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Introduction to

Merchant Banking
 MB is a combination of Banking and Consultancy
Services.
 Consultancy means to provide advice, guidance and
services for a fee. It helps to raise finance. It helps to
expand and modernize the business.
 It helps to review sick business units. It also helps
companies to register, buy and sell shares at the
stock exchange.
 It provides consultancy to its clients for financial,
marketing, managerial and legal matters.
Origin

 It originated in Europe in the 17th & 18th century.


 The wealthy people were financing trade & that was
their profit making business.
 They were Merchant Financiers. In today’s terms,
they are Merchant Bankers.
 The East India Company was a merchant bank which
facilitated merchants to carry out trade, especially
with India.
 It could own, lease, control, fund, properties & in fact
could establish a colony under its own administration.
 Till the 18th century, moneylenders, moneychangers,
village merchants and salukaars performed the
function of banks & merchant banks.
 They gave loan on mutual trust, on mortgages of
lands, ornaments & other property.
 Jagat Sheth and Habib & sons which is now Habib
Bank (In Pakistan )were organized merchant
bankers.
 In 1967, RBI issued its first merchant banking
license to Grindlays Bank, later Citibank also set up a
merchant banking division in 1970.
 Even Indian banks started offering their clients these
services in 1972, and SBI was the first to start in
1972, later ICICI in 1973.
Definition

 Any person who is engaged in the business of issue


management either by making arrangements
regarding selling, buying or subscribing to the
securities as managers, consultants, advisors or
rendering corporate advisory service in relation to
such issue management.

 The financial institutions providing specialist service


which generally include the acceptance of bills of
exchange, corporate finance, portfolio management,
underwriting and other banking services.
Objectives of MB

1. To assists in the capital formation in the economy.


2. To assists in modernization and diversification of
business units.
3. To assists in mobilizing resources of the business
enterprises.
4. To assists in foreign exchange dealings within the ambit
of relevant laws and regulations
5. To promote the venture capital technology funds and
provides services to them.
6. To assists in project formation and development.
7. To create secondary market for bills and facilitate
discounting or rediscounting of bills.
Features of MB

1. MB acts as a manager, consultant, advisor in the


Issue Management process.
2. They are the financial intermediary that matches
the entities that need capital and those that have
capital for investment.
3. MB engages in the business of Issue Management.
4. MB services include the arrangement regarding
selling, buying or subscribing to securities.
5. MB is skill based activities and involves serving
every financial need of every client.
6. The MBs charge fee and commission as their
income.
7. They provide special and sophisticated services at a
national and international level.
Classification of Merchant Bankers

SEBI has classified Merchant Bankers into 4 categories on the


basis of Capital Adequacy:
 Category I :-
The capital adequacy requirement for category I, merchant
bankers is that the net worth should not be less than 5 cr.
The banker would be allowed for carrying on any activity of
the Issue Management which will consist of preparation of
prospectus & other information relating to the issue,
determining financial structure, tie up of financiers, final
allotment & refund of subscription. MB act as Advisor,
Consultant, Manager, Underwriter & Portfolio
Manager.
2. Category II

 The minimum capital adequacy requirement for


category II, merchant banker is a net worth of 50
lakh.
 This merchant banker is allowed to act only as
Advisor, Consultant, Co manager,
Underwriter, & Portfolio Manager.
3. Category III

 The Minimum capital adequacy requirement for this


category should be Rs. 20 lakh.
 The possible activities they can carry on are
Underwriting, Advisor & Consultant to an
issue.
4. Category IV

 There is no capital adequacy requirement


specified for this category.
 Merchant banker is only allowed to act as Advisor,
or Consultant to an issue.
Organisational Set up of MB in India
 The organisational set up of MB in India can be
classified into four groups on the basis of linkages
with parent activity.
1. Bankers Base
2. Institutional Base
3. Brokers Base
4. Private Base
Bankers Base

 This type of MB functions as a Subsidiary Institution


or a division within the bank.
 The parent banks are either foreign bank operating
in India or Indian Bank. Many Indian Banks are in
the category of public bank or private bank.
 This type of MB helps the parent company to
participate in the capital market as an intermediary.
 Foreign Players : Bank of America, Citibank etc
 Public Sector Players : Bank of Maharashtra, Punjab National
Bank
 Private Sector Players : ICICI securities, Kotak Mahindra
Capital Co Ltd.
Institutional Base

 MB functions as an independent unit or as


subsidiary of various private or Govt financial
institution.
 In India most of the financial institution function
under public sector.
 Public Financial Institution : IFCI Financial Service Ltd., IDBI
Capital Market services Ltd.
 Private Financial Institution : Reliance Securities Ltd., Tata
Capital Markets Ltd
Broker Base

 Brokers are playing major role in different aspects by


having qualified and professionally skilled groups in
their business team.
 They are undertaking MB related operations also
like, portfolio management services, issue
management etc.
 Karvy Consultancy services Ltd.
 Motilal Oswal Investment Advisory Ltd.
 Religare Capital Market
Private Base

 These MB firm operate as sole proprietary,


partnership, private ltd.
 These type were popular before the establishment of
separate division of commercial banks.
 They provide skill based services to the clients.
 Finshare Mgt services
 Pioneer Invertcorp
 A.K. Capital Service Ltd
QUALITIES OF A
MERCHANT BANKER
Merchant Banks Commercial Banks

1) Assist in raising capital in the form of 1) Provide funds in the form of term
equity, preference shares, and loan and working capital.
syndicated loan working capital
instruments.

2) Advisor not financer. 2) Financing is the main business.

3) Do not accept chequable deposits. 3) Demand deposits are the key feature.

4) Mainly fees based business. 4) Mainly fund based business


Merchant Banks Commercial Banks

5) Being advisors, they are closer to the 5) Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on proposal and cannot afford to be
risks shields i.e. mitigation measures grossly relationship based and close to
the customer.

6) Most of work they get is about 6) Commercial banks majority business


management of equity issues in the is of terms lending and bank deposits.
capacity of lead manager, underwriter,
piercing of issue, book running, and
liaisoning with SEBI.
Merchant Banks Commercial Banks

7) Merchant banks cater to the needs of 7) They cater to the needs of the
corporate firms. common man.

8) MB cannot undertake banking 8) CB undertake merchant banking


business business
SERVICES OF
MERCHANT
BANKERS
1. Corporate Counselling

 MB provide guidance to the clients on organisational


goals, choice of product and market survey,
forecasting a product, cost analysis, investment
decisions, pricing methods, capital management,
marketing strategies etc.
 The scope of corporate counselling is limited to
giving suggestions and opinions to clients and help
in taking actions to solve their problems.
2. Project Feasibility Study :

It comprises preparation of project reports, deciding


upon the pattern of financing to meet out the cost of
the project and appraising the project report with
financial institutions and banks.
It also includes filling up of application forms with
significant information for obtaining funds from
financial institutions and obtaining government
approvals etc.
3. Advice on capital structuring

 Based on the project appraisal & fund capacity of the


promoters, merchant bankers prepare suitable
capital structure.
 Firstly , optimal & achievable debt-equity mix is
decided.
 Then within equity how much from promoters, how
much by private placement and when & how much
by public issue is decided.
4. Preparation of prospectus & liaisoning with
SEBI

 As the co decides to go for public issue, merchant


banker are appointed to prepare prospectus.
 It is as per the SEBI format.
 The activity includes lots of data collection from the
corporate itself as the theme of prospectus is
disclosures to the prospective IPO investors.
 The prospectus so prepared is submitted to SEBI.
 The merchant bankers hold dialogues with SEBI
officers & comply with any suggestions, requirements
from them.
 Prospectus is updated & resubmitted for final approval.
5. Loan Syndication

 Loan syndication refers to the services rendered by an


organization in arranging & procuring credit from
financial institutions, banks, other lending &
investment cos. For financing the project or meeting
working capital needs.
 The merchant banker involves it self in identification of
sources from funds could be arranged, approaching
these sources with requisite application & supporting
documents & complying with all formalities involved in
sanction & disbursal of loan.
6. Issue Management

 Issue management means management of issues which


involves marketing of corporate securities such as
equity shares, preference shares and debentures by
offering to public.
 After taking action as per SEBI guidelines, the MB
organizes a meeting with company representatives and
advertising agents to finalize arrangements relating to
date of opening and closing an issue, registration of
prospectus, launching publicity campaign and fixing
date for board meeting to approve and sign prospectus
and pass the necessary resolutions.
7. Advice on mergers & acquisitions

 Merchant bankers scrutinize merger, acquisition &


takeover proposal.
 Merchant bankers work on both the sides, acquirer
as well as acquiree.
 Tasks include projection of post merger scenario,
assessment of viability of merger.
 Decisions include share exchange ratio, nature of
deal etc.
8. Underwriters to issues
 If subscription to the issue is less than full i.e. under
subscription, then underwriters are responsible to
subscribe to the gap between total applied capital & size of
the issue.
 Maximum guarantee of the underwriter could be up to 10%
of the total issue size.
 That means at least 90% of the issue must be subscribed to
by prospective investors.
 Remaining 10% under subscription is filled by the
underwriters.
 Incase issue subscription is less than 90%, then amount is
refunded to applicants & issue stands cancelled.
 A separate licence is to be taken from SEBI for
underwriting activity.
9. Venture Capital

 Funding an emerging high risk, hi tech project based


purely on R & D efforts is called Venture Capital
financing.
 The services of MB includes the provision of long
term start up funds for high risk ventures promoted
by unknown entrepreneurs which suffer from capital
deficiencies but have a high profit potential.
10. Assistance in ADR/GDR and other
international instruments.

 Many Indian corporate issue ADRs/GDRs in US &


other global markets respectively.
 They have to deal with the local depository &
merchant bankers in respective countries.
 The corporates at times lack in expertise to deal with
them or they de not have adequate staff to coordinate
entire process with these agencies
 Mostly these corporates appoint an Indian merchant
banking firm to coordinate with foreign merchant
bankers & depositories.
11. Miscellaneous Services

 MB also provides leasing, counselling to sick


industrial units, distribution of financial product,
asset management, investment research, joint
ventures etc.
Scope of MB in India
1. Growth of new issue market
2. Entry of foreign investors
3. RBI policies
4. Changing policy
5. Innovations in financial instruments
6. Corporate culture
SEBI Guidelines for MB
MB in India is governed by SEBI regulations act 1992.
These are amended from time to time. It is mandatory
for a MB to register with SEBI.
1. An application should be made to SEBI in Form A
as per SEBI regulations. SEBI shall consider the
application and on being satisfied issue a certificate
of registration in Form B. The MB has to pay a sum
of Rs 10 lakhs as registration fee.
2. The applicant should not carry on any business
other then those connected with the securities
market.
3. All applicants for MB should have qualification in
finance, law or business management and applicant
should have infrastructure like space, equipment,
manpower etc.
4. There are 4 categories of MB – Category I, II, III and
IV.
5. The capital adequacy of each category is prescribed by
SEBI :
3. Category I – Rs 5 crore
 Category II – Rs 50 lakh
 Category III – Rs 20 Lakh
 Category IV – Nil
7. MB should fulfill capital adequacy criteria as
specified by SEBI from time to time.
8. SEBI has prescribed the code of conduct to MB and
MB should perform his duties with highest
standards of integrity and fairness in all his
dealings.
9. MB has to maintain proper books of accounts and
have to submit half yearly / annually reports to
SEBI from time to time.
10. Every MB should appoint a compliance officer.
11. SEBI can suspend or cancel registration of MB
anytime if they violate rules.
Association of MB in India

 Association of MB in India is a professional non


profit company set up to represent the MB industry.
 There are over 500 members.
 It is a self regulatory organisation where it can
implement the code of conduct on all members in the
industry.
Thank You