Merchant Banking

Merchant Banking-An Overview

• Companies raise capital by issuing securities in
the market. Merchant bankers act as
intermediaries between the issuers of capital
and the ultimate investors who purchase
these securities.
• Merchant banking… is the financial
intermediation that matches the entities that
need capital and those that have capital. It is a
function that facilitates the low of capital in
the market.
• Ministry of Finance: “Any person who is
engaged in the business of issue management
either by making arrangements regarding
selling, buying or subscribing to securities as
manager, consultant, advisor or rendering
corporate advisory service in relation to such
issue management”
• Banking commission Report-1972
a) Necessity
b) Distinct from commercial Banks
c) Investment Management and Advisory services
d) Medium and small savers
e) Manage
 Merchant Banking in India
• Grindlays Banks-1967
Management of capital issue
Production planning, system design to market
research
Management consultancy
• Citibank-1970
• SBI-1972
 Services rendered
• Organising finance for investment in projects
• Assistance in financial management
• Acceptance of house business
• Raising Eurodollar loans and issue of foreign
currency bonds
• Financing export of capital goods, hydropower
• Financing of hire-purchase transaction, leasing
• Mergers, takeovers, valuation of assets
 Regulation
• Merchant Bankers Regulations of Securities
and Exchange Board of India
• Company Act 1956
• Listing guidelines of Stock Exchanges
• Securities Contracts (Regulation) Act, 1956

• Formation of divisions
• Subsidiaries companies
 Structure
• Category-I
to carry on any activity of the issue management,
which will inter-alia consist of preparation of
prospectus and other information relating to the
issue, determining financial structure, tie-up of
financiers and final allotment and refund of the
subscription; and
to act as adviser, consultant, manager,
underwriter, portfolio manager.
 Structure
• Category II
that is, to act as adviser, consultant, co-manager,
underwriter, portfolio manager;
• Category III
 that is to act as underwriter, adviser, consultant
to an issue;
• Category IV
 that is to act only as adviser or consultant to an
issue.
 Registration with SEBI
• Around 250 Merchant Bankers
• Abolished all categories and maintained
Category-I
• Separate registration for underwriters and
portfolio manager
• Segregation between fee based and Fund
based activities
 Registration with 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
 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
 Authorized Activities
• Issue Management
Preparation of prospectus
Information relating to the issue
• Determining financing structure
• Tie-up of finances and final allotment and/or
refund of subscription
• Corporate advisors to the issue
• Consultants or advisors to issue and
underwriting
 Terms of Authorization
• Authorization is valid for an initial period of 3 years
• Authorization fee, annual fee and renewal fee
• All issues should be managed by at least one authorized
merchant bankers, functioning as sole manager or lead
manager
• MB expected to exercise due diligence independently
• Involvement of MB in post-issue management
• Adhere a code of conduct prescribed by SEBI
• MB may be cancelled or suspended for suitable duration
• MB regulations integrate issue management with
underwriting
 General Obligations and Responsibilities
• Maintenance of books of accounts, records and documents
• Copy of the balance sheet, auditor’s report and statement of
financial position
• Responsibilities of lead Manager
• Underwriting obligation
• Submission of due diligence certificate
• Insider Trading
• Acquisition of shares
 Main functions of a merchant banker

• 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 include:
instrument designing, pricing the issue, registration of the offer document,
underwriting support, marketing of the issue, allotment and refund, listing on
stock exchanges.
• Placement and distribution- The merchant banker helps in
distributing various securities like equity shares, debt instruments, mutual fund
products, fixed deposits, 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 consists of mutual funds, foreign
institutional investors, private equity funds, pension funds, financial institutions
etc. The size of such a network represents the wholesale reach of the merchant
banker. The retail network depends on networking with investors.
 Functions
• Corporate advisory services- Merchant bankers offer customized
solutions to their clients financial problems. The following are the main
areas in which their advice is sought:
•
Financial structuring includes determining the right debt-equity ratio
and gearing ratio for the client, the appropriate capital structure theory is
also framed.
• Merchant bankers also explore the refinancing alternatives of the
client, and evaluate cheaper sources of funds.
• Another area of advice is rehabilitation and turnaround
management. In case of sick units, merchant bankers may design a revival
package in coordination with banks and financial institutions.
• Risk management is another area where advice from a merchant banker
is sought. He advises the client on different hedging strategies and
suggests the appropriate strategy.
 Functions
• Project advisory services-
 conceptualizing the project idea
 feasibility studies
 Preparing different documents like the detailed project report .
• Loan syndication-
 Tie up loans for their clients
 Analyze the pattern of the client’s cash flows
 Prepares a detailed loan memorandum This takes place in a
series of steps. Firstly they, based on which the terms of
borrowings can be defined. Then the merchant banker, which is
circulated to various banks and financial institutions and they
are invited to participate in the syndicate.