AN ASSIGNMENT ON

MERCHANT BANKING AND SEBI GUIDELINES

Parvesh Sharma Roll No. 16 10TH SEM. FINANCE

MERCHANT BANKING
In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money. The term can also be used to describe the private equity activities of banking. According to Cox, D. merchant banking is defined as, merchant banks are the financial institutions providing specialist services which generally include the acceptance of bills of exchange, corporate finance, portfolio management and other banking services.

The Growth of Merchant banking in India

Formal merchant activity in India was originated in 1969 with the merchant banking division setup by the Grindlays Bank, the largest foreign bank in the country. The main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial consultancy. Following Grindlays 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.

Cont.
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).

Organizational setup of merchant bankers in India Institutional Base Banker Base Broker Base Private Base

Requirements for setting up a merchant banking outfit

1. Formation of the Business OrganizationSEBI act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the types of organizations are listed below: Sole proprietorship Partnership firm Hindu Undivided Family (HUF) Corporate Enterprises Co-operative Society

2. Adoption of a viable business plan 3. Registration of Merchant Bankers

Application for grant of certificate Application to conform to the requirements Furnishing of information, clarification and personal representation Consideration of application Procedure for Registration Payment of fees and the consequences of failure to pay fees

Main Objectives Of Merchant Bankers

To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India. The main object of merchant banker is to create secondary market for bills and discount or re-discount bills and acts as an acceptance house. Merchant bankers another objective is to set up and provide services for the venture capital technology funds. They also provide services to the finance housing schemes for the construction of houses and buying of land. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

Obligations and Responsibilites

Merchant bankers have the following obligations and responsibilities. Merchant banker should maintain proper books of accounts, records and submit half yearly/annual financial statements to the SEBI within stipulated period of time. No merchant banker should associate with another merchant banker who is not registered in SEBI. Merchant bankers should not enter into any transactions on the basis of unpublished information available to them in the course of their professional assignment. Every merchant banker must submit himself to the inspection by SEBI when required for and submit all the records. Every merchant banker must disclose information to the SEBI when it requires any information from them. All merchant bankers must abide by the code of conduct prescribed for them. Every merchant banker who acts as lead manager must enter into an agreement with the issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular reference to disclosures allotment, refund etc.

Code of Conduct
According to the 13 Regulation of the SEBI of 1992 (Merchant bankers), every merchant banker should comply with following codes of conduct. They are: The merchant banker must observe high integrity and fairness in all his dealings. He shall render at all times high standard of services, exercise due diligence, exercise independent professional judgement. If necessary, he must disclose to his clients the possible source of conflict of duties and interests. The merchant banker should not indulge in unfair practice or unfair competition with other merchant bankers. He should not make any exaggerated statement about his capacity or achievement. He should always Endeavour to give the best possible advise and prompt efficient and cost effective service. He should maintain the secrecy of all the confidential information received during the course of service to his client. He should not engage in the creation of a false market or price rigging or manipulation.

Guidelines of SEBI
The SEBI has announced the new guidelines for the disclosures by the Companies leading to the investor protection. They are presented below: If any Companys other income exceeds 10 per cent of the total income, the details should be disclosed. The Company should disclose any adverse situation which affects the operations of the Company and occurs within one year prior to the date filing of the offer document with the Registrar of Companies or Stock Exchange. The Company should also disclose the information regarding the capacity utilization of the plant for the last 3 years. The Promoters of the Company must maintain their holding at least at 20 per cent of the expanded capital. The minimum application money payable should not be less than 25 per cent of the issue price. The company should disclose the time normally taken for the disposal of various types of investors grievances. The Company can make firm allotments in public issues as follows: Indian mutual funds (20%), FIIS (24%), Regular employees of the company (10%), Financial institution (20%).

Cont
The Company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities. According to the guidelines, in case of the public issues, at least 30 mandatory collection centres should be established. According to the SEBI guidelines regarding rights issue, the Company should give advertisements in not less than two newspapers about the dispatch of letters of offer. No preferential allotment may be made along with any rights issue. The Company should also disclose about the fee agreed between the lead managers and the Company in the memorandum of understanding.

Qualities of merchant bankers

To be a successful merchant banker, following qualities are necessary: Knowledge: Thorough understanding of technical issues related to business, understanding of legal and statutory requirements, appreciation of business acumen; financial expertise is a key thing a merchant banker must know. Delivery of his services depends on his basic understanding of these issues. Capital market familiarity: Merchant banker should be well versed with stock markets, their movements. He should track imp happenings in the market on ongoing basis. Liasioning ability: Merchant bankers are required to liaison with SEBI, RBI, the stock exchanges, depositories and other government authorities for public issue related duties. It is imperative that a merchant bank maintains excellent rapport with all of them and also close relations even at informal levels. This only can see speedy and favorable clearances by the authorities. Innovation: Corporate may approach with unique requirements. Standard solutions and products may not solve problems sometimes. Merchant bankers should do out of box thinking and be able to do financial engineering. They can device new financial instruments and get approved from the authorities. Innovation is required even to address stringent legal requirements. Integrity: Merchant banker has valuable and confidential information of its customers. Merchants bankers should take utmost care that the information is not leaked and also not consumed for the purpose other than for which it was disclosed to the merchant banker.

THANKS