METHODOLOGY

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 field. 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

EXECUTIVE SUMMARY
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 securities. 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 market.

Scope of merchant banking activities:Merchant banking activities helps: • • • In channel sing the financial surplus of the general public into productive investment avenues. 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 exchanges. 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 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 cores

Introduction

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 BANKING”. 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 and in solving business problems, assisting in in investments financial decision making, assisting 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.

Definition
“ 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 banking. 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 India
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.

REGISTRATION PROCESS OF MERCHANT BANKING
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 condition: 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 business.  They should not be connected with any company directly or indirectly. Procedure for getting registration

Failing to pay registration fees Cancellation of certificate

 CAPITAL STRUCTURE DECISION: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 them; 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 onelead 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.


least

Submission of Documents:The lead managers(s) to an issue has (have) to. Submit at two weeks of before offer, the date of filing to with be the registrar to of the

companies/regional stock exchange or both particulars of the issue, draft prospectus/letter other literature circulated 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 intended retention oversubscription Up to Rs.5 crore Rs 5 crore- Rs 10 crore Rs 50 crore- Rs 50 corer Rs 10 crore- Rs 100 corer Rs 10,000 Rs 15,000 Rs 25,000 Rs 50,000

Fee per document

Rs 100 crore- Rs 500 corer More than Rs 500 corer

Rs 2,50,000 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 transaction.

Disclosures to SEBI:As and when required, a merchant banker has to disclose to

the SEBI: I) II) His responsibilities with regard to the management of the issue, Any changes in the information/particulars previously furnished which have a bearing and the certificate of registrations granted to it. III) IV) The names of the companies whose issues he has managed or has been associated with, 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 banker. 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 regulations; 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 interest 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 writing. 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 conduct. 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 India

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, besides covered. 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 basic financial requirements changes and of the sources of finance, evaluating financial alternatives, rate of returns and cost of capital corporate financial rearrangement, Reorganization, mergers and acquisitions, etc. are the areas to be

PROJECT COUNSELLING: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

LOAN SYNDICATION: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) (b) Estimating the total costs 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) (e)

Selecting the institutions and banks for participation in financing. Follow-up of the term loan application with the financial institutions and banks and obtaining the satisfaction for their respective share of participation.

(f) (g)

Arranging bridge finance. Assisting in completion of formalities for drawl of term finance sanctioned by institution expediting legal documentation formalities drawing up interse agreements etc. prescribed by the participating financial institutions and banks.

(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) (B) (A) Pre-issue management Post-issue management

Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:(1) (2) (3) Obtaining stock exchange approvals to memorandum and articles of associations. Taking action as per SEBI guide lines Finalizing the appointments of the following agencies: • • • • • • (4) (5) (6) (7) 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

Advise the company to appoint auditors, legal advisers and broad base Board of Directors Drafting of prospectus Obtaining approvals of draft prospectus from the company’s legal advisers, underwriting financial institutions/Banks Obtaining consent from parties and agencies acting for the issue to be enclosed with the prospectus.

(8) (9)

Approval of prospectus from Securities and Exchange Board of India. Filing of the prospectus with Registrar of Companies. with copy of the prospectus.

(10) Making an application for enlistment with Stock Exchange along, (11) Publicity of the issue with advertisement and conferences. (12) Open subscription list.

(B) (1)

Post-issue Management:Steps involved in post-issue management are:To verify and confirm that the issue is subscribed to the extent of 90% including devolvement from underwriters in case of under subscription

(2) (3)

To supervise and co-ordinate the allotment procedure of registrar to the issue as per prescribed Stock Exchange guidelines To ensure issue of refund order, allotment letters / certificates within the prescribed time limit of10 weeks after the closure of subscription list

(4) (5) (6)

To report periodically to SEBI about the progress in the matters related to allotment and refunds To ensure he listing of securities at Stock Exchanges. 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.

MUTUAL FUNDS

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 wants. 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 etc.

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 torender 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 assignment.

• 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. iv. v. vi.

Attendant risks involved in the management of the portfolio; Period of the contract and provision of early termination, if any; Amount to be invested; Procedure of setting the client’s accounts including the form of repayment on maturity or early termination of contract;

vii. viii.

Fee payable to the portfolio manger; 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 corporate. 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 period. 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.

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

Disclosure to SEBI :

Underwriters
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 disadvantageous position other underwriters to place them in a 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 Contravention of any provision of the SEBI act/rules/ regulation

was granted, underwriter involves the suspension/cancellation of registration: the effect of suspension/ cancellation on the lines followed by the SEBI in case of lead manager.

MERGERS /AMALGAMATION:
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 knowledge.

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 private enterprises, (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 adverse circumstances and inter-personal behavior. A merchant the viewpoints of others. Effective banker should have a positive approach to understand the difficulties, 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 trait.

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 firms
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 source

Unit

Stages in development of merchant banking

Organizational setup Very loose organization, founders and associates involved in the management Emerging formal organization, founders, or professional manager in management Formal organization with professional, manager or founder Complex organization with professional manager Multilayer complex management organization

1

Start-up

Own investment

2

Early growth

Individual investment

3

Accelerating growth

Firms investment with banks backing in terms of loan Corporate finance from bank plus equity funds from public Matching finance available from all possible sources

4

Sustaining growth

5

maturity

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 199293 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

ENVIRONMENTAL FACTORS
-Open for changeMerchant Banking Services THE USERS OF SERVICES

General Economic Conditions

Technology Scientific Innovations

Legal Aspect Law & Regulations

Demand for Services

THE MERCHANT BANKERS -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 commerce. (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 services. (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.

Conclusion
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. character. Merchant banking is usually international in

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