Merchant Banking and

Financial Services
The first merchant bank was set up in 1969 by Grind
lays Bank.

Initially they were issue mangers looking after the issue
of shares and raising capital for the company.


But subsequently they expanded their activities such as

Working capital management;
Syndication of project finance,
Global loans,
Mergers,
Capital restructuring, etc.,



Initially the merchant banker in India was in the form of
management of public issue and providing financial
consultancy for foreign banks.

In 1973, SBI started the merchant banking and it was
followed by ICICI.

SBI capital market was set up in August 1986 as a full
fledged merchant banker. Between 1974 and 1985, the
merchant banker has promoted lot of companies.
However they were brought under the control of SEBI in
1992.
Merchant Bank - Introduction


A merchant bank is a financial institution that
engages in underwriting and business loans, catering
primarily to the needs of large enterprises and high net
worth individuals.

In the British market, the term merchant bank refers to
an investment bank.

Merchant Bank

An organisation that acts as an intermediary
between the issuers and the ultimate purchasers of
securities in the primary security market .

A Merchant Banking is an institution that helps the
companies to raise capital. It is an organization that
underwrites corporate securities, provide advisory
services to its clients.

It is an organization that underwrites corporate
securities and advices its clients on issues like
corporate mergers, etc involved in ownership of
commercial ventures.




Merchant Banker Definition SEBI

According to Securities and Exchange Board of
India (Merchant Banker) rules, 1992,

A merchant banker has been defined as
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, adviser or rendering corporate
advisory services in relation to such issue
management

Functions of Merchant Banking

Corporate Counselling Services

Project Counselling Services

Pre Investment Studies
Capital Restructuring services
Credit Syndication Services
Issue Management and underwriting services
Portfolio Management Services
Working Capital Financing Services
Acceptance Credit and Bill Discounting Services
Mergers and Acquisitions services
Venture Financing Services
Lease Financing Services
Project Appraisal Services
Foreign Currency Financing Services
Relief to sick companies
Services contd.
Corporate Counseling:

Set of activities undertaken for efficient running of an
enterprise.
Identifying areas of growth & diversification.
Guiding clients on aspects like locational factors,
organizational size, investment decision, choice of product.

Contd.
Project counseling:

Its a part of corporate counseling & deals with analysis of
project viability .

Comprises of preparation of project report & deciding finance
pattern for cost of project.

Filling up of application form with significant information for
obtaining funds.


Services contd.
Working Capital Finance:

Meeting the day-to-day expenses of an enterprise is working
capital finance.

Assessment of working capital requirements.

Preparing necessary application to negotiation for sanction of
appropriate credit facilities.
Portfolio Management.
Making decisions for the investment of cash resources of a
corporate enterprise in marketable securities.

Decides quantum, timing & type of security to be bought.

Help in achieving maximum return with minimum risk by
proper combination of securities.
Restructuring Strategies.
Deals with Mergers & Acquisitions.
Its a specialized service of Merchant bankers wherein they act
as middle-men in negotiating between two companies.
Offers expert evaluation regarding identification organizations
with matching characteristics.
Obtaining approvals from various authorities.
Services contd.
Credit Syndication:

Relates to activities connected with credit procurement &
project financing.
Estimates total cost of the project
Drawing up of financial plan which conforms requirements
of promoters & their collaborators.
Selecting institutions for participation for financing.

Lease Financing.

Its an important alternative source of financing a capital
outlay.
Involves letting out assets on lease for use by the lessee for a
particular period of time.
Providing advice on viability of leasing & choice of favorable
rental structure.
Other Services:
Relief to Sick Industries:

Rejuvenating old lines & ailing units by appraising
technology, process etc.

Evolving rehabilitation packages acceptable to financial
institutions/banks.

Exploring possibilities of mergers & acquisitions.


Other Services contd.
Mutual Funds:

Its collective investment scheme that pools money from
several investors & channels them into productive investments.
Investing money in diversified portfolio of shares &
debentures.
Assuring Investors return in terms of capital appreciation.
Difference b/w Commercial & Merchant banks
Commercial Banking
Catering needs of common man.
Anyone can open an A/c.
Less exposed to risk.
Related to secondary markets.
Plays the role of financers.
Merchant Banking
Catering needs of corporate
firms.
It cannot be done.
More exposed to risk.
Related to Primary markets.
Plays different roles like
underwriting, portfolio etc.
Merchant Banking
Advantages:
Merchant banks perform functions that
cannot be carried out by businesses on
their own.
Merchant banks have access to
traders, financial institutions, and
markets that companies or individuals
could not possibly reach.
By using their skills and contacts,
merchant banks can get the best
possible deals for their clients.

Disadvantages:
Merchant banks are really only for
large corporate customers, or
extremely wealthy smaller
businesses owned by individual
clients.
Not all deals carried out by
merchant banks meet with
unqualified success.
There is always risk attached to the
kinds of deal that merchant banks
undertake.

Merchant Banking
Advantages:
Merchant banks perform functions that
cannot be carried out by businesses on
their own.
Merchant banks have access to
traders, financial institutions, and
markets that companies or individuals
could not possibly reach.
By using their skills and contacts,
merchant banks can get the best
possible deals for their clients.

Disadvantages:
Merchant banks are really only for
large corporate customers, or
extremely wealthy smaller
businesses owned by individual
clients.
Not all deals carried out by
merchant banks meet with
unqualified success.
There is always risk attached to the
kinds of deal that merchant banks
undertake.

Institutes offering Merchant Banking
Public Sector
SBI capital markets ltd
Punjab national bank
Bank of Maharashtra
Karur Vysya bank ltd
State Bank of Bikaner and
Jaipur.
IFCI financial services ltd.
Private Sector
ICICI Securities Ltd
Axis Bank Ltd
Bajaj Capital Ltd
Reliance Securities Limited
Kotak Mahindra Capital
Company Ltd
Yes Bank Ltd
Key Foreign Players
Goldman Sachs (India) Securities Pvt. Ltd.
Morgan Stanley India Company Pvt. Ltd.
Barclays Securities (India) Pvt. Ltd.
Bank Of America
Citigroup Global Markets India Pvt. Ltd.
DSP Merrill Lynch Ltd.
INDIAN FINANCIAL SYSTEM
Meaning
A system that aims at establishing and providing a
regular, efficient and cost effective linkage between
depositors and investors is known as Financial System.


Seekers of Funds
(mainly business
firm and
government)
Suppliers of funds
(mainly
households)
Flow of funds(Saving)
Flow of financial
Services
Features of Financial System

It provide linkage between depositors and investors.
It facilitate expansion of financial market
It promotes efficient allocation of financial resources
It influences both quality and the pace of economic
development.
An overview of Indian Financial System:


Financial Financial Financial Financial
Markets Institution Instruments Services

Financial Markets:
It is a place where financial assets are created or
transferred.
(i)Money Market
(ii) Capital Market
(iii) Government Securities Market
(iv) Foreign Exchange Market.
(i)Money Market:
The money market is a wholesale debt market
for low-risk, highly-liquid, short-term instrument.
I t consists of following sub-markets:
1. Call money market
2. Bill market.
3. Short-term government securities.
4. Collateral loan market.
(ii)Capital Market:
=> The capital market is designed to finance the long-
term investments.
=> The capital market deals with new issue and
transfer of existing securities.


Capital Market in
India
Government
security (Gill-
edged market)
Industrial
security
market
New issues market
and
Old issue market
Development
financial
Institution
IFCI
ICICI
SFCs
IDBI
IIBI
UTI
Financial
Intermediaries
Merchant banks
Mutual funds
Leasing companies
Venture capitalist

(iii) Government Securities Market
It is a market where government securities are
traded.
(iv) Foreign Exchange Market:
Purchase and sale of national currencies.
The Forex market deals with the multicurrency
requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is
applicable, the transfer of funds takes place in this
market. This is one of the most developed and
integrated market across the globe.


Most Traded Currencies
Financial Institution:
=> Institution that provide credit and credit
related services are called financial institution.
=> Financial institutions are the
intermediaries who facilitates smooth
functioning of the financial system by making
investors and borrowers meet. They mobilize
savings of the surplus units and allocate them in
productive activities promising a better rate of return.
Functions:
=> Collecting deposits and lending loan to trade.
Examples: NABARD, EXIM bank, IDBI, etc.,


Scheduled
bank
Commercial
bank
Public sector
(27)
Nationalized
banks (19)
State bank of
India & its
associates (8)
Private sector
(30)
Foreign
banks (40)
Regional
Rural banks
(196)
Co-operative
bank

Characteristics of Financial Institutions

1. Saving Mobilized
2. Participants
3. Dealers
4. Generators
5. Regulation
6. Types
7. Special institutions

Financial Services:
=> It is concerned with the design and delivery
of advice and financial products to individual and
businesses.
=> This service is regulated by SEBI, RBI,
Government of India. It comprise of various functions
and services that provide by the financial institutions in
a financial system.
Services are:
Leasing, Hire Purchasing, Factoring, Forfeiting,
Mutual Fund, Bill discounting, Credit cards,
underwriting, Brokerage, Portfolio Management,
Housing Finance, etc.,

Financial Instrument:
Financial instrument in the Indian financial system
may be categorized into
(i)Money market instrument:
=> Treasury Bill
=> Bill of Exchange.
=> Commercial paper
=> Certificate of deposits
(ii) Capital market instrument:
=> Equity shares
=> Preference Shares.
=> Different type of debentures.

Legal and Regulatory
Framework of Merchant
Bankers
Number of regulative measures are brought by the
SEBI for the efficient functioning of the merchant
bankers in India.

Objective:

To have regulated markets and pave way for the
development of capital market in India.

The measures were introduced by the SEBI in
the year 1992 and the measures were revised by
SEBI in 1997.
SEBI has brought a number of regulative measures for the
purpose of disciplinary functions of merchant banks.

SEBI Regulations:

1. Application for Grant for Certificates
2. Conformance to requirements
3. Furnishing of information
4. Granting licence considerations
5. Capital adequacy requirements
6. Procedure for registration
7. Renewal of certificate
8. Procedure where registration is not granted
9. Effect of refusal to grant certificate
10.Payment of fees


SEBI Regulations on merchant bankers

With effect from 9th December, 1997, an application can
be made only for carrying on the activities mentioned in
category I.
Category I To carry on any activity of the issue management
includes preparation of prospectus, determining
financial structure, tie-up for franchisers, final
allotment, refund of the subscription and to act as
adviser, consultant, manager, underwriter, portfolio
manager etc.
Category II To act as adviser, consultant, co-manager, underwriter,
portfolio manager
Category III To act as underwriter, adviser, consultant to an issue.
Category IV To act only as adviser or consultant to an issue
I. Registration of Merchant Bankers
A. Application for Grant of Certificate
An application by a person for grant of a certificate shall be made to the
Board in Form A. The application shall be made for any one of the following
categories :



With effect from 9th December, 1997, an application can be made only for
carrying on the activities mentioned in category I.
An applicant carry on the activity as
UNDERWRITER only if he obtain separate
certificate of registration under provisions of SEBI
(Underwriters) Regulations 1993, and

As a PORTFOLIO MANAGER obtains separate
certificate under the provisions of SEBI (Portfolio
Manager, Regulations, 1993
B. Conformance to Requirements:
Subject to the provisions of the regulations, any application,
which not complete in all respects and does not conform to the
instructions specified in the form, shall be rejected.
C. Furnishing of Information:
The Board may require the applicant to furnish further
information or clarification regarding matter relevant to the
activity of a merchant banker for the purpose of disposal of the
application.
D. Consideration of Application:
The Board shall take into account for considering the grant of a
certificate , applicant complies with the following requirements:
That the applicant shall be a body corporate
That the applicant has the necessary infrastructure
Employment minimum of two persons who have the experience
to conduct the business of the merchant banker


That the applicant fulfils the capital adequacy requirement as
specified

That the applicant, his partner, director or principal officer is not
involved in any litigation connected with the securities market .

That the applicant, his partner, director or principal officer has not at
any time been convicted for any offence

That the applicant has the professional qualification

That the applicant is a fit and proper person

That the grant of certificate to the applicant is in the interest of
investors.

E. Capital Adequacy Requirement

According to the regulations, the capital requirement shall not be
less than the net worth of the person making the application for
grant of registration. The net worth are as follows









Category Minimum Amount
Category I
Rs.5,00,00,000
Category II
Rs.50,00,000
Category III
Rs.20,00,000
Category IV
Nil

F. Procedure for Registration:
The Board on being satisfied that the applicant is eligible shall
grant a certificate in Form B. On the grant of a certificate the
applicant shall be liable to pay the fees in accordance with
Schedule II.

G. Renewal of Certificate:
Three months before expiry of the period of certificate, the
merchant banker, may if he so desired, make an application for
renewal in Form A. The application for renewal shall be dealt
with in the same manner as if it were a fresh application for grant
of a certificate.
.

H. Procedure where Registration is not Granted
Where an application for grant of a certificate under
regulation 3 or of renewal under regulation 9, does not satisfy
the criteria set out in regulation 6, the board may reject the
application after giving an opportunity of being heard.

The refusal to grant registration shall be communicated
by the Board within thirty days of such refusal to the applicant
stating therein the grounds on which the application has been
rejected.

Any applicant may, apply within a period of thirty days
from the date of receipt of such intimation to the Board for
reconsideration for its decision.

I. Effect of Refusal to Grant Certificate:
Any merchant banker whose application for a certificate
has been refused by the Board can cease to carry on any
activity as merchant banker.

J. Payment of Fees:

Every applicant eligible for grant of a certificate shall pay
such fees in such manner and within the period specified in
Schedule II. Where a merchant banker fails to any annual fees
as the Board may suspend the registration certificate .

SEBI Guidelines
Operational Guidelines
SEBI has pronounced the following guidelines for
merchant bankers
1. Submission of offer document :
The offer documents of issue size up to Rs. 20 crores
shall be filed by lead merchant bankers with the concerned
regional office of the Board under the jurisdiction of which the
registered office of the issuer company falls.
The lead merchant banker shall make available 10 copies
of the draft offer document to the Board and 25 copies to
the stock exchange(s) where the issue is proposed to be listed.
The lead merchant banker and the Stock Exchange(s)
may charge a reasonable charge for providing a copy of the
draft offer document.
The lead merchant banker shall also submit to the Board to
draft offer document on a computer floppy in the format
specified in Schedule XXIII. The Lead Merchant Banker shall
submit two copies of the printed copy of the final offer document to
dealing offices of the Board within three days of filing offer
document with Registrar of companies/concerned Stock
Exchange(s) as the case may be.
Wherever offer documents (for public/rights issues, takeovers
or for any other purpose) are filed with any Department/Office of the
Board, the following details certified as correct shall be given
by the lead merchant banker in the forwarding letters:
a. Registration number
b. Date of registration/Renewal of registration
c. Date of expiry of registration
d. If applied for renewal, date of application
e. Any communication from the Board prohibiting them from acting as
a merchant banker

f. Any inquiry/investigation being conducted by the Board
g. Period up to which registration/renewal fees has been paid
h. Whether any promoter/group and/or associate company of
the issuer company is associated with securities-related
business and registered with SEBI
i. If any one or more of these persons/entities are registered with
SEBI, their respective registration numbers
j. If registration has expired, reasons for non-renewal
k. Details of any enquiry/investigation conducted by SEBI at any
time
l. Penalty imposed by SEBI
m. Outstanding fees payable to SEBI by these entities, if any
2. Advance Dispatch of issue Offer Documents:
Lead merchant bankers shall ensure that whenever there is
a reservation for NRIs, 10 copies of the prospectus together with
1000 application forms are dispatched in advance of the issue
opening date, directly along with a letter addressed in person to
Adviser (NRI), Indian Investment Centre, Jeevan Vihar Building
Sansad Marg, New Delhi. Twenty copies of the prospectus and
application forms shall be dispatched in advance of the issue
opening date to the various Investors Associations.
3. Underwriting
While selecting underwriters and finalizing underwriting
arrangement, lead merchant bankers shall ensure that the
underwriters do not overexpose themselves so that it becomes
difficult to fulfill their underwriting commitments.

4. Compliance obligations
The merchant banker shall ensure compliance with the following
post-issue obligations

a. Involving public for finalization of allotment:
In case of over-subscription in public issues, a Board
nominated public representative shall be associated in the
process of finalization of the basis of allotment. Honorarium at a
minimum of Rs.500/- per day, plus normal conveyance charges
shall be paid to them.



b. High priority for Redressal of investor grievances
The merchant bankers shall assign high priority to
investor grievances, and take all preventive steps to
minimize the number of complaints. The lead merchant
banker shall set up a proper grievance monitoring and
redressal system in co-ordination with the issuers and the
Registrars to Issue.
c. Submission of post issue monitoring reports
The concerned lead merchant banker shall submit, in
duplicate, the Post Issue Monitoring Reports specified in Clause
7.2 of Chapter VII of these Guidelines, within 3 working days
from the due dates to the regional offices/head given in schedule
XXII.
d. Submission of No objection Certificate (NOC)
In accordance with the Listing Agreement of the Stock
Exchanges, the issuer companies shall deposit 1% of the amount
of securities offered to the public
These securities can be related by the concerned Stock
Exchange only after obtaining an NOC from the Board


e. Renewal of Registration of merchant bankers

Application for renewal of Certificate of Registration
shall be made by the merchant bankers according to
Regulation 9 of SEBI Rules and Regulations, 1992 in the form
A of the FORM A of the SEBI Merchant Bankers Rules and
Regulations.

While filing the renewal application for the certificate of
registration as merchant banker, it shall provide a statement
highlighting the changes that have taken place in the
information .


f. Reporting requirements
In terms of Regulation 28 of SEBI (Merchant Bankers
Regulation) 1992, the merchant bankers shall send a half
yearly report, in the format specified in Schedule XXVII,
relating to their merchant banking activities.
g. Impositions of penalty points
Penalty points may be imposed on the merchant
banker for violation of any of the provisions for operational
guidelines.
Guidelines on Advertisement
1. Factual and truthful
An issue advertisement shall be truthful, fair and clear,
and shall not contain any statement that is untrue or
misleading. Any advertisement reproducing, or purporting to
reproduce, any information contained in an offer document shall
reproduce such information in full and disclose all relevant facts
2. Clear and concise
An advertisement shall be set forth in a clear, concise and
understandable language. Extensive use of technical, legal
terminology or complex language and the inclusion of excessive
details, which may distract the investor, shall be avoided.
3. Promise or profits
An issue advertisement shall not contain statements
which promise or guarantee rapid increase in profits.
4. Mode of advertising
No models, celebrities, fictional characters,
landmarks, caricatures or the likes shall be displayed on or form
part of the offer documents or issue advertisements. Issue
advertisements shall not appear in the form of crawlers on
television.
5. Financial data
If any advertisement carries any financial data, it shall
also contain data for the past three years and shall include
particulars relating to sales, gross profit, not profit, share capital,
reserves, earnings per share, dividends, and book values.
6. Risk factors
All issue advertisements carried in the print media such as
newspapers, magazines, brochures or, pamphlets shall contain
highlights relating to any issue, besides containing detailed
information on the risk factors.
The print size of highlights and risk factors in issue
advertisements shall not be less than point 7 size.
7. Issue date
No corporate advertisement of issuer company shall be
issued after 21 days of filing of the offer document with the Board
until the closure of the issue, unless the risk factors which are
required to be mentioned in the offer document, are mentioned
in the advertisement.
8. Product advertisement
No product advertisement of the company shall
contain any reference, directly or indirectly, to the
performance of the company during the period.
9. Subscription
No advertisement shall be issued stating that the issue has
been fully subscribed or oversubscribed during the period the
issue is open for subscription
10. Issue closure
No announcement regarding closure of the issue shall be made
except on the closing date.
11. Shall contain no offer of Incentives
No incentives, apart from the permissible underwriting
commission and brokerage, shall be offered through advertisements to
anyone associated with marketing the issue.
12. Shall specify about Reservation
In case there is a reservation for NRIs, the issue advertisement
shall specify the same, and also indicate the place in India from where
the individual NRI applicant can procure application forms.
13. Undertaking from issuer company
An undertaking has to be obtained from the issuer as part of the
MOU between the lead merchant banker and the issue company to the
effect that the issuer company shall not directly or indirectly release
14. Availability of copies
Ensure the availability of copies of all issue related
materials with the lead merchant banker, at least until the
allotment is completed.
Following are the SEBI regulations on
Merchant Banking

1. Registration of Merchant Bankers
2. Responsibilities of Merchant Bankers
3. Procedure for Inspection
4. Procdure for Action in case default
5. Amendments to SEBI (Merchant Bankers)
Regulations 1992
Registration of Merchant Bankers

1. Categories of Merchant Bankers
2. Requirements for Granting of Certificate
3. Capital Adequacy requirements
4. Procedure for Registration
5. Renewal of Certificate


Guidelines on Advertisement
1. Factual and truthful
2. Clear and Concise
3. Promise or profits
4. Mode of advertising
5. Financial data
6. Risk factors
7. Issue data
8. Product advertisement
9. Subscription
10. Shall contain no offer of Incentives
11. Shall specify about Reservation
12. Undertaking of issuer company
13. Availability of Copies

Responsibilities of Merchant Bankers

1. Code of Conduct
2. Maintenance of Books of Accounts, Records etc
3. Submission of Half yearly results
4. Appointment of Lead Merchant Bankers
5. Restriction on Appointment of Lead Merchant Bankers
6. Responsibilities of Lead Merchant Bankers
7. Underwriting Obligations
8. Appointment of Compliance officers

Procedure for inspection

1. SEBIs Right to Inspect the books of accounts by
appointing one or persons
2. Notice before Inspection
3. Submission of reports to the SEBI
4. Action on Inspection or Investigation report
5. Appointment of Auditors


Procedure for Action in Case of Default

1. Suspension of Registration: A penalty of suspension
of registration of a merchant banker may be imposed
where,
a. the merchant banker violates the provisions of the
Act, rules or regulations.
b. Furnishes wrong or false information
c. Does not submit periodical reports
d. Fails to pay fees



2. Cancellation of Registration:

3. Show Case Notice and order: within 3o days MB
want to reply to SEBI

4. Effect of Suspension and cancellation

5. Publication of Order of Suspension

Suspension shall be published in at least two daily
newspaper by SEBI



Amendment to SEBI (Merchant Banker) Regulations
1992

1. The Applicant should be fit and proper person

2. MB Seek Separate Registration for its underwriting
and portfolio management activities

3. The applicant should be corporate body other than
non banking finance company

4. They do not accept/ hold public deposits