Financial Services

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Meaning and Concept

 Financial services are services that ensure the smooth flow of

financial activities in the economy
 It including banking, insurance, stock broking and investment
services as well as business and professional services.
 Cater the need of financial institutions, financial markets and
financial instruments
 Financial services include the services offered by both Asset
Management companies and Liability Management companies

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 Meaning and Concept

 Financial Services help to raise the required funds but also ensure
their efficient deployment

 To ensure an efficient management of funds, services such as bill

discounting, factoring of debtors, parking of short term funds in
money market, e-commerce and securitization of debts are provided
by financial service firms

 This sector provides services such as banking, insurance, credit

rating, lease financing, factoring, venture capital, mutual funds,
merchant banking, stock lending, depository services, housing
finance

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Characteristics of Financial
services
 Customer-Specific: Focused, need of the customer, due regard to
cost, liquidity and maturity consideration

 Intangibility: Quality and innovativeness of their services to build up

their credibility

 Concomitant: Production of new and innovative financial services

and supplying of these services are to be performed simultaneously

 Tendency to Perish: Proper synchronization of demand and supply

 People based services: People incentive and hence its subjected to

variability of performance or quality of service

 Market Dynamics: Constantly redefined and refined taking into

consideration of various dynamics in financial services

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 Types of financial services

 Financial services industry classifying the financial

services under three broad categories

 Fee Based services

 Fund Based services
 Insurance Services

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Fee Based Services
 Financial institutions operate in specialized fields to earn
a substantial income by way of fees, dividend
commission, discount and brokerage on operations.

 Issue Management
 Corporate Advisory Services
 Credit Rating
 Mutual Funds
 Assets Securitization

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 Fund Based Services
 The firm raises funds through equity, debt, and deposits
and invests these funds in securities or lends to those
who are in need of capital

 Leasing and Hire Purchase

 Hosing Finance
 Credit Cards
 Venture Capital
 Factoring
 Forfaiting
 Bill Discounting

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Merchant Banking-An
Overview
 Companies raise capital by issuing securities
in the market. Merchant bankers act as
intermediaries between the issuers of capital
and the ultimate investors who purchase
these securities.

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Merchant Banking-An
Overview
• Merchant banking… is the financial intermediation that
matches the entities that need capital and those that have
capital. It is a function that facilitates the flow of capital in the
market.

• Ministry of Finance: “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, advisor or rendering
corporate advisory service in relation to such issue
management”

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 MERCHANT BANKING

Merchant banking may be defined as an ‘institution which

covers a wide range of activities such as underwriting of shares,
portfolio management, project counseling, insurance etc…They
render all these services for a fee

ORIGIN :
The term merchant banking originated from the London who
started financing foreign trade through acceptance of bills
Later they helped government of under developed countries to
raise long term funds
Later these merchants formed an association which is now
called ”Merchant Banking and Securities House Association”
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Merchant Banking-An
Overview
 Banking commission Report-1972
a) Necessity
b) Distinct from commercial Banks
c) Investment Management and Advisory services
d) Medium and small savers
e) Manage

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Merchant Banking in India

 Grindlays Banks-1967
 Management of capital issue
 Production planning, system design to market
research
 Management consultancy
 Citibank-1970
 SBI-1972

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Services rendered

• Organizing finance for investment in projects

• Assistance in financial management
• Acceptance of house business
• Raising Eurodollar loans and issue of foreign currency
bonds
• Financing export of capital goods, hydropower
• Financing of hire-purchase transaction, leasing
• Mergers, takeovers, valuation of assets

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Regulation

• Merchant Bankers Regulations of Securities

and Exchange Board of India
• Company Act 1956
• Listing guidelines of Stock Exchanges
• Securities Contracts (Regulation) Act, 1956

• Formation of divisions
• Subsidiaries companies

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Structure
 Category-I
 to carry on any activity of the issue management,
which will inter-alia consist of preparation of
prospectus and other information relating to the
issue, determining financial structure, tie-up of
financiers and final allotment and refund of the
subscription; and

 to act as adviser, consultant, manager,

underwriter, portfolio manager.

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Structure

• Category II
 that is, to act as adviser, consultant, co-manager,
underwriter, portfolio manager;
• Category III
 that is to act as underwriter, adviser, consultant
to an issue;
• Category IV
 that is to act only as adviser or consultant to an
issue.

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Registration with SEBI

 Around 250 Merchant Bankers

 Abolished all categories and maintained
Category-I
 Separate registration for underwriters and
portfolio manager
 Segregation between fee based and Fund
based activities

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Registration with SEBI
• 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.
 The applicant must have at least two employees with prior experience in
merchant banking
 Any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant
banker
 The applicant should not have been involved in any securities scam or
proved guilt for any offence
 The applicant should have a minimum net worth of Rs.5 crores

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Authorized Activities

• Issue Management
 Preparation of prospectus
 Information relating to the issue
• Determining financing structure
• Tie-up of finances and final allotment and/or
refund of subscription
• Corporate advisors to the issue
• Consultants or advisors to issue and
underwriting

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Terms of Authorization
• Authorization is valid for an initial period of 3 years
• Authorization fee, annual fee and renewal fee
• All issues should be managed by at least one authorized
merchant bankers, functioning as sole manager or lead
manager
• MB expected to exercise due diligence independently
• Involvement of MB in post-issue management
• Adhere a code of conduct prescribed by SEBI
• MB may be cancelled or suspended for suitable duration
• MB regulations integrate issue management with
underwriting

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General Obligations and
Responsibilities
 Maintenance of books of accounts, records and
documents
 Copy of the balance sheet, auditor’s report and
statement of financial position
 Responsibilities of lead Manager
 Underwriting obligation
 Submission of due diligence certificate
 Insider Trading
 Acquisition of shares

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Main functions of a merchant
banker
• Management of debt and equity offerings- This
forms the main function of the merchant banker. He assists the
companies in raising 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.

• Placement and distribution- The merchant banker helps

in distributing various securities like equity shares, debt instruments,
mutual fund products, fixed deposits, insurance products, commercial
paper to name a few. The distribution network of the merchant banker
can be classified as institutional and retail in nature.

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Functions
• Corporate advisory services-
• Merchant bankers offer customized solutions to their clients financial
problems. The following are the main areas in which their advice is
sought:

• Financial structuring includes determining the right debt-equity ratio and

gearing ratio for the client, the appropriate capital structure theory is
also framed.

• Merchant bankers also explore the refinancing alternatives of the client,

and evaluate cheaper sources of funds.

• Another area of advice is rehabilitation and turnaround management. In

case of sick units, merchant bankers may design a revival package in
coordination with banks and financial institutions.

• Risk management is another area where advice from a merchant banker

is sought. He advises the client on different hedging strategies and
suggests the appropriate strategy.

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Functions
• Project advisory services-
 conceptualizing the project idea
 feasibility studies
 Preparing different documents like the detailed project report.

• Loan syndication-
 Tie up loans for their clients
 Analyze the pattern of the client’s cash flows
 Prepares a detailed loan memorandum This takes place in
a series of steps. Firstly they, based on which the terms of
borrowings can be defined. Then the merchant banker,
which is circulated to various banks and financial
institutions and they are invited to participate in the
syndicate.

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 SERVICES OF MERCHANT BANKERS

PROJECT COUNSELLING :
It includes preparation of project reports,deciding upon the
financing pattern, appraising the project relating to its
technical, commercial and financial viability. It includes filling
up of application forms for obtaining funds from financial
institutions.
LOAN SYNDICATION :
Assistance is rendered to raise loans for projects after
determining promoter’s contribution. These loans can be
obtained from a single institution or a consortium.

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ISSUE MANAGEMENT :
Management of issues involves marketing of corporate securities
ie…equity shares, preference shares and debentures by offering
them to public.
Pre-issue activities:
They prepare copies of prospectus and send it to to SEBI and then
file them to Registrar of Companies
They conduct meetings with company representatives and
advertising agencies to decide upon the date of opening of issue,
closing of issue, launching & publicity campaign etc..
They help the companies in fixing up the prices for their issues
Post-issue activities:
It includes collection of application forms, screening of applications,
deciding allotment procedure, mailing of allotment letters, and
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UNDERWRITING OF PUBLIC ISSUES :
Underwriting is an insurance to the company which makes
public issues. Raising of external resources is easy for the
issues backed by well known underwriters.

MANAGERS,CONSULTANTS OR ADVISERS TO THE

ISSUE :
SEBI insist that all issues should be managed by atleast one
authorised merchant banker but not more than two. For an issue
of 100 crores, upto a maximum of four merchant bankers shall
be appointed. They help in listing of shares in stock exchange,
completion of formalities under Companies Act etc..

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PORTFOLIO MANAGEMENT :

Portfolio refers to investment in different kinds of securities

such as shares, debenture issued by different companies. It is
a combination of assets but a carefully blended asset
combination.

Portfolio management refers to maintaining proper

combination of securities in a manner that they give
maximum return

Investors are interested in safety, liquidity and profitability

of his investment but they cant choose the appropriate
securities. So merchant bankers help their investors in
choosing the shares. They conduct regular market and
economic surveys.
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NRI INVESTMENT :
NRIs has to follow lots of complicated rules for investing in the
shares in India.Merchant bankers help them in choosing the shares
and offer expert advice fulfilling government regulations thus
mobilising more resources for corporate sector.
ADVISORY SERVICE RELATING TO MERGERS AND
TAKEOVERS :
Merger is a combination of two or more companies into a singe
company where one survives and other loses its existence
Takeover is the purchase by one company acquiring controlling
interest in the share capital of another company
Merchant banker acts as middlemen between offeror and
offeree,negotiates mode of payment and gets approval from
government.
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OFF SHORE FINANCE :
Merchant bankers help their clients in :
Long term foreign currency loan
Joint venture abroad
Financing exports and imports
Foreign collaboration arrangement

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BANKS PROVIDING MERCHANT BANKING SERVICES
IN INDIA

Commercial banks
Foreign banks like National Grindlays Bank, Citibank, HSBC
bank etc..
Development banks like ICICI,IFCI,IDBI etc..
SFC , SIDCs
Private firms like JM Financial and Investment service , DSP
Financial Consultants, Ceat Financial Services, Kotak Mahindra,
VMC Project Technologies, Morgan Stanley, Jardie Fleming,
Klienwort Benson etc…

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SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for

authorization which prevents young, specialised
professionals into merchant banking business
 Non co-operation of the issuing companies in timely
allotment of securities and refund of application of money
etc.. is another problem
 Yet merchant banking is vast but should develop
adequate expertise to provide a full range of merchant
banking services

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