Merchant Banking

EXECUTIVE SUMMARY
Although merchant banking activity was ushered in two decades ago, it was only in
1992 after the formation of Securities and Exchange Board of ndia that it is defined
and a set of rules and regulations in !lace" #oday a merchant banker is who has the
ability to merchandise that is, create or ex!and a need and fulfill ca!ital re$uirements"

have given an overview about the financial markets and the role of merchant bankers
in the growth of these markets" %y !ro&ect covers how the merchant banks works,
rules ' regulations laid by SEB ' its im!act on the merchant banking activities"
#heir im!ortance in the economy is ex!ected to grow even further in the coming years
with an increasing !ro!ortion of household savings getting invested in cor!orate '
other securities" (ence, my !ro&ect covers the challenges and advantages, which
ndia will get and is getting by merchant banking activities" have covered several
services !rovided by %erchant Bankers ' the role of %erchant bankers in !roviding
those services to the business world"
)inally, the to! !layers, which exist in merchant banking, are also covered* their
services are also been focused" #o get the !ractical knowledge about merchant
banking activities have interviewed visited State bank of ndia, +otak mahindra
bank and S,A %erchant bankers ltd"
1
Merchant Banking
INDEX
SR.NO. CONTENTS PAGE NO.
1. Introduction 1
2. History 2
3. Defnition 4
4. Eo!ution " E#er$ence o% &erc'(nt
)(n*in$
+
+. &erc'(nt )(n*in$ in Indi(
,. &erc'(nt -(n*in$ .(st (nd .resent /
/. Need " I#.ort(nce in Indi( 0
0. Ro!e o% &erc'(nt )(n*ers 1
1. &erc'(nt )(n*ers Co##ission 11
12. Co##erci(! )(n*s " &erc'(nt )(*s 12
11. Gro3t' o% &erc'(nt )(n*s in Indi( 13
12. Pro-!e#s o% &erc'(nt )(n*ers 14
13. Current Scen(rio 1+
14. &erc'(nt )(n*in$ Indi(n Scen(rio 1,
1+. &erc'(nt )(n*in$ Intern(tion(!
Scen(rio
1/
1,. &erc'(nt )(n*in$ Or$(nis(tion 11
1/. 4u(!ities o% $ood &erc'(nt )(n*ers 22
10. Res.onsi-i!ities o% &erc'(nt -(n*er 22
11. Re$istr(tion o% &erc'(nt )(n*er 24
22. Sco.e o% serices 2,
21. Serices Rendered -y &erc'(nt
)(n*ers
2/
22. Recent Trends 31
23. P!(yers in &erc'(nt )(n*in$ 41
24. &erc'(nt )(n*in$ 5 6uture
Dee!o.#ent
40
2+. 4uestionn(ire +1
2,. Anne7ure +3
2/. Conc!ussion ,2
20. )i-!io$r(.'y ,3
2
Merchant Banking
INTRODUCTION
#he term %erchant Banking has its origin in the trading methods of countries in the
late eighteenth and early nineteenth century when trade-taking !lace was financed by
bill of exchange drawn by merchanting houses" At that time the merchants were
merely financing their own activities" As international trade grew and other lesser-
known names wanted to im!ort goods from abroad, the established merchants .lent
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Merchant Banking
their names0 to the newcomers by agreeing to acce!t bills of exchange on their behalf"
#he acce!tance houses would charge a commission for this service and thus there
grew u! the business of acce!ting bills of finance trade not merely of themselves, but
of others" Acce!tance business thus became and to a degree always has been
hallmark of true %erchant Banks"
#he second historical of %erchant Banks was the raising of ca!ital for foreign
1overnment" n many cases, the %erchant Banks have been trading in the countries
concerned and gained the confidence of 1overnments and other authorities in those
countries" #hus the second !rinci!al ingredient of %erchant Banking became and still
is raising of ca!ital through the issue of stocks and bonds" #herefore, %erchant Banks
can be acce!ting houses or issuing houses or both" %erchant Banking started in the
beginning of 22
th
century in 3+ and 3SA" %ore recently, the services offered by
%erchant Banks have entered into the other areas of o!erations" #heir role is wide
ranging and they can now !rovide most of the financial services re$uired by a
com!any, touching almost all as!ects of establishing and running of industrial units
on sound financial footing"
4ictionary meaning of .merchant bank0 refers to an organi5ation that underwrites
cor!orate securities and advises such clients on issues like cor!orate mergers, etc"
involved in the ownershi! of commercial ventures" #his organi5ation may be a bank,
cor!orate body, firm or !ro!rietary concern"
HISTORY OF MERCHANT BANKING
4uring the seventeenth and most of the eighteenth century international finance was
centred on Amsterdam" 6onse$uently Amsterdam merchants became the first masters
of the various financial techni$ues and develo!ments which, in the course of time,
became identified with the emergent !rofession of .%erchant Bankers0"
7
Merchant Banking
6ommercial Banking and nvestment Banking are often confused with %erchant
Banking" n many ways, there may be similarities in their functions" (owever, in
certain ways, %erchant Banking is distinctly different from commercial Banking and
nvestment Banking"
#he !rimary function of a commercial bank is to receive de!osits from the !ublic and
lend the same to others" 6ommercial Banks can undertake some of the merchant
banking activities like ssue %anagement whereas %erchant Banking 3nits can not
undertake commercial banking activities" (owever, the functions of %erchant
Banking may not widely vary from nvestment Banking" #he %erchant Banker
mainly deals with ssue %anagement, !ost issue services, cor!orate adviser services
etc" the nvestment Banker undertaken trading in securities, nvestment advises and
Bought out deals which are not the main activities of %erchant Bankers"
n todays Scenario the %erchant banker and management consultants undertake
advisory services to the cor!orate sector" #he %erchant Banker advices cor!oration
and firms relating to o!ening of issues, receiving loans etc, which the management
consultants also do" #he management consultant have a wide area o!erations like
!roduction, %arketing, ,ersonnel 8elations, of finance etc" but they lack statutory
recognition to undertake ca!ital market related activities which has enabled the
merchant banker to cater to the needs of the 6or!orate Sector"
A merchant bank may be considered as an institution which centres its o!eration on
all or most of the following activities"
91: cor!orate financial advice, on such diverse matters as new share and bond
issues, ca!ital reconstructions, mergers and ac$uisitions*
92: #he taking of de!osits and currency, money market o!erations including foreign
exchange dealing*
9/: %edium-term lending and syndication of loans*
97: Acce!tance credits and all forms of ex!ort finance*
9;: #he holding and dealing in $uoted and un$uoted investment* and
9<: )und management on behalf of clients, most ty!ically !ension funds, unit trust,
investment trusts and wealthy individuals"
;
Merchant Banking
DEFINITION
#he first authoritative definition for the term .%erchant Banker0 has been given in the
8ule 2 9e: of SEB 9%erchant Bankers: 8ules, 1922" Accordingly, =A Merchant
Banker means 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, Adviser of rendering Corporate Advisory Service in relation
to such Issue Management
<
Merchant Banking
Sec>; 9b: of the Banking 8egulation Act,1979 defines Banking as =accepting, for the
purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by che!ue, draft, order or otherwise?"
#he @otification of the %inistry of )inance defines a merchant banker as, "any
person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as manager,
consult, adviser or rendering corporate advisory service in relation to such issue
management
EVOLUTION & EMERGENCE OF MERCHANT BANKING
ndia has entered the 21
st
century as one of the Asia0s most dynamic economies" #his
is the !art of the assessment made by nternational )inancial and 6a!ital %arket
nstitutions based on ndia0s economic and financial reforms initiated in 1991 and
brought to fruition in various budget"
A
Merchant Banking
#he !rogress of any economy mainly de!ends on the efficient financial system of the
country" ndian economy is no exce!tion financial system of the country" #he
im!ortance of the financial sector reforms affirms an effective means for solving the
!roblems of economic, financial and social in ndia and elsewhere in the develo!ing
nations of the world" #he !rogress of the Securities ndustry of any country de!ends
mainly on the flow of funds" n fact, ca!ital generation is the lifeblood of the ca!ital
market without which the health and soundness of the financial system cannot be
geared and for which well-develo!ed ca!ital market as well as money market is
essential"
ndia0s ca!ital market is among the largest in the develo!ing world" #he market is
com!rised of 27 stock exchanges transacting long-term debt* debentures and e$uity
shares both electronic and !hysical forms" 4erivatives financial instruments are also
be added to the market shortly" #he number of firms listed on the ndian Stock
Exchange is more than the 3SA" %arket 6a!italisation of listed firms is 19B2s was
similar to Bra5il, %alaysia, Singa!ore and 4enmark"
#he ca!ital market of the country, however, underwent dramatic changes since the
beginning of 19B2s basically because of a !rogressive reali5ation that the command
economy on which the em!hasis was !laced could not lead to higher levels of
economic develo!ment and that a slant towards a market-oriented economy is
necessary"
t is in the context of fast ex!anding economy and a liberali5ed and deregulated
atmos!here that the growth of the ndian Stock %arket activities has to be viewed"
@o wonder that the markets have registered a $uantum &um! &udge by any standards"
MERCHANT BANKING IN INDIA
n ndia !rior to the enactment of ndian 6om!anies Act, 19;<,managing agents acted
as issue houses for securities, evaluated !ro&ect re!orts, !lanned ca!ital structure and
to some extent !rovided venture ca!ital for new firms" )ew share broking firms also
functioned as merchant bankers"
B
Merchant Banking
#he need for s!eciali5ed merchant banking services was felt in ndia with the ra!id
growth in the number and si5e of the issues made in the !rimary market" #he
merchant banking services were started by foreign banks, namely the National
Gin!la"# Ban$ in %&'( an! the Cit" Ban$ in %&(). #he Banking 6ommission in
its re!ort in 19A2 recommended the setting u! of merchant banking institutions" #his
marked the beginning of s!eciali5ed merchant banking in ndia"
#o begin with, merchant banking services were offered along with other traditional
banking services" n the mid-Eighties, the Banking 8egulation Act was amended
!ermitting commercial banks to offer a wide range of financial services through the
subsidy rule" The State Ban$ o* In!ia +a# the *i#t In!ia Ban$ to #et ,- .e/hant
Ban$in0 !i1i#ion in %&(2. Cater 66 set u! its %erchant Banking division followed
by Bank of ndia, Bank of Baroda, 6anada Bank, ,un&ab @ational Bank and 36D
Bank" #he merchant banking gained !rominence during 19B/-B7 due to new issue
boom"
MERCHANT BANKING3 4AST AND 4RESENT
%any banks entered merchant banking in the 19<2s to take advantage of the
economies of sco!e !roduced when !rivate e$uity investing is added to other bank
services, !articularly commercial lending" As lenders to small and medium-si5ed
com!anies, banks become knowledgeable about individual firms0 !roducts and
!ros!ects and conse$uently are natural !roviders of direct !rivate e$uity investment to
9
Merchant Banking
these firms" As mentioned above, commercial banks were the largest !roviders of
venture ca!ital in the 19<2s" n the middle to late 19B2s, the decision to enter
merchant banking was thrust on other banks and bank holding com!anies by
unforeseen events" n those years, as a result of the C46 9less-develo!ed-country:
debt crisis, many banks received !rivate e$uity from develo!ing nations in return for
their defaulted loans" At that time, many of these banks set u! merchant banking
subsidiaries to try to get some value from this !rivate e$uity"
Also at about that time, most commercial banks began refocusing their !rivate e$uity
investments to middle-market and !ublic com!anies 9often low-tech, already
!rofitable com!anies: and, rather than !roviding seed ca!ital, financed ex!ansion or
changes in ca!ital structure and ownershi!" %ost !articularly, they took e$uity
!ositions in CBDs, takeovers, or reca!itali5ations or !rovided subordinated debt in the
form of bridge loans to facilitate the transaction" Dften they did both" 6ommercial
banks financed much of the CBD activity of the 19B2s"#hen, in the mid-1992s, ma&or
commercial banks began once again focusing on venture ca!ital, where they had
substantial ex!ertise from their !revious ex!osure to this kind of investment" Some of
these recent venture-ca!ital investments have been s!ectacularly successful" )or
exam!le, the nternet search engine Cycos was a 199B investment of 6hase
%anhattan0s venture-ca!ital arm" 6ommercial banks are !ermitted to re!ort either
reali5ed or unreali5ed gains on their merchant-banking !ortfolios, as long as they are
consistent in the re!orting" #his o!tion makes it difficult for one to com!are different
entities0 financial results and could lead to an overly liberal re!orting of !rofits"
NEED & IM4ORTANCE IN INDIA
m!ortant reason for the growth of merchant banking is due to exerting excess
demand on the sources of funds forever ex!anding industry and trade"
6or!orate sector had the only alternative to avail of the ca!ital market services
for meeting their long-term financial re$uirements through ca!ital issues of e$uity
and debentures"
12
Merchant Banking
Eith the growing demand for funds there was !ressure on ca!ital market that
enthused the commercial banks, share brokers and financial consultancy firms to
enter into the field of merchant banking and share the growing ca!ital market"
n ndia have o!ened their merchant banking windows and are com!eting in this
field, and also doing advisory functions as merchant bankers as well as managing
!ublic issues in syndication with other merchant bankers"
%erchant banks can !lay highly significant role in mobili5ing funds of savers to
investible channels assuring !romising return on investments" activity"
Eith the growth of merchant banking !rofession cor!orate enter!rises in both
!ublic and !rivate, sectors would be able to meet the growing re$uirements for the
funds for establishing new enter!rises, undertaking
ex!ansion>moderni5ation>diversification of the existing enter!rises"
%erchant banks have been !rocuring im!ressive su!!ort from ca!ital market for
the cor!orate sector for financing their !ro&ects"
n view of multitude of enactments, rules and regulations, guidelines and offshoot
!ress release instructions brought out by the 1overnment from time to time
im!osing statutory obligations u!on the cor!orate sector to com!ly with all those
re$uirements !rescribed therein, the need of skilled agency existed which could
!rovide counseling"
%erchant bankers advise the investors of the incentives available in the form of
tax reliefs, other statutory relaxations, good return on investment and ca!ital
a!!reciation in such investment to motivate them to invest their savings in
securities"
#hus, the merchant bankers hel! industry and trade to raise funds, and the
investors to invest their saved money in sound and healthy concerns with
confidence, safety and organi5ations for higher yields"
ROLE OF MERCHANT BANKERS
#he role of merchant banker is dynamic in the wake of diverse nature of merchant
banking services" %erchant banker0s dynamism lies in !rom!tly attending to the
cor!orate !roblems and suggests ways and means to solve it" #he nature of merchant
banking services is develo!ment oriented and !romotional to hel! the industry and
11
Merchant Banking
trade to grow and survive" %erchant banker is, therefore, dedicated to achieve this
ob&ective through his dynamism" (e is always awake to renew his skills, develo!
ex!ertise in new areas so as to e$ui! himself with the knowledge and techni$ues to
deal with emerging new !roblems of cor!orate business world" (e has to kee! !ace
with the changing environment where 1overnment rules, regulations and !olicies
affecting business conditions fre$uently change* where science and technology create
new innovations in !roduction !rocesses of industries envisaging immediate
renovations, diversification, moderni5ations or re!lacements of existing !lant and
machinery or other e$ui!ments !utting new demands for finances and necessitating
overhauling of the ca!ital structure of the firms"
%erchant banker has to think and devise new instruments of financing industrial
!ro&ects" (e has to assume wider res!onsibilities of saving industrial units from going
sick and guiding industries to be set u! industrially backward areas to eliminate
regional imbalances in industrial develo!ment of the country" (e has to guide the
wider section of the community !ossessing sur!lus money to invest in cor!orate
securities and other !roductive investment channels" (e has to hel! the industry in
different forms to ensure that it runs risk free and devoid of uncertainty by assisting
the has to watch the interest and win over the confidence of the 1overnment, its
agencies, along with the entre!reneurs, the investors and the whole community" (e
must bridge the communication ga! between different sections and resolve the
!roblem being faced in different areas concerned with the business world"

#o discharge the above role, a merchant banker has t be dynamic" )or this reason, a
merchant banker is sometimes, called %"B i"e" %oving Bottom, i"e", one who never
sits at one !lace, always moving- attending meetings and meeting clients and
constituents, doing business and getting business by attending meetings and
conferences, im!arting knowledge to others and ac$uiring new knowledge to maintain
his su!remacy in !ossession of latest information" (is role de!icts a !ersonality cult,
which is uni$ue and envious to be followed by others"
n the days ahead, merchant bankers have very significant role to !lay tuning their
activities to the re$uirements of the growth !attern of cor!orate sector, the industry
and the economy as a whole, which is, in it, a challenging task and to meet these
12
Merchant Banking
challenges merchant bankers will have to be more vigorous and strategic in !laying
their role" #hey will have also to ado!t new ways and means in discharging their role"
ROLE IN THE MARKET
#he Securities and Exchange Board of ndia 9SEB: has stated that merchant bankers
must be involved more closely in the market making !rocess as share brokers do not
have the re$uisite ex!ertise to evaluate the fundamentals of the scri!s before taking
over the role of market makers" )urther, share brokers generally being !artnershi!*
firms do not have the financial clout which is necessary for market making activity"
8esultantly, the SEB has suggested that any member of the stock exchange along
with one merchant banker registered with SEB could act as a market maker"
#he SEB has felt that to ensure li$uidity of scri! it was necessary to facilitate greater
movement, which could only be achieved through the institution of market makers"
%arket makers would also create a market for the scri!s by offering two way $uotes
to the investors" A minimum of ten scri!s has been !ro!osed by SEB for the market
makers"
MERCHANT BANKERS COMMISSION
As determined by the )inance %inistry, 1overnment of ndia, %erchant Bankers are
eligible to charge commission > fee from their clients as detailed below F
9i: A %erchant Banker can charge 2";G as the maximum as commission for whole
of the issue"
1/
Merchant Banking
9ii: #hey can charge !ro&ect a!!raisal fees"
9iii: A lead manager can claim a commission of 2";G u! to 8s"2; crore and 2"2G in
excess of 8s"2; crore"
9iv: 3nderwriting 6ommission"
T"-e o* Se/,it"
On a.o,nt
De1ol1in0 on
,n!e+ite#
On a.o,nt
#,5#/i5e! 5"
-,5li/
1"E$uity shares
2",reference share>debentures
9a: 3!to 8s" ; lakh
9b: Excess of 8s" ; lakh
2";2
2";2
2"22
2";2
1";2
1"22
9v: Brokerage commission 1";G"
9vi: Dther ex!enses like advertising, !rinting, 8egistrar0s ex!enses, stam! duty etc",
in connection with the issue can be reimbursed from its clients"
COMMERCIAL BANKS AND MERCHANT BANKS
#here are differences in a!!roach, attitude, and areas of o!erations between
commercial banks and merchant banks" #he differences between merchant banks and
commercial banks are summari5ed belowF
6D%%E86AC BA@+S %E86(A@# BA@+S
Basically deal in debt related finance
and their activities are a!!ro!riately
Basically they deal
with mainly funds raised through
17
Merchant Banking
arrayed around credit !ro!osals,
credit a!!raisal and loan sanctions"
Are asset oriented and their lending
decisions are based on detailed credit
analysis of loan !ro!osals and the
value of security offered against
loans" #hey generally avoid risks"
#hey are merely finanaciers"
money market and ca!ital market
and the area of activity is 6e7,it"
an! e7,it" elate! *inan/e8"
Are management
oriented" #hey generally are willing
to a//e-t i#$# o* 5,#ine##9
#here activities
include !ro&ect counseling, cor!orate
counseling in areas of ca!ital
restructuring, amalgamations,
mergers, takeovers etc", discounting
and rediscounting of short term
!a!er in money markets, managing,
underwriting and su!!orting !ublic
issues and new issue market and
acting as brokers and advisers on
!ortfolio management in stock
exchange" #his activities have
i.-a/t on 0o+th: #ta5ilit" an!
li7,i!it" o* .one" .a$et#9
GRO;TH OF MERCHANT BANKING IN INDIA
)ormal merchant banking activity in ndia was originated in 19<9 with %erchant
Banking 4ivision set u! by the 1rindlays Bank, the largest foreign bank in the
country" #he main service offered at that time to the cor!orate enter!rises by the
merchant banks included the management of !ublic issues and some as!ects of
financial consultancy" Dther foreign banks like 6iti Bank, 6hartered Bank also
assumed the merchant banking activity in ndia" State Bank of ndia started merchant
banking in 19A/ followed by 66 in 19A7" Both these ndian merchant bankers
1;
Merchant Banking
emerged as leaders in merchant banking having done significant business during the
!eriod of 19A7-19BA in com!arison to foreign banks" #he early and mid-seventies
witnessed a boom in the growth of merchant banking organi5ations in the country
with various commercial banks, financial institutions, broker0s firms entering in to the
field of merchant banking"
#he early growth of merchant banking in the country is assigned to the )oreign
Exchange 8egulation Act, 19A/ 9)E8A: where under large number of foreign
com!anies o!erating in ndia were re$uired to dilute their foreign holdings in order to
continue business in the country" #his had caused two-!ronged effect vi5" firstly, in
the form of s!ate in .)oreign Exchange 8egulation Act ssues0 eliciting interest of the
investors by creating massive awareness about ca!ital markets amongst the new class
of investing !ublic, secondly, merchant banking activity became attractive to banks
and the firms of consultants and share brokers who entered into this fields vigorously
to rea! the advantages of the ex!anding ca!ital markets"
4ROBLEMS OF MERCHANT BANKERS
1" SEB guidelines have authori5ed merchant bankers to undertake issue related
activities only with an exce!tion of !ortfolio management" #hese guidelines have
made the merchant bankers either to restrict their activities or think of se!arating
these activities from the !resent one and float new subsidiary and enlarge the sco!e of
its activities"
2" SEB guidelines sti!ulate a minimum net worth of 8s"1 crore for authori5ation of
merchant bankers" Small but !rofessional and s!eciali5ed merchant bankers who do
1<
Merchant Banking
not have a net worth of 8s"1 crore may have to close down their business" #he entry is
denied to young, s!eciali5ed !rofessionals into merchant banking business"
/" @on co-o!eration of the issuing com!anies in timely allotment of securities and
refund of a!!lication money is another !roblem of merchant bankers" #he guidelines
have !ut the res!onsibility on the merchant bankers" #hey have to seek the co-
o!eration of the issuing com!any to shoulder the res!onsibility"
CURRENT SCENARIO
%erchant banking is an area that we need to build and grow in the years to come" As
ndia forms !art of the global village, it becomes increasingly necessary for us to look
at this business in a more holistic manner"
Dbviously, international !layers with strong domestic !artners such as 4S, %errill
Cynch, H% %organ Stanley, +otak %ahindra 6a!ital, together with ex!erienced
organisations like Enam and institutional backed investment bankers such as 66
1A
Merchant Banking
Securities, etc", are the ones who have ex!ertise, muscle, and !lacement !ower in a
greater measure than relatively new entrants"
#he red hot economy is the obvious starting !oint" ndia is likely to end the year with
14, growth in excess of A !ercent" 6om!anies and !rivate e$uity investors are sitting
on large !iles of cash" n 222< deal activity was largely restricted to the # and
#elecom sectors"
#hus, while there is a steady flow of deals, there is now a shortage of talent to do the
&ob"
MERCHANT BANKING3 INDIAN SCENARIO
%erchant Banking activity was formally initiated into the ndian ca!ital markets when
1rindlays Bank received the license from 8eserve Bank in 19<A" 1rindlays which
started with management of ca!ital issues, recogni5ed the needs of emerging class of
entre!reneurs for diverse financial services ranging from !roduction !lanning and
system design to market research" A!art from meeting s!ecially, the needs of small-
scale units it !rovided management constancy services to large and medium si5ed
com!anies" )ollowing 1rindlays Bank, 6iti Bank set-u! its %erchant Banking
division in 19A2" #he division took u! the task of assisting new entre!reneur and
1B
Merchant Banking
existing units in the evaluation of new !ro&ects and raising funds through borrowing
and issue of e$uity" %anagement consultant services were also offered" 6onse$uent
to the recommendations of Banking 6ommission in19A2, that ndian bank should start
%erchant Banking 4ivision in 19A2" n the initial years the SB0s ob&ective was to
render cor!orate advice and assistance to small and medium entre!reneurs"
#he economic reforms initiated by the 1overnment since Huly 1991 in the files of
industry, trade and financial sector have !aved the way for ra!id develo!ment of the
economy" Several !ro&ects have been conceived since then and almost all the ma&or
grou!s in the country that have announced their intentions to set-u! mega !ro&ects in
infrastructure sector envisaging investment of thousands of crores" Eith several large
!ro&ects been set-u! and many more on the drawing board, the demand for a com!lete
range of %erchant Banking services encom!assing !ro&ect advisory services, issue
management and financial advisory services for cor!orate sector has increased
considerably" #his has led to a shar! growth in the %erchant Banking business in the
last 2 years"
MERCHANT BANKING3 INTERNATIONAL SCENARIO
#he %erchant Banking scenario in develo!ed countries like 3SA and 3+ are
different from ndian %erchant Banking activities" #he %erchant banker is also
called as nvestment Bankers" A brief outline of %erchant Banking in 3SA and 3+
has shown in the following !aragra!hs"
Me/hant Ban$# in UK
19
Merchant Banking
n 3nited +ingdom, %erchant Banks came on the scene in the late eighteenth century
and early nineteenth century" ndustrial revolution made England into a !owerful
trading nation" 8ich merchant houses that made their fortunes in a colonial trade
diversified into banking" #heir !rinci!le activity started with the acce!tance of
commercial bills !ertaining to domestic as well as international trade" #he acce!tance
of the trade bills and their discounting gave rise to acce!tance houses, discount
houses, and issue houses" %erchant Bankers initially included acce!tance houses,
discount houses and issue houses" A %erchant Banker was !rimarily a merchant
rather than his customers entrusted banker but him with funds" %erchant Banks in
3+F
)inance foreign trade,
ssue ca!ital,
%anage individual funds,
3ndertake foreign security business, and
)oreign loan business"
#hey also used to finance sovereign government through grant of long-term loans"
Since the end of Second Eorld Ear commercial banks in Eestern Euro!e have been
offering multi!le services including %erchant Banking services to their individual and
cor!orate clients" British banks set-u! division or subsidiaries to offer their customers
%erchant Banking services"
Me/hant Ban$in0 in USA
%erchant banks make the !rimary markets in 3SA, arrange mergers and ac$uisitions,
undertake global, custody, !ro!rietary trading and market making, niche business,
fund management and advisory services to governments and firms"
#he increased regulation and control of domestic o!erations gave a filli! to large 3S
banks to undertake %erchant Banking functions in international ca!ital markets" #he
22
Merchant Banking
3S investments Banks have extended their o!erations to the international level" #hey
are largely res!onsible for the develo!ment of the Euro-dollar market in the securities
and globalisation of ca!ital markets" #hey have a !rominent !resence in Condon and
other Euro!ean financial centers" %erchant Banks have today a strong !arent, a
strong balance sheet and a strong international network to !lay a global role"
MERCHANT BANKING ORGANISATIONS
n ndia, merchant banks o!erate in the form of 4ivisions of ndian and )oreign banks
and financial institutions, subsidiary com!anies established by banks like SB 6a!ital
%arkets Ctd", can Bank )inancial Services Ctd", ,@B 6a!ital Services Ctd", ndian
Bank %erchant Banking services Ctd", etc", the firm organi5ed by the stock brokers,
stock exchange dealers, the financial and technical consultants and chartered
accountants" Securities and Exchange Board of ndia 9SEB: has divided merchant
bankers into four categories, which are as followsF -
21
Merchant Banking
CATEGORIES ACTIVITIES NET;ORTH
6ategory #o carry on the activity of issue management
and to act as adviser, consultant, manager,
underwriter, !ortfolio manager"
8s"1crore
6ategory #o act as adviser, consultant, co-manager,
underwriter, !ortfolio manager"
8s";2 lakhs
6ategory #o act as underwriter, adviser or consultant to
an issue"
8s" 22 lakhs
6ategory I #o act only as adviser or consultant to an issue @il
%erchant Bankers are classified into 7 categories as shown in the above table having
regard to their nature and range of activities and their res!onsibilities to SEB,
investors and issuers of securities" #he minimum net worth and initial authori5ation
fee de!ends on the category" #he first category consists of merchant bankers who
carry on any activity of issue management, determining financial structure, tie-u! of
financiers, advisor or consultant to an issue, !ortfolio manager and underwriter" #he
second category consists of those authori5ed to act in the ca!acity of co-
manager>advisor, consultant, and underwriter to an issue or !ortfolio manager" #he
third category consists of those authori5ed to act as underwriter, advisor or consultant
to an issue" #he fourth category consists of merchant bankers who act as advisor or
consultant to an issue"
<UALITIES OF GOOD MERCHANT BANKERS
%erchant bankers are individual ex!erts who organi5e and manage the merchant
banks" #he o!erations of merchant banks are, therefore, influenced by the !ersonality
trait of these individuals" )or the success of merchant bank0s o!erations, the $ualities
which merchant bankers should have are discussed belowF-
LEADERSHI43= merchant banker should !ossess all relevant skills, u!date
knowledge to interact with the clients and effectively communicate" Ceadershi! is
synonymous with followers who follow the one who leads"
22
Merchant Banking
AGGRESSIVE ACTION3> aggressiveness is a !ersonality trait of a good leader but
in merchant banking it has a wider connotation" Aggressive merchant bankers are
always looking for new business" Dnce a business o!!ortunity has been located, the
merchant banker has got to obtain the mandate for the merchant banking assignment
from the clients at once which will de!end u!on his own communication skills,
!ersuasiveness and the background of the organi5ation to which he belongs" A good
merchant banker is one who does not allow his client to think anything outside exce!t
what has been advised"
COO4ERATION AND FRIENDLINESS3> #hese two characteristics are the
symbols of good leadershi! but it hardly needs to be stressed that coo!eration and
friendliness cou!led with !ersuasiveness are the main instruments with which a
merchant banker mixes with the !eo!le, gathers information, obtains business
mandate and renders satisfactory services to the clients" Business of an honest
business merchant banker s!reads with geometrical !ro!agation when he shares the
thoughts of his clients with sym!athetic gestures and offers !ragmatic suggestions
without greed or favours" Iery often, rude, intem!erate and indifferent dis!osition or
blunt out burst withdrew fortunate business o!!ortunities forever" )riendliness and
coo!eration must flow as natural traits in the merchant banker to win the trust of the
clients"
CONTACTS 3= success of merchant banker de!ends u!on his sociable nature and the
richness of wider contacts" A merchant banker is su!!osed to be ac$uainted dee!ly
with all the constituents of merchant banking" #he sco!e of contact encom!asses
intimate contiguity and ac$uaintances within his own organi5ation, 6entral and State
1overnment Dffices where com!liances under various relevant enactments are to be
re!orted, ndian and foreign banks, financial institutions at 6entral and State levels,
!romoters>directors>owners and chief executives of the !rivate and !ublic enter!rises
which would be !ros!ective beneficiaries of merchant banking services, !rinters,
advertising agencies, brokers and stock exchange dealers, advocates and solicitors and
members of the !ress whose services are availed of in executing merchant banking
assignments" %erchant bankers should widen contacts and references and continue to
maintain them with goodness, honour and humour by meeting !eo!le"
2/
Merchant Banking
ATTITUDE TO;ARDS 4ROBLEM SOLVING3= #he most im!ortant !ersonality
trait of a merchant banker is his attitude towards !roblem solving" Even client coming
to him has got to return fully satisfied having consulted a merchant banker" ,ositive
a!!roach to understand the view !oints of others, their difficulties and their adverse
circumstances is !ossible only when a !erson is skilled in human relations !articularly
the inter-!ersonal and intra-!ersonal behavior" Effective communication and !ro!er
feedback are the !re-re$uisite for creating a !ositive attitude towards !roblem solving"
%any !ersons are effective in this trait without any training for reasons of cultivating
a habit from environment in which they have been brought u! at home, in school,
college and office" #his is so im!ortant that it must be treated as a se!arate ob&ective
$uality of a good merchant banker"
IN<UISITINESS FOR AC<UIRING NE; SKILLS: INFORMATION AND
KNOLEDGE3 = merchant bankers lice on their wits they earn by giving information
to needy clients" #herefore, they should kee! abreast with latest information in the
area of the service !roduct, they market" #his is !ossible if merchant bankers !ossess
the $uality of in$uisitiveness"
#he above $ualities of a merchant banker are only illustrative" All good $ualities in
merchant bankers are difficult to be defined so elaborately" @evertheless, merchant
banker should !ossess su!er business acumen, managerial abilities, administrative
ca!acities and salesmanshi! so as to understand the !roblems and sell the service
!roduct to the needy clients"
27
Merchant Banking
RES4ONSIBILITIES OF MERCHANT BANKER
To the In1e#to#
nvestor !rotection is fundamental to a healthy growth of the 6a!ital %aerket"
,rotection is not to be conceived as that of com!ensating for the losses suffered"
#he res!onsibility of the %erchant Banker in ensuring the com!leteness of the
disclosures is of !aramount im!ortance in view of the fact that entire reliance is
based on offer 4ocument either ,ros!ectus or Cetter of Dffer because an
inde!endent agency like a %erchant Banker has done the scrutiny"
Ca-ital #t,/t,in0
#he %erchant Bankers while designing the ca!ital structure take into account the
various factors such as Ceverage effect on earnings !er share, the !ro&ect cost and
the gestation !eriod, cash flow ability of the com!any, the cost of ca!ital, the
considerations of management control, si5e of the com!any, and general economic
factors" #hese exercise are done mainly in order to meet the fund re$uirement of
the com!any taking due cogni5ance of the investor0s !reference"
4o?e/t E1al,ation an! !,e Dili0en/e
4ue diligence and !ro&ect evaluation is another ma&or res!onsibility of the
%erchant Banker" Ehere the !ro&ect has already been a!!raised by a
bank>financial institution, the %erchant Banker relies on the said a!!raisal before
acce!ting an assignment" (owever, where the !ro&ect has not been a!!raised by
as bank>financial instituion, the %erchant Bank undertakes a detailed evaluation
of the !ro&ect before taking u! an assignment for issue management"
Le0al a#-e/t
#he factors that are looked into in case of the legal aspects are$
6om!liance with the SEB guidelinesand the various guidelines issued by the
%inistry of )inance and 4e!artment of 6om!anyAffairs"
,ending litigation0s towards tax liabilities or any criminal>civil !rosecution any of
the directors for any offenses"
)air and ade$uate disclosures in the !ros!ectus"
2;
Merchant Banking
4i/in0 o* the I##,e
#he %erchant Banker looks into the various factors while !ricing the issue" Some
of the factors are !ast financial !erformance of the com!any, Book value !er
share, stock market !erformance of the shares" #he %erchant Banker has a vital
role to !lay in !ricing of the instrument"
Ma$etin0 o* the I##,e
%arketing of the issue is a vital res!onsibility of the %erchant Banker" #he first
stage is ,re-issue marketing for !lacement of the issue with the financial
institutions, banks, mutual funds, )0s and @80s" #he second stage is the
marketing of the issue to the general !ublic through various vehicles such as !ress,
brokers, etc"
Bo,0ht o,t Deal#
#he conce!t of wholesale but out of !ublic offerings by the %erchant Bankers
started off with over the 6ounter Exchange of ndia where a %erchant banker acts
also as a s!onsor and either takes u! the entire issue to be offered wholly of &ointly
with other co-investors and off-loads the same to the !ublic at a later date by an
offer for sale" %a&or amendments were made to the SEB regulations regarding
%erchant Bankers" #he duration of this transaction !eriod has not officially been
announced"
2<
Merchant Banking
REGISTRATION OF MERCHANT BANKER
#he term .%erchant Banking0 originated in the 1B
th
and early 19
th
centuries in the
3nited +ingdom when trade between countries was financed by bills of exchange
drawn on the !rinci!al merchant houses" Eith the increase in international trade, the
established merchants started the !ractice of lending their names to the new comers
and acce!ting the bills of exchange on their behalf" #hey would charge a commission
for the !ur!ose and thus acce!tance business became the hallmark of %erchant
Bankers" Dnce these banks had gained the confidence of the government, they also
entrusted with the &ob of issuing bonds in the Condon market"
Although %erchant Banking activity ushered in two decades ago, it was only in 1992,
in ndia, after the formation of SEB that is defined and a set of rules and regulations
governing it are in !lace" n fact, the origin of %erchant Banking is to be traced to
taly in late medieval times and )rance during the seventeenth and eighteenth
centuries" %erchant Banker invested accumulated !rofits in all kinds of !romising
activities" Since they added banking business into the !rofession of %erchant
activities and became a %erchant Banker" A distinction was existed in banking
systems between moneychanger and exchanger" %oneychangers concentrate on the
mutual exchange of different currencies, o!erated locally and later acce!ted de!osits
for security reasons" ,assage of time money changers evolved into !ublic or de!osit
banks whereas exchangers, who o!erated internationally, engaged in bill-broking that
raising foreign exchange and !rovision of long-term ca!ital for !ublic borrowers" #he
exchanges were remitters and %erchant Bankers" n the seventeenth century, a
%erchant Banker was a dealer in bills of exchange who o!erated with corres!ondents
abroad and s!eculated on the rate of exchange" nitially, %erchant Bankers were not
banks at all and a distinction was drawn between banks, %erchant Banks and other
)inancial nstitutions" Among all these, nstitutions it was only banks that acce!ted
de!osits from !ublic" @o !erson s allowed carrying out any activity as a %erchant
Banker unless he or she holds a certificate grated by SEB" 8egistration with SEB is
mandatory to carry out the business of merchant banking in ndia"
2A
Merchant Banking
An a--li/ant #ho,l! /o.-l" +ith the *ollo+in0 no.#3
#he a!!licant should be a body cor!orate
#he a!!licant should not carry on any business other than those connected with
the securities market
#he a!!licant should have necessary infrastructure like office s!ace, e$ui!ment,
man!ower etc"
#he a!!licant must have at least two em!loyees with !rior ex!erience in merchant
banking
Any associate com!any, grou! com!any, subsidiary or interconnected com!any of
the a!!licant should not have been a registered merchant banker
#he a!!licant should not have been involved in any securities scam or !roved
guilt for any offence
#he a!!licant should have a minimum net worth of 8s"; crores

2B
Merchant Banking
MERCHANT BANKING SERVICES3 SCO4E
n the !resent dynamic environment where !ublic money is !laying a vital role in
financing a large number of !ro&ects, both in the !ublic and !rivate sectors, %erchant
Banking has a significant role in managing the show and meeting the growing
demands for funds by the cor!orate sector" %erchant Banking includes a whole
gamut of activities which meet the needs of both cor!orate and individual investors
and which range from identification, evaluation, !romoting and financing of !ro&ects
9both domestic and overseas: by raising resources in the e$uity and long-term loans,
to organi5e and !artici!ate in international consortia, to raise foreign currency loans
and to offer advisory services on various matters related to finance, investment,
ca!ital management, structure, mergers, amalgamation, takeovers and ac$uisitions"
#hey also !lay a useful role in the !ortfolio management, money market o!erations,
venture ca!ital, leasing, etc" %erchant bankers act as a guide for the entre!reneurs
who are unaware, or have little knowledge or ex!erience, of the com!lexities involved
in the above s!heres"
n addition to the above, the sco!e of %erchant Banking services has extended to
!roviding advisory services to com!anies to increase or divest their stakes, !ublic
sector undertaking disinvestments, international issues, etc" Eith the D#6E being
o!eration now, %erchant Bankers will have a key role to !lay in terms of a!!raising
the !ro&ects and offering two-way $uotes for market making in case of entre!reneur
going for listing in the above exchange"
%erchant Bankers act as a critical link between the cor!orate who are intend to raise
funds and the investors who are interested to invest in securities ndustry" Besides
issue management, the %erchant Bankers are also undertake the activities like
underwriting connected with the !ublic issue management business,
%anaging>advising on nternational offerings of 4ebt>E$uity i"e", 148, A48, Bonds
and other instruments, ,rivate !lacement securities, ,rimary or Satellite dealershi! of
government securities, 6or!orate Advisory services related to securities market 9e"g",
#akeovers, ac$uisitions, disengagement:, Stock-Broking, Advisory Services for
!ro&ects, Syndication of ru!ee term loans and nternational )inancial Advisory
Services" #he services can be re!resented as followsF -
29
Merchant Banking
SERVICES RENDERED BY MERCHANT BANKERS
Among the im!ortant financial intermediaries are the merchant bankers" #he services
of %erchant bankers have been identified in ndia with &ust issue management" t is
$uite common to come across reference to merchant banking and financial services as
though they are distinct categories" #he services !rovided by merchant banks de!end
on their inclination and resources - technical and financial" %erchant bankers
96ategory 1: are mandated by SEB to manage !ublic issues 9as lead managers: and
o!en offers in take-overs" #hese two activities have ma&or im!lications for the
integrity of the market" #hey affect investorsJ interest and, therefore, trans!arency has
to be ensured" #hese are also areas where com!liance can be monitored and enforced"
%erchant banks are rendering diverse services and functions, which are as followsF
/2
Merchant Banking
ISSUE MANAGEMENT3
#he !ublic issue of securities is the core of merchant banking function" At one
time it was constructed as the sole function" %erchant bankers were identified as
issue houses" t was later !erceived that they !rovide other financial services"
Ehen com!anies seek to raise resources for im!lementation of a new !ro&ect or
finance ex!ansion or moderni5ation or diversification of an existing unit or fund
long term working ca!ital re$uirement, they retain the services of a merchant
banker" #o a large extent the ty!e of issue would vary with the !ur!ose for which
funds are raised" %erchant bankers when retained as managers to issue will have
to assist the com!any in all the stages connected with !ublic issue"
#he merchant bankers hel! cor!orate to raise money from the markets through the
issue of shares, debentures, bonds etc" #hey are designated as managers to the
issue" #heir main business is to attract !ublic money to ca!ital issues"
#hey usually render the following servicesF
4rafting of !ros!ectus and getting it a!!roves from the stock exchanges"
Dbtaining consent>acknowledgement from SEB"
A!!ointing bankers, underwriters, brokers, advertisers, !rinters etc"
Dbtaining the consent of all the agencies involved in the !ublic issue"
(olding road shows, to sell the issue" #hese shows are held for the analysts,
brokers ' institutional investors" #he !ur!ose of these shows is to answer $ueries
from these !eo!le about the com!any and the !ro&ect for which the funds are
being raised"
4eciding the !attern of advertising"
4eciding the branches where a!!lication money should be collected"
4eciding the dates of o!ening and closing of the issue"
Dbtaining the daily re!ort of a!!lication money collected at various branches"
Dbtaining subscri!tion to the issue"
After the close of the issue, obtaining consent of stock exchange for deciding basis
of allotment etc"
/1
Merchant Banking
COR4ORATE ADVISORY SERVICES RELATING TO THE ISSUE
n ndia, the !ricing of issues is now freely decided by the com!any, with valuable
in!uts from the merchant bankers, who have to sell the issue at the decided !rice"
#he !ricing of the issue es!ecially in a !ublic issue is very im!ortant" #he !ricing
has to be such, that the investors will be attracted to invest in the issue at that
!rice, at the same time the com!any should get the !remium that it is looking for"
After all, the !remium can !lay a very role in deciding the com!any0s ca!ital
structure, as larger the !remium lesser will be the re$uirement for borrowed funds"
#he !romoter also needs to decide whether to go in for a fresh issue or to go for a
rights issue" (owever this will de!end mainly on the $uantum of funds that the
com!any needs to raise" #he success of the issue is de!endent on the selection of
the right ty!e of security" n this matter, the ex!ert advice of merchant bankers is
of immense im!ortance"

n the issue management the merchant bankers have to coordinate the various
agencies to the issue" #he success of the issue de!ends on the coo!eration of all
the agencies involved"
#he merchant bankers offer following services during the public issuesF
,re!aring an action !lan and budget for the total ex!enses for the issue"
,re!aration of a!!lication to SEB and assistance in obtaining the consent from
SEB"
4rafting of the !ros!ectus"
Selection of underwriters, Brokers etc"
Selection of bankers to the issue"
Selection of advertising agency for !ublicity"
Dbtaining a!!roval of the institutional underwriters and stock exchanges for
!ublication of the !ros!ectus"
6om!anies are free to a!!oint one or more agencies as %anagers to an issue"
SEB guidelines insist that all issues should be managed by at least one authori5ed
merchant banker, functioning either as the sole or lead manager to the issue"
/2
Merchant Banking
Drdinarily, not more than two merchant bankers should be associated as lead
managers, advisors and consultants to a !ublic issue" n issues of over 8s" 122
crores, the number could be u! to a maximum of four"
#he res!onsibilities of merchant bankers in management of !ublic issues are
many" Some of these areF
Ee have seen that many unscru!ulous !romoters have raised money from the
market" #his has hurt the investors a lot and has also made investors nervous
about stock market investments" #his in turn affects the functioning of stock
markets both the !rimary and the secondary markets" t is therefore necessary that
merchant bankers are satisfied with the viability of the !ro&ect, which they can
then sell to the investors with confidence" t is therefore im!ortant for the
re!utation of merchant bankers, to only associate themselves with good issues"
#he merchant banker should act as the custodians of the investors money and this
!uts a lot of res!onsibility on them" #o discharge this function the merchant
bankers have to exercise due diligence inde!endent by verifying the contents of
the !ros!ectus and the reasonableness of the views ex!ressed therein"
t is the res!onsibility of the merchant bankers to get the securities listed on all the
stock exchanges mentioned in the !ros!ectus" Eith the introduction of 4emat
accounts the com!laints about allotment have surely gone down" t is the
res!onsibility of the merchant bankers to ensure timely refunds and allotment of
securities to the investors"
#he merchant bankers have to certify that they verified everything and that they
believe it to be true" #his assures the investing !ublic about the safety of their
investment" #he !recautions by the merchant bankers would ensure that all the
fake com!anies, whose intention is to defraud the investors, don0t have access to
the market"
UNDER;RITING
//
Merchant Banking
3nderwriting is like insurance against the failure of an issue" t is a guarantee to
the issuing the com!any, that the money that it re$uires for its !ro&ect will
definitely be raised" t means that even if the issue is not fully subscribed to by
the !ublic, the underwriters will make u! the short fall"
3nderwriting involves the underwriter agreeing to subscribe directly, or to !rocure
subscri!tion for the unsubscribe !ortion of the issue, which is not taken u!" )or
the risk that the underwriter takes, he is !aid commission" @ew com!anies
entering the markets for the first time, always face number of !roblems in raising
funds from the market" Dne of the biggest !roblems of course that the com!any is
not well known to the investors and many of them will be unwilling to invest their
money in such ventures" %any a times even existing com!anies may find it
difficult to raise money, due to some reasons" ssuing com!anies therefore
a!!roach different underwriters with a re$uest to underwrite the issue"
3nderwriters on their !art need to satisfy themselves about the viability of the
!ro&ect and also about the integrity of the !romoters of the com!any" t must be
noted that when an issue is under subscribed, the underwriters will !ick the shares
and only if the !ro&ect is good enough, then in future they can sell the shares in the
market and get not only their money back, but can also make a decent !rofit as
well"
t is obligatory for the merchant bankers to acce!t a minimum ;G underwriting in
the issue sub&ect to a ceiling" By taking underwriting in an issue managed by
them, they show their full commitment to the issue that they are managing"
MERGERS AND AC<UISITIONS
%ergers and ac$uisitions 9%'A: and cor!orate restructuring are a big !art of the
cor!orate finance world" Every day, Eall Street investment bankers arrange %'A
transactions, which bring se!arate com!anies together to form larger ones" Ehen
theyJre not creating big com!anies from smaller ones, cor!orate finance deals do
the reverse and break u! com!anies through s!in-offs, carve-outs or tracking
stocks"
/7
Merchant Banking
Role of Merchant Banker
%ergers ' Ac$uisitions is an area where %erchant Bankers act as intermediaries
in negotiating on one with cor!orate interested in hiving of divisions>com!anies
which are not with in the !urview of the long-term business strategy of the
grou!>com!any, and on the other hand for 6or!orate interested in non organic
growth by ac$uiring com!anies>units for reason strategic or non strategic in
nature" %ergers can be beneficial for both the entities, as due to com!etition the
com!anies unable to survive or !ros!er on their own may like to merge and face
com!etition and achieve growth targets" #akeovers may be hostile or friendly in
nature, hostile takeovers are without the consent of the com!any and com!any
being takeover may work out an anti takeover strategy to counter the threat"
%erchant Bankers !rovide following services in %'AF -
dentification of !otential takeover targets"
)inancial ' #echnical a!!raisal of the merger>takeover !ro!osal"
@egotiation with the !arties for arriving at the suitable !rice or
exchange ratio"
Assistance in obtaining necessary a!!roval ' addressing !rocedural ' legal
issues"
4RO@ECT COUNSELLING
,ro&ect counseling is very im!ortant and lucrative merchant banking services
which only very few merchant bankers having advantages of knowledge, skills
and ex!erience over others are able to render satisfactorily" #he cor!orate seek
advice in res!ect of identification of !rofitable investment o!!ortunities in the
related business areas 9like forward>backward integration: or as !art of
diversification !rocess" #he merchant bankers carry out detailed studies on
!roduct demand !atterns, cost structures, etc", to enable the cor!orate in
!re!aration of feasibility study may involve arrangement of a foreign
collaboration, advice on technical !arameters and also legal issues"
S/o-e o* #e1i/e#
/;
Merchant Banking
,ro&ect counseling services are needed by industrial entre!reneurs in ndia in the
following areasF -
,re!aration of !ro&ect re!ort
4eciding u!on the financing !attern to finance the cost of the !ro&ect"
As!ects of !ro&ect a!!raisal with financial institutions>banks"
4o?e/t e-ot
,ro&ect re!ort consists of technical !rocess, location, management !rofile, means
of financing, re!orts on market surveys and market ex!lorations" %erchant
bankers advise the clients on !ro&ect !re!aration" %erchant bankers, on behalf of
their clients, engage technical consultants s!eciali5ed in the s!ecific area, and
marketing ex!erts to !re!are technical feasibility re!ort and market survey
re!orts" %erchant bankers maintain the list of such ex!erts a!!roves by financial
institutions and assign the work to these ex!erts"
4o?e/t e-ot -,-o#e
,ro&ect re!ort about the !ro!osed activity is !re!ared to obtain government
a!!rovals !articularly in the following areasF
1rant of industrial license to undertake s!ecified industrial activity"
)oreign investment and technology tie-u!"
1rant im!ort license for im!orting raw material, !lant, machinery and
e$ui!ments"
1rant of foreign exchange allocation for im!ort of ca!ital goods or raw
materials, etc"
1rant of subsidies and other concessions from the government at center or
state levels or from government s!onsored agencies, etc"
LOAN SYNDICATION
t refers to assistance rendered by merchant banks to get mainly term loans for
!ro&ects" Such loans may be obtained from a single develo!ment finance
institution or a syndicate or consortium as in the case of large term loans"
%erchant banks can also hel! cor!orate clients to raise syndicated loans from
commercial banks"
/<
Merchant Banking
S/o-e o* #e1i/e
Dnce the client com!any has decided about the !ro&ect !ro!osed to be undertaken,
the next ste! is looking for the sources wherefrom funds could be !rocured to
im!lement the !ro&ect" #he res!onsibility of locating the sources of finance,
a!!roaching these sources by !utting in re$uisite !rescribed a!!lications and
com!lying with all the formalities involved in the sanction and disbursal of loan
rests with the merchant bankers who !rovide the service of loan>credit
syndication"
Coan syndication in the case of domestic borrowing is undertaken with the
institutional lenders and the banks" Amongst institutional lenders the following
institutions are the main su!!liers of the long and medium term funds with which
the merchant bankers contact, liaison and arrange loans working for and on behalf
of their clients"
% All India financial institutions
i" ndustrial )inance 6or!oration of ndia 9)6:
ii" ndustrial 4evelo!ment Bank of ndia 94B:
iii" ndustrial 6redit ' nvestment 6or!oration of ndia Ctd 966:
& State level financial bodies
i" State )inancial 6or!orations 9S)6s:
ii" State ndustrial 4evelo!ment 6or!orations 9S46s:
iii" State ndustrial ' nvestment 6or!orations 9S6s:
' All India level investment institutions
i" Cife nsurance 6or!oration of ndia 9C6:
ii" 3nit #rust of ndia 93#:
iii" 1eneral nsurance 6or!oration of ndia 916: ' its subsidiary
com!anies"
( Commercial banks$ 6ommercial banks &oin in consortium loan being
!rovided by the above institutions
) Mutual *unds + ,enture Capital *unds$ these funds generally invest in
e$uity but mutual funds contribute to the issues of 4ebentures>Bonds on
!rivate !lacement basis as well as subscribe to !ublic issues"
RESTRUCTURING SERVICES
/A
Merchant Banking
%erchant bankers assist the management of the client com!any to successfully
restructure various activities, which include mergers and ac$uisitions, divestitures,
management buyouts, &oint venture among others"
#o hel! com!anies achieve the ob&ectives of these restructuring strategies, the
merchant banker !artici!ates in different activities at various stages which include
understanding the ob&ectives behind the strategy 9ob&ectives could be either to
obtain financial, marketing, or !roduction benefits:, and hel! in searching for the
right !artner in the strategic decision and financial valuation of the !ro!osal"
CA4ITAL ASSISTANCE
n !roviding financial assistance, merchant banks offer a full understanding of all
facets of the ca!ital markets" #his includes all ty!es of debt and e$uity financing
available from both the domestic and international markets"
t should be understood that interest rates are not the only definition of ca!ital
costs" 8estrictions on availability, !re!ayment terms, and o!erating effectiveness
can often outweigh what might a!!ear to be inex!ensive ca!ital with low interest
rates" #oo often, ca!ital includes costs, which force an entre!reneur or a business
to undertake undesirable actions" n the short-run, some actions might be
necessary, but often in the long run are detrimental" #he traditional merchant
banker understands these ca!ital limitations and can structure a transaction, which
is beneficial to all sides of the table -- not &ust the ca!ital source"
(e also knows how to substitute one ty!e of ca!ital for another, sometimes
utili5ing internal sources from asset re!ositioning or cash creation from
im!rovements in working ca!ital" (e understands fully the risk versus return
elements necessary to com!lete the ca!ital !rocurement !rocess"
COR4ORATE ADVISORY SERVICES
%erchant bankers offer customised solutions to solve the financial !roblems of
their clients" Advice is sought in areas of financial structuring 9as shown in the
%odern %anufacturing case above:" %erchant bankers study the working ca!ital
/B
Merchant Banking
!ractices that exist within the com!any and suggest alternative !olicies" #hey also
advise the com!any on rehabilitation and turnaround strategies, which would hel!
com!anies to recover from their current !osition"
FACTORING SERVICE
)actoring involves the outright sale of a//o,nt e/ei1a5le" By such sale a client 9the
ex!orter or manufacturer: transfers his>her ownershi! of the accounts to a factor 9an
organi5ation, firm:" #he factor buys all the client0s outstanding invoices and takes over
all the subse$uent dealings with the buyer>im!orter>customer" t is short-term debt
financing" (ere three !arties are involved
1"#he factoring organi5ation >firms
2"#he manufacturer>ex!orter>seller
/"#he im!orter>customer>buyer
Role Of Merchant Banker In Factoring
#he merchant banker may act as factor organi5ation with a view to earning a great
amount of commission" #he factor !rovides the following servicesF
9a: )inancing
9b: Advisory services if necessary
9c: 6ollection of bills>Account 8eceivable against sales !roceeds"
9d: %aintenance of sales ledger
9e: ,rovide further if necessary
9f: 6overing losses if there are any
ASSET SECURITIAATION
t is a !rocess through which some inactive assets 9mortgage assets: are converted
into cash>active assets" t is long-term debt financing" (ere assets are converted
into long-term bonds" #he whole !rocess is done by the S!ecial ,ur!ose Iehicle
9S,I:" n this a!!roach, the merchant banker for issuance of security bonds
against the assets with a matching of time and terms between mortgage !ro!erty
and security bonds" (ere the selection of asset is generally considered on the basis
of the followingF
9: Kuality of assets
/9
Merchant Banking
9ii: 6ertainty of re!ayment
9iii: 1ood ranking from the credit rating agency"
#he !rocess of asset securiti5ation takes !lace in the following firmsF
Driginating nstitutions>)irm
S!ecial ,ur!ose Iehicle 9S,I:
%erchant Banker 9%B:
FOREX SERVICES
#his as!ect of banking is becoming increasingly im!ortant as the forex flow in the
country is increasing and the international markets are funding the o!erations of
the cor!orate in ndia" #he success of any business is measured by the fund
management* this makes treasury management as a very critical finance function"
%anagement of treasury !rofit center re$uires a wide variety of knowledge in the
area of global money markets and financial instruments such as de!osit
certificates, treasury bills, forecasting, source evaluation and cost of domestic and
foreign currency funds" #reasury and risk management ensures cost effectiveness
in !lanning strategies in this era of deregulation"
Role of merchant banker in Forex function
#he currency values, interest rates, share index and commodities affect the
financial derivatives like futures, swa!s and other tools of risk management"
6or!orates therefore em!loy well-trained !rofessionals to manage treasury and
forex functions so that they can ensure com!etent management" #hus, this service
is !rovided to 6or!orates through merchant bankers" %erchant bankers assess
various markets to advice 6or!orates or other banks that needs currency"
%erchant bankers constantly u!date about the !olicies of the regulatory bodies,
monitors the current !rices, makes !redictions based on the analysis of trends etc
HIRE 4URCHASE SERVICE
t involves a system under which term loans for !urchases of goods and services
are advanced to be li$uidated in stages through a contractual obligation" #he
goods whose !urchases are thus financed may be consumer goods or !roducer
72
Merchant Banking
goods or they may be sim!ly services such as air travel" (ire-!urchase credit may
be !rovided by the seller himself or by any financial institution" (owever, unlike
in other countries, the em!hasis in ndia is on the !rovision of instalment credit
for !roductive goods and services rather than for !urely consumer goods"
Role of Merchant Banker
%erchant Banker undertakes the activity of financing for hire-!urchase activities"
#he merchant banker looks more to the credit-worthiness and business morality of
the buyer than the value of security
LEASE FINANCE COM4ANIES
Cease finance com!anies !rovide finance to ac$uire the use of assets for a
sti!ulated !eriod of time without owning them" #he user of the asset is known as
the lessee, and the owner of the asset is known as the Cessor" Ceasing is medium-
term arrangement for finance"
Role of Merchant Banker
%erchant Bankers hel!s in assessing the credit risk of industrial borrowers" #he
merchant bankers !rovide hel! in evaluating lease !ro!osals" (e analyse the
merits and demerits of lease finance with reference to a given !ro!osal and leave
it to their clients to decide on the a!!ro!riate source and ty!e of finance, thus
enlarging their range of choices and the variety of services available to them"
VENTURE CA4ITAL
Ienture ca!ital is money !rovided by !rofessionals who invest alongside
management in young, ra!idly growing com!anies that have the !otential to
develo! into significant economic contributors" Ienture ca!ital is an im!ortant
source of e$uity for start-u! com!anies" ,rofessionally managed venture ca!ital
firms generally are !rivate !artnershi!s or closely-held cor!orations funded by
!rivate and !ublic !ension funds, endowment funds, foundations, cor!orations,
wealthy individuals, foreign investors, and the venture ca!italists themselves"
Role of Merchant Banker
71
Merchant Banking
%erchant Bankers assist ventures !ro!osals of technocrats, with high technology,
which are new, and high risk" #o seek assistance from venture ca!ital funds or
com!anies"
#hey also !rovide technical, financial ' managerial services ' hel! the com!any
to set u! a track record"
#he assistance should mainly be for e$uity su!!ort, through loan su!!ort to
su!!lement this may be extended"
RECENT TRENDS
%erger ' Ac$uisition transaction -- %erchant banksJ services not taxable
The Finance Ministry has excluded services provided by merchant banks and other
agencies in a merger and acuisition !M"#$ transaction from the scope of taxable
services provided by a %management consultant.&
The rationale accorded is that the role of such agencies is limited to compliance of
any statute or regulation '' such as takeover regulations of the (ecurities and
)xchange Board of India !()BI$ '' and not governed by any contractual
relationship *ith the advisee company.
%erchant banks do not !rovide any consultancy on an %'A transaction, but merely
verify and submit a re!ort to the authorities concerned, according to the 6entral Board
for Excise and 6ustoms 96BE6:"
Barring the services of merchant banks, any service rendered in relation to an %'A
transaction will be covered under the sco!e of taxable service !rovided by the
management consultant and will be liable to service tax, the Board has ruled" ndustry
re!resentatives held that services !rovided in res!ect of %'A cannot be construed as
a management consultancy service, but were in the nature of financial advisory
service"
72
Merchant Banking
#hey further o!ined that ac$uisition or divesting of shareholdings was a !urely
financial transaction and distinct from the advice or service !rovided !rior to taking a
decision to divest, merge or ac$uire an organisation"
RA4ID RISE IN VALUATION IM4EDES M&A#
#he surging stock market is creating an unusual !roblemF %ergers ' Ac$uisitions
9%'A: deals are becoming tougher to close as the two !arties to a deal kee! looking
over their shoulders to figure out how the market is !ricing their shares" #he key to
any deal is valuation" And when the market booms, agreed valuations for !ro!osed
%'A are thrown into disarray"
n this scenario, %'A rankings will change de!ending on who has been able to close
deals faster" n the first nine months of 222;, 9ended Se!tember:, +otak
%ahindra>1oldman Sachs to!!ed the hea! by executing 1/ deals valued at L2";/
billion 9about 11,222 crore:" #his bank was ranked @o" 7 last year in the !rocess, the
investment bank has increased its share by 722 basis !oints from 1/"1G for last year
to 1A"/G now" %organ Stanley retained its @o 2 !osition, having sewn u! 11 deals
worth L2"2/ billion so far" ts market share is u! ;2 basis !oints to 1;"2G" Stock
!rices have gone u! because of !rofitability" ndian com!anies are also looking at
overseas o!!ortunities" %'A are also getting hit because more ' more com!anies
are o!ting for the global de!ository recei!ts>foreign currency convertible bonds issue
to sate their ca!ital needs" #he analyst sees !harmaceuticals, information technology
' engineering s!ecifically auto ancillaries as the areas where an increasing amount of
%'As will take !lace in ndia"
8a!id valuation changes do cause some delays, but in the end, the deals go through if
there are benefits to both !arties" nfrastructure related business, airlines and the auto
com!onent sectors as being !rime for ac$uisitions"
INDIA8S TO4 %) M&A 4LAYERS
4LAYERS Ran$
6)B
Ran$
8)C
M$t
#hae8
)B
M$t
#hae8
)C
Val,e
DE.F
Deal#
+otak>1oldman Sachs 1 7 1A"/ 1/"1 2,;/7 1/
7/
Merchant Banking
%organ Stanley 2 2 1;"2 17"A 2 ,22A 11
%errill Cynch ' 6o" / / 12"1 17 1,AA1 12
Standard 6hartered 7 9 <"A 7"B 9B1 ;
Ernst ' Moung ; 1 <"A 1<"9 9B2 /A
6itigrou! < < <"< 11 9<2 B
Ambit 6or!orate )in A B <"7 7"9 9/< 21
4BS 1rou! B - 7"B - A27 1
66 Securities 9 ; 7"7 12"2 <79 12
3BS 12- - /"B - ;;2 /
8ankings based on deals in u! to /2
th
Se!tember, 222A "
4LAYERS IN MERCHANT BANKING
1. ENAM
E@A% was founded in19B7 to !rovide knowledge-driven financial services at the
time when ndian economy investors faced a bewildering array of o!tions" E@A% is
the one of the largest underwriters in ndia" E@A% offers !romising ' exciting
com!anies the o!!ortunity of assessing the !ublic market e$uity finances" E@A%0s
long-term association with ca!ital markets ' !rimary markets has !rovided it with
dee! insights of the functioning of ndian financial institutions"
#he merchant banking services !rovided by E@A% areF -
)uity debt+syndication, 8aising ca!ital through a !rivate !lacement of a
com!any0s securities is an effective ' timely offering to a !ublic offering" E@A%
re!resents the clients in the !rivate !lacement of debt and e$uity with institutional
' high net worth investors"
-orporate Restructuring, ' E@A% !rovides client with strategic and !ractical
solutions to financial challenges" #heir restructuring services includes %ergers '
Ac$uisitions, #akeovers, 4ebt restructuring, Buyers services etc"
E@A% also !rovide the seed stage services, value creation services and ,D0s
advisory services which are re!resented belowF
77
Merchant Banking
2. ICICI SECURITIES
66 Securities Cimited is a leader across the s!ectrum of %erchant Banking" Ee are
ex!erienced in every as!ect of the business from domestic and international ca!ital
markets advisory, to %'A advisory, ,rivate E$uity syndication, 8estructuring and
infrastructure advisory" Dur investment banking team, based across key cities in ndia
and @ew Mork, Condon, and Singa!ore consists of !rofessionals with ex!ertise across
a range of industries"
66 SE638#ES !rovide following servicesF
Mergers and #cuisitions, ' 66 Securities Cimited is amongst the first ndian
investment Banks to form a dedicated %'A !ractice and continues to be a leader
by !roviding innovative and uni$ue solutions to achieve varied ob&ectives of the
client" #hey offer a full range of advisory services, which include &oint ventures,
mergers, ac$uisitions, and divestitures"
)uity -apital Markets, ' 66 Securities Cimited is at the forefront of ca!ital
markets advisory having been involved in most ma&or book building and fixed
!rice offerings over the last decade" t is amongst the leading underwriters of
ndian e$uity and e$uity-linked offerings"
Infrastructure #dvisory, ' 66 Securities Cimited has a dedicated infrastructure
vertical focused on assisting clients in identifying and ca!italising on the
7;
Merchant Banking
o!!ortunities thrown u! by the all !ervasive boom in the ndian infrastructure
sector"
.ealing *ith Bulls and Bears, - 66 Securities Cimited assists global
institutional investors to make the right decisions through insightful research
coverage and a client focused Sales and 4ealing team" #he e$uity grou!
leverages research and distribution reach to domestic and foreign institutional
investors in case of !ublic offerings"
#hus the $uality of analysis and client servicing standards, are a testimony to the
$uality of 66 SE638#ES team"
3. KOTAK SECURITIES LIMITED
+otak Securities Cimited, a subsidiary of +otak %ahindra Bank, is the stock broking
and distribution arm of the +otak %ahindra 1rou!" #he com!any was set u! in 1997"
+otak Securities is a cor!orate member of both #he Bombay Stock Exchange and #he
@ational Stock Exchange of ndia Cimited" ts o!erations include stock broking and
distribution of various financial !roducts - including !rivate and secondary !lacement
of debt and e$uity and mutual funds" 6urrently, +otak Securities is one of the largest
broking houses in ndia with wide geogra!hical reach"
#he com!any has four main areas of businessF
/otak Institutional )uities, ' +otak nstitutional E$uities, among the to!
institutional brokers in ndia" t mainly covers secondary market broking and the
marketing of e$uity offerings, including ,Ds, to domestic and foreign
institutional investors"
(tructured Finance !0ro1ect Finance " #dvisory Business$, '+%66 has
develo!ed ex!ertise in various vertical segments in the infrastructure sector
including !ower, oil, gas, !orts, automobiles, steel ' metals and hotels, by
offering structured finance solutions" Some of the transactions executed by this
team includeF
Advisor to )ord on financial closure for its 6ar !ro&ect in ndia"
Advisor to one of the largest C@1 !ro&ects on the Eestern coast of ndia"
7<
Merchant Banking
)inancial advisors and loan syndications to British 1as and 1AC"
Mergers " #cuisitions, 'n the area of %ergers ' Ac$uisitions, we !rovide
our clients ex!ertise and a com!rehensive set of services that hel! them achieve
their strategic and financial ob&ectives" Dur s!ectrum of services includeF
4ivestments
S!in-Dffs > 8estructuring ' Hoint Ientures > Strategic Alliances
4. CITIGROU4
6itigrou! 6or!orate and nvestment Banking achieve the extraordinary for our clients
around the world" @o financial institution is more committed to advancing the goals
of its clientsNour diverse and talented staff in more than 122 countries advises
com!anies, governments and institutions on the best ways to reali5e their strategic
ob&ectives" Ee create solutions for and !rovide the broadest !ossible ca!ital and
market access to thousands of issuer and investor clients" And no institution better
executes the increasingly com!lex !ayment and cash management solutions re$uired
in todayJs global economy" #he features 6itigrou! are as followsF -
Dver the years, 6itigrou! has established a track record of outstanding business
milestones such as 6ash %anagement, !ioneered by 6itigrou! in 19B< and
utili5ed by over 922 6or!orates with through-!uts totaling around L /; billion
9BG of ndiaJs 14,:"
t is ndiaJs largest foreign bank in the )O 9foreign exchange: market with a 17 !er
cent market share"
As the leading custodian, 6itibank has over L22 billion of custody assets under
management"
7A
Merchant Banking
5. DS4 MERRILL LYNCH LTD9
4S, %errill Cynch Cimited 94S,%C:, among ndiaJs leading investment banking and
brokerage com!any, is a culmination of a long standing relationshi! between 4S,
)inancial 6onsultants Ctd", and %errill Cynch ' 6o", the leading international ca!ital
raising, financial management and advisory com!any" 4S,%C is a full service
investment bank and broking com!any with leadershi! !osition in %'A, 6a!ital
8aising, Securities 8esearch, E$uity ' 4ebt Brokering, and nvestment Advisory
services" Euro money %aga5ine has ranked 4S,%C as the PBest 4omestic Securities
firm in ndiaP for the last four consecutive years" #his #ransaction heralds 4S,%C as
a key !layer in the !rivate e$uity market" #he service features of 4S,%C are as
followsF -
4S,%C has consistently been rated as one of ndiaJs leaders in origination,
distribution, and trading of e$uity and debt securities"
4S,%C has consistently brought re!utable issues to the ca!ital markets"
7B
Merchant Banking
A diverse client base made u! of ndiaJs most !restigious !rivate and !ublic sector
cor!orations and multinational cor!orations have rendered 4S,%C a
commanding !resence in the ndian ca!ital market"
#hrough direct marketJs grou!, 4S,%C offers investors access to every ma&or
initial or subse$uent !ublic offering"
4S, %errill Cynch is the leading underwriter of ndian e$uity and e$uity-linked
offerings across domestic and international markets" By leveraging their extensive
knowledge of local markets and global resources, they have delivered innovative
and customi5ed solutions to their clients"
6. U4FCDUtta 4a!e#h Finan/ial Co-oationF
Scheme for merchant banking ' financial services
4ecades ago 3,)6 has taken a humble ste! for the industrial develo!ment of
3"," by !roviding term loan assistance to small ' medium scale units" Since then it
has ac$uired a matured !rofessional a!!roach in ndustrial )inancing, several small-
scale units nurtured by 3,)6 has groomed into big enter!rises"
n order to meet the challenges of liberali5ed !olicy of the 1overnment ' 6hanged
economic Scenario, 3,)6 has started %erchant Banking ' other financial Services to
serve its valued clients" 3,)6, a category- %erchant Banker with unmatched
ex!ertise in !ro&ect a!!raisal and term lending offers a whole gamut of %erchant
Banking Services"
1" I##,e .ana0e.ent3 3,)6 !rovides ex!ert services to manage !ublic issues of
the com!anies successfully* it has already managed ,ublic ssues as a lead
%anager with great success"
2" Un!e+itin03 n order to !rovide a !rotective umbrella to the !ublic issues of its
clients, 3,)6 also underwrites the issue"
79
Merchant Banking
/" S,5#/i-tion to e7,it" #hae3 3,)6 subscribes to the e$uity shares reserved
under ) $uota, to enable the com!any to market the !ublic issue effectively"
7" A!1i#o" #e1i/e#3 3,)6, with its long ex!erience, advises its clients for various
advisory services such as ca!ital Structuring, loan syndication etc"
;" 4o?e/t /eti*i/ation3 3,)6 also certifies the !ro&ects going to ca!ital markets
for raising funds" #his is a s!eciali5ed activity of the 6or!oration"
<" Othe *inan/ial #e1i/e#3 As a !art of its commitment to !rovide !rofessionali5ed
financial services to its clients, 3,)6 also offers Bill 4iscounting, E$ui!ment
Ceasing ' (ire ,urchase Services, Short- term loan, Brand E$uity loan, etc to
meet diversified re$uirements of itJs clients
7. @M Mo0an Stanle"
nvestment Banking focuses on ca!ital raising, mergers, ac$uisitions, restructuring
and financial advisory and !rivate e$uity for ndian cor!orates in the international and
domestic ca!ital markets" #hrough innovation and value-added services, the firm has
contributed immensely to the overall develo!ment of the ca!ital market and mergers
and ac$uisitions in ndia" t have the merchant banking and underwriting licenses
from the ndian securities market regulator, the Securities and Exchange Board of
ndia" Some of the recent transactions of H% %organ Stanley
3SL 22%% fund raising for @i!una Services 9a B,D subsidiary of Satyam
6om!uter Services:
;2
Merchant Banking
8s" /,219 %% !referential allotment of e$uity shares> warrants in Ba&a& Auto
)inance Cimited to financial investors and the !romoter, Ba&a& Auto Cimited"
#he services of H% %organ Stanley areF
H% %organ Stanley has a dedicated grou! that regularly interacts with
over 72 financial investors in ndia as well as overseas"
H% %organ Stanley offers research-based investment advisory and
e$uity broking services to cor!orates, high net-worth individuals and retail
investors across a wide range of financial !roducts"
#hey are known for lead managing some of the most com!lex and
innovative and large e$uity and debt offerings in ndia and abroad by the ndian
issuers" A robust deal-flow across sectors has allowed them to build significant
traction with the financial investors" #his hel!s in raising !rivate e$uity ca!ital for
the com!anies"
MERCHANT BANKING>FUTURE DEVELO4MENT
#ime and again the %erchant banking ndustry in ndia witnessed, ex!erienced and
underwent significant changes" #he very !ur!ose for which these firms are
commences their services should be taken care of and they should mould their !olicy
decision and activities to move in tune with the main ob&ectives of nvestor0s
!rotection and to create healthy environment in ca!ital markets" @o doubt, %erchant
Banking firms are sub&ect to a host of control measures, regulations and rules framed
and guided by SEB" #o some extent, fre$uent changes and >or amendments to
!olicies and control measures, though needed for smooth working of the securities
ndustry, !roves to be detrimental to the very existence of the %erchant Banking
system in the country" #he SEB0s Act 1992 confers !ower u!on SEB to su!ervise
and control the affairs of the %erchant Banking firms in ndia"
;1
Merchant Banking
#he various studies which had been undertaken in ndia for evaluating the
!erformance of %erchant Banking firms and the im!lications of these on securities
industry" @o single study has been emerged so far !ertaining to the evaluation of
%erchant Banking firms and in-de!th study on their activities as well as o!erational
and financial !erformance in the light of changing regulatory environment"
n recent !ast, the small investor has turned his back on the !rimary ca!ital market"
ssue after issue as failed to ca!ture his imagination, rekindle his enthusiasm, and
reinforce his faith" (e has lost all ho!es of a!!reciation of his investment" And this
when all these years millions have though ca!ital market, ate ca!ital market and
dreamt ca!ital market" t needed an extraordinary effort and skill the drive the small
investor awayQ (igh !remiums, false !remiums and gray market o!erations" #he
!rofessed !rotector of his interests first laid down the dictum of !ro!ortionate
allotment, then of minimum subscri!tion, all working against his interests" #his
would make an observant student of the stock market infer that there is some game
!lan afoot to dethrone the small investor from his !rominent* he was believed to be
the king"
Eith the coming to SEB, an organisation that was ostensibly brought into existence
to guard the interest of the small investor, ho!es ran high that the small investor
would now have a safe !laying field" But these ho!es were soon belied" )ar from
guarding the interests of the investing !ublic, SEB embarked on a course of action,
which has !ositively hurt them" #he latest fiat of EB bans cor!orate advertising after
the recei!t of acknowledgement card by a com!any wanting to go !ublic" SEB0s this
action has caused the closure of an information window" @ow ;2 million !otential
investors are de!rived of official and authentic information given by the ssuer" t is
hard to understand reasons for this drastic and totally uncalled for action" Ehile there
has been no official ex!lanation for this fiat, there is reason to believe that it may be
based on a wrong !erce!tion of the role for cor!orate advertising"
All this has been done !erha!s because the cor!orate and intermediaries is to follow
the !ractices of Eestern ca!ital markets here, oblivious of the fact that our ca!ital
markets are altogether different in structure, in systems and in the number of
!artici!ants)reedom of commercial ex!ression could be ex!loited by some to serve
;2
Merchant Banking
their own ends, &ust a s freedom of s!eech and ex!ression could be abused but this has
not led our 1overnment to !ut arbitrary restrictions on our freedom"
%erchant Bankers have reason to believe they will be handica!!ed without the
marketing su!!ort" But the worst sufferer would be the investor, es!ecially the small
investor it is this class, which forms the backbone of the ca!ital market" As a result of
the ban, the small investor would be de!rived of the o!!ortunity to study the
cor!orate !rofile of the ssuer" n the absence of ade$uate information, they will have
to de!end on mani!ulated facts and information fed by unreliable sources"
Besides, there are larger issuers arising out of SEB0s action" )rom the !oint of view
of liberalisation of the economy, SEB has taken a retrograde ste!" A market economy
flourished through bigger markets, higher sales and lesser !rofits" #o achieve this
!erformance, a com!any needs an aggressive marketing !lan and advertising effort is
the main thrust to such a !lan" @o marketing !lan can be worthwhile unless it is
backed by an effective advertising !lan" #he ban im!osed by SEB ni!s the
marketing !lan in the bud"
#he ndian !rimary ca!ital market is basically a retail market" t consists of
innumerable investors who take own individual investment decisions" Ehatever, the
system, it is this market that will bring in the funds" f these markets destabilised, the
investors will look for alternative avenues to invest their funds" SEB in its one of the
first documents on =SEB and nvestor ,rotection, 4evelo!ment and 8egulation of
Securities %arket? clearly s!ecifies significance of regulating ca!ital market and its
future !lans for fulfilling the twin ob&ectives vi5", 4evelo!ment of ca!ital market and
investor !rotection are ex!lained in introductory !aragra!hs" t s!eak out that, =#he
decade of the 19B2 witnessed a !henomenal growth and develo!ment of the securities
market, demonstrated its !otential not only to mobili5e the savings of the horseshold
sector but also to allocate it with some degree of efficiency for industrial
develo!ment" #he dilution of the holdings of the multinational com!anies at
affordable !rices in the latter !art of the 19A2s had generated considerable interest,
which was, carries well into the next decade" Several com!anies0 came in the early
!art of the 19B2s and successfully raised large resources from the market es!ecially
through debt instruments, which further sustained investor interest" #here were
several changes in 1overnment !olicy, which significantly influenced industry and
;/
Merchant Banking
aided the market" ndia was then entering the !hase of liberali5ation and decontrol
which was to accelerate and gather momentum in the 19B2s"
By the end of the decade, the securities market in ndia came to be firmly integrated
with the financial system of the country" Eith the cor!orate sector increasingly
relying on the securities market for meeting their long-term re$uirement of funds, the
securities market their long-term re$uirement of funds* the securities market
com!eted on e$ual terms with the 4evelo!ment )inancial nstitutions, which were the
traditional !urveyors of long-term ca!ital" #he emergence of the securities markets
into the main stream of the financial system of the country was thus one of the ma&or
economic !rocesses of the 19B2s R an inevitable outcome of the maturing !rocess of
the financial system" #hey brought about notable changes in the ca!ital structure of
the com!anies across industries, gave birth to new intermediaries and institutions in
the securities market and created a new awareness and interest in investment
o!!ortunities in the securities market among investor" n s!ite market, its $uality
lagged far behind and there was absence of ade$uate !rofessionalism and fair
com!etition among the various !layers in the market" Besides, the regulatory
framework then !revailing was fragmented difficult, if not effective"
QUESTIONAIRE
STATE BANK OF INDIA KOTAK MAHINDRA BANK
%. /etails of the person Interviewed
@ameF- Iasudha Eaman Hoshi @ameF- 6handrakala 1ururani
KualificationF- 1raduate in %aths KualificatinF- B"com 1raduate '
%BA96)A:
Ex!erienceF- 2/ years Ex!erienceF- 1 years
&. 0hich activities does your Company1Bank undertakes2
;7
Merchant Banking
m!ort>Ex!ort, 8emittances, ssue (ome loan, ,ersonal loan, over
of Bank guarantees and letter of credit drafts, etc" But not into credit
card
'. 0hat are the service provided2
Dn !resentation of 4ocuments in Dverdraft facilities, settlement of
case of !hysical m!ort>Ex!ort" 6ash" Bank to bank sercices
8e$uired !roof in case of remittances"
7: According to you what is the need for Merchant Banking2
)acilities to the banks like funds, su!!ort from government
nfrastructure,etc so that more and to aware the banks and com!ani
more banks can have this facility es about the schemes available
in there bank and !rovide more
services related to the same
;: Ehat is m!ortance of %erchant BankingS
4ue to this !eo!le will en&oy those #his hel!s the mergers
services which are not !rovided by
commercial banks
<: @ames of the com!any with which you crack deals
Shiv shakti !lastic, nglobe and Ii&ayan 1rou! of (otels, Shree
shreeram ndustries,etc nath hunday and other small
com!anies
;;
Merchant Banking
ANNEXURE
SCHEDULE I > FORMS
FORM A
SECURITIES AND EXCHANGE BOARD OF INDIA
DMERCHANT BANKERSF REGULATIONS: %&&2
DREGULATION GF
;<
Merchant Banking
A,,C6A#D@ )D8 18A@# D) 6E8#)6A#E >
8E@EEAC D) 6E8#)6A#E
A44#D@AC @)D8%A#D@ )D8 )8ES( 8E1S#8A#D@
@A%E D) A,,C6A@#
6A#E1D8MF
6D@#A6# @A%E TTTTTTTTTTTTTTTTTTTTTT
#ECE,(D@E @DF TTTTTTTTTTTTTTTTTTTTT
@S#836#D@S )D8 )CC@1 3, )D8%
1" s im!ortant that this a!!lication form should be filled in accordance with the
regulations"
2" A!!licants must submit a com!leted a!!lication form together with a!!ro!riate
su!!orting documents to the Board"
/" A!!lication for registration will be considered !rovided it is com!lete in all
res!ects"
7" Answers must be ty!ed"
;"All signatures must be original"
<"nformation, which needs to be su!!lied in more details, may be given on se!arate
sheets, which should be attached to the a!!lication form"
1" ,A8#63CA8S D) #(E A,,C6A@#
1"1 @ame of the A!!licantF
1"2 9A: Address - ,rinci!al ,lace of business > 8egistered Dffice of the 6om!any"
,in codeF TTTTTTTTTTTTTTTTTTTTTT #ele!hone @oFTTTTTTTTTTTTTTTT
#elex @oFTTTTTTTTTTTTTTTTTTTTTT)ax @oFTTTTTTTTTTTTTTTTTTTTTT
9B: Address for 6orres!ondenceF
,in codeFTTTTTTTTTTTTTTTTTTTTTT#ele!hone @oFTTTTTTTTTTTTTTTT
#elex @oFTTTTTTTTTTTTTTTTTTTTTT)ax @oFTTTTTTTTTTTTTTTTTTTTTT
96: Address of Branch DfficesF
2" D81A@SA#D@ S#836#38E
9Drgani5ation 6hart se!arately showing functional res!onsibilities of %erchant
Banking activities to be enclosed:"
2"1 Db&ectivesF-
9#o be given in brief along with co!y of %emorandum and Articles of Association:"
2"2 4ate and ,lace of ncor!orationF
4ay %onth Mear ,lace
;A
Merchant Banking
2"/ Status of the A!!licantF
9e"g" limited com!any - ,rivate>,ublic, unlimited com!any, !artnershi!, !ro!rietary,
others" f listed, names of Stock Exchanges and latest share !rice to be given:"
2"7 ,articulars of all 4irectors>,artners>,ro!rietorsF-
@ame
Kualification
Ex!erience in %erchant Banking '
)inancial Services related areas
Share in a!!licants firm com!any
4irectorshi! in other com!anies
2"; ,articulars of +ey %anagement ,ersonnelF 9,articulars of merchant banking
division:
@ame
Kualification
Ex!erience with !articular
reference to merchant banking
4ate of a!!ointment
)unctional areas
2"< @ame and activities of associate com!anies>concerns
@ame of 6om!any
Address>firm
#y!e of activity handled
@ature of nterest of ,romoter>4irector
@ature and interest of A!!licant 6om!any
/" B3S@ESS @)D8%A#D@
/"1 (istory, ma&or events and !resent activitiesF
/"2 4etails of Ex!erience in %erchant Banking activities"
/"/ Ex!erience in other financial services renderedF-
/"7 Business handled during the last three yearsF
a: ssue %anagement
@ame of client
#y!e of ssue
Si5e of ssue
;B
Merchant Banking
Mear of ssue
#imes subscribed
@ame of lead merchant banker
)unctional res!onsibilities
b: nvestment AdviserF -
@ame of 6lient Mear for which services are rendered
@ature of services rendered
c: 3nderwriting
@ame of client #y!e and si5e
Amount underwritten of ssue
G Age of issue under Mear of ssue
Ehether there was any devolvement written
d: ,ortfolio %anagement
@ame of Scheme
)eatures of the Scheme
@umber of 6lients
#otal Iolume of )unds managed
Average 8eturns
e: 6onsultants>Advisors to the ssue
@ame of the 6lient
Mear of ssue
#y!e and Si5e of ssue
@ature of services rendered
@ame of Cead %erchant Banker9s:
7" 6CE@# @)D8%A#D@
7"1 Cist of ma&or clients with address
@ame
Services 8endered
7"2 f the a!!licant is !ro!osing to engage in %erchant Banking activities for the first
time, the ex!erience of key management !ersonnel to be indicated"
@ame of +ey management !ersonnel
Kualification
,revious !ositions held
Ex!erience !articularly in res!ect of merchant banking activities
;9
Merchant Banking
7"2 9a: f the a!!licant is !ro!osing to engage in %erchant Banking activities for the
first time, business !lan of the com!any with !ro&ected volume of activities and
income for which registration is sought to be s!ecifically given"
7"/ 4etails of infrastructure including com!uting facilities, e$uity research and
database available with the a!!licant"
7"7 Any other information considered relevant to the nature of services rendered by
the a!!licant"
;" )@A@6AC @)D8%A#D@
;"1 6a!ital Structure 98s" in lakhs:

Mear !rior to the !receding year of current year ,receding year 6urrent year
a: ,aid-u! ca!ital
b: )ree reserves
9excluding re- valuation reserves:

c: #otal 9a: U 9b:
@oteF - 1" n case of !artnershi! or !ro!rietary concerns, !lease indicate ca!ital minus
drawings"
2" n case of !artnershi! or !ro!rietary concerns, !lease indicate the financial !osition,
means, and networth of the !artners"
;"2 4e!loyment of 8esources 98s" in lakhs:
Mear !rior to the !receding year of current year ,receding year 6urrent year
9a: )ixed Assets
9b: ,lant ' %achinery and
Dffice E$ui!ment

9c: Kuoted nvestments
9d: 3n$uoted nvestments
9e: 4etails of Ci$uid Assets
9f: Dthers
94etails of nvestments, Coans ' Advances made to Associate 6om!anies> firms
where ,romoters> 4irectors have an interest be se!arately given:"
;"/ %a&or Sources of ncomeF 98s" in lakhs:
Mear !rior to the !receding year of ,receding 6urrent year V)ees charged as G of
<2
Merchant Banking
current year year issue
9a: ssue %anagement
9b: 3nderwriting
9c: ,ortfolio %anagement
9d: 6onsultant> Advisor to ssue
9e: nvestment Adviser
9f: Dthers
VAs fees charged by the merchant banker may vary from issue to issue, !lease
indicate range within which fees have been charged"
;"7 @et ,rofit
Mear !rior to the !receding year of current year ,receding year 6urrent year
;" ; 4ividend
Mear !rior to the !receding year of current year ,receding year 6urrent year
Amount
,ercentage
@oteF ,lease enclose three years of audited annual accounts" Ehere unaudited re!orts
are submitted, give reasons" f minimum networth re$uirement has been met after last
audited annual accounts, audited statement of accounts of a later date also be
submitted"
;"< Cist of ma&or shareholders 9holding ;G and above of a!!licant directly or along
with associates R
A!!licable only to limited com!anies:
Shareholding as onF TTTTTTTTTTTTTTTTTTTTTTTTTTTTTT
@ame of shareholder
@o" of Shares held
G age of total !aid u! ca!ital of the com!any
;"A @ame and Address of the ,rinci!al bankers of the a!!licant"
;"B @ame and address of the Auditors"
<" D#(E8 @)D8%A#D@
<"1 4etails of all settled and !ending dis!utesF
<1
Merchant Banking
@ature of dis!ute @ame of the !arty ,ending>settled"
<"2 ndictment of involvement in any economic offences by the a!!licant or any of
the 4irectors, or key managerial ,ersonnel in the last three years"
4E6CA8A#D@
#(S 4E6CA8A#D@ %3S# BE S1@E4 BM #ED 48E6#D8S, #ED
,A8#@E8S D8 #(E SDCE ,8D,8E#D8 AS #(E 6ASE %AM BE
>Ee hereby a!!ly for registration" >Ee warrant that >Ee have truthfully and fully
answered the $uestions above and !rovided all the information which might
reasonably be considered relevant for the !ur!oses of my registration" >Ee declare
that the information su!!lied in the a!!lication form is com!lete and correct"
)or and on behalf of ------------------------------------------ 9@ame of A!!licant:
4irector>,artner or Sole ,ro!rietor 4irector>,artner TTTTTTTTTTTTTTTTTTT
9@ame in Block Cetters: 9@ame in Block Cetters: TTTTTTTTTTTTTTTTTTTTTTT
4ate
FORM B
SECURITIES AND EXCHANGE BOARD OF INDIA
DMERCHANT BANKERSF REGULATIONS: %&&2
DREGULATION H
CERTIFICATE OF REGISTRATIONF
n exercise of the !owers conferred by sub-section 91: of section 12 of the Securities
and Exchange Board of ndia Act, 1992, read with the rules and regulations made
there under the Board hereby grants a certificate of registration to
TTTTTTTTTTTTTTTTTTTTTTTTTTTTTT as a merchant banker in 6ategory sub&ect to
the conditions in the rules and in accordance with the regulations to carry out the
following activitiesF -
1" %anagement of any issue, including !re!aration of !ros!ectus, gathering
information relating to the ssue, determining financing structure, tie u! of financiers,
final allotment and refund of excess a!!lication money"
<2
Merchant Banking
2" nvestment Advisor"
;" %anagers, 6onsultant or Adviser to any issue including cor!orate advisory
services"
<" 6onsultant or Advisor"
9V4elete whichever are not a!!licable:
" 8egistration 6ode for the merchant banker is %B > > >
" #his certificate shall be valid from TTTTTTTTTTTTT to TTTTTTTTT and may be
renewed as s!ecified in regulation 9 of Securities and Exchange Board of ndia
9%erchant Bankers: 8egulations, 1992"
,lace
4ate
By Drder
Sd>-
)or and on behalf of Securities and Exchange Board of ndia
FORM C
SECURITIES AND EXCHANGE BOARD OF INDIA
DMERCHANT BANKERSF REGULATIONS: %&&2
DREGULATION 2GF
43E 4C1E@6E 6E8#)6A#E
#o,
SE638#ES A@4 EO6(A@1E BDA84 D) @4A
4ear Sirs,
S3BF SS3E D) TTTTTTTTTTTTTTTTTTTT BM TTTTTTTTTTTTTTTTTTTTTTT C#4"
Ee, the under noted Cead %anager9s: to the above mentioned forthcoming issue state
as followsF
1" Ee have while finali5ing the draft !ros!ectus>letter of offer !ertaining to the said
issue have examined various documents and other material as for ade$uate disclosures
to the investor*
</
Merchant Banking
2" Dn the basis of such examination and the discussions with the com!any, its
directors and other officers, other agencies, inde!endent verification of the statements
concerning ob&ects of the issue the contents of the documents and other material
furnished by the com!any, EE 6D@)8% thatF
9a: the draft !ros!ectus>letter of offer forwarded to SEB is in conformity with the
documents, materials and !a!ers relevant to the issue*
9b: all the legal re$uirements connected with the said issue have been duly com!lied
with* and
9c: the disclosures made in the draft !ros!ectus>letter of offer are true, fair and
ade$uate to enable the investors to make a well informed decision as to the investment
in the !ro!osed issue"
,CA6EF
4A#EF
CEA4 %A@A1E8 9S: #D #(E SS3E
@" B" A list of documents and materials examined may be forwarded along with this
certificate"
*oot notes
&3 #he figures 4II1III1I,4 after the word 4Category I4 and before the words 4sub5ect
to the conditions4 in paragraph % in *orm A of Schedule I were deleted by S6BI
7Merchant Bankers. 7Amendment. 8egulations, %99: published in the ;fficial <a=ette
of India dated >:>:%99:
&9 #he words 4' ?nderwriting of Issue4 and 4( @ortfolio Manager Service4 after
the words 4% Investment Adviser4 in paragraph % in *orm B of Schedule I were
deleted by the S6BI 7Merchant Bankers. 7Amendment. 8egulations, %99: published in
the ;fficial <a=ette of India dated >:>:%99:
<7
Merchant Banking
<;
Merchant Banking
CONCLUSION
#he merchant banker !lays a vital role in channelising the financial sur!lus of
the society into !roductive investment avenues" (ence before selecting a merchant
banker, one must decide what are the services for which he is being a!!roached"
Selecting the right intermediary who has the necessary skills to meet the re$uirements
of the client will ensure success"
t can be said that this !ro&ect hel!ed me to understand every details about
%erchant Banking and in future how its going to get emerged in the ndian economy"
(ence, %erchant Banking can be considered as essential financial body in ndian
financial system"
%arket develo!ment is !redicated on a sound, fair and trans!arent regulatory
framework" #o sustain the growth of the market and crystalli5e the growing
awareness and interest into a committed, discerning and growing awareness and
interest into a essential to remove the trading mal!ractice and structural inade$uacies
!revailing in the market, and !rovide the investors an organi5ed, well regulated
market !lace in future"
<<
Merchant Banking
BIBLIOGRA4HY
BOOKS REFFERED
%erchant Banker R ("8" S3@EHA
%erchant Banking ,rinci!les ' ,ractices- ("8"%A6(8AH3
%erchant Banking in ndia-
B"6" CA+S(%A@@A ' 6"@" +8S(@A
@A+
%erchant Banking R H"6"IE8%A 9/
rd
' 7
th
Edition:
;EBSITES
www"google"co"in
www"yahoo"com
www"economictimes"com
www"&mmorgansranley"com
www"ds!ml"com
www"sebi"com
<A