Study of Merchant Banking Activites

Study of merchant banking activities
Introduction
A merchant bank is a financial institution that provides capital to companies
in the form of share ownership instead of loans. A merchant bank also
provides advisory on corporate matters to the firms in which they invest. In
the United Kingdom, the term "merchant bank" refers to an investment bank.
Today, according to the U.S. Federal Deposit Insurance
Corporation (acronym FDIC), "the term merchant banking is generally
understood to mean negotiated private equity investment by financial
institutions in the unregistered securities of either privately or publicly held
companies. Both commercial banks and investment banks may engage in
merchant banking activities. Historically, merchant banks' original purpose
was to facilitate and/or finance production and trade of commodities, hence
the name "merchant". Few banks today restrict their activities to such a
narrow scope.
The Reserve bank of India performs merchant banking functions for the
central and the state governments; it also acts as their banker.
A Merchant bank is a bank or a financial institution which is more focusing
on providing financial services and advice to corporations and wealthy
individuals, so we can say that a Merchant bank is that which providing
Private equity activities of banking. There are two types of banks which
provides these private equity services and they are Merchant banks and
Investment Banks and the main difference between these banks is merchant
bank invest its own capital in a client company whereas an investment bank
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is act as a distributor of the securities of the company in its capital raising

role. First bank that providing these services was establish on 13th
November 1994 and its name was First Merchant Bank (FMB). It is a
registered commercial bank that's established in Malawi Stock exchange. So,
in short we can say that Merchant bank is the bank that engaged in providing
the business of issue management either by making arrangements regarding
selling, buying or subscribing to securities as manager , consultant, advisor
or rendering corporate advisory service in relation to such issue
management.
Dictionary meaning of merchant bank refers to an organization that under
Rwrites corporate securities and advises such clients on issues like corporate
mergers, etc. Involved in the ownership of commercial ventures. This
organization may be a bank, corporate body, firm or proprietary concern.
The Notification of the Ministry of Finance defines merchant banker as;

Any person who is engaged in the business of issue management either by
making arrangements regarding selling, buying or subscribing to securities
as manager-consultant, adviser or rendering corporate advisory services in
relation to such issue management
The Amendment Regulation specifies that issue management consist of
prospectus and other information relating to issue, determining financial
structure, tie-up of financiers and final allotment and refund of the
subscriptions, underwriting and portfolio management services.
In the words of Skully A Merchant Bank could be best defined as a

financial institution conducting money market activities and lending,
underwriting and financial advice, and investment services whose
organization is characterized by a high proportion of professional staff able
to able to approach problems in an innovative manner and to make and
implement decisions rapidly.
Nature of Merchant Banking

Merchant banking is skill based activities and involves serving every
financial need of every client. It requires focused skill-base to provide for
the requirements of the client. SEBI has made the quality of man-power as
one of the criteria for registration as merchant banker. These skills should
not be concentrated in issue management and underwriting alone, which
may have an adverse impact on business. Merchant bankers can turn to any
of the activities mentioned above depending upon resources, such as capital,
foreign tie-ups for overseas activities and skills. The depth and
sophistication in merchant banking business are improving since the avenues
for participating in capital market activities have widened from issue
management and underwriting to private placement, bought out deals
(BODS), buy-back of shares, merges and takeovers.
The services of merchant bank cover project counseling, pre-investment
activities, feasibility studies, project reports, design of capital structure, issue
management, underwriting, loan syndication, mobilization of funds from
Non-Resident
Indians,
foreign
currency
finance, mergers,
amalgamation, takeover, venture capital, buy back and public deposits. A
Category-1 merchant banker can undertake issue management only. Separate

registration is not necessary to carry on the activity as underwriter.
Characteristics of Merchant Banking
High proportion of decision makers as a percentage of total staff.
Quick decision process.
High density of information.
Intense contact with the environment.
Loose organizational structure.
Concentration of short and medium term engagements.
Emphasis on fee and commission income.
Innovative instead of repetitive operations.
Sophisticated services on a national and international level.
Low rate of profit distribution.
High liquidity ratio.
Qualities of a Merchant Banker

Merchant bankers are individual experts who organize and manage the
merchant banks. The operations of merchant banks are, therefore,
influenced by the personality trait of these individuals. For the success of
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merchant banks operations, the qualities which merchant bankers should

have are discussed below: LEADERSHIP: merchant banker should possess all relevant skills, update
knowledge to interact with the clients and effectively communicate.
Leadership is synonymous with followers who follow the one who leads.
AGGRESSIVE ACTION:- aggressiveness is a personality trait of a good
leader but in merchant banking it has a wider connotation. Aggressive
merchant bankers are always looking for new business. Once a business
opportunity has been located, the merchant banker has got to obtain the
mandate for the merchant banking assignment from the clients at once which
will depend upon his own communication skills, persuasiveness and the
background of the organization to which he belongs. A good merchant
banker is one who does not allow his client to think anything outside except
what has been advised.
COOPERATION AND FRIENDLINESS:- These two characteristics are
the symbols of good leadership but it hardly needs to be stressed that
cooperation and friendliness coupled with persuasiveness are the main
instruments with which a merchant banker mixes with the people, gathers
information, obtains business mandate and renders satisfactory services to
the clients. Business of an honest business merchant banker spreads with
geometrical propagation when he shares the thoughts of his clients with
sympathetic gestures and offers pragmatic suggestions without greed or
favours. Very often, rude, intemperate and indifferent disposition or blunt
out burst withdrew fortunate business opportunities forever.
Friendliness
and cooperation must flow as natural traits in the merchant banker to win the
trust of the clients.
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CONTACTS : success of merchant banker depends upon his sociable

nature and the richness of wider contacts. A merchant banker is supposed to
be acquainted deeply with all the constituents of merchant banking. The
scope of contact encompasses intimate contiguity and acquaintances within
his own organization, Central and State Government Offices where
compliances under various relevant enactments are to be reported, Indian
and foreign banks, financial institutions at Central and State levels,
promoters/directors/owners and chief executives of the private and public
enterprises which would be prospective beneficiaries of merchant banking
services, printers, advertising agencies, brokers and stock exchange dealers,
advocates and solicitors and members of the press whose services are
availed of in executing merchant banking assignments. Merchant bankers
should widen contacts and references and continue to maintain them with
goodness, honour and humour by meeting people.
ATTITUDE TOWARDS PROBLEM SOLVING: The most important
personality trait of a merchant banker is his attitude towards problem
solving. Even client coming to him has got to return fully satisfied having
consulted a merchant banker. Positive approach to understand the view
points of others, their difficulties and their adverse circumstances is possible
only when a person is skilled in human relations particularly the interpersonal and intra-personal behavior. Effective communication and proper
feedback are the pre-requisite for creating a positive attitude towards
problem solving.
Many persons are effective in this trait without any
training for reasons of cultivating a habit from environment in which they

have been brought up at home, in school, college and office. This is so
important that it must be treated as a separate objective quality of a good

merchant banker.
INQUISITINESS FOR ACQUIRING NEW SKILLS, INFORMATION
AND KNOLEDGE: merchant bankers lice on their wits they earn by
giving information to needy clients. Therefore, they should keep abreast
with latest information in the area of the service product, they market. This
is possible if merchant bankers possess the quality of inquisitiveness.
The above qualities of a merchant banker are only illustrative. All good
qualities in merchant bankers are difficult to be defined so elaborately.
Nevertheless, merchant banker should possess super business acumen,
managerial abilities, administrative capacities and salesmanship so as to
understand the problems and sell the service product to the needy clients.
Ability to analyse
Abundant knowledge
Ability to built up relationship
Innovative approach
Integrity
Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital
markets when Grind lays bank received the license from Reserve Bank in
1967. Grind lays started with management of capital issues, recognized the
needs of emerging class of entrepreneurs for diverse financial services
ranging from production planning and system design to market research.
Even it provides management consulting services to meet the requirements
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of small and medium sector rather than large sector. Citibank Setup its
merchant banking division in 1970. The various tasks performed by this
divisions namely assisting new entrepreneur, evaluating new projects,
raising funds through borrowing and issuing equity. Indian banks started
banking services as a part of multiple services they offer to their clients from
1972. State bank of India started the merchant banking division in 1972. In
the initial years the SBIs objective was to render corporate advice and
assistance
activities is
to
small
of-course
and
medium
organized
entrepreneurs. Merchant
and
undertaken
in
banking
several
forms. Commercial banks and foreign development finance institutions have

organized them through formation divisions, nationalized banks have formed
subsidiaries companies and share brokers and consultancies constituted
themselves into public limited companies or registered themselves as private
limited companies. Some merchant banking outfits have entered into
collaboration with merchant bankers abroad with several branches
.
Brief history
During the seventeenth and most of the eighteenth century international
finance was centered on Amsterdam. Consequently Amsterdam merchants
became the first masters of the various financial techniques and
developments which, in the course of time, became identified with the
emergent profession of Merchant Bankers.
Commercial Banking and Investment Banking are often confused with

Merchant Banking. In many ways, there may be similarities in their
functions. However, in certain ways, Merchant Banking is distinctly
different from commercial Banking and Investment Banking.
The primary function of a commercial bank is to receive deposits from the
public and lend the same to others. Commercial Banks can undertake some
of the merchant banking activities like Issue Management whereas Merchant
Banking Units can not undertake commercial banking activities. However,
the functions of Merchant Banking may not widely vary from Investment
Banking. The Merchant Banker mainly deals with Issue Management, post
issue services, corporate adviser services etc. the Investment Banker
undertaken trading in securities, Investment advises and Bought out deals
which are not the main activities of Merchant Bankers.
In todays Scenario the Merchant banker and management consultants
undertake advisory services to the corporate sector. The Merchant Banker
advices corporation and firms relating to opening of issues, receiving loans
etc, which the management consultants also do. The management consultant
have a wide area operations like production, Marketing, Personnel Relations,
of finance etc. but they lack statutory recognition to undertake capital market
related activities which has enabled the merchant banker to cater to the
needs of the Corporate Sector.
A merchant bank may be considered as an institution which centres its

operation on all or most of the following activities.
(1) Corporate financial advice, on such diverse matters as new share and
bond
issues, capital reconstructions, mergers and acquisitions;
(2) The taking of deposits and currency, money market operations including
foreign exchange dealing;
(3) Medium-term lending and syndication of loans;
(4) Acceptance credits and all forms of export finance;
(5) The holding and dealing in quoted and unquoted investment; and
(6) Fund management on behalf of clients, most typically pension funds,
unit trust, investment trusts and wealthy individuals.
EVOLUTION & EMERGENCE OF MERCHANT BANKING
India has entered the 21st century as one of the Asias most dynamic
economies.
This is the part of the assessment made by International
Financial and Capital Market Institutions based on Indias economic and

financial reforms initiated in 1991 and brought to fruition in various budget.
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The progress of any economy mainly depends on the efficient financial

system of the country. Indian economy is no exception financial system of
the country. The importance of the financial sector reforms affirms an
effective means for solving the problems of economic, financial and social
in India and elsewhere in the developing nations of the world. The progress
of the Securities Industry of any country depends mainly on the flow of
funds. In fact, capital generation is the lifeblood of the capital market
without which the health and soundness of the financial system cannot be
geared and for which well-developed capital market as well as money
market is essential.
Indias capital market is among the largest in the developing world. The
market is comprised of 24 stock exchanges transacting long-term debt;
debentures and equity shares both electronic and physical forms.
Derivatives financial instruments are also be added to the market shortly.
The number of firms listed on the Indian Stock Exchange is more than the
USA. Market Capitalization of listed firms is 1980s was similar to Brazil,
Malaysia, Singapore and Denmark.
The capital market of the country, however, underwent dramatic changes
since the beginning of 1980s basically because of a progressive realization
that the command economy on which the emphasis was placed could not
lead to higher levels of economic development and that a slant towards a
market-oriented economy is necessary.
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It is in the context of fast expanding economy and a liberalized and

deregulated atmosphere that the growth of the Indian Stock Market activities
has to be viewed. No wonder that the markets have registered a quantum
jump judge by any standards.
MERCHANT BANKING IN INDIA
In India prior to the enactment of Indian Companies Act, 1956,managing

agents acted as issue houses for securities, evaluated project reports, planned
capital structure and to some extent provided venture capital for new firms.
Few share broking firms also functioned as merchant bankers.
The need for specialized merchant banking services was felt in India with
the rapid growth in the number and size of the issues made in the primary
market. The merchant banking services were started by foreign banks,
namely the National Grindlays Bank in 1967 and the City Bank in 1970.
The Banking Commission in its report in 1972 recommended the setting up
of merchant banking institutions. This marked the beginning of specialized
merchant banking in India.
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To begin with, merchant banking services were offered along with other
traditional banking services. In the mid-Eighties, the Banking Regulation
Act was amended permitting commercial banks to offer a wide range of
financial services through the subsidy rule. The State Bank of India was the
first India Bank to set up merchant Banking division in1972. Later ICICI set
up its Merchant Banking division followed by Bank of India, Bank of
Baroda, Canada Bank, Punjab National Bank and UCO Bank. The merchant
banking gained prominence during 1983-84 due to new issue boom.
MERCHANT BANKING: PAST AND PRESENT
Many banks entered merchant banking in the 1960s to take advantage of the
economies of scope produced when private equity investing is added to
other bank services, particularly commercial lending. As lenders to small
and medium-sized companies, banks become knowledgeable about
individual firms products and prospects and consequently are natural
providers of direct private equity investment to these firms. As mentioned
above, commercial banks were the largest providers of venture capital in the
1960s. In the middle to late 1980s, the decision to enter merchant banking
was thrust on other banks and bank holding companies by unforeseen
events. In those years, as a result of the LDC (less-developed-country) debt
crisis, many banks received private equity from developing nations in return
for their defaulted loans. At that time, many of these banks set up merchant
banking subsidiaries to try to get some value from this private equity.
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Also at about that time, most commercial banks began refocusing their
private equity investments to middle-market and public companies (often
low-tech, already profitable companies) and, rather than providing seed
capital, financed expansion or changes in capital structure and ownership.
Most particularly, they took equity positions in LBOs, takeovers, or
recapitalizations or provided subordinated debt in the form of bridge loans to
facilitate the transaction. Often they did both. Commercial banks financed
much of the LBO activity of the 1980s.Then, in the mid-1990s; major
commercial banks began once again focusing on venture capital, where they
had substantial expertise from their previous exposure to this kind of
investment. Some of these recent venture-capital investments have been
spectacularly successful. For example, the Internet search engine Lycos was
a 1998 investment of Chase Manhattans venture-capital arm. Commercial
banks are permitted to report either realized or unrealized gains on their
merchant-banking portfolios, as long as they are consistent in the reporting.
This option makes it difficult for one to compare different entities financial
results and could lead to an overly liberal reporting of profits
MERCHANT BANKING: PAST AND PRESENT
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Many banks entered merchant banking in the 1960s to take advantage of the
economies of scope produced when private equity investing is added to
other bank services, particularly commercial lending. As lenders to small
and medium-sized companies, banks become knowledgeable about
individual firms products and prospects and consequently are natural
providers of direct private equity investment to these firms. As mentioned
above, commercial banks were the largest providers of venture capital in the
1960s. In the middle to late 1980s, the decision to enter merchant banking
was thrust on other banks and bank holding companies by unforeseen
events. In those years, as a result of the LDC (less-developed-country) debt
crisis, many banks received private equity from developing nations in return
for their defaulted loans. At that time, many of these banks set up merchant
banking subsidiaries to try to get some value from this private equity.
Also at about that time, most commercial banks began refocusing their
private equity investments to middle-market and public companies (often
low-tech, already profitable companies) and, rather than providing seed
capital, financed expansion or changes in capital structure and ownership.
Most particularly, they took equity positions in LBOs, takeovers, or
recapitalizations or provided subordinated debt in the form of bridge loans to
facilitate the transaction. Often they did both. Commercial banks financed
much of the LBO activity of the 1980s.Then, in the mid-1990s; major
commercial banks began once again focusing on venture capital, where they
had substantial expertise from their previous exposure to this kind of
investment. Some of these recent venture-capital investments have been
spectacularly successful. For example, the Internet search engine Lycos was
15
a 1998 investment of Chase Manhattans venture-capital arm. Commercial

banks are permitted to report either realized or unrealized gains on their
merchant-banking portfolios, as long as they are consistent in the reporting.
This option makes it difficult for one to compare different entities financial
results and could lead to an overly liberal reporting of profits.
CURRENT SCENARIO
Merchant banking is an area that we need to build and grow in the years to
come. As India forms part of the global village, it becomes increasingly
necessary for us to look at this business in a more holistic manner.
Obviously, international players with strong domestic partners such as DSP
Merrill Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with
experienced organizations like Enam and institutional backed investment
bankers such as ICICI Securities, etc., are the ones who have expertise,
muscle, and placement power in a greater measure than relatively new
entrants.
The red hot economy is the obvious starting point. India is likely to end the
year with GDP growth in excess of 7 percent. Companies and private equity
investors are sitting on large piles of cash. In 2006 deal activity was largely
restricted to the IT and Telecom sectors.
Thus, while there is a steady flow of deals, there is now a shortage of talent
to do the job.
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Objectives of Study
Research Methodology
Scope of Study
The main focus of the study would be on functioning of the
Merchant Banking companies. The study would have information and
details
of Merchant
Banking
of
public
sector and
private
sector companies and then an analysis will be done on the collected
information and finally comparison between these two categories will be
done. After comparison it would be find out which category has more
growth potential in present scenario as well as in future.
Data Analysis
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Findings
Important 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 financial
institutions 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
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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
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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.
Growing complexity in rules and procedures of the government.
Growing industrialization and increase of technologically advanced

industries.
Need for encouragement of small and medium industrialists, who

require specialist services.
Need to develop backward areas and states which require different

criteria.
Exploring the possibility of joint ventures abroad and foreign market.
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.
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Functions of Merchant Banks:

The basic function of a merchant banker is marketing corporate and other
securities. Now they are required to take up some allied functions also.
A merchant bank now takes up the following functions:
1. Promotional Activities:
A merchant bank functions as a promoter of industrial enterprises in India
He helps the entrepreneur in conceiving an idea, identification of projects,
preparing feasibility reports, obtaining Government approvals and
incentives, etc. Some of the merchant banks also provide assistance for
technical and financial collaborations and joint ventures
2. Issue Management:
In the past, the function of a merchant banker had been mainly confined to
the management of new public issues of corporate securities by the newly
formed companies, existing companies (further issues) and the foreign
companies in dilution of equity as required under FERA In this capacity the
merchant banks usually act as sponsor of issues.
They obtain consent of the Controller of Capital Issues (now, the Securities
and Exchange Board of India) and provide a number of other services to
ensure success in the marketing of securities. The services provided by them
include, the preparation of the prospectus, underwriting arrangements,
appointment of registrars, brokers and bankers to the issue, advertising and
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arranging publicity and compliance of listing requirements of the stockexchanges, etc.

They act as experts of the type, timing and terms of issues of corporate
securities and make them acceptable for the investors on the one hand and
also provide flexibility and freedom to the issuing companies.
3. Credit Syndication:
Merchant banks provide specialised services in preparation of project, loan
applications for raising short-term as well as long- term credit from various
bank and financial institutions, etc. They also manage Euro-issues and help
in raising funds abroad.
4. Portfolio Management:
Merchant banks offer services not only to the companies issuing the
securities but also to the investors. They advise their clients, mostly
institutional investors, regarding investment decisions. Merchant bankers
even undertake the function of purchase and sale of securities for their
clients so as to provide them portfolio management services. Some merchant
bankers are operating mutual funds and off shore funds also.
5. Leasing and Finance:
Many merchant bankers provide leasing and finance facilities to their
customers. Some of them even maintain venture capital funds to assist the
entrepreneurs. They also help companies in raising finance by way of public
deposits.
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6. Servicing of Issues:
Merchant banks have also started to act as paying agents for the service of
debt- securities and to act as registrars and transfer agents. Thus, they
maintain even the registers of shareholders and debenture holders and
arrange to pay dividend or interest due to them
7. Other Specialized Services:
In addition to the basic activities involving marketing of securities, merchant
banks also provide corporate advisory services on issues like mergers and
amalgamations, tax matters, recruitment of executives and cost and
management audit, etc. Many merchant bankers have also started making of
bought out deals of shares and debentures. The activities of the merchant
bankers are increasing with the change in the money market.
RESPONSIBILITIES OF MERCHANT BANKER

To the Investors
Investor protection is fundamental to a healthy growth of the Capital
Maerket. Protection is not to be conceived as that of compensating for
the losses suffered.
The responsibility of the Merchant Banker in
ensuring the completeness of the disclosures is of paramount importance

in view of the fact that entire reliance is based on offer Document either
Prospectus or Letter of Offer because an independent agency like a
Merchant Banker has done the scrutiny.
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Capital structuring
The Merchant Bankers while designing the capital structure take into
account the various factors such as Leverage effect on earnings per share,
the project cost and the gestation period, cash flow ability of the
company, the cost of capital, the considerations of management control,
size of the company, and general economic factors. These exercise are
done mainly in order to meet the fund requirement of the company taking
due cognizance of the investors preference.
Project Evaluation and due Diligence

Due diligence and project evaluation is another major responsibility of
the Merchant Banker. Where the project has already been appraised by a
bank/financial institution, the Merchant Banker relies on the said
appraisal before accepting an assignment. However, where the project
has not been appraised by as bank/financial instituion, the Merchant
Bank undertakes a detailed evaluation of the project before taking up an
assignment for issue management.
Legal aspect
The factors that are looked into in case of the legal aspects are:
Compliance with the SEBI guidelinesand the various guidelines issued
by the Ministry of Finance and Department of CompanyAffairs.
Pending litigations towards tax liabilities or any criminal/civil
prosecution any of the directors for any offenses.
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Fair and adequate disclosures in the prospectus.
Pricing of the Issue

The Merchant Banker looks into the various factors while pricing the
issue.
Some of the factors are past financial performance of the
company, Book value per share, stock market performance of the shares.
The Merchant Banker has a vital role to play in pricing of the instrument.
Marketing of the Issue

Marketing of the issue is a vital responsibility of the Merchant Banker.
The first stage is Pre-issue marketing for placement of the issue with the
financial institutions, banks, mutual funds, FIIs and NRIs. The second
stage is the marketing of the issue to the general public through various
vehicles such as press, brokers, etc.
Bought out Deals

The concept of wholesale but out of public offerings by the Merchant
Bankers started off with over the Counter Exchange of India where a
Merchant banker acts also as a sponsor and either takes up the entire
issue to be offered wholly of jointly with other co-investors and off-loads
the same to the public at a later date by an offer for sale. Major
amendments were made to the SEBI regulations regarding Merchant
Bankers. The duration of this transaction period has not officially been
announced.
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REGISTRATION OF MERCHANT BANKER
The term Merchant Banking originated in the 18th and early 19th centuries
in the United Kingdom when trade between countries was financed by bills
of exchange drawn on the principal merchant houses. With the increase in
international trade, the established merchants started the practice of lending
their names to the new comers and accepting the bills of exchange on their
behalf. They would charge a commission for the purpose and thus
acceptance business became the hallmark of Merchant Bankers. Once these
banks had gained the confidence of the government, they also entrusted with
the job of issuing bonds in the London market.
Although Merchant Banking activity ushered in two decades ago, it was

only in 1992, in India, after the formation of SEBI that is defined and a set
of rules and regulations governing it are in place. In fact, the origin of
Merchant Banking is to be traced to Italy in late medieval times and France
during the seventeenth and eighteenth centuries. Merchant Banker invested
accumulated profits in all kinds of promising activities. Since they added
banking business into the profession of Merchant activities and became a
Merchant Banker. A distinction was existed in banking systems between
moneychanger and exchanger. Moneychangers concentrate on the mutual
exchange of different currencies, operated locally and later accepted deposits
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for security reasons. Passage of time money changers evolved into public or
deposit banks whereas exchangers, who operated internationally, engaged in
bill-broking that raising foreign exchange and provision of long-term capital
for public borrowers. The exchanges were remitters and Merchant Bankers.
In the seventeenth century, a Merchant Banker was a dealer in bills of
exchange who operated with correspondents abroad and speculated on the
rate of exchange. Initially, Merchant Bankers were not banks at all and a
distinction was drawn between banks, Merchant Banks and other Financial
Institutions. Among all these, Institutions it was only banks that accepted
deposits from public. No person s allowed carrying out any activity as a
Merchant Banker unless he or she holds a certificate grated by SEBI.
Registration with SEBI is mandatory to carry out the business of merchant
banking in India.
An applicant should comply with the following norms:

The applicant should be a body corporate
The applicant should not carry on any 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
banker
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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 crores.
SERVICES RENDERED BY MERCHANT BANKERS
Among the important financial intermediaries are the merchant bankers. The
services of Merchant bankers have been identified in India with just issue
management. It is quite common to come across reference to merchant
banking and financial services as though they are distinct categories. The
services provided by merchant banks depend on their inclination and
resources - technical and financial. Merchant bankers (Category 1) are
mandated by SEBI to manage public issues (as lead managers) and open
offers in take-overs. These two activities have major implications for the
integrity of the market. They affect investors' interest and, therefore,
transparency has to be ensured. These are also areas where compliance can
be monitored and enforced.
Merchant banks are rendering diverse services and functions, which are as
follows:
29
ISSUE MANAGEMENT:
The public issue of securities is the core of merchant banking function.
At one time it was constructed as the sole function. Merchant bankers
were identified as issue houses. It was later perceived that they provide
other financial services. When companies seek to raise resources for
implementation of a new project or finance expansion or modernization
or diversification of an existing unit or fund long term working capital
requirement, they retain the services of a merchant banker. To a large
extent the type of issue would vary with the purpose for which funds are
raised. Merchant bankers when retained as managers to issue will have
to assist the company in all the stages connected with public issue.
The merchant bankers help corporate to raise money from the markets
through the issue of shares, debentures, bonds etc. They are designated
as managers to the issue. Their main business is to attract public money
to capital issues.
30
They usually render the following services:

Drafting of prospectus and getting it approves from the stock exchanges.
Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers etc.
Obtaining the consent of all the agencies involved in the public issue.
Holding road shows, to sell the issue. These shows are held for the
analysts, brokers & institutional investors. The purpose of these shows is
to answer queries from these people about the company and the project
for which the funds are being raised.
Deciding the pattern of advertising.
Deciding the branches where application money should be collected.
Deciding the dates of opening and closing of the issue.
Obtaining the daily report of application money collected at various
branches.
Obtaining subscription to the issue.
After the close of the issue, obtaining consent of stock exchange for
deciding basis of allotment etc.
CORPORATE ADVISORY SERVICES RELATING TO THE

ISSUE
In India, the pricing of issues is now freely decided by the company, with
valuable inputs from the merchant bankers, who have to sell the issue at
the decided price. The pricing of the issue especially in a public issue is
very important. The pricing has to be such, that the investors will be
31
attracted to invest in the issue at that price, at the same time the company
should get the premium that it is looking for. After all, the premium can
play a very role in deciding the companys capital structure, as larger the
premium lesser will be the requirement for borrowed funds.
The promoter also needs to decide whether to go in for a fresh issue or to

go for a rights issue. However this will depend mainly on the quantum of
funds that the company needs to raise. The success of the issue is
dependent on the selection of the right type of security. In this matter, the
expert advice of merchant bankers is of immense importance.
In the issue management the merchant bankers have to coordinate the

various agencies to the issue. The success of the issue depends on the
cooperation of all the agencies involved.
The merchant bankers offer following services during the public issues:
Preparing an action plan and budget for the total expenses for the issue.
Preparation of application to SEBI and assistance in obtaining the
consent from SEBI.
Drafting of the prospectus.
Selection of underwriters, Brokers etc.
Selection of bankers to the issue.
Selection of advertising agency for publicity.
Obtaining approval of the institutional underwriters and stock exchanges
for publication of the prospectus.
32
Companies are free to appoint one or more agencies as Managers to an

issue. SEBI guidelines insist that all issues should be managed by at least
one authorized merchant banker, functioning either as the sole or lead
manager to the issue. Ordinarily, not more than two merchant bankers
should be associated as lead managers, advisors and consultants to a
public issue. In issues of over Rs. 100 crores, the number could be up to
a maximum of four.
The responsibilities of merchant bankers in management of public issues
are many. Some of these are:
We have seen that many unscrupulous promoters have raised money from
the market. This has hurt the investors a lot and has also made investors
nervous about stock market investments. This in turn affects the
functioning of stock markets both the primary and the secondary markets.
It is therefore necessary that merchant bankers are satisfied with the
viability of the project, which they can then sell to the investors with
confidence. It is therefore important for the reputation of merchant
bankers, to only associate themselves with good issues.
The merchant banker should act as the custodians of the investors money
and this puts a lot of responsibility on them. To discharge this function
the merchant bankers have to exercise due diligence independent by
verifying the contents of the prospectus and the reasonableness of the
views expressed therein.
33
It is the responsibility of the merchant bankers to get the securities listed

on all the stock exchanges mentioned in the prospectus. With the
introduction of Demat accounts the complaints about allotment have
surely gone down. It is the responsibility of the merchant bankers to
ensure timely refunds and allotment of securities to the investors.
The merchant bankers have to certify that they verified everything and
that they believe it to be true. This assures the investing public about the
safety of their investment. The precautions by the merchant bankers
would ensure that all the fake companies, whose intention is to defraud
the investors, dont have access to the market.
UNDERWRITING
Underwriting is like insurance against the failure of an issue. It is a
guarantee to the issuing the company, that the money that it requires for
its project will definitely be raised. It means that even if the issue is not
fully subscribed to by the public, the underwriters will make up the short
fall.
Underwriting involves the underwriter agreeing to subscribe directly, or

to procure subscription for the unsubscribe portion of the issue, which is
not taken up. For the risk that the underwriter takes, he is paid
commission. New companies entering the markets for the first time,
always face number of problems in raising funds from the market. One of
the biggest problems of course that the company is not well known to the
34
investors and many of them will be unwilling to invest their money in

such ventures. Many a times even existing companies may find it
difficult to raise money, due to some reasons. Issuing companies
therefore approach different underwriters with a request to underwrite the
issue.
Underwriters on their part need to satisfy themselves about the viability

of the project and also about the integrity of the promoters of the
company. It must be noted that when an issue is under subscribed, the
underwriters will pick the shares and only if the project is good enough,
then in future they can sell the shares in the market and get not only their
money back, but can also make a decent profit as well.
It is obligatory for the merchant bankers to accept a minimum 5%

underwriting in the issue subject to a ceiling. By taking underwriting in
an issue managed by them, they show their full commitment to the issue
that they are managing.
MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) and corporate restructuring are a big
part of the corporate finance world. Every day, Wall Street investment
bankers arrange M&A transactions, which bring separate companies
together to form larger ones. When they're not creating big companies
from smaller ones, corporate finance deals do the reverse and break up
companies through spin-offs, carve-outs or tracking stocks.
35
Role of Merchant Banker

Mergers & Acquisitions is an area where Merchant Bankers act as
intermediaries in negotiating on one with corporate interested in hiving of
divisions/companies which are not with in the purview of the long-term
business strategy of the group/company, and on the other hand for
Corporate interested in non organic growth by acquiring companies/units
for reason strategic or non strategic in nature. Mergers can be beneficial
for both the entities, as due to competition the companies unable to
survive or prosper on their own may like to merge and face competition
and achieve growth targets. Takeovers may be hostile or friendly in
nature, hostile takeovers are without the consent of the company and
company being takeover may work out an anti takeover strategy to
counter the threat. Merchant Bankers provide following services in
M&A: Identification of potential takeover targets.
Financial & Technical appraisal of the merger/takeover proposal.
Negotiation with the parties for arriving at the suitable price or exchange
ratio.
36
Assistance in obtaining necessary approval & addressing procedural

& legal issues.
PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking
services which only very few merchant bankers having advantages of
knowledge, skills and experience over others are able to render
satisfactorily. The corporate seek advice in respect of identification of
profitable investment opportunities in the related business areas (like
forward/backward integration) or as part of diversification process. The
merchant bankers carry out detailed studies on product demand patterns,
cost structures, etc., to enable the corporate in preparation of feasibility
study may involve arrangement of a foreign collaboration, advice on
technical parameters and also legal issues.
37
Scope of services
Project counseling services are needed by industrial entrepreneurs in

India in the following areas: Preparation of project report
Deciding upon the financing pattern to finance the cost of the project.
Aspects of project appraisal with financial institutions/banks.
Project report
Project report consists of technical process, location, management
profile, means of financing, reports on market surveys and market
explorations. Merchant bankers advise the clients on project preparation.
Merchant bankers, on behalf of their clients, engage technical consultants
specialized in the specific area, and marketing experts to prepare
technical feasibility report and market survey reports. Merchant bankers
maintain the list of such experts approves by financial institutions and
assign the work to these experts.
38
Project report purpose

Project report about the proposed activity is prepared to obtain
government approvals particularly in the following areas:
Grant of industrial license to undertake specified industrial activity.
Foreign investment and technology tie-up.
Grant import license for importing raw material, plant, machinery and
equipments.
Grant of foreign exchange allocation for import of capital goods or
raw materials, etc.
Grant of subsidies and other concessions from the government at
center or state levels or from government sponsored agencies, etc.
LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term
loans for projects. Such loans may be obtained from a single
development finance institution or a syndicate or consortium as in the
case of large term loans. Merchant banks can also help corporate clients
to raise syndicated loans from commercial banks.
Scope of service
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom funds
could be procured to implement the project. The responsibility of
locating the sources of finance, approaching these sources by putting in
requisite prescribed applications and complying with all the formalities
39
involved in the sanction and disbursal of loan rests with the merchant
bankers who provide the service of loan/credit syndication.
Loan syndication in the case of domestic borrowing is undertaken with

the institutional lenders and the banks. Amongst institutional lenders the
following institutions are the main suppliers of the long and medium term
funds with which the merchant bankers contact, liaison and arrange loans
working for and on behalf of their clients.
1. All India financial institutions
i.
Industrial Finance Corporation of India (IFCI)
ii.
Industrial Development Bank of India (IDBI)
iii.
Industrial Credit & Investment Corporation of India Ltd (ICICI)
2. State level financial bodies

i.
State Financial Corporations (SFCs)
ii.
State Industrial Development Corporations (SIDCs)
iii.
State Industrial & Investment Corporations (SIICs)
3. All India level investment institutions

i.
Life Insurance Corporation of India (LIC)
ii.
Unit Trust of India (UTI)
iii.
General Insurance Corporation of India (GIC) & its subsidiary

companies.
4. Commercial banks: Commercial banks join in consortium loan being

provided by the above institutions.
5. Mutual Funds & Venture Capital Funds: these funds generally
invest in equity but mutual funds contribute to the issues of
40
Debentures/Bonds on private placement basis as well as subscribe to

public issues.
RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to
successfully restructure various activities, which include mergers and
acquisitions, divestitures, management buyouts, joint venture among
others.
To help companies achieve the objectives of these restructuring

strategies, the merchant banker participates in different activities at
various stages which include understanding the objectives behind the
strategy (objectives could be either to obtain financial, marketing, or
production benefits), and help in searching for the right partner in the
strategic decision and financial valuation of the proposal.
CAPITAL ASSISTANCE
In providing financial assistance, merchant banks offer a full
understanding of all facets of the capital markets. This includes all types
of debt and equity financing available from both the domestic and
international markets.
It should be understood that interest rates are not the only definition of
capital costs. Restrictions on availability, prepayment terms, and
operating effectiveness can often outweigh what might appear to be
inexpensive capital with low interest rates. Too often, capital includes
41
costs, which force an entrepreneur or a business to undertake undesirable

actions. In the short-run, some actions might be necessary, but often in
the long run are detrimental. The traditional merchant banker understands
these capital limitations and can structure a transaction, which is
beneficial to all sides of the table -- not just the capital source.
He also knows how to substitute one type of capital for another,
sometimes utilizing internal sources from asset repositioning or cash
creation from improvements in working capital. He understands fully the
risk versus return elements necessary to complete the capital procurement
process.
CORPORATE ADVISORY SERVICES

Merchant bankers offer customised solutions to solve the financial
problems of their clients. Advice is sought in areas of financial
structuring (as shown in the Modern Manufacturing case above).
Merchant bankers study the working capital practices that exist within the
company and suggest alternative policies. They also advise the company
on rehabilitation and turnaround strategies, which would help companies
to recover from their current position.
FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a
client (the exporter or manufacturer) transfers his/her ownership of the
42
accounts to a factor (an organization, firm). The factor buys all the clients
outstanding invoices and takes over all the subsequent dealings with the
buyer/importer/customer. It is short-term debt financing. Here three parties
are involved
1. The factoring organization /firms
2. The manufacturer/exporter/seller
3. The importer/customer/buyer
Role Of Merchant Banker In Factoring

The merchant banker may act as factor organization with a view to earning a
great amount of commission. The factor provides the following services:
(a) Financing
(b) Advisory services if necessary
(c) Collection of bills/Account Receivable against sales proceeds.
(d) Maintenance of sales ledger
(e) Provide further if necessary
(f) Covering losses if there are any
43
ASSET SECURITIZATION
It is a process through which some inactive assets (mortgage assets) are
converted into cash/active assets. It is long-term debt financing. Here
assets are converted into long-term bonds. The whole process is done by
the Special Purpose Vehicle (SPV). In this approach, the merchant banker
for issuance of security bonds against the assets with a matching of time
and terms between mortgage property and security bonds. Here the
selection of asset is generally considered on the basis of the following:
(I) Quality of assets
(ii) Certainty of repayment
(iii) Good ranking from the credit rating agency.
The process of asset securitization takes place in the following firms:
Originating Institutions/Firm
Special Purpose Vehicle (SPV)
Merchant Banker (MB)
FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex
flow in the country is increasing and the international markets are
44
funding the operations of the corporate in India. The success of any

business is measured by the fund management; this makes treasury
management as a very critical finance function. Management of treasury
profit center requires a wide variety of knowledge in the area of global
money markets and financial instruments such as deposit certificates,
treasury bills, forecasting, source evaluation and cost of domestic and
foreign currency funds. Treasury and risk management ensures cost
effectiveness in planning strategies in this era of deregulation.
Role of merchant banker in Forex function
The currency values, interest rates, share index and commodities affect
the financial derivatives like futures, swaps and other tools of risk
management. Corporates therefore employ well-trained professionals to
manage treasury and forex functions so that they can ensure competent
management. Thus, this service is provided to Corporates through
merchant bankers. Merchant bankers assess various markets to advice
Corporates or other banks that needs currency. Merchant bankers
constantly update about the policies of the regulatory bodies, monitors
the current prices, makes predictions based on the analysis of trends etc
HIRE PURCHASE SERVICE
It involves a system under which term loans for purchases of goods and
services are advanced to be liquidated in stages through a contractual
obligation. The goods whose purchases are thus financed may be
consumer goods or producer goods or they may be simply services such
as air travel. Hire-purchase credit may be provided by the seller himself
45
or by any financial institution. However, unlike in other countries, the

emphasis in India is on the provision of instalment credit for productive
goods and services rather than for purely consumer goods.
Merchant Banker undertakes the activity of financing for hire-purchase

activities. The merchant banker looks more to the credit-worthiness and
business morality of the buyer than the value of security
LEASE FINANCE COMPANIES
Lease finance companies provide finance to acquire the use of assets for
a stipulated period of time without owning them. The user of the asset is
known as the lessee, and the owner of the asset is known as the Lessor.
Leasing is medium-term arrangement for finance.
Merchant Bankers helps in assessing the credit risk of industrial

borrowers.
The merchant bankers provide help in evaluating lease
proposals. He analyse the merits and demerits of lease finance with

reference to a given proposal and leave it to their clients to decide on the
appropriate source and type of finance, thus enlarging their range of
choices and the variety of services available to them.
46
VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to
develop into significant economic contributors. Venture capital is an
important source of equity for start-up companies. Professionally managed
venture capital firms generally are private partnerships or closely-held
corporations funded by private and public pension funds, endowment funds,
foundations, corporations, wealthy individuals, foreign investors, and the
venture capitalists themselves.
Conclusion and Suggestions.

Bibliography
www.wikipedia.com
www.ukessays.com
www.academia.edu
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Study of merchant banking activities

Study of merchant banking activities

is act as a distributor of the securities of the company in its capital raising

The Notification of the Ministry of Finance defines merchant banker as;

Study of merchant banking activities

In the words of Skully A Merchant Bank could be best defined as a

Nature of Merchant Banking

amalgamation, takeover, venture capital, buy back and public deposits. A

Study of merchant banking activities

Category-1 merchant banker can undertake issue management only. Separate

Characteristics of Merchant Banking

High proportion of decision makers as a percentage of total staff.

Quick decision process.

High density of information.

Intense contact with the environment.

Loose organizational structure.

Concentration of short and medium term engagements.

Emphasis on fee and commission income.

Innovative instead of repetitive operations.

Sophisticated services on a national and international level.

Low rate of profit distribution.

High liquidity ratio.

Qualities of a Merchant Banker

Study of merchant banking activities

merchant banks operations, the qualities which merchant bankers should

Study of merchant banking activities

CONTACTS : success of merchant banker depends upon his sociable

Many persons are effective in this trait without any

training for reasons of cultivating a habit from environment in which they

Study of merchant banking activities

important that it must be treated as a separate objective quality of a good

Ability to built up relationship

Merchant Banking in India

Study of merchant banking activities

forms. Commercial banks and foreign development finance institutions have

Study of merchant banking activities

Commercial Banking and Investment Banking are often confused with

Study of merchant banking activities

A merchant bank may be considered as an institution which centres its

issues, capital reconstructions, mergers and acquisitions;

EVOLUTION & EMERGENCE OF MERCHANT BANKING

This is the part of the assessment made by International

Financial and Capital Market Institutions based on Indias economic and

Study of merchant banking activities

The progress of any economy mainly depends on the efficient financial

Study of merchant banking activities

It is in the context of fast expanding economy and a liberalized and

MERCHANT BANKING IN INDIA

In India prior to the enactment of Indian Companies Act, 1956,managing

Study of merchant banking activities

Study of merchant banking activities

MERCHANT BANKING: PAST AND PRESENT

Study of merchant banking activities

Study of merchant banking activities

a 1998 investment of Chase Manhattans venture-capital arm. Commercial

Study of merchant banking activities

Study of merchant banking activities

Study of merchant banking activities

Study of merchant banking activities

Study of merchant banking activities

appreciation in such investment to motivate them to invest their savings

Growing complexity in rules and procedures of the government.

Growing industrialization and increase of technologically advanced

Need for encouragement of small and medium industrialists, who