MERCHANT

BANKING

MERCHANT BANKING

A set of financial institutions that are

engaged in providing specialist services,
which generally include the acceptance of
bills of exchange, corporate finance,
portfolio management & other banking
services.
A merchant bank is a financial institution
primarily engaged in offering financial
services and advice to corporations and
wealthy individuals on how to use their
money.

According to SEBI Merchant Bankers rules 1992

& The Notification of the Ministry of Finance
the merchant banker is:

Any person who is engaged in the business of

issue management either by making arrangements
regarding selling , buying or subscribing to securities
as manager-consultant ,advisor or rendering
corporate advisory services in relation to such issue
management.

MERCHANT BANKING

Merchant banking primarily involves financial

advice and services for large corporations
and wealthy individuals.
Merchant banks do not provide regular
banking services to the general public.
Merchant banks invest their own capital in
client companies & provide services for
merger & acquisition.

CONTD..

A merchant bank is sometimes said to be a

wholesale bank , or in the business of
wholesale banking.

MERCHANT BANKING: ORIGIN

Merchant banking came into existence in 17 th

& 18th century in Italy & France
Merchant banking in the modern era started
from London
Merchant Banking officially came to India
through (Foreign Bank) Grindlays Bank in
1967
Recognized the requirements of upcoming
class of Entrepreneurs for diverse financial
services

CONTD..

Few other Institutes

who joined the
bandwagon :Citibank set up its merchant banking division
in India in 1970.
Indian Bank started banking services from
1972
SBI started the merchant banking division in
1972
Many other banks came after this like ICICI,
Canara Bank, UCO Bank etc

MAIN MERCHANT BANKING

COMPANIES
Public Sector

ORGANIZATIONS OFFERING MB
SERVICES

Commercial Banks: SBI (SBICAP), Canbank

Financial Services Ltd. (Canfina), and Bank of
Baroda Fiscal Services Ltd. (BOB Fiscal)
All India Financial Institutions: ICICI, IFC &
IDBI.
Private Consultancy Firms: DSP Financial
Consultants,
Credit
Capital
Finance
Corporation Ltd., J M Financial Services Ltd.

MERCHANT BANKING ACTIVITIES ARE REGULATED BY

1.Guidelines of SEBI & Ministry of Finance

2.Companies Act, 1956
3.Listing Guidelines of Stock Exchange and
4.Securities Contracts (Regulation) Act,1956

REGULATIONS OF MERCHANT BANKING:

The merchant banking activity in India is

governed by SEBI (Merchant Bankers)
Regulations, 1992.
Registration with SEBI is mandatory to carry
out the business of merchant banking in India.
An applicant should comply with the following
norms: i) The applicant should be a corporate
body.
ii) The applicant should have necessary
infrastructure like office space, equipment,
manpower, etc.

CONTD..
iii) The applicant must have at least two
employees with prior experience in merchant
banking.
iv) Any associate company, group company,
subsidiary or interconnected company of the
applicant should not have been a registered
merchant banker.
v) The applicant should not have been involved in
any securities scam or proved guilt for any
offence.
vi) The applicant should have a minimum net
worth Rs50 million.

WHO CAN BE A MERCHANT

BANKER?

REQUIREMENTS FOR SETTING

UP A MERCHANT BANK
Merchant Bank

QUALITIES OF A GOOD
MERCHANT BANKER

PRIME OBJECTIVES OF A
MERCHANT BANKING

Providing long term funds to the projects or

companies
Project Counseling-Loan syndication , project
appraisal and arrangement of working capital
Deciding the capital structure
Portfolio Management
Underwriting
Corporate advisory & issue management

SERVICES OF MERCHANT
BANKER

Project counseling
Pre investment activities
Feasibility studies
Project reports
Design of capital structure
Issue management & underwriting
Loan syndication
Mobilization of funds from non resident Indians
Foreign currency finance
Merger, amalgamations and takeovers
Venture capital
Buy-back and public deposits

ISSUE MANAGEMENT &

UNDERWRITING

Preparation of an action plan

Preparation of the budget for the total
expenses for the issue
Drafting prospectus
Selection of institutional & broker
underwriters
Selection of issue houses & advertising
agencies

CONTD

Approval of institutional underwriters &

stock exchanges for publication of prospectus
Co-ordination with the underwriters, brokers
and bankers to the issue
Providing advice on the design of a sound
capital structure.

CORPORATE COUNSELING

A set of activities undertaken for efficient

running of a corporate enterprise.
Identifying areas of growth & diversification
Guiding clients on aspects like locational
factors, organizational size, investment
decisions, choice of product
Act as a financial & investment expert.

PROJECT COUNSELING

Its a part of corporate counseling & deals

with analysis of project viability.
Comprises of preparation of project report &
deciding finance pattern for cost of project
General review of project ideas & providing
advice on procedural aspects
Review of technical feasibility
Assisting in preparing project reports &
obtaining approvals
Identification of potential investment avenues
Arranging & negotiating foreign collaborations,
mergers & takeovers

WORKING CAPITAL FINANCE

Meeting the day to day expenses of an

enterprise is working capital finance.
Assessing working capital requirements
Preparing
necessary
application
for
negotiation for the sanction of credit
Coordinating & expediting documentation &
other formalities

PORTFOLIO MANAGEMENT

Decides quantum ,timing & type of security to be

bought.

Advice on selection of investment

Critical evaluation of investment portfolio

Help in achieving maximum return with minimum risk by

proper combination of securities.

Collecting & remitting interest & dividend on investment

Tax counseling
consultants

&

filing

tax

returns

through

tax

CAPITAL RESTRUCTURING
SERVICES

Deals with Mergers & Acquisitions

Its a specialized service of merchant bankers
wherein they act as middle-men in
negotiating between two companies.
Offers
expert
evaluation
regarding
identification of organizations with matching
characteristics
Obtaining approvals from various authorities.

CREDIT SYNDICATION

Activities connected with credit procurement

& project financing
Aimed at raising Indian & Foreign Currency
loans from banks & financial institutions.
Estimating the total cost
Drawing up financial plan conforming the
requirements of the promoters, financial
institutions & banks, government agencies &
underwriters.

CREDIT SYNDICATION

Preparing Loan Application for financial

assistance from FIs/Banks/Lenders
Assisting in completion of formalities for
drawing of finance sanctioned by institutions
by
expediting
legal
documentation
formalities
Assisting working capital requirements.

LEASE FINANCING

Its an important alternative source of

financing a capital outlay.
Involves letting out assets on lease for use by
the lessee for a particular period of time
Providing advice on viability of leasing &
choice of favorable rental structure.

RELIEF TO SICK INDUSTRIES

Exploring possibilities of mergers &

acquisitions.
Rejuvenating old lines & ailing units by
appraising technology , process etc.
Evolving rehabilitation packages acceptable
to financial institutions/banks.

MUTUAL FUNDS
Its a collective investment scheme that
pools money from
several investors &
channels them into productive investments.

PRE-INVESTMENT STUDIES

A detailed feasibility exploration to evaluate

alternative avenues of capital investment in
terms of growth & profit prospects
In depth investigation of environment and
regulatory factors, location of raw material
supplies, demand projections & financial
requirements of a project.

MERGERS & ACQUISITION

Audit to identify areas of corporate strength

and weaknesses to formulate guidelines &
actions
To locate overseas markets, foreign
collaborations & joint venture
Obtaining approvals from shareholders,
creditors, depositors, govt.

STRUCTURE OF MERCHANT BANKING INDUSTRY:

Initially Merchant Bankers were classified into 4 categories with regard

to their nature and range of activities and their responsibilities to SEBI,
investors and issuers of securities. Since September 1997 only a single
category exists. The requirements are as under:
There are four different categories of merchant bankers. Only category
1 merchant bankers are allowed to act as lead managers to the issue:
Category 1: Those merchant bankers who can conduct all above
mentioned activities, relating to management of issues. They may, if
they so choose, act only in an advisory capacity or as co-manager,
underwriter or as portfolio manager.
Category 2: Those merchant bankers who can act as consultant, advisor,
portfolio manager and co-manager.
Category 3: Those merchant bankers who can act as underwriter,
advisor and consultant.
Category 4: Those merchant bankers who can act only as advisor or
consultant to an issue.

DIFFERENCE BETWEEN
COMMERCIAL & MERCHANT BANKS
COMMERCIAL BANKING

MERCHANT BANKING

Catering needs of common man

Catering needs of corporate

firms

Anyone can open an A/C

It cannot be done

Less exposed to risk

More exposed to risk

Related to secondary markets

Related to primary markets

Plays the role of financers

Plays different roles like

underwriting, portfolio etc

They make money by loans ,

issuing mortgages and by
providing small business and
home improvement loans

Profit from fee it charges its

large customers for the services
it provides

MERCHANT BANKING
ADVANTAGES
Merchant banks perform
functions that cannot be carried
out by businesses on their own.

DISADVANTAGES
Merchant banks are really only
for large corporate customers ,
or extremely wealthy smaller
businesses owned by individual
clients.

By using their skills and contacts,

merchant banks can get the best There is always risk attached to
possible deals for their clients.
the kinds of deal that merchant
banks undertake

GUIDELINES FOR MERCHANT

BANKERS

The Merchant banker should have a

professional qualification.
Should comply with the SEBI regulations and
submit reports accordingly
The Merchant Banker will be suspended if
found violation of guidelines
Proper fees should be collected by SEBI
Proper information should be given when
inspection by SEBI

RECENT DEVELOPMENTS IN MERCHANT

BANKING AND CHALLENGES AHEAD

The foreign investors both in the form of portfolio

investment and through foreign direct investments are
venturing in Indian Economy. It is increasing the scope of
merchant bankers in many ways.

Disinvestment in the government sector in the country

gives a big scope to the merchant banks to function as
consultants.
New financial instruments are introduced in the market
time and again. This basically provides more and more
opportunity to the merchant banks.
The mergers and corporate restructuring
are giving
immense opportunity to the merchant bankers for
consultancy jobs.

CHALLENGES ..
However the challenges faced by merchant bankers in India are:
i. SEBI guideline has restricted their operations to Issue Management and Portfolio
Management to some extent. So, the scope of work is limited.
ii. In efficiency of the clients are often blamed on to the merchant banks, so they are
into trouble without any fault of their own.
Iii . SEBI guidelines stipulate a minimum net worth of Rs 1 crore for authorisation of
merchant bankers . The entry is denied to young , specialised professionals into
merchant banking business.
iv. Poor New issues market in India is drying up the business of the merchant bankers.
Thus the merchant bankers are those financial intermediary involved with the
activity of transferring capital funds to those borrowers who are interested in
borrowing.
The activities of the merchant banking in India is very vast in the nature of the
management of the portfolio

The management of projects and counseling as well as appraisal

The management of underwriting of shares and debentures

The circumvention of the syndication of loans

Management of the interest and dividend etc

SCOPE OF MB IN INDIA