentures or bonds issued by different companies. Portfolio management means maintaining proper combinations of securities in a mode that they give maximum return with minimum risk. Restructuring strategies A merger is a blending of two companies into a single company where one survives and other loses its corporate existence. A takeover is the purchase by one company obtaining controlling interest in the share capital of another existing company. Merchant bankers act as the middlemen in setting negotiation between the two companies. Merchant bankers assist the management of the client company to successfully restructure various activities such as mergers and acquisitions, divestitures, management buyouts, joint venture among others.

Registration with SEBI as Merchant Banker FAQ Q. Is it mandatory for a merchant banker to register with the SEBI?

A. Yes. Without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as a merchant banker. Q. Who is eligible to obtain registration as a merchant banker? A. Only a body corporate other than a non-banking financial company shall be eligible to get registration as merchant banker. Q. What are the various categories for which registration can be obtained? A. The categories for which registration may be granted are given below: Category I to carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager. Category III - to act as underwriter, adviser or consultant to an issue Category IV to act only as adviser or consultant to an issue Q. What is the capital requirement for carrying on activity as merchant banker? A. The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker is given below: Category I Rs. 5 crores Category II Rs, 50 lakhs Category III Rs. 20 lakhs Category IV Nil

Q. What is the procedure for getting registration? A. An application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the application and on being satisfied issue a certificate of registration in Form B of the SEBI (Merchant Bankers) Regulations, 1992. Q. What is the registration fee payable to SEBI? A. Rs. 5 lakhs which should be paid within 15 days of date of receipt of intimation regarding grant of certificate.

Q. What is the validity period of certificate of registration? A . Three years from the date of issue. Q. How to renew the certificate? A. Three months before the expiry period, an application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the application and on being satisfied renew certificate of registration for a further period of 3 years. Q. What is the renewal fee payable to SEBI? A. Rs. 2.5 lakhs which should be paid within 15 days of date of receipt of intimation regarding renewal of certificate. Q. What is the consequence of non-registration or failure to renew registration? A. The person whose registration is not current shall not carry on the activity as merchant banker from the date of expiry of validity period.