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 Quantitative aspect:-
Primarily various books on merchant banking were read to know
various features and principle used in working of the industry. Moreover,
various magazines were read to know about the latest happening in this
Websites were visited and information regarding different aspect, to
get a better knowledge on the topic was collected. Various websites were
visited so as to study the important of merchant banking in the ever rising
competition in today’s world.

 Qualitative aspect:-
MR. NAVNEET (Anand rathi) was approached and interviewed, and
implementation and scope of merchant banking was understood through his
expertise in the field. Some analysis was done for different cases so as to
understand different strategies in different situation,
MR. Kotiyal (share khan) was also approached to give an insight on
the future of merchant banking in India and the current scenario
Merchant banking an overview:-
Company raises capital by issuing securities in market. Merchant bankers at as
intermediaries between the issuer of capital and the ultimate investor who purchase these
Merchant banking……. is the financial intermediation that matches the entities that
need capital and those that have capital? It is function that facilitates the flow of capital in the

Scope of merchant banking activities:-

Merchant banking activities helps:

• In channel sing the financial surplus of the general public into productive investment
• To coordinate the activities of various intermediaries to the share issue such the
registrar, banker, advertising agency, printers, underwriters, brokers etc.
• To ensure the compliance with rules and registration governing the securities market.
Functions of a merchant banker…..

The following comprise the main functions of a merchant banker:

1. Management of debt and equity offerings:-

This forms the main function of the merchant banker. He assists
the companies in raising funds from the market. The main areas of
work in this regard includes : instrument designing, pricing the issue,
registration of the offer document, underwriting support, and
marketing of the issue, allotment and refund, listing on stock

2. Placement and distribution:-

the merchant banker helps in distributing various securities like
equity shares ,debt instrument, mutual fund product, fixed deposit,
insurance products, commercial paper to name a few. The distribution
network of the merchant banker can be classified as institutional and
retail in nature. the institutional network consist of mutual fund, foreign
institutional investor, private equity funds, pension fund, financial
institution etc. the size of such a network represents the wholesale
reach of the merchant banker. The retail network depends on
networking with investors.

3. Corporate advisory services:-

Merchant bankers offer customized solutions to their client’s
financial problems. The following are the main areas in which their
advice is sought.

4. Financial structuring:-
Includes determining the debt-equity ratio and gearing ratio for
the client: the appropriate capital structure theory is also framed.
Merchant banker also explores the refinancing alternatives of the client
and evaluate cheaper source of fund. Another area of advice is
habilitation and turnaround management. In case of sick units,
merchant banker may design a revival package in coordination with
banks and financial institution. Risk management is another area
where advice from a merchant banker is sought. He advice the client
on different hedging strategies and suggest the appropriate strategy.

5. Project advisory service:-

Merchant banker help their clients in various stage of project
undertaken by the clients. They assist them in conceptualizing the
project idea in the initial stage. Once the idea is formed, they conduct
feasibility studies to examine the viability of the proposed project. They
also assist the client in preparing different document like the detail
project report.

6. Loan syndication:-
Merchant banker arranges to tie up loans for their clients. This
take place in a series of step. Firstly they analyze the pattern of the
clients cash flows, based on which the terms of borrowing can be
defined. Then the merchant banker prepares a detailed loan
memorandum, which is circulate to various banks and financial
institution and they are invited to participate in the syndicate. The
banks then negotiate the terms of lending on the basis of witch the
final allocation is done.
Registration of merchant banker….
Registration with SEBI is mandatory to carry out the business of
merchant banking in India. An application should comply with the
following norms:

• The applicant should be a body corporate.

• The applicant should not carry on business other than those connected
with the securities market.

• The applicant should have necessary infrastructure like office space,

equipment, manpower etc.

• The applicant must have at least two employees with prior experience in
merchant banking.

• Any associate company, group company, subsidiary or interconnected

company of the applicant should not have been a registered merchant

• The applicant should not have been involved in any securities scam or
proved guilt for any offence.

• The applicant should have a minimum net worth of Rs.5 cores

The history of origin and growth of merchant banking
throughout the world, as discussed in the forgoing paragraphs, has
established, beyond doubts, the fact that the role of the merchant
banker had never been determined. They had followed strategy of
assuming different roles according to the need of need of time to
maintain their existence in the business environment. This is one of the
reasons that no fixed definition cold be ascribed to “MERCHANT
Very commonly, the merchant banking has been defined
as to what a merchant banker does. This is well convinced definition
that could be given to any service oriented industry. The definition
given by different authors explaining the meaning of merchant banking
revolved around the role played by merchant banks. There role and
scope of such role have enlarged with the passage of time. The survey
of the existing literature in the foregoing pages reveals that merchant
banking is a non-banking financial activity resembling banking
originated, grown and sustain in European land, got enriched under
American patronage and now being rendered throughout the world by
both banking and non-banking institution. Some of the definitions are
discussed below to locate the practical meaning of the term “merchant
banking”. Dictionary meaning of merchant banking hints at merchant
banks as an organization that underwrites securities that underwrites
securities for corporations.
Dictionary meaning of merchant banking hints at merchant
banks as an organization that underwriters securities for operation
advises such clients on mergers and is involved in the ownership of
commercial venture. These organizations are sometimes banks which
are not merchants and sometimes merchants who are not banks and
sometimes houses which are neither merchants nor banks. These
definition reflects the historical formation of the merchant banking
profession as such, in which the merchants had assume banking role
and subsequently banks assume the merchant roles. Paul ferries
rightly states this phenomenon; the original label of ‘merchants and
bankers was replaced by merchant banker’s. There name lent
creditability involving the other people money.
In financial history of Western Europe, Charles P Kindle
Berger writes about merchant banking as the development of banking
from commerce frequently encountered a prolonged intermediate
stage known in England original as merchant banking. The merchant
banker was a banker was a merchant who lent his credit to others. This
was done in various ways viz. making advance to produces before
goods were sold, either the goods entrusted to merchant on
commission for sale abroad or received on consignment from abroad,
by issuing letters of credit under which merchants could draw bills of
exchange created by trade. Most merchant banks drifted from
generalized commerce into specified commerce and from specialized
commerce into finance.
Merchant Banks, thus, in essence, are financial institution
providing specialist services which generally include the acceptance of
bill of exchanges, corporate finance, portfolio management and other
banking services. It is not necessary that a merchant banker should do
all such activities to be called a merchant bankers, one merchant bank
may specialized in one activity only, and take up other activities also,
which may be complimentary or supportive to specialized activity. For
example, firms in England which are engaged in the business of
acceptance of bills are known as merchant bankers. Again, the firm
which are members of the issue House Committee in England (not
necessarily be engaged in the former activity) are also merchant
banks. Thus, merchant banks despite specialization in one activity
have different roles to play in different economic situation.
Merchant Banking is an emerging concept in the area of
financial services in India. The profession of Merchant Banking is
dedicated to fulfill the needs of trade and industries by acting as an
intermediary, consultant, liaison man and financer too. Merchant
banking is a result oriented profession commanding high degree of
skills and dexterity in solving business problems, assisting in
investments and financial decision making, assisting in laying
corporate strategies, assessing capital needs and helping in producing
the owed as well as borrowed funds for achieving balanced capital
structure of the client corporate un its. Merchant’s banker’s with the
confidence of investors and general public command high reputation
for passing on accurate, adequate and timely information which helps
and facilities in the functioning of capital markets, money markets &
international financial system. Merchant Bankers observe their skill as
personal possession for their comparative strengths in the profession.

“ A merchant bank is a defined as a financial institution or an

organization that underwrites corporate securities and advice such
clients on issue like corporate mergers etc involved in the ownership of
commercial venture, etc. this organization may be bank corporate
body, a firm or a priority concern”

Merchant banking in India started with management of

public issues and loan syndication and has been slowly and gradually
covering activities like “project counseling”, “portfolio management”
and mergers and amalgamation of corporate firm.
A merchant banker has been defined under the securities
and exchange board of India [merchant banker] rules,1992 as “any
person who is engaged in the business of issue management either by
making arrangements regarding selling, buying or subscribing
securities as manager, consultant, advisor or rendering corporate
advisory service in relation to such issue management.
Origin of Merchant Banking

The origin of merchant banking is traceable with the development of

inters a national trade and finance. Economic literature available on
international trade and finance contains lucid information on the evolution of
merchant banking and make a fascinating reading that provides the
historical background of origin of merchant banking.
During 13 th century a few families owned and managed firms
engaged in coastal trade and finance were spread throughout the European
continent. The first known such firms were Ricardo of Lucca, Medici and
fogger. These firms besides their commercial activity involving sale and
purchase of commodities were engaged in banking activity also. These firms
had acted as the bankers to the kings of European status, financing costal
trade amongst European nation, borne exchange risk in the absence of any
international medium of exchange in addition to the security risk in financing
the king, monarchs and the state government engaged in the continental
wars. The motivation behind their banking activity was profit maximization
and to achieve this aim they invested their funds were they expected higher
return despite high degree of risk. For this reason ,merchant bankers used to
charge rate of return for financing , the highly risky venture .In turn , they
had to suffer ,very often , with heavy losses , closed down for reasons of
denial of , repayments ,denouncements of obligations by debtors , credits
losses and confiscations of their properties by the kings they financed .For
example , Riccardi of Lucca ,the Italian merchant banker, had opened an
office in England to serve the English Government of Edward-I of England and
had to succumb to closure when kings confiscate its properties on its refusal
to finance the war in 1924.similarly, the Medici bank of Florence was
liquidate in 1494, Fugger banker had to suffer in 1650 when Habsburg
Emperors Maximillan and Charles- V deflated in payments. There are
numerous instances likewise where, and then the existing merchant banker
had to collapse, leave the activity or started another activity or started the
same activity after strengthening the financing background. Thus, merchant
banking, with all the odds, survived and continued during thirteen and
sixteen centuries.

The main trading center for world trade and during the above period
had remained in Amsterdam where the Dutch trader relied, on the finance of
trade, upon the expertise of merchant banker, then knows as “commission
agent”. The important service they rendered including handling of the costal
trade and for their masters goods on commission basis, financing the owners
or suppliers of the goods and the shipping agencies by expounding their
payment obligations by accepting credit in addition to the direct financing.
These commission agents did big business by making small investment in
the goods manufactured by the sellers and thus accumulated huge wealth.
This gives a fillip to merchant banking activities and involves them in acts of
lending in addition to doing the jobs on commission basis. The main
borrowers of their funds were crowns, emperors and state government, as
started earlier, to whom these merchant banker continued lending for
reasons of patronage, recognition and higher expectation, despite the
suffering, at their hands and by their fellow trader. During the 17 th centuries
also, the
Dutch trader and banker lent heavily to finance continental wars,
William of England borrowed huge sums in Amsterdam to fight the
continental wars. Many European states
Including Germany, Russia and Sweden had borrowed in Amsterdam
such huge sums during beginning of the 18th century. During Napoleonic war,
margrave of hassle, the richest merchant of Europe, had financed the
germane prince: jaws of Kassel and Frankfurt made loans to the rulers in the
name of, banker. This risky investment was made with the sole objective of
profit maximization by the merchant banker.
The industrial revolution in England gave further boost to the
merchant banking activity with the growth of the home industry made goods
like linen and paper. The scope of international trade and expanded to the
colonies of the new world. That is the North America and other continents.
Many more persons and firms were attracted to take up the merchant
banking activities particularly to transship the machine made goods from
European nations to other nations, developing colonies of the European
nation in other continents and bringing raw material from other nations and
colonies to Europe, and to finance such trade.
The founders of the several of the present day merchant banks who
started the business having the 18th century and early 19th century were the
merchants who traded overseas and earned reputation with their name.
These prominent merchants were requested to lend their name to the lesser
known traders by accepting a bills they guaranteed that the holder of bill will
receive the full value on the date of payment. This acceptance business has
grown with the expansion of the trade through the European nations and
continuous today the banks most activity engaged in it are the number of the
acceptance house committee of London.
The merchant banker traded for centuries and retained their names
and activities in different nations by expanding their activities. For example,
in Amsterdam, john & co. were bankers in 18th century and at the same time
engaged in trading of all commodities they could sell at a profit. In Frankfurt,
Meyer mashes Rothschild traded coffee, sugar, tobacco, along with the
British manufactures.
Growth of merchant banking in India
Merchant baking activities in India originated in 1969 with the
merchant banking division set up by the grind lay bank, the largest foreign
bank in the country, at the time. The main service offer to the corporate
enterprises by the merchant bank includes management public issue and
financial consultancy. Other forcing bank like city bank, chartered bank also
assumed the merchant banking activity in India. State bank of India started
merchant banking in 1973 followed by the ICICI in1974; both emerged as
leader in merchant banking with significance business during the period of
1974-1985 in comparison to forcing banks. Mid seventies witnessed a growth
of merchant banking organization in the country with various commercial
banks, financial institutions, broker firms entering in to the field of merchant
The growth in merchant banking business during the early
seventies was to forcing exchange regulation act 1973 [ FERA] where in large
number of forcing companies operating in India were required to dilute their
foreign holdings In order to continue business in the country his result in
expansion in the capital markets providing enough opportunities to merchant
bankers to established themselves. The change in Indian economy opened
new doors for merchant banking business enter in diversified area of
activities, but at the same time this brought competition in merchant
banking sector. This sector has traditionally been dominated by financial
institution, banks and their subsidiaries. Now, various private sectors
merchant bankers have emerged and some of them having international
reputation. Till the end of 1990, the merchant banking sector was almost
monopoly public sector institution and commercial banks, however since
1991 considerable number of private merchant banker have emerged on
same. Various existing corporate entities and non-banking finance
companies have also focused their activities in merchant banking business.
Before 1990 there were less than 40 merchant banking concerns while in 199
this number has exceeded to more than 400 firms.

Importance and need of Merchant Banking in


Importance reasons for the growth of merchant banks has

been development activities throughout the country, exerting excess
demand on the sources of fund for ever expanding industries and trade, thus
leaving a widening gap unabridged between the supply and demand of
invisible funds. All India financial institution had experienced constrain of
resources to meet ever increasing demands for demands for funds frame
corporate sector enterprises. In such circumstances corporate sector had the
only alternative to avail of the capital market service for meeting their long
term financial requirement through capital issue of equity shares and
debentures. Growing demand for funds put pressure on capital market that
enthused commercial banks, share brokers and financial consultancy firms to
enter into the field of merchant banking and share the growing capital
market. As a result all the commercial banks in nationalized and public sector
as well as in private sector including foreign banks in India have opened their
merchant banking windows and competing in this field.
Need for merchant banking is felt in the wake of huge public
saving lying untapped. Merchant banker can play highly significant role in
mobilizing funds of savers to invisible channels assuring promising returns on
investment and thus can assist in meeting the widening demand for invisible
funds for economic activity. With growth of merchant banking profession
corporate enterprises in both private sectors would be able to raise required
amount of funds annually from the capital market to meet the growing
requirement for funds for establishing new enterprises, undertaking
expansion, modernization and diversification of the existing enterprises. This
reinforces the need for a vigorous role to be played by merchant banking.
In view of multitude of enactment, rules and regulation, gridlines
and offshoot press release instructions brought out the government from
time to time imposing statutory obligations upon the corporate sector to
comply with those entire requirement prescribed there in the need of a
skilled agency existed which could provide counseling in these matters in a
package form. A merchant banker with their skills updated information and
knowledge provide this service to the corporate units and advice them on
such requirement to be complied with for raising funds from the capital
market under different enactment viz. companies act, income tax act,
foreign exchange regulation act, securities contracts corporate laws and
regulations. Merchant bank advice the investors of the incentives available in
the form of tax relief, other statutory relaxation, good return on investment
and capital appreciation in such investment to motivate them to invest their
savings securities of the corporate sector. Thus merchant banks help
industries and trade to rise and the investors to invest their saved money in
sound and healthy concern with confidence, safety and expectation for
higher yields. Finance is the backbone of business activities. Merchant
banker make available finance for business enterprises acting as
intermediaries between them raising demand for funds and the supplies of
funds besides rendering various other services.
The following are some of the reasons why specialist
merchant bank have a crucial role to play in India.
1. Growing complexity in rules and procedures of the government.
2. Growing industrialization and increase of technologically advanced industries.
3. Need for encouragement of small and medium industrialists, who require specialist services.
4. Need to develop backward areas and states which require different criteria.
5. Exploring the possibility of joint ventures abroad and foreign market.
6. Promoting the role of new issue market in mobilizing saving from.
Where merchant banks function as an independent wing or as subsidiary of various
private/central governments/ state government financial institution. Most of the financial
institution in India is in public sector and therefore such setup plays a role on the lines of
governmental priorities and policies.


MERCHANT BANKER without holding a certificate of registration
granted by the Securities and Exchange Board of India cannot act as a
merchant banker.
SEBI will grant certificate to Merchant banker if it follows the following
 Merchant banker should be a body corporate and should not be non banking finance company

 They must have a necessary infrastructure for maintaining an office

 They must have employed a minimum of 2 persons with experience in merchant banking

 They should not be connected with any company directly or indirectly.

Procedure for getting registration

Failing to pay

of certificate


The capital requirement depends upon the category. The minimum net
worth requirement for acting as merchant banker is given below:

 Category I – Rs. 5 crores

 Category II – Rs, 50 lakhs
 Category III – Rs. 20 lakhs
 Category IV – Nil

The categories for which registration may be granted are given below

 Category I – to carry on the activity of issue management and to act as

adviser, consultant, manager, underwriter, portfolio manager.
 Category II - to act as adviser, consultant, co-manager, underwriter,
portfolio manager.
 Category III - to act as underwriter, adviser or consultant to an issue
 Category IV – to act only as adviser or consultant to an issue

Obligations and responsibilities

 Code of conduct:-
Every merchant banker has to abide by the code of conduct as
specified below. A merchant banker in the conduct of his business has to
observe standards of integrity and fairness of all his dealings with the clients
and other merchant bankers. He ought to render at all times high standards
of service, exercise due diligence, ensure proper care and exercise
independent professional judgment. He has to, wherever necessary, disclose
to his clients, the possible sources of conflict of duties and interest, while
providing services. He cannot made any statement or become privy to any
act, practice unfair competition, which is likely to be harmful to interest of
other merchant bankers or is likely to place such other merchant banker in a
disadvantageous position in relation to him, while competing for, or
executing, any assignment. He should not make any exaggerated statement,
whether oral or written, to the client either about his qualification or his
capability to other clients. A merchant banker always to endeavors to:
1) Render the best possible advice to the clients regarding clients the
needs and requirements, and his own professional skill; and
2) Ensure that all professional dealing are affected in prompt, efficient
and cost effective manner

 He should not:-
1) Divulge to other clients, press or any other party any other party
confidential information about his client, which has come to his
knowledge; and

2) Deal in the securities of any client company without making disclosure

to the SEBI as per the regulations and also the Board of Directors of the
client company.
 He should endeavor to ensure that:-
1) The investors are provided with true and adequate information
without making any misguided or exaggerated claims, and are made
aware of attendant risks before any investment decision is taken by

2) The copies of prospectus, memorandum and related literature are

made available to the investors

3) Adequate steps are taken for the fair allotment of securities and
refund of application money without delay; and
A merchant banker should not generally and particularly
in respect of the issue of any securities be part to
a) Creation of false market;
b) Price rigging or manipulations; and
c) Passing of price sensitive information to brokers, members of
stock exchanges and other players in the capital market or take any
other action which is unethical or unfair to the investors.
Finally, he has to avoid by the provisions of the SEBI Act,
its rules and regulations which may be applicable and relevant to the
activities carried on by the merchant banker.

 Restriction on Business:-

No merchant banker, other than a bank/public financial

institution (PFI) is permitted to carryon business other than that just in the
securities market with effect from December 9, 1997.
However, a merchant banker who is registered with RBI as a Primary
Dealer/Satellite Dealer may carry on such business as may be permitted
by RBI with effect from November 1999.
 Maximum Number of Lead Managers :-

The maximum number of lead manager is related to the size

of the issue. For an issue of size less than Rs.50 crore, two managers are
appointed. For size groups of Rs.50 crore to Rs.100 crore and Rs.100 corer to
Rs.200 crore, the maximum permissible lead managers are three and four
respectively. A company can appoint five and five or more (as approved by
the SEBI) lead managers in case of issues between Rs.200 corer and above
Rs.400 crore respectively.

 Responsibilities of Merchant Banker:-

Every lead manager has to enter into an agreement with the

issuing companies setting out their mutual rights, liabilities, and obligation
relating to issue and in particular to disclosures, allotment and refund. A
statement specifying these is to be furnished to SEBI at least one month
before the opening of the issue for subscription. In case of more than one-
lead manager/Merchant banker, the statement of has to provide details
about their respective responsibilities. A lead merchant banker cannot
manage an issue if the issuing company is its associate. He can also not
associate with a merchant banker who does not hold a certificate of
registration with the SEBI. It is necessary for a lead manager to accept a
minimum underwriting obligation of 5% of the total underwriting
commitment or Rs.25 lakh whichever is less. If he is unable to do so, he has
to make arrangements for an underwriting of an, equal amount by a
merchant banker associated with that issue under intimation to SEBI.

 Due Diligence certificate:-

The lead manager is responsible far the verification of the

content of a prospectus/letter of offer in respect of an issue and the
reasonableness of the views expressed in them. He has to submit to the SEBI
at least two weeks before the opening of the issue far subscription a due
diligence certificate to the effect that
a) The prospectus/letter of after is in conformity with the
documents/materials and papers relevant to the issue,
b) All legal requirements connected with the issue have been fully
complied with, and
c) The disclosure is true, fair and adequate to enable the investors
to make a well-informed decision as to the investment in the
proposed issue.

 Submission of Documents:-

The lead managers(s) to an issue has (have) to. Submit at

least two weeks before the date of filing with the registrar of
companies/regional stock exchange or both particulars of the issue, draft
prospectus/letter of offer, other literature to be circulated to the
investors/shareholders, and so an to the SEBI. They have to ensure that the
modifications/suggestion made by it with respect to the information to be
given to the investors is duly incorporated. The draft prospectus/draft letter
of offer should be submitted to the SEBI along with the prescribed fee
specified below:-

Issue size including premium and

Fee per document
intended retention oversubscription
Up to Rs.5 crore Rs 10,000

Rs 5 crore- Rs 10 crore Rs 15,000

Rs 50 crore- Rs 50 corer Rs 25,000

Rs 10 crore- Rs 100 corer Rs 50,000

Rs 100 crore- Rs 500 corer Rs 2,50,000

More than Rs 500 corer Rs 5,00,000

They have to continue to be associated with the issue till the

subscribers have received the share debentures certificate or the refund of
excess application money.

Acquisition of shares a merchant banker is prohibited from

acquiring securities of any company on the basis of unpublished price
sensitive information obtained during the course of any professional
assignment either from the client or otherwise. He has to submit to the SEBI
the complete particulars of any acquisition of securities of a company whose
issue is being managed by him within 15 days from the date of the

 Disclosures to SEBI:-

As and when required, a merchant banker has to disclose to

the SEBI:
I) His responsibilities with regard to the management of the
II) Any changes in the information/particulars previously
furnished which have a bearing and the certificate of
registrations granted to it.
III) The names of the companies whose issues he has managed or
has been associated with,
IV) The particulars relating to breach of capital adequacy
requirements and
V) Information relating to his activities as manager, under writer,
consultant or adviser to an issue.

 Procedure for Inspection:-

The SEBI can undertake the inspection of the books of accounts,

records, and documents of a merchant banker to ensure that the books are
maintained in the manner required, the provision of the SEBI Act, rules and
regulations are being camp lied with, and to investigate complaints from
investors/other merchant bankers/any other person or any matter having a
bearing on his activities, as a merchant banker and suo moto in the interest
of securities business/investors interest into the affairs of the merchant
The merchant banker has an obligation to furnish all the information
called for, allow a reasonable access to the premises, extend reasonable
facility for the examination of books/records/documents/computer data and
provide copies of the some and give all assistance to the inspecting
authority in connection with the inspection.
On the basis of the inspection report and after giving him an
opportunity to make an explanation, the SEBI can all upon the merchant
banker to take such measures as it deems fit in the interest of the securities
market and for due compliance with the provisions of the SEBI can appoint a
qualified auditor with the above powers of the inspection committee to
investigate into the books of accounts or the affairs and obligations of the
merchant banker.

 Action in Case of Default:-

A merchant banker who fails to comply with any conditions subject

to which the certificate of registration has been granted has been granted,
by the SEBI and/or contravenes any of the provisions of the SEBI Act, rules or
regulations, is liable to any of the two penalties:
a) Suspension of registration or
b) Cancellation of registration

 Suspension of Registration:-

A penalty of suspension of registration of merchant banker maybe

imposed where the merchant banker

1) violates the provisions of the SEBI Act, rules or regulations;

2) (a) Fails to furnish any information relating to his activity as

Merchant banker as require
(b) Furnishes wrong or false information;
(c) Does not submit periodical returns as required by the SEBI;
(d) Does not cooperate in any enquiry conducted by the SEBI;
3) Fails to resolve the complaints of the investors or fails to give a
satisfactory reply to the SEBI in this behalf;
4) Indulges in manipulating or price rigging or cornering activities;
5) Is guilty of misconduct or improper or unbusiness like or unprofessional
conducted which is not in accordance with the code of conduct under the
6) Fails to maintain the capital adequacy requirement in accordance with the
provisions of the regulations;
7) Fails to pay the fees;
8) Violates the conditions of registration; and
9) Does not carry out his obligations-as specified in the regulation
 Cancellation of Registration:-

A penalty of cancellation of registration of a merchant banker may

be imposed where:
1. The merchant banker indulges in deliberate manipulation or price rigging
or cornering activities affecting the securities market and the investor’s
2. The financial position of the merchant banker deteriorates to such an
extent that SEBI is of the opinion that his continuance as merchant banker
is not in the interest of investors
3. The merchant banker is guilty of fraud, or is convicted of a criminal
offence and
4. In case of repeated defaults of the nature leading to suspension of
registration provided that the SEBI flourish reasons for cancellation in
On and from the date of suspension and cancellation of registration of the
merchant banker, he ceases to carryon any activity as a merchant banker.
The order of suspension of cancellation of certificate is published in at least
two daily newspapers by the SEBI.

 Default by Merchant Bankers and Penalty Points:-

The SEBI imposes penalties for non-compliance for registration and

contravention of the regulations on the basis of which registration is
suspended/cancelled. The defaults are categorized into
(a) General,
(b) Minor,
(c) Major and
(d) Serious.

General defaults for the purpose of penalty points, the following activities
are classified under general defaults and attract one penalty point.
1) Non-receipt of draft prospectus/letter of offer from the lead manager by
SEBI, before filing with the registrar of companies/stock exchange
2) Non-receipt of interse allocation of responsibilities of lead managers in an
issue by SEBI prior to the opening of issue.
3) Non-receipt of due diligence certificate in the prescribed manner by SEBI,
before opening of the issue.
4) Failure to ensue the submission of certificate of minimum 90%
subscription to the issue.
5) Failure to ensure expediting of dispatch of refund orders,
shares/debentures certificate, filing of listing application by the issuer.

 Minor Defaults:-
The following activities are categorized under minor defaults and attract two
penalty points.
a. Advertisement, circular, brochure, press release and other issue related
materials not being in conformity with the contents of prospectus.
b. Exaggerated information or information extraneous to the prospectus is
given by issuer or associated merchant baker in any press conference,
investor’s conference, broker’s conference or other such conference/meet
prior to the issue for marketing of the issue for marketing of the issue
arranged/participated by the merchant banker.
c. Failure to substantiate matters contained in highlights to the prospectus.
d. Violation of regulations relating to advertisement on capital issues.
e. Failure to exercise due diligence in verifying the contents of prospectus
letter of offer.
f. Failure to provide adequate and fair disclosure to investors and objective
information about risk factors in the prospectus and other issue literature.
g. Delay in refund/allurement of securities.
h. Non-handling of investors grievances promptly

 Major Defaults:-
The following activities are categorized under major defaults and
attract three penalty points.
a) Mandatory underwriting not takes up by the managers
b) Excess number of lead managers than permissible.
c) Association of unauthorized merchant banker in an issue.

 Serious Defaults:-

The following activities are categorized under serious defaults and

attract four penalty points:
1) Unethical practice by a merchant banker and/or violation of Code of
2) Non-cooperation with SEBI in furnishing desired Information, documents,
evidence as may be called for.
A merchant banker on reaching cumulative penalty points of eight
attracts action from SEBI in terms of suspension/cancellation of
authorization. To enable a merchant banker to take corrective action, the
maximum penalty points awarded in a single issue managed by a merchant
banker are restricted to four. In the event of joint responsibility, the same
penalty point is awarded to all lead managers. In the absence of receipt of
inter se allocation of responsibilities, all lead managers to the issue are
awarded the penalty points.

 Defaults in Prospectus:-

In the highlights are provided, the following deficiencies attract

negative points.
I. Absence of risk factors
II. Absence of listing
III. Extraneous contents to prospectus, if stated

The maximum grading points of prospectus can be 10 and

prospectuses scoring greater than or equal to 8 points are categorized
as A+, those with 6 or less than 8 points as A, those with 4 or less than
6 points as B and those with score of less than 4 points, the prospectus
falls in category C

 General Negative Marks:-

If all highlights are provided in an issue

a) Risk factors should from part of highlights,-otherwise it attracts a

negative points of-1
b) Listing details, should form of part of highlights, otherwise it attracts a
negative point of-OS
c) Any matter extraneous to the contents of the prospectus, if stated in
highlights attracts a negative point of -0.5.
Organizational set up of Merchant Bankers in

In India a common organizational set up of merchant bankers to

operate is in the form of divisions of Indian and Foreign banks and Financial
institutions, subsidiary companies established by bankers like SBI, Canada
Bank, Punjab National Bank, Bank of India, etc. some firms are also organized
by financial and technical consultants and professionals. Securities and
exchanges Board of India has divided the merchant bankers into four
categories based on their capital adequacy. Each category is authorized to
perform certain functions. From the point of Organizational set up India’s
merchant banking organizations can be categorized into 4 group on the basis
of their linkage with parent activity. They are:

a) Institutional Base:-
Where merchant banks function as an independent wing or as
subsidiary of various Private/ Central Governments/State Governments
Financial institutions. Most of the financial institutions in India are in public
sector and therefore such set up plays a role on the lines of governmental
priorities and policies.

b) Banker Base:-
These merchant bankers function as division/ subsidiary of banking
organization. The parent banks are either nationalized commercial banks
or the foreign banks operating in India. These organizations have brought
professionalism in merchant banking sector and they help their parent
organization to make a presence in capital market.
c) Broker Base:-
In the recent past there has been an inflow of Qualified and
professionally skilled brokers in various Stock Exchanges of India. These
brokers undertake merchant baking related operating also like providing
investment and portfolio management services.

d) Private Base:-
These merchant banking firms are originated in private sectors.
These organizations are the outcome of opportunities and scope in
merchant banking business and they are providing skill oriented
specialized services to their clients. Some foreign merchant bankers
are also entering either independently or through some collaboration
with their Indian counterparts. Private Sectors merchant banking firms
have come up either as sole proprietorship, partnership, private limited
or public limited companies. Many of these firms were in existence for
quite some time before they added a new activity in the form of
merchant banking services by opening new division on the lines of
commercial banks and All India Financial Institution (AIFI).
Scope of merchant banking services in India
Merchant banking is a service oriented industry. The services rendered
by merchant banks to the corporate client in India are more or less the same
which are, being rendered traditionally in U.K and other European countries
by the merchant banks in U.S.A by the investment bankers to carter to the
needs of the business enterprises. India’s economy is in the state of
transition facing an entirely different environment than that faced by the
developed nations of the world. In view of these circumstances, a mark of
distinction is apt to be noted in the nature and the type of services being
offered by the merchant banks in India.

Following services provide by the merchant bankers in India:-

1. Corporate Counseling
2. Project Counseling
3. Loan Syndication
4. Management Of Capital Issues
5. Dealing In Secondary Market
6. Mutual Funds
7. Portfolio Management
8. Underwriters
9. Mergers / Amalgamations
Corporate Counseling:-
Corporate counseling denotes the advice provided by the Merchant
Banking to the corporate unit to ensure better corporate performance in
terms of image building among investors, steady growth through good
working and appreciation in market value of its equity shares. The scope
of corporate counseling, capital restructuring and, portfolio management
and the full range of financial engineering includes venture capital, public
issue management, and loan syndication, working capital, fixed deposit,
lease financing, acceptance credit, etc. However counseling is limited to
only opinions and suggestions and any detailed analysis would form part
of a specific service.
The scope of corporate counseling is restricted to the explanations
of concepts, procedures and laws to be observed by the client company.
Requirement of any action to be taken or compliance of statutory
formalities to be made for implementation of those suggestions would
mean the demand for a specific type of service other than corporate
counseling being offered by the merchant bankers. An academic analysis
of corporate counseling present a different picture than that transpires
from the literature of the merchant bankers Firstly corporate counseling is
the beginning of the merchant banking service which every clients
whether new or existing has got to avail a different matter whether a
merchant bank charges its client separately for rendering the corporate
counseling service or includes the element of fee in the other heads of
services but fro the angle of priority. Corporate counseling is first in line of
the services which a merchant banker offers and than other services.
Secondly the scope of the corporate counseling is very vast. Its
coverage ranges from the managerial economies, investments and
financial management to Corporate Laws and the related legal aspects of
the organizational goals, locations factors, organizational size and
operational scale, choice of product and market survey, forecasting of
product, cost reduction and cost analysis, allocation of resources,
investment decisions, capital management and expenditure control,
pricing methods and marketing strategy, etc. As financial and liivestment
experts, a merchant banker has to guide the corporate clients in areas
covering financial reporting, project measurements, working capital
management, financial requirements and the sources of finance,
evaluating financial alternatives, rate of returns and cost of capital
besides basic corporate changes of financial rearrangement,
Reorganization, mergers and acquisitions, etc. are the areas to be

Corporate laws should basically cover the legal aspects including

the various legal formalities involved in areas of corporate finance being
raised from the financial institutions, banks and the general pubic in the
form of loan, new issues of equity or debentures respectively
Project counseling services may be rendered independently or
maybe, it relates to project finance and broadly covers the study of the
project and offering advisory assistance on the project viability and
procedural steps for its implementation broadly including following
aspects:- general review of he project ideas/ project profile, advice on
procedural aspects of project implementation, review of technical
feasibility of the project on the basis of the report prepared by own
experts r by the outside consultants, selecting Technical consultancy
Organization (TCO) for preparing project reports and market survey, or
review of the project reports or market survey report prepared by the
TCO, preparing project report form financial angle, and advice and act on
various procedural steps including obtaining government consents for
implementation of projects. This assistance can include obtaining of the
following approvals/licenses/permission/grants etc form the govt. agencies
viz. letter of intent, industrial license and DGTD registration and
government approval for foreign collaboration.
In addition to above, the facility providing guidance to Indian
entrepreneurs for making investment projects in India and in Indian joint
ventures overseas is also covered under this activity.
Besides the above services, project counseling may include
identification of potential investments avenues, precise capital structuring
shaping the pattern of financing, arranging and negotiating foreign
collaborations, amalgamations, mergers and takeover, financial study of
the project and preparation of viability reports, to advice on the
framework of institutional guidelines and laws governing corporate
finance, assistance in the preparation of project profiles and feasibility
studies based on preliminary project ideas in order to indicate the
potential. These reports would cover the technical, financial and economic
aspects of the project from the point of view of their acceptance by the
financial institutions and banks; advising and assisting clients in preparing
the applications for obtaining letters of intent, industrial license and DGTD
registrations etc, seeking approvals form the government of India for
foreign technical and financial collaboration agreements, guidance on
investment opportunities for entrepreneurs coming to India.
Pre-investment studies are directed mainly for the prospective
investor. These are the objective and detailed feasibility explanation of
which the principal aim is to arm the clients with the sound foundation of
facts and figures to evaluate the alternative avenues open for capital
investments form the pint of view of growth and profit prospects. Some of
the critical issues that a study of this genre deals will include an in-depth
investigation of environment and regulatory factors, location of raw
material, supplies, demand projections and financial requirements. Such a
study would assess the financial and economic viability of a given project
and help the clients to identify and short list those projects that are built
upon his inherent strength son as to accentuate corporate profitability and
growth in long run.
Grind lays bank has specialization in pre investment studies and it
conducts such studies for foreign companies’ whishing to participate in
joint ventures in India and offers a package of services including advice on
the extent of participation, government regulatory factors and an
environmental scan of particular industries in India

Credit syndication also known as credit procurement and project
finance services. The main task involved in credit syndication is to raise to
rupee and foreign currency loans with the banks and financial institutions
both in India and abroad. It also arranges the bridge finance and the
resources for cost escalations or cost Overruns.
Broadly, the credit syndications include the following acts;
(a) Estimating the total costs
(b) Drawing a financing plan for the total project cost-conforming to the
requirements of the promoters and their collaborators. Financial institutions
and banks, government agencies and underwriters.
(c) Preparing loan application for financial assistance from term
lenders/financial institutions/banks and monitoring their progress including
the pre-sanction negotiations.
(d) Selecting the institutions and banks for participation in financing.
(e) Follow-up of the term loan application with the financial institutions and
banks and obtaining the satisfaction for their respective share of
(f) Arranging bridge finance.
(g) Assisting in completion of formalities for drawl of term finance sanctioned
by institution expediting legal documentation formalities drawing up inter-
se agreements etc. prescribed by the participating financial institutions and
(h) Assessing the working capital requirements.
Preparing the necessary application for a successful issue management the
close liaison and coordination with the various constituents of the public
issue is an essential condition that warrants full cooperation of all the parties
affecting the cost and prospects f the issue. Merchant banks, acting as
‘Manager’ to the issue has to settle the fee for Advocate/solicitors’ advice,
accountants certification, broker’s and banks charges, underwriters’
commission, printers’ charges and advertising and publicity expenses and
coordinates with syndicated merchant bankers and principal brokers, stock
exchanges, etc. The responsibility for all this rests upon the merchant
banker. If proper coordination is not done, the success of the issue may be
rendered unassured.

Management OF Capital ISSUES:-

The capital issue are managed are category-1 merchant banker and
constitutes the most important aspects of their services. The public issue
of corporate securities involves marketing of capital issues of new and
existing companies, additional issues of existing companies including
rights issue and dilution of shares by letter of offer,. The public issues are
managed by the involvement of various agencies i.e. underwriters,
brokers, bankers, advertising agency, printers, auditors, legal advisers,
registrar to the issue and merchant bankers providing specialized services
to make the issue of the success. However merchant banker is the agency
at the apex level than that plan, coordinate and control the entire issue
activity and direct different agencies to contribute to the successful
marketing of securities. The procedure of the managing a public issue by
a merchant banker is divided into two phases, viz;
(A) Pre-issue management
(B) Post-issue management

(A) Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:-

(1) Obtaining stock exchange approvals to memorandum and articles
of associations.
(2) Taking action as per SEBI guide lines
(3) Finalizing the appointments of the following agencies:
• Co-manager/Advisers to the issue
• Underwriters to the issue
• Brokers to the issue
• Bankers to the issue and refund Banker
• Advertising agency
• Printers and Registrar to the issue

(4) Advise the company to appoint auditors, legal advisers and broad
base Board of Directors
(5) Drafting of prospectus
(6) Obtaining approvals of draft prospectus from the company’s legal
advisers, underwriting financial institutions/Banks
(7) Obtaining consent from parties and agencies acting for the issue to
be enclosed with the prospectus.
(8) Approval of prospectus from Securities and Exchange Board of
(9) Filing of the prospectus with Registrar of Companies.
(10) Making an application for enlistment with Stock Exchange along,
with copy of the prospectus.
(11) Publicity of the issue with advertisement and conferences.
(12) Open subscription list.

(B) Post-issue Management:-

Steps involved in post-issue management are:-
(1) To verify and confirm that the issue is subscribed to the extent of
90% including devolvement from underwriters in case of under
(2) To supervise and co-ordinate the allotment procedure of registrar
to the issue as per prescribed Stock Exchange guidelines
(3) To ensure issue of refund order, allotment letters / certificates
within the prescribed time limit of10 weeks after the closure of
subscription list
(4) To report periodically to SEBI about the progress in the matters
related to allotment and refunds
(5) To ensure he listing of securities at Stock Exchanges.
(6) To attend the investors grievances regarding the public issue

The Merchant Bankers for managing public issue can negotiate a fee
subject to a ceiling. This fee is to be shared by all lead managers,
advisers etc.
0.5% of the amount of public issues up to Rs.25 crores 0.2% of the
amount exceeding Rs.25crores, if more than one Merchant bankers are
managing the issue.

A Mutual Fund is a special type of investment institution which
collects or pools the savings of the community and invests large funds in
variety of Blue-chip Companies which are selected from a wide range of
industries with the objects of maximizing returns/incomes on
investments. E.g. Unit Trust of India (UTI), Sri Ram Mutual Fund, Morgan
Stanley Growth Fund (foreign mutual fund), etc. Mutual Funds are
basically a trust which mobilize savings from the people and invest them
in a mix of corporate and government securities. Money collected by the
investors is invested in various issues of primary and secondary markets
in order to gain profits on such investments
It is a Trust, which combines the investments of various investors
having similar financial goals. The Trust issues units to the investors in
the proportion of their investments. A fund manager then invests these
funds in different types of assets, which provide returns in the form of
dividends, interests, and capital appreciation. This is distributed to the
various investors in the proportion of their contribution to the pool funds.
Ordinary investors, who want to invest their savings, neither
understand the complexities of financial markets nor have the time to
watch, research, and analyse different equities, securities or any other
investments opportunities that are available in the market.
At present, all the markets viz. the debt market, the equity market,
the money market, real estates, derivatives, and the market dealing with
the other assets have now reached a stage where a minimal information
affect the markets. Besides this, the economy has opened up and global
events influence their performance.
It is very difficult for a lay person to keep track of various
investments, transactions, brokerages etc.
In the present scenario mutual funds are some of the most efficient
financial instruments as it offers above services like managing
investments at a very low cost.
What is NAV?
NAV of the Fund is the market value of all the assets of the Fund
subtracting the Liabilities. NAV reflects the Fund that will be available to
the shareholders if the Fund is liquidated and all the liabilities are paid. In
the mutual fund industry NAV refers to Net Asset Value per unit holder,
which NAV of the Fund divided by the outstanding number of the units. It
shows the performance of the Fund.

Calculation of NAV = Net Asset Value of the fund sum of

market value of shares/debentures + Liquid assets/cash
Dividends/interest accrued – All liabilities
Net asset value per unit =NAV of the fund / Outstanding
number of units

Market value of the shares and debentures is calculated by

multiplying the number of shares/units by the closing price of the
shares/debentures. The closing price will be of the previous day of the
stock exchange from where the shares have been purchased.
If the shares were not traded in the previous day in that
stock exchange, then the closing price of the shares of any other stock
exchange is taken where the shares were traded.
If the shares were not traded in any stock exchange the
previous day, then the closing price of the shares when they were last
traded is taken.
For untraded shares, the value has to be determined by the
other methods such as Book Value, comparable company approach, etc.
Value of the illiquid bond is estimated on the basis of yields
of comparable liquid bonds.
Benefits of Investing in Mutual Funds

1) Professional management of the investments:-

Each Mutual fund appoints an experienced and professional
funds manager and several research analyst, who research before
investing, thus adding value to the common investor. These
professional constantly keep track of the market changes and news,
predict the impact they will have on the investments and take quick
decision regarding the adjustments to be made in the portfolio.

2) Low costs of Investments:-

Due to the large amount of funds manages, very low costs
accrue per investor. Mutual fund achieves economics of scales in
research, transactions and investments. It lowers the cost of
brokerage, custodial and other charges.

3) Diversification :-
A common investor has limited money, which he can invest only
in a few securities and faces a great risk. If their values go down, the
investor loses all his money. Since Mutual Funds have huge amounts of
funds to invest, the Fund manager invests in the securities of many
industries and sectors; ( called diversifying the risk ). This
diversification reduces the risk involved because all the sectors and
industries will never go down at the same time. Investors get this
diversification by investing a small amount in Mutual Funds.
4) Convenient record keeping and administration: -
Mutual funds take care of all record keeping including
paperwork. It also deals with the problem of bad deliveries, broker’s
commission etc.

5) Various types of Schemes:-

Mutual Funds offer various types of schemes such as regular
income plan, growth plan, equity funds, debt Funds, and balanced
Funds. So an investors can select a plan according to his needs.

6) Flexibility:
mutual funds offers various schemes, giving the investor the
option to shift from one scheme to another at various times depending
on his needs, the risk he is willing to take, and the type of return the

7) Scope for good return:

mutual fund invest in various industries and sectors, therefore
the portfolio gets diversified, resulting in mutual funds generating
equitable return.

8) Enables investing in high value stocks:

the individual investors have less money to invest and cannot
invest in high value stocks such as Infosys. With Rs 12000 an investors
can purchase only 2 shares of infosis, which is like putting all his eggs
in one basket. Mutual funds have huge amount of funds and can invest
in these high value stocks. The benefits from this high value stock can
pass on to all the investors.
9) Easy liquidity:
mutual fund provides easy liquidity. In the case of open-ended
scheme units can be purchased/sold at NAV from/to the mutual fund on
any day. In the case of closed-ended funds units are traded on the
stock exchange at the market prices, or the investors can repurchase
the units from the mutual fund at the prevailing NAV related prices.

10) Tax benefits:

there are certain schemes that offer tax benefits o the
customers. So the investor also tax benefits from mutual fund.

11) Provides transparency:

mutual funds keep the customers informed about the
competition of all the investments in various asset classes from time to
time. During the launch of the mutual fund the offer document
provides information on the objective of the funds, cost to be incurred,
entry/exist load to be charged to the investor, risk associated with the
funds, & detail about the fund mariners, sponsors, members of trust

12) Regulated by SEBI:

just like equities, mutual funds are also regulated by the SEBI.
This is to safeguard the interests of investor.
Portfolio manager
portfolio managers are defined as persons who, in pursuance of a
contract with client, advise/ direct undertake on their behalf the
management/ administration of portfolio of securities/ funds of clients. The
term portfolio means the total holding of securities belonging to any person.
The portfolio management can be…

• Discretionary: the first type of portfolio management permits the

exercise of discretion in regard to investment/ management of the
portfolio of the securities /funds.
• Non-discretionary: the non-discretionary portfolio manager should
manage the funds in accordance with the direction of client.

In order to carry on portfolio management services, a certificate of

registration from SEBI is mandatory. But for category 1 and 2 merchant
banker a separate registration is not required to act as a portfolio manager.
They have, however, To carry on the portfolio management activity within
the framework of SEBI regulations applicable to portfolio managers. The SEBI
regulation applicable to portfolio manager. The SEBI is authorized to grant
and renew certificate of registration as a prior permission to portfolio
managers on the payment of the requisite registration/renewal fee. A
certificate/ renewal of registration is valid for three years. An application for
renewal must be made three months before the expiry of the validity of the
certificate. The annual registration fee payable to SEBI was Rs 2.5 lakh for
the first two year and Rs. 1 lakh for the third year. The renewal fee was rs
75,000 per annum. After November 1999, the registration fee and renewal
fee after every three years in Rs. 5 lakh respectively. The portfolio manager
is also to give an undertaking to take adequate steps for the redresses of
grievance of clients within one month of the receipt of complaint, keep SEBI
informed about the number, nature, and other particular of complaints and
abide by its rules and regulations.

Procedure for Registration

While considering the application for registration made in the
prescribed form, the SEBI takes into accounts all matters relevant to the
activities relating to portfolio manger and in particular.

a) Necessary infrastructure like adequate office staff, equipment and

manpower to discharge his activities.

b) Has in employment a minimum of two persons with experience to conduct

portfolio management business.

c) A person directly/ indirectly connected with the applicant, that is,

associated/subsidiary/inter-connected pr Group Company has not been
granted registration;
d) Capital adequacy of not less than net worth of Rs. 50 lakh in term of
capital plus free reserves.

e) The applicant/ partner/ director/principal officer has not been convicted

for nay offence involving moral turpitude/ guilty of any economic offence;

f) The applicant/partner/director/partner/ principal officer is not involved in

any litigation connected with the securities market;

g) The applicant has professional qualification in

finance/law/accounting/business management; and

h) Grant of certificate is in the interest of the investors.

General Obligations and Responsibilities

 Code of Conduct:-
A portfolio manger has to, in the conduct of business; observe high
standards of integrity and fairness in all his dealing with his clients and other
portfolio managers. The money received by him from a client for an
investment purpose should be deployed as soon as possible and money due
and payable to a client should be paid forthwith.

A portfolio manager has to render at all times high standards of

services, exercise due diligence, ensure proper-care and exercise
independent professional judgment. He should either avoid any conflict of
interest in his investment or disinvestment decision, or where any conflict of
interest arises; ensure fair treatment of all his customers. He must disclose
to the client, possible sources of conflict of duties and interest, while
providing unbiased services. A portfolio manger should not place his interest
above those of his clients.
He should not make any statement or become privy to any act,
practice or unfair competition, which i! Likely to be harmful to the interest of
other portfolio mangers or is likely to place them in a advantageous position
in relation to the portfolio manager himself, while competing for or executing
any assignment.

Any exaggerated statement, whether oral or written, should not be

made ‘by him to client other about the qualification or the capability to-
render certain services or his achievements in regards to services n rendered
to the other clients.

At the time of entering into contract, he should been in writing from

the clients his interest in various corporate bodies which enable him to
obtain unpublished price-sensitive information of the, body corporate.
A portfolio manger should not disclose to any clients or press any
confidential information about his clients, which has come in his knowledge.
Where necessary and in the interest of the clients, he should take
adequate’ steps for the registration of the transfer of the clients’ securities
and for claiming and receiving dividends, interest payment and other right
accruing to the client. He must also make necessary action for the
conversion of securities and subscription/ renunciation of/or rights in
accordance with the clients’ instruction.

• A portfolio manger has to endeavor to:-

a) Ensure that the investors are provided with true and adequate
information without making any misguiding or exaggerated claims and
are made aware of attendant risks before any investment decision is
taken by them;
b) Render the best possible advice to the client having regards to the
client’s needs and the environment and his own professional skills;

c) Ensure that all professional dealing are affected in prompt, efficient

and cost effective manager.

• A portfolio manger should not be party to:-

a) Creation of false market in securities;

b) Price rigging or manipulation of securities;

c) Passing of price sensitive information to brokers, members of the stock

COI exchanges and any other intermediaries in the capital market or
take any other action which in prejudicial to the interest of the
investors. No portfolio manager or any of its directors, partners or
managers should either on their respective accounts or through their
associates or family members, relatives enter into any transaction in
securities of the companies on the basis of published price sensitive
information obtained by them during the course of any professional

• Contract with Clients:-

Every portfolio manger is required, before taking up an assignment of

management of portfolio on behalf of a client, is enter into an agreement
with such client clearly defining the inter se relationship, and setting out their
mutual rights, liabilities and obligation relating to the management of the
portfolio of the client. The contract should, inter alias, contain.

i. The investment objectives and the services to be provided

ii. Areas of investment and restrictions, if any, imposed by the client with
regards to investment in a particular company or industry;

iii. Attendant risks involved in the management of the portfolio;

iv. Period of the contract and provision of early termination, if any;

v. Amount to be invested;

vi. Procedure of setting the client’s accounts including the form of

repayment on maturity or early termination of contract;

vii. Fee payable to the portfolio manger;

viii. Custody of securities.

The funds of all clients must be placed by the portfolio manger in a

separates accounts to be maintained by him in a scheduled commercial
bank. He can charges an agreed fee from the client for rendering portfolio
management services without guaranteeing or assuring, either directly or
indirectly, any return and such fee should be independent of the returns
to the clients and should not be on return sharing basis.

 General Responsibilities;-
The discretionary portfolio manager should individually and
independently manage the funds of each client in accordance with the
need of the client in a manner, which does not partake the character of a
mutual fund, whereas the non-discretionary portfolio manager should
manage the funds in accordance with the direction of client. He should act
in a fiduciary capacity with regard to the client funds and transact in
securities in within the limitation placed by the client himself with regard
to dealing to securities under the provisions of the reserve bank of India
act, 1934. He should not derive any direct or indirect benefit out of the
client funds or securities. he cannot pledge or give on loan securities held
on behalf of client to a third person, without obtaining a written
permission from his client. He should ensure proper timely handling of
complaints from his client and take appropriate action immediately.

 Investment of clients money:-

The portfolio manager should not accept money of securities from
his client from his client for a period of less than one year. Any renewal of
portfolio funds the maturity of the indicial period is deemed as a fresh
placement for a minimum period of one year. The portfolio funds can be
withdrawn or taken back by the portfolio client at his risk before the
maturity date of the contract under the following circumstances..

• Voluntary or compulsory termination of portfolio management

service by the portfolio manager.
• Suspension or termination of registration of portfolio manager by
the SEBI.
• Bankruptcy or liquidation in case the portfolio manager is a body
• Permanent disability, lunacy or insolvency in case the portfolio
manager is an individual.
The portfolio manager can invest funds of his clients in money market
instrument or as specified in the contract, but not in bill discounting,
bedlam financing or for the purpose of lending or placement with
corporate or non-corporate bodies.
While dealing with clients funds, he should not indulge in speculative
transaction, that is, not enter into any transaction for the purchase or sale
of any securities in which transaction is periodically or ultimately settled
otherwise than by actual delivery or transfer of security. He may enter
into transaction on behalf of the client for the specific purpose of meeting
margin requirements only if the contract so provides and the client is
made aware of, the attendant risk of such transaction.
He should ordinarily purchase all sell securities separately for each
client. However, in the event of aggregation of purchase or sales for
economy of scale, inter se allocation should be done on a pro rata basis
and at weighted average price of the days transaction. The portfolio
manager should not keep any position open in respect of allocation of
sales or purchase affected in a day.
Any transaction of purchase or sale including that between the
portfolio managers own account and client accounts or between two
clients account should at the prevailing market price. He should segregate
each clients fund and portfolio securities and keep them separately from
his own funds and securities and be responsible for the safekeeping of
clients fund and securities. He may hold the belonging to the portfolio
account in his own name on behalf of his client’s only if, the contract so
provides and in such an event his record and reports to the client should
clearly indicate that the securities are held by him on behalf of the
portfolio account.

 Maintenance of book of accounts / records:

Every portfolio manager must keep am maintain the following book of

accounts, records and documents.
• A copy of balance sheet at the and of each accounting period.
• A copy of the profit and loss account for each accounting period.
• A copy of the auditor report on the account for each accounting
• A statement of financial position and
• Record in support of every investment transaction or
recommendation which indicate the data, fact and opinion leading
to that investment decision.
After the end of each accounting period, copies of the balance sheet,
profit and loss account and such other documents for any other preceding
five accounting year when required must be submitted to the SEBI. Half
yearly unedited financial result, when required with a view to monitor the
capital adequacy have to be submitted to the SEBI the books of account
and other record and document must be preserved for a minimum period
off five years.

 Disclosure to SEBI :
A portfolio manager must disclose to SEBI a and when required the
following information.
• Particulars regarding the management of a portfolio.
• Any information or particulars previously furnished, which have a
bearing on the certificate granted to him.
• The name of the clients whose portfolio he has managed and
• Particulars relating to the capital adequacy requirement

Another important intermediary in the new issue/primary market is
the underwriters to the issues of capital who agree to take u securities
which are not fully, subscribed. They make a commitment to get the issue
subscribed either by other or by them. Through underwriting is not
mandatory after April 1995, its organization is an important element of
the primary market. Are appointed by the issuing companies in
consultation with the lead manager/ merchant banker to the issues. A
statement to the effect that in the opinion of the lead manager, the
underwriters asset are adequate to meet their obligation should be
incorporated in the prospectus certificate.

 Registration
To act as underwriter, a certificate of registration must be obtained
from the SEBI in granting the registration, the SEBI considers all matters
relevant relating to the underwriting and in particular,
a. The necessary infrastructural like adequate office space, equipment and
manpower to effectively discharged the activity:
b. Past experience in underwriting/ employment of at least two persons with
experience in underwriting:
c. Any person directly/ indirectly connect with the applicant is not registered
with the SEBI as underwriter or previous application of any such person
has been rejected or any disciplinary action has been taken against such
person under the SEBI act/rules/regulation.
d. Capital adequacy requirement of not less than the net worth ( CAPITAL +
free reserve) of Rs. 20 lakh: and
e. The applicant/ director/ principle officer/ partner has been convicted of
offence involving moral turpitude or found guilty of any economic offence.
Fee underwriters, had to, for grant or renewal of registration, pay a fee to
the SEBI from the date of initial grant of certificate, Rs 2 lakh for the first
and second year and Rs 1 lakh for the third year. A fee of Rs 20,000 was
payable every year to keep the certificate in force or for its renewal. Since
1999 the registration fee has been raised to Rs 5 lakh. To keep the
registration in force, renewal fee of Rs 1 lakh. Every three years from the
forth year the date of initial registration is payable. Failure to pay the fee
would result in the suspension of the certificate of registration.
General obligations and responsibilities:
1) Code of conduct :

Every underwriter has at all time to abide by a code of conduct;

he has to maintain high standard of integrity, dignity and fairness in all
his dealings with his clients and, other underwriters in the conduct of
his business. He has to ensure that he and his personal act in an
ethical manner in all dealing with the issuers of capital. An underwriter
has to rendered high standard of service exercise due diligence, ensure
proper care and exercise independent professional judgment. He must
disclose to the issuer his possible source/ potential areas of conflict of
duties and interest of other underwriters to place them in a
disadvantageous position in relation to him while competing
for/carrying out any assignment. He must not make any written or oral
statement to misrepresent…
• The service that he to be capable of performing for the issuer/ or
has rendered to other issuer or
• He underwriting commitment

He should not divulge to other issuer/ any party any confidence

information about his issuer, which forms the come to his knowledge
and deal in securities of any issuer without disclosing to the SEBI or to
the board of director of the issuer. An underwriter should not willfully
make untrue statement/suppress material fact in any document,
reports, papers or information furnished to the SEBI.

a) Agreement with clients:

Every underwriter has to enter into an agreement with the

issuing company. The agreement, among others, provides for the
period during which the agreement is in for amount of underwriting
obligations, the period within which the underwriter has to subscribe to
the after being intimated by/on behalf of the issue, the amount of
commission/ brokerage, and detail of arrangement, If any , made by
the underwriter for fulfilling the underwriting obligations.
b) General responsibilities :

An underwriter cannot derive any direct or indirect benefit from

underwriting the issue other than by the underwriting commission. The
maximum obligation under all writing agreements of an underwriter
cannot exceed 20 times his net worth, underwriters have to subscribe
for securities under the agreement within 45 days of the receipt of
intimation from he issuer.

c) Inspection and disciplinary proceedings:

The framework of the SEBI right to undertake the inspection of

the book of account, other record documents of the underwriters, the
procedure for inspection and obligation of the underwriters is on the
same pattern as applicable to the lead manager

d) Action in case of default :

The liability for action in case of default arising out of

• Non-compliance with any conditions subject to which registration
was granted,
• Contravention of any provision of the SEBI act/rules/ regulation
underwriter involves the suspension/cancellation of registration: the effect
of suspension/ cancellation on the lines followed by the SEBI in case of
lead manager.

The terms merger and amalgamation are used interchangeably as a
form of business organization to seek external growth of business. A merger
is a combination of two or more firms in which only one firm would survive
and the other would cease to exist, its asset/ liabilities being taken over by
surviving firm. And amalgamation is an arrangement in which the
asset/liability of to or more firm to form a new entity or absorption of
one/more firm with another. The out come of this arrangement is that the
amalgamating firm is dissolved/wound-up and losses it identity and its
shareholders become shareholders of the amalgeted firm. Although the
merger/amalgamation of firm in India is governed by he provision of the
companies act, 1956, it does not defined this term. The income tax act ,
1961, stipulates to pre-requisite for amalgamation through which the
amalgeted company seeks to avail the benefit of set of / carry forward of
losses and unabsorbed depreciation of the amalgamating company against
its future profits u/s 72A ,namely,
1. All the property and liabilities of the amalgamated company / companies
immediately before amalgamation should vest with/ become the liabilities
of the amalgamated company and
2. The shareholders other than amalgamated company/its subsidiary holding
at list 90% value of shares/ voting power in the amalgamating company
should become shareholders of the amalgamated company by virtue of
amalgamation. The scheme of merger, income tax implications of
amalgamation and financial evaluation are discussed in the section.
Following the economic reforms in India in the post-1991 period, there
is a discernible trend among promoters and established corporate group
towards consolidation of market share and diversification into new areas
through acquisition/takeover of companies but in a more pronounced
manner through mergers/amalgamation. Although the economic
consideration in terms of motive and effect of these are similar, the legal
procedure involved are difficult. The merger and amalgamation of corporate
constitute a subject matter of the companies act, the courts and law and
there are well-laid down procedure for valuation of share and right of
investor. The acquisition/takeover bids fall under the purview of SEBI. The
terms merger and amalgamation on the one hand and acquisition and
takeover on the other are treated here synonymously. Section one of the
chapter covers the framework of merger/amalgamation including financial
evaluation. The regulatory framework governing acquisition/takeover is
described in section two.
Scheme of merger/amalgamation:
Whenever two or more companies agree to merge with each other,
they have to prepare a scheme of amalgamation. The acquiring company
should prepare the scheme in consultation with its merchant banker/
financial consultant. The main contents of a model scheme, are listed below

• Description of the transfer and the transfer company and the business
of transferor.
• Their authorized, issue and subscribed/ paid-up capital
• Basis of scheme; the main terms, of the scheme in self’-contained
paragraph on the recommendation of valuation report, covering
transfer of asset/liabilities, transfer date, reduction or consolidation of
capital, application to financial institution as lead institution for
permission and so on.
• Change of name, object clause and accounting year .
• Protection of employment
• Dividend position and prospectus
• Management: board of director banking their number and participation
and transfer company’s director on the board
• Application under section 391and 394 of the companies act, 1956, to
obtain high course approval
• Expenses of amalgamation
• Condition of the scheme to become effective and operative, effective
date of amalgamation
The basis of merger/ amalgamation in the scheme should be the
report of the value’s of asset of both the merger partner companies.
The scheme should be prepared on the basis of the values report;
reports of the charter accountant engaged for financial analysis and
fixation of exchange ratio, report of auditors and audited account of
both the companies prepared up to the appointed date. It should be
ensured that the scheme is just and equitable to the shareholders,
employees of each of the amalgamating company and to the public.

Qualities of a Good Merchant Banker

Merchant Bankers are individual’s experts who organize and manage the
merchant banks. The operation of a merchant bank is influenced by the personality, traits of its
merchant bankers. Their qualities are:

1) Leadership:-
In order to interact with their clients and communicate
effectively merchant bankers should possess all relevant skills and update
2) Aggressive action:-
Merchant bankers always looking for new business
opportunities. On locating a business opportunity and after obtaining
the assignment from the clients, a merchant banker has to be prompt
in grasping the client’s problems and to provide a better choice
amongst alternative solutions. A good merchant banker is one who
does not allow his clients to think anything outside except what has
been advised and thus holding the clients interest for the present as
well as for the future.

3) Co-operation and Friendliness:-

Co-operation and friendliness coupled with persuasiveness
must flow as natural traits in the merchant banker in order to win over
the trust of their clients just like a doctor or a lawyer who retains their
clients permanently. A good merchant banker has to share the
thoughts of his clients with sympathetic gestures and offer suggestions
without any greed or favors.

4) Contacts:-
A merchant banking business mainly depends upon the
sociable nature and wider contacts. The scope of contact of a merchant
banker covers:
(a) His own organization
(b) Central and State Government Offices (c) Banks,
(c) Financial Institutions,
(d) Promoters/Directors/Owners/Chief Executives of the public and
(e) Printers,
(f) Advertising Agencies,
(g) Brokers and Stock Exchange Dealers,
(h) Advocates and Solicitors
(i) Members of the press, etc.
Merchant bankers have to widen the contacts and continue to maintain
them by meeting people in personal, in special gatherings and through
writing to them.

5) Attitude towards problem solving:-

A good quality of a merchant banker is to be skilled in human
relations particularly in the inter-personal behavior. A merchant
banker should have a positive approach to understand the difficulties,
adverse circumstances and the viewpoints of others. Effective
communication and proper feedback are the pre-requisites for creating
a positive attitude towards problem solving which could be gained
partly through the learning process and partly as an inborn personality

6) Inquisitiveness for acquiring new skills, information and knowledge:-

Merchant bankers survive by providing the information required
by their needy clients. Therefore they must keep themselves updated
with the latest information in the area of the service product which
they market.
Development stages of Merchant Banking
In the merchant banking organization in the following chart,
the firm of merchant banker and individual stock broker have been included
as they have been contributing jointly to the growth of the profession of
merchant banking. But most of these firms are not well developed to show
stage of maturity. Most of them are still in the start-up and early growth
stages. This is easily dissemble from the following projection of the
development stages

Principal financing
Stages in development
Unit Organizational setup source
of merchant banking

Very loose organization,

founders and associates
1 Start-up Own investment
involved in the
Emerging formal
organization, founders, or
2 Early growth Individual investment
professional manager in
Formal organization with Firms investment with
3 Accelerating growth professional, manager or banks backing in terms of
founder loan
Corporate finance from
Complex organization with
4 Sustaining growth bank plus equity funds
professional manager
from public

Multilayer complex Matching finance available

5 maturity
management organization from all possible sources

Market potential of merchant banking services

Merchant banking in the country has come to be primarily
associated with the capital markets. With deregulation of Indian markets
there are several new sectors open to private investment which have
consequently created an opportunity for private financing. The need for this
banking is not currently met, by their commercial banks or the financial
institutions and hence there is a huge gap which needs to be filled. This gap
can be met through capital markets or a range of finance products and hence
a good scope exists for the various services offered by a merchant banker.
The establishment of SEBI and the abolition of the office of Controller of
Capital Issues (CCI) in 1992 heralded in area of free market pricing of equity
shares. Merchant bankers in particular have been assigned a greater
responsibility in the fixation of issue price & premium, if any. In the CCI
regime merchant bankers had restricted role to play in that regard. The role
was confined mainly to getting clearance from the CCI & to ensuring the
success of capital issue through marketing efforts. There were also no
disclosure norms. Merchant bankers were seldom held accountable for the
correctness of the information disclosed in the prospectus & letter of offer
but with issuance of comprehensive guidelines for free market pricing, code
of conduct for merchant bankers, etc. by SEBI role of merchant bankers has
considerably increased.
An outstanding development in history of Indian capital market
was opening up in 1992 by allowing financial institutions to invest in the
primary & secondary markets & also permitting Indian companies to directly
tape foreign capital markets through Euro Issues. The result was so
encouraging that within less than 2 years to march 1994 the total inflow of
foreign capital through these routes reached to about $5 billion. It was
estimated that this figure may go up to $35-$40 billion by the turn of the
century. Though, at the initial stage the Indian merchant banker have played
supportive role has almost all of the euro issue have been laid managed by
foreign merchant banker, but in future they may play major role by their
increasing participation as managers/lead managers. Foreign direct
investment (FDI) has also investments by NRI have risen considerably due to
number of incentives offered to them. They need the service of merchant
bankers to advice them for their investments in India. Further increasing
investments in joint ventures abroad by Indian corporations also require
expert service of merchant banker. For the first time in India the concept of
debt market has set to work through NSE & OTCI. Experts feel that the
estimated capital issues of Rs.4000 crores in 1994-95, a good portion may be
raised through debt instruments. The development of debt market will offer
tremendous opportunity to, Merchant Bankers. Recently, Indian Capital
Market has also witnessed innovations in the financial instruments such as
non-convertible debentures with detachable warrants, cumulative convertible
preference shares, zero coupon bonds, secured premium notes, suction rated
bonds, etc. This has further extended the role of Merchant bankers as market
makers for these instruments.
Level of Competition
The rapid growth in the primary capital market has led to an even
greater proliferation of Merchant Bankers. The number of Merchant Bankers
has increased from only 33 in the year 1989-90 to 405 in 1993-94. Presently,
the number of Merchant Bankers in different categories registered with SEBI
is 501 (August 1994). Considering a total number of public issues in the year
1994-95, a Merchant Banker on average viedlor 3.5 issues. Therefore a tough
competition exists in the line off issue management. The high level of
competition in Merchant Banking business especially issue management is
evident from the fact that out of 140 Category-I merchant Bankers in 1992-
93 only 66 were able to manage an issue.
Merchant Banking business is handled by a few established
players and for the others there is a heavy competition. Therefore, their
survival dependent on innovative capital issue structuring and other income
generating activities like leasing, high-purchase, investments and dealings in
secondary market operations.
As a result of liberalization and globalization, competition in
corporate sector is becoming intense. For their survival and growth,
companies are reviewing their strategies, structures and functioning. This
had led to corporate restructuring including mergers, acquisitions, splits,
divestments and financial restructuring. This area of corporate advisory
services which is largely in the hands of private consultancy firms, also offers
good opportunity to Merchant Bankers to extend the area of operations.
Environmental factors affecting merchant
banking services

Schematic view of environmental factors

Affecting Merchant Banking Services

-Open for change-
Merchant Banking Services


General Technology Legal Aspect Demand

Economic Scientific Law & for
Conditions Innovations Regulations Services


-Open for entry-
The merchant bankers are a part of economics structure of the
nation and they function in an environment which is influenced inter alias by
the following important factors:
(1) The general economics condition, prevailing in the country presenting
an economics environment, affects the functioning of every economic or
social organization. These economic conditions assimilate the boom and
prosperity, the depression and recessionary impacts on industry trade and
(2) The technology and scientific innovations are responsible for onward
shifting of the entire developmental process to a state of higher
development. Besides, the technological development also helps the
system to use information processing and communication techniques to
overcome limitations or restrictions of time and space, and provide better
(3) The ‘law and regulations’ affect the functioning and relationship with
users of the services of the organization. Besides complying to various
legal formalities the merchant bankers exist the legal framework. Both
creation of law and regulation of law is the network within which the
government and merchant bankers have to abide by the legal norms
which have the characteristics of change depending upon the moods of
the public system. (I.e. the government) and public interest.
(4) Demand for merchant banking services is one of the environmental
factors that affect the merchant banking functioning in two respects viz.
the competitive forces exist for merchant banking units and there remains
a demand for the quality service to be provided to the users.
Demand will change subject to changes in others environment
factors, particularly under the influence of technological development taking
place. The coverage of rural areas and small business is the present day
need of environmental through geared professionalism. The merchant
banking professionalism requires new response in education and training
conforming to the dynamics of the change. Professional development
programs have got be reshaped to suggest merchant banks to render more
specialized services.

The merchant banking business has increased
over a short period of time and with continued economic
reforms. However, a stiff competition exists in this line and
survival will depend upon the financial skills and spectrum of
financial services and instruments offered by the Merchant
Banker. Hence, Merchant Banking Service is taking shape for
turbulent times.
Merchant banking is an activity initially
undertaken by a few large commercial banks in India, and it is
now being adopted or undertaken by a few large commercial
banks in India, and it is now being adopted or undertaken by
practically every commercial bank through its Merchant
Banking Department. The range of activities covered under
merchant banking very wide indeed. The merchant banks offer
a package of financial services. Unlike in the past, their
activities are now primarily non-fund based. Therefore, they do
not require much capital. One of the basic requirements of
merchant banking is a highly professional staff and worldwide
contacts. Merchant banking is usually international in