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Merchant Banking in India: "Liberalization, Privatization and Globalization"
Merchant Banking in India: "Liberalization, Privatization and Globalization"
DEFINITION:
In banking, a merchant bank is a financial institution primarily engaged in
offering financial services and advice to corporations and wealthy
individuals on how to use their money. The term can also be used to describe
the private equity activities of banking.
According to Cox, D. merchant banking is defined as, merchant banks are
the financial institutions providing specialist services which generally
include the acceptance of bills of exchange, corporate finance, portfolio
management and other banking services.
The Notification of the Ministry of Finance 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
securities as manager, consultant, advisor or rendering corporate
advisory service in relation to such issue management.
In short, merchant bankers assist in raising capital and advice on related
issues.
in
corporations
by
the
banks.
bank
and
its
managers
before
seeking
their
help.
banking practices evolved from the financing structure of the Silk Road
Trading that predates the Roman Empire.
The basic financing structure was the advance payment for goods by
merchant bankers at a great discount to the delivery value of those goods. In
the case of Italy and then Germany, wheat was the product. The merchant
banks purchased the wheat soon after planting. They accepted the risk of
crop failure.
They profited when they sold the wheat. In most countries today, the
national government accepts the risk through government crop insurance.
As the British Empire expanded in the 18th and 19th Centuries, merchant
banks prospered in London. For instance, merchant bankers funded Canadas
Hudson Bay Company. This period saw the rise of such merchant banks as
Schroders, Warburgs or Rothschilds. Amsterdam benefited from the trade
created by the Dutch East Indian Company. Since the 18th century, the role
of the merchant banker has been considerably broadened to include a
composite of modern day skills. Such skills are inherently entrepreneurial,
managerial,
financial
and
transactional.
Today, North American merchant banks have taken the form of "boutiques"whereby, each offers its own specialized services. The hallmarks of these
merchant bank boutiques are that they typically charge fees payable in cash
and/or the client's stock for each service rendered. You can find a merchant
bank that meets any reasonable set of needs.
Merchant Bank
A merchant bank deals with the commercial banking needs of international
finance, long term company loans, and stock underwriting. A merchant bank
does not have retail offices where one can go and open a savings or checking
account. A merchant bank is sometimes said to be a wholesale bank, or in
the business of wholesale banking. This is because merchant banks tend to
deal primarily with other merchant banks and other large financial
institutions.
The most familiar role of the merchant bank is stock underwriting.
A large company that wishes to raise money from investors through the
stock market can hire a merchant bank to implement and underwrite the
process. The merchant bank determines the number of stocks to be issued,
the price at which the stock will be issued, and the timing of the release of
this new stock. The merchant bank files all the paperwork required with the
various market authorities, and is also frequently responsible for marketing
the new stock, though this may be a joint effort with the company and
managed by the merchant bank. For really large stock offerings, several
merchant banks may work together, with one being the lead underwriter.
By limiting their scope to the needs of large companies, merchant banks can
focus their knowledge and be of specific use to such clients. Some merchant
banks specialize in a single area, such as underwriting or international
finance.
Many of the largest banks have both a retail division and a merchant bank
division. The divisions are generally very separate entities, as there is very
little similarity between retail banking and what goes on in a merchant bank.
Although your life is probably affected every day in some way by decisions
made in a merchant bank, most people reading this article are unlikely ever
to visit or deal directly with a merchant bank. Merchant banks operate
behind the scenes and away from the spotlight.
gap
under
supply
and
demand
of
10
for
establishing
new
enterprises,
undertaking
12
13
private/Central
Governments/State
Governments
financial
15
16
Sole proprietorship
b.
Partnership firm
c.
d.
Corporate Enterprises
e.
Co-operative Society
17
Category I, that is
(i) to carry on any activity of the issue management, which will inter-alia
consist of preparation of prospectus and other information relating to the
issue, determining financial structure, tie-up of financiers and final allotment
and refund of the subscription; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.
issue;
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b.
The application should conform to all the requirements under the SEBI
guidelines, otherwise it may be rejected.
c.
Furnishing
of
information,
clarification
and
personal
representation
The Board may require the applicant to furnish further information or
clarification regarding matters relevant to the activity of a merchant banker
for the purpose of disposal of the application. The applicant or its principal
officer may appear before the Board for personal representation.
d.
Consideration of application
The Board shall take into account for considering the grant of a certificate,
all matters, which are relevant to the activities relating to merchant banker
and in particular the applicant complies with the following requirements,
namely:
financial company
the merchant banker who has been granted registration by the Reserve
The capital adequacy requirement should not be less than the net worth of
the person making the application for grant of registration. The networth
shall be as follows,
Category
Minimum Amount
Category I
Rs. 5, 00, 00, 000
Category II
Rs. 50, 00, 000
Category III
Rs. 20, 00, 000
Category IV
Nil
the applicant, his partner, director or principal officer is not involved
in any litigation connected with the securities market which has an adverse
bearing on the business of the applicant and have not at any time been
convicted for any offence involving moral turpitude or has been found guilty
of any economic offence
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e.
The Board on being satisfied that the applicant is eligible shall grant a
certificate. On the grant of a certificate the applicant shall be liable to pay
the fees as prescribed.
f.
Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
Where a merchant banker fails to pay the Annual fees as provided in
Schedule II, the Board may suspend the registration certificate, whereupon
the merchant banker shall cease to carry on any activity as a merchant
banker for the period during which the suspension subsists.
The Merchant Bank can commence business on acquisition of a Certificate
of Registration from the SEBI after completion of the above mentioned
formalities.
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They also provide services to the finance housing schemes for the
exchange, and authorized dealer and to buy and sell foreign exchange in all
lawful ways in compliance with the relevant laws of India.
6.
22
Merchant bankers should not enter into any transactions on the basis
for them.
7.
Every merchant banker who acts as lead manager must enter into an
agreement with the issuer setting out mutual rights, liabilities, obligations,
relating to such issues with particular reference to disclosures allotment,
refund etc.
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Code of Conduct
According to the 13 Regulation of the SEBI of 1992 (Merchant
bankers), every merchant banker should comply with following codes of
conduct. They are:
a)
The merchant banker must observe high integrity and fairness in all
his dealings.
b)
achievement.
f)
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g)
or manipulation.
Guidelines of SEBI
After the obligations of the CCI, the place was occupied by a legal organ
called as Securities and Exchange Board of India. The issue of capital and
pricing of issues by companies has become free of prior approval. The SEBI
has issued guidelines for the issue of capital by the companies. The
guidelines broadly covers the requirement of the first issue by a new or the
first issue of a new company set up by the existing company, the first issue
by the existing private companies and public issues by the existing listing
companies. The SEBI is the most powerful organization to control and lead
both the primary market and secondary market.
The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented
below:
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a)
The Company should disclose any adverse situation which affects the
operations of the Company and occurs within one year prior to the date
filing of the offer document with the Registrar of Companies or Stock
Exchange.
c)
e)
The company should disclose the time normally taken for the disposal
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h)
The Company should disclose the safety net scheme or buy back
should give advertisements in not less than two news-papers about the
dispatch of letters of offer. No preferential allotment may be made along
with any rights issue.
k)
The Company should also disclose about the fee agreed between the
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and large public and private share offerings. Merchant banks tend to operate
on small-scale companies and offer creative equity financing, bridge
financing, mezzanine financing and a number of corporate credit products.
While investment banks tend to focus on larger companies, merchant banks
offer their services to companies that are too big for venture capital firms to
serve properly, but are still too small to make a compelling public share
offering on a large exchange. In order to bridge the gap between venture
capital and a public offering, larger merchant banks tend to privately place
equity with other financial institutions, often taking on large portions of
ownership in companies that are believed to have strong growth potential.
Merchant banks still offer trade financing products to their clients.
Investment banks rarely offer trade financing because most investment
banking clients have already outgrown the need for trade financing and the
various credit products linked to it.
Commercial banks
feature.
Mainly fund based business
5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on risks proposal and cannot afford to be
shields i.e. mitigation measures
banks
majority
Equity raising:
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8)assistance in ADR/GDR
9)management of debenture issue
10)preparation of bankable proposal
Strategic advice:
capital finance
12)advice
on
mergers
and
acquisitions
13)corporate structuring advice
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The need of merchant banker is also felt in the wake of huge untapped
public savings as merchant bankers can play a highly significant role in
mobilizing funds from savers to invest in channels assuring promising return
on investments and thus narrow down the gap between demand for and
supply of investible funds.
Merchant bankers not only provide advisory services to corporate
enterprises but also advise the investors of the incentives available in the
form of tax relief and other statutory obligations. Thus, the merchant
bankers help industry and trade to raise funds, and the investors to
invest their saved money in sound and healthy concerns with
confidence, safety and expectation of higher yields.
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33
Project Counseling
Project counseling is an important merchant banking service which includes
preparation of project reports, deciding upon the financing pattern to finance
the cost of the project, appraising the project report with the financial
institutions/banks.
Project reports are prepared to obtain government approval of the project,
for procuring financial assistance from financial institutions and banks, for
ensuring market for the proposed product, for planning public issues, etc.
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Credit Syndication
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom the funds
could be procured to implement the project.
Merchant banker has to locate the sources of funds and comply the
formalities required to procure the funds. This service rendered by the
merchant banker in arranging and procuring credit from financial
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36
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from the public together with subscription money and transfer them to the
account of the controlling branch.
Portfolio Management
Portfolio refers to investment in different types of marketable securities or
investment papers like shared, debentures and debenture stocks, bonds etc.
from different companies or institutions held by individuals firm or
corporate units.
Portfolio management refers to managing efficiently the investment in the
securities held by professionals to others.
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formalities like getting approval from the Government/ RBI; drafting the
scheme of amalgamation; getting approval of company Board, financial
institution, high court if required; arranging for the meeting etc.
Venture Capital Financing
Financing an emerging high-risk project is called venture capital financing.
Many merchant bankers are entering into this area by also financing viable
upcoming projects. The financing is by subscription to the equity capital,
while repayment is by selling the equity through stock market when the
shares are listed.
Leasing
Is there another lucrative area of financing where merchant bankers are
turning? Leasing is a viable source of financing while acquiring capital
assets. The services include arrangement for lease finance facilities for
leasing companies, legal; documents and tax consultancy.
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sale of securities securing the necessary clearance from RBI under FERA for
repatriation of dividends and interest, etc.
Acceptance Credit and Bill Discounting
Though merchant bankers world over specialize in acceptance credit and bill
discounting, these services are not currently provided by merchant bankers
in India the principal reasoning being the lack of an active market for
commercial bills.
Arranging Offshore Finance
The merchant bankers also help their clients in the following areas involving
foreign currency financing:
1.
2.
3.
4.
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restructuring;
2.
causing sickness;
3.
4.
Qualities of merchant bankers:To be a successful merchant banker, following qualities are necessary:
1. Knowledge: Thorough understanding of technical issues related to
business, understanding of legal and statutory requirements, appreciation of
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44
Problems and hurdles:Not many but some problems are faced by Indian merchant bankers.
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I.
III. Regulations: though regulations are much better now, there is still scope
for further improvement. Merchant bankers can be made more accountable
and responsible. Professional qualification focused on merchant banking is
not available. Industry is not well organized and all the players do not play
the same tune. This is specifically evident in comparison with insurance
industry and mutual funds industry.
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1.
India is one of the largest emerging markets. Obviously, public issues, FDI,
debt raising are on rise. Lots of new and green fried projects are happening.
Merchant bankers have lots space to contribute.
2.
3.
4.
Progress of Merchant Banking in India:Upto 1970, there were only two foreign banks which performed
merchant banking operations in the country. SBI was the first Indian
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commercial bank and ICICI the first financial institution to take up the
activities in 1972 and 1973 respectively. As a result of buoyancy in the
capital market in 1980s some commercial banks set up their subsidiaries
to operate exclusively in merchant banking industry. In addition, a number
of large stock broking firms and financial consultants also entered into
business. Thus, by the end of the end of 1980s there were 33 merchant
bankers belonging to three major segments viz., commercial banks, all
India financial institutions, and private firms. Merchant banking
functions of these institutions was related only to management of new
capital issues.
Merchant banking industry which remained almost stagnant and
stereotyped for over two decades, witnessed an astonishing growth after the
process of economic reforms and deregulation of Indian economy in 1991.
The number of merchant banks increased to 115 by the end of 1992-93 300
by the end of 1993-94 and 501 by the end of August, 1994. all merchant
bankers registered with SEBI under four different categories include 50
commercial banks, 6 all Indian financial institutions ICICI, IFCI, IDBI,
IRBI, Tourism Finance corporation of India, infrastructure Leasing and
Financial Services Ltd. and private merchant bankers.
In addition to Indian Merchant Bankers, a large number of reputed
international Merchant Bankers like Merrill Lynch, Morgan Stanley,
Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India
under authorization of SEBI. As a result of proliferation, Indian Merchant
Bankers are faced with severe competition not only among themselves but
also with the well developed global players.
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CURRENT AFFAIRS
RBI allows cash withdrawal from merchant banker terminals
Besides ATMs, customers can now also withdraw cash up to Rs1000 from
terminals at different merchant establishments, the Reserve Bank. As a
further step towards enhancing the customer convenience in using the plastic
money, it has been decided to permit cash withdrawals at POS (point of sale)
terminals. To start with, this facility will be available for all debit cards
issued in India, up to Rs1000 per day," RBI said in a statement issued here.
The use of debit cards at POS terminals at different merchant establishments
has been steadily increasing, it said. This facility is available only against
debit
cards
issued
in
India.
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banking
subsidiary.
in
management
control.
This arrangement replaces the earlier practice of both I-Sec and ICICI Bank
working together on M&A deals. Since a predominant number of people,
who wish to be advised on M&A, also look for acquisition finance, it was
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decided that the business should be housed in the bank, I-Sec MD Madhabi
Puri Buch told ET. Now, if a corporate is seeking a sell mandate or a buy
mandate, where the transfer of controlling interest takes place, the deal will
be
done
by
ICICI
Bank.
ICICI Bank had initially entered the investment banking space in 2006. Over
the past couple of years, both the bank and its subsidiary have been vying
for deals. The new deal has taken into effect between both the entities from
April 1.
Birla Capital and Financial Services gets SEBI merchant banking
license
Birla Capital & Financial Services Ltd has been granted a merchant-banking
license by the Securities and Exchange Board of India. The license will
enable the company to offer a wide range of on-shore investment banking
advisory
and
underwriting
services
in
the
Indian
market.
The company, which is a part of the Yash Birla conglomerate, will initially
concentrate on regulated services like initial public offerings, takeover,
buybacks, delisting and valuations. It also offers non-regulated services like
PE Syndication, M&A Advisory and other corporate advisory.
Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash Birla
Group that has diversified interest in sectors like auto & engineering, textiles
& chemicals and power & electrical, education & IT.
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of
brokerage
firm
SMC
Global
Securities.
Merchant bankers are those who advise the issuer about the public offer and
manage
the
issue.
The average percentage fees has declined to 1.21 per cent so far this year
from
2.24
per
cent
in
2007,
the
report
added.
Reliance Power IPO of Rs 11,563 crore during this year with the merchant
banking fee of Rs 50.6 crore, amounting to 0.44 per cent of the issue size
had a great bearing on this trend.
Nomura launches its investing banking operations in India
Nomura Financial Advisory and Securities (India) Private limited ('Nomura
India'), a wholly-owned subsidiary of Nomura Holdings, Inc. ('Nomura'), has
launched its equity sales and trading and investment banking operations in
India.
In October 2008, Nomura, a global investment bank, acquired the majority
of Lehman Brothers' employees in India, including the equities sales and
trading, equity research, fixed income liquid markets sales and trading, and
investment
banking
teams.
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By integrating the former Lehman Brothers India franchise and obtaining its
merchant banking licence and stock exchange memberships, Nomura India
said in a statement it has significantly expanded its capabilities in India
through a wide range of onshore financial solutions spanning securities
brokerage, securities underwriting and advisory services.
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hearing and also feels that AMBI as the SRO should have been informed
about the decision. A committee has subsequently been set up by AMBI to
go into the matter. Then there was the issue of asking all merchant bankers
to furnish details of employees to SEBI. This was also demanded without
consulting/informing AMBI.
The association has already made its disappointment clear to SEBI and the
proposed
dialogue
is
reportedly
misunderstandings.
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being
undertaken
to
clear
all
EXAMPLE:-
bodies
and
corporate
sector.
Market"
related
assignments.
They undertake "project appraisals" with resource raising plans from Capital
Market/ Debt Markets and facilitate tie-ups with Banks / Financial
Institutions
and
Potential
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Investors.
Merchant Banking
2.
Commercial Banking
3.
Investments
4.
5.
Underwriting
6.
Loan Syndication
issues
both
retail
SPECTRUM OF SERVICES:1.
2.
3.
Private Placements
4.
Project Appraisals
5.
6.
IPO Funding
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&
HNIs.
8.
9.
10.
11.
12.
Share Valuations
13.
Syndication
Project Appraisal
2.
Capital structuring
3.
4.
5.
6.
Underwriting
7.
8.
9.
10.
Refund Bankers
11.
12.
Debenture Trusteeship
Investment Criteria:-
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60
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SBI being an Indian entity has no India exposure ceiling. Their Primary
focus is On Indian Clients. SBIs seasoned Team of professionals provides
you with Insightful credit Information and helps you Maximize the Value
from the transaction.
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Debenture Trustee
Marketing
of
the
issue
through
strong
network
of
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CONCLUSION
The merchant banker plays a vital role in channelising the financial
surplus of the society into productive investment avenues. Hence before
selecting a merchant banker, one must decide, the services for which he is
being approached. Selecting the right intermediary who has the necessary
skills to meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every details
about Merchant Banking and in future how its going to get emerged in the
Indian economy. Hence, Merchant Banking can be considered as essential
financial body in Indian financial system.
Market development is predicted on a sound, fair and transparent
regulatory framework. To sustain the growth of the market and crystallize
the growing awareness and interest into a committed, discerning and
growing awareness and interest into an essential to remove the trading
malpractice and structural inadequacies prevailing in the market, and
provide the investors an organized, well regulated market.
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