Merchant Banking

Introduction
Assists

corporates in raising capital via public

issue of shares or debentures, syndicating
loan, etc.
Do not provide funds but only assist
Actively arrange working capital, appraise
projects, scrutinize or pursue merger
proposals

Definition

As the role of merchant bankers is widespread and

overlapping with that of commercial banks and
finance companies, the definition is usually the one
which is accepted by that countrys regulatory
authority.
In UK, investment bank & merchant bank are
synonyms.
In US, merchant bank means an investment bank
which is well-equipped to handle MNCs.
In India, merchant banker is a body corporate who
carries on any activity of the issue management (ie)
assist in raising capital and advice on related issues.
There is no official category as investment bank.

Origin & History

In the late 17th & 18th century Europe, the largest

companies of the world were merchant adventurers.
Wealthy people were financing trade and that was
their profit making business. They were merchants
financiers.
In todays terms, they were merchant bankers. (eg)
The East India Company was a merchant bank
which facilitated merchants to carry out trade
especially with India.
In Europe, the term merchant banking has evolved
from 18th century to today to include most of the
services spanned from early stage negotiations to
the final transaction.

Historical Perspective of Merchant

Banking in India

Kautilyas Arthashastra (4th century BC) mentions about

business of funding and facilitating merchants.
Till 18th century, moneylenders, moneychangers,
village merchants and sahukaars performed the
function of banks and merchant banks.
They also issued and discounted hundies (bills of
exchange), bank drafts, extended loans to private
parties on mutual trust, on mortgages of land,
ornaments and other property, stood as guarantor for
loans and for trade (ie) import and export transactions.
Jagat Seth (1720-1773 AD, Bengal) and Habib & Sons
(1921) which is now Habib Bank (founded in 1941, now
in Pakistan) were organized merchant bankers in
recent history of India.

Post Independence stage of Merchant

Banking in India

In 1967, RBI issued its first merchant banking license to Grindlays

Bank which started with management of capital issues, production
planning, system design, market research and now it provides
management consulting services as well.
Citibank set up its merchant banking division in 1970 with services
such as assisting new entrepreneurs, evaluating new projects and
raising funds through borrowing and issuing equity.
Indian banks (SBI) started merchant banking services in 1972 as a
part of the multiple services they offer to their clients.
Merchant banking activities are organized and undertaken in
several forms.
Commercial banks and foreign development finance institutions
have organized them through formation of divisions, nationalized
banks have formed subsidiary companies and share brokers and
consultancies have constituted themselves into public limited
companies or registered themselves as private limited companies.
Some of them have equity stake of foreign merchant bankers.

Services of Merchant Bankers

Business Planning Stage Project feasibility study /

appraisal & Advice on Capital Structuring.
Equity Raising Preparation of prospectus &
liaisoning with SEBI (Advisors to the issue), Pricing
decisions, Marketing in the capacity of Lead
Managers, Underwriters to the issue (separate
license needed from SEBI for this service), Post
issue management & Assistance in ADR / GDR.
Debt Raising Management of Debentures issue &
Preparation of Bankable proposal & Syndication of
Loan.

Services of Merchant Bankers

Working

Capital Raising Assistance in

arranging optimal working capital finance.
Strategic Advice Advice on mergers and
acquisitions & Corporate structuring advice.

Qualities required of a Merchant

Banker
Knowledge
Capital

Market Familiarity
Liaisoning Ability
Innovation
Integrity

Guidelines for Merchant Bankers

(1)
(2)
(3)

(4)

Merchant Banking in India is governed by SEBI (Merchant

Bankers) Regulations , 1992.
Highlights of the provisions are as follows:To be a merchant banker, person should apply to SEBI in a
prescribed format.
Merchant banking business only includes an action as an
advisor, a consultant or a manager.
To act as an underwriter and portfolio manager, separate
applications are to be made to SEBI under respective
regulations.
Applicant has to be a body corporate and should not be a
NBFC carrying out activities other than those of a
merchant banker as specified from time to time. It should
not accept or hold deposits. At least 2 merchant banking
experienced persons should be in employment.

Guidelines for Merchant Bankers

(5) Should fulfill the capital adequacy (net worth) norms as specified
by SEBI from time to time.
(6) A merchant banker (except a bank or public financial institution)
registered under the regulations should not carry on any business
other than that in the securities market.
(7) Every merchant banker should furnish to the Board half-yearly
unaudited financial results when required by the Board with a view
to monitor the capital adequacy of the merchant banker.
(8) All issues should be managed by at least one merchant banker
functioning as the lead merchant banker.
(9) Merchant banker or any of its directors, partners, managers or
principal officers should not either on their respective accounts or
through their associates or relatives enter into any transaction in
securities of (client) companies.
(10) Every merchant banker should appoint a compliance officer.
(11) SEBI can suspend / cancel registration of defaulter merchant
bankers.

Merchant Bankers Commission

(1)
(2)
(3)

Ceiling rates of merchant bankers commission as

decided by SEBI and Ministry of Finance.
Additionally, brokerage is to be paid to brokers
(1.5% on public issue, 0.5% on private placement
and no brokerage on promoters quota and
institutional subscription if it is as a result of
underwriting devolvement)
Project Appraisal Fee Discretionary and
negotiable (no ceiling)
Public Issue Management Fees 0.5% of the total
issue
Lead Managers Commission 0.5% upto INR 25
crores & 0.2% in excess of INR 25 crores

Merchant Bankers Commission

Merchant Bankers & Market Making

Market making means that a trader or company puts both buy

and sell orders into the market and wait for people to trade with
them on either sides. This is done for ensuring liquidity in the
market for a particular stock.
Market making could be made compulsory at least for a period
of 6 to 12 months after listing of issues. This facility is not
available in India as of date.
SEBI has encouraged merchant bankers to be market makers &
has stipulated compulsory market making for at least 2 years
from the date of listing for IPOs not satisfying certain criteria.
Market making is also necessary and observed better in G-Secs
market. RBI appoints primary dealers (who act as merchant
bankers to GOI for securities issuances) for participating in GSecs market.
A PD forms the 1st level of market makers for Gilts.

Progress of Merchant Banking in India

With stock markets progressing, merchant bankers business

activitys growing.
Earlier, Controller of Capital Issues was the controlling authority
for the stock markets & issue pricing. Now, its SEBI.
Physical shares replaced with Demat form as a part of 100%
Book-Building.
BSE got NSE as a strong companion. Both are highly
automated and sophisticated now.
With India liberalizing its policies, its presence in the
international markets has increased. Also, number of merchant
bankers is increasing since then.
Now, almost every PSU bank has a dedicated merchant
banking subsidiary. Also, giant MNC merchant bankers are now
showing their presence in India.

Scope for Merchant Banking in India

Size

and dynamics of the market

Restrictions & Liberalization
Banking Policies
Corporate Culture
Corporate Dynamics

Problems & Hurdles for Merchant

Banking in India
Industry

Compartmentalization
Malafide Practices
Regulations

Association of Merchant Bankers in

India (AMBI)
Professional

non-profit company setup to

represent the industry.
Expected to set code of ethics and facilitate
dialogue between the industry and regulatory
bodies and conduct training and awareness
programmes.
But, its actually dormant (practically defunct)
as of date because of lack of support from
the members and non-initiative from SEBI
and other government bodies.