LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT SEMINAR ON CONTEMPORARY ISSUE ON INTERNATIONAL BUSINESS (MGT 721) TOPIC: MERCANTAILISM &

MERCHANT BANK SUBMITTED TO LOVELY PROFESSSIONAL UNIVERSITY

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION IN INTERNATIONAL BUSINESS SUBMITTED TO DR. MAHESH CHANDRA JOSHI PROJECT GUIDE SUBMITTED BY VIKRAM KUMAR ROLL NO.:- B 44

LOVELY PROFESSIONAL UNIVERSITY PHAGWARA, PUNJAB, (INDIA)

INTRODUCTION
Mercantilism is the economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the country. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from the 16th to late-18th centuries. Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion. Mercantilist theory varied in sophistication from one writer to another and evolved over time. Favours for powerful interests were often defended with mercantilist reasoning. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy. Other policies have included :

Building a network of overseas colonies; Forbidding colonies to trade with other nations; Monopolizing markets with staple ports; Banning the export of gold and silver, even for payments; Forbidding trade to be carried in foreign ships; Export subsidies; Promoting manufacturing with research or direct subsidies; Limiting wages; Maximizing the use of domestic resources; Restricting domestic consumption with non-tariff barriers to trade.

Mercantilism in its simplest form was naive bullions, but mercantilist writers emphasized the circulation of money and rejected hoarding. Their emphasis on monetary metals accords with current ideas regarding the money supply, such as the simulative effect of a growing money supply. Specie concerns have since been rendered moot by fiat money and floating exchange rates. In time, the heavy emphasis on money was supplanted by industrial policy, accompanied by a shift in focus from the capacity to carry on wars to promoting general prosperity. Mature neomercantilist theory recommends selective high tariffs for "infant" industries or to promote the mutual growth of countries through national industrial specialization. Currently, advocacy of mercantilist methods for maintaining high wages in advanced economies are popular among workers in those economies, but such ideas are rejected by most policymakers and economists.

Influence :
Mercantilism was the dominant school of thought in Europe throughout the late Renaissance and early modern period (from the 15th to the 18th century). Mercantilism encouraged the many intra-European wars of the period and arguably fueled European expansion and imperialism both in Europe and throughout the rest of the world until the 19th century or early 20th century. Evidence of mercantilist practices appear in early modern Venice, Genoa, and Pisa regarding control of the Mediterranean trade of bullion. However, as a codified school, mercantilism's real birth is marked by the empiricism of the Renaissance, which first began to quantify large-scale trade accurately. England began the first large-scale and integrative approach to mercantilism during the Elizabethan Era (15581603). An early statement on national balance of trade appeared in Discourse of the Common Weal of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them. The period featured various but often disjointed efforts by the court of Queen Elizabeth to develop a naval and merchant fleet capable of challenging the Spanish stranglehold on trade and of expanding the growth of bullion at home. Queen Elizabeth promoted the Trade and Navigation Acts in Parliament and issued orders to her navy for the protection and promotion of English shipping. A systematic and coherent explanation of balance of trade was made public through Thomas Mun's argument England's Treasure by Foreign Trade, or the Balance of our Foreign Trade is The Rule of Our Treasure. It was written in the 1620s and published in 1664. These efforts organized national resources sufficiently in the defense of England against the far larger and more powerful Spanish Empire, and in turn paved the foundation for establishing a global empire in the 19th century. The authors noted most for establishing the English mercantilist system include Gerard de Malynes and Thomas Mun, who first articulated the Elizabethan System, which in turn was then developed further by Josiah Child. Numerous French authors helped cement French policy around mercantilism in the 17th century. This French mercantilism was best articulated by Jean-Baptiste Colbert (in office, 16651683), though policy liberalized greatly under Napoleon.

In Europe, academic belief in mercantilism began to fade in the late 18th century, especially in England, in light of the arguments of Adam Smith and the classical economists. The repeal of the Corn Laws by Robert Peelsymbolised the emergence of free trade as an alternative system. Neomercantilism is a 20th century economic policy that uses the ideas and methods of neoclassical economics. The new mercantilism has different goals and focuses on more rapid economic growth based on advanced technology. It promotes such policies as substitution state taxing, subsidizing, spending, and general regulatory powers for tariffs and quotas, and protection through the formation of supranational trading blocs.

Theory-:
Most of the European economists who wrote between 1500 and 1750 are today generally considered mercantilists; this term was initially used solely by critics, such as Mirabeau and Smith, but was quickly adopted by historians. Originally the standard English term was "mercantile system". The word "mercantilism" was introduced into English from German in the early 19th century. The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great Britain. Smith saw English merchant Thomas Mun (15711641) as a major creator of the mercantile system, especially in his posthumously published Treasure by Foreign Trade (1664), which Smith considered the archetype or manifesto of the movement. Perhaps the last major mercantilist work was James Stewart Principles of Political Economy published in 1767. "Mercantilist literature" also extended beyond England. Italy and France produced noted writers of mercantilist themes including Italy's Giovanni Botero (15441617) and Antonio Serra (1580-?); France's, Jean Bodin, Colbert and other physiocrats. Themes also existed in writers from the German historical school from List, as well as followers of the "American system" and British "free-trade imperialism," thus stretching the system into the 19th century. However, many British writers, including Mun and Misselden, were merchants, while many of the writers from other countries were public officials. Beyond mercantilism as a way of understanding the wealth and power of nations, Mun and Misselden are noted for their viewpoints on a wide range of economic matters.

The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively:

That every inch of a country's soil be utilized for agriculture, mining or manufacturing. That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials. That a large, working population be encouraged. That all export of gold and silver be prohibited and all domestic money be kept in circulation. That all imports of foreign goods be discouraged as much as possible. That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver. That as much as possible, imports be confined to raw materials that can be finished [in the home country]. That opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver. That no importation be allowed if such goods are sufficiently and suitably supplied at home.

Origin
Scholars debate over why mercantilism dominated economic ideology for 250 years. One group,

represented by Jacob Viner, sees mercantilism as simply a straightforward, common-sense system whose logical fallacies remained opaque to people at the time, as they simply lacked the required analytical tools. The second school, supported by scholars such as Robert B. Ekelund, portrays mercantilism not as a mistake, but rather as the best possible system for those who developed it. This school argues that rent-seeking merchants and governments developed and enforced mercantilist policies. Merchants benefited greatly from the enforced monopolies, bans on foreign competition, and poverty of the workers. Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by academics and philosophers, almost all mercantilist writers were merchants or government officials. Monetarism offers a third explanation for mercantilism. European trade exported bullion to pay for goods from Asia, thus reducing the money supply and putting downward pressure on prices and economic activity. The evidence for this hypothesis is the lack of inflation in the English economy until the Revolutionary and Napoleonic wars when paper money came into vogue. A fourth explanation lies in the increasing professionalization and technification of the wars of the era, which turned the maintenance of adequate reserve funds (in the prospect of war) into a more and more expensive and eventually competitive business. Mercantilism developed at a time of transition for the European economy. Isolated feudal estates were being replaced by centralized nation-states as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade. Mercantilism focused on how this trade could best aid the states. Another important change was the introduction of double-entry bookkeeping and modern accounting. This accounting made extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade. Of course, the impact of the discovery of America cannot be ignored.New markets and new mines propelled foreign trade to previously inconceivable heights. The latter led to "the great upward movement in prices" and an increase in "the volume of merchant activity itself".

Policies:
France Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics. In 1539, an important decree banned the importation of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions were imposed on the export of bullion. Over the rest of the sixteenth century further protectionist measures were introduced. The height of French mercantilism is closely associated with JeanBaptiste Colbert, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism . Under Colbert, the French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of over a thousand directives outlining how different products should be produced. To encourage industry, foreign artisans and craftsmen were imported. Colbert also worked to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals. Colbert's policies were quite successful, and France's industrial output and economy grew considerably during this period, as France became the dominant European power. He was less successful in turning France into a major trading power, and Britain and the Netherlands remained supreme in this field.

Great Britain In England, mercantilism reached its peak during the 1340-1789 Long Parliament government (16401660). Mercantilist policies were also embraced throughout much of the Tudor and Stuart periods, with Robert Walpole being another major proponent. In Britain, government control over the domestic economy was far less extensive than on the Continent, limited by common law and the steadily increasing power of Parliament.[23] Government-controlled monopolies were common, especially before the English Civil War, but were often controversial. The Anglo-Dutch Wars were fought between the English and the Dutch for control over the seas and trade routes. With respect to its colonies, British mercantilism meant that the government and the merchants became partners with the goal of increasing political power and private wealth, to the exclusion of other empires. The government protected its merchantsand kept others outby trade barriers, regulations, and subsidies to domestic industries in order to maximize exports from and minimize imports to the realm. The government had to fight smugglingwhich became a favorite American technique in the 18th century to circumvent the restrictions on trading with the French, Spanish or Dutch. The goal of mercantilism was to run trade surpluses, so that gold and silver would pour into London. The government took its share through duties and taxes, with the remainder going to merchants in Britain. The government spent much of its revenue on a superb Royal Navy, which not only protected the British colonies but threatened the colonies of the other empires, and sometimes seized them. Thus the British Navy captured New Amsterdam (New York) in 1664. The colonies were captive markets for British industry, and the goal was to enrich the mother country. British mercantilist writers were themselves divided on whether domestic controls were necessary. British mercantilism thus mainly took the form of efforts to control trade. A wide array of regulations was put in place to encourage exports

and discourage imports. Tariffs were placed on imports and bounties given for exports, and the export of some raw materials was banned completely. The Navigation Acts expelled foreign merchants from England's domestic trade. The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials and to only trade with Britain. This led to friction with the inhabitants of these colonies, and mercantilist policies (such as forbidding trade with other empires and controls over smuggling) were a major irritant leading to the American Revolution. Over all, however, mercantilist policies had a positive impact on Britain helping turn it into the world's dominant trader, and an international superpower]. One domestic policy that had a lasting impact was the conversion of "waste lands" to agricultural use. Mercantilists felt that to maximize a nation's power all land and resources had to be used to their utmost, and this era thus saw projects like the draining of The Fens.

Other countries The other nations of Europe also embraced mercantilism to varying degrees. The Netherlands, which had become the financial centre of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few mercantilist policies. Mercantilism became prominent in Central Europe and Scandinavia after the Thirty Years' War (16181648), with Christina of Sweden, Jacob Kettler of Courland, Christian IV of Denmark being notable proponents. The Habsburg Holy Roman Emperors had long been interested in mercantilist policies, but the vast and decentralized nature of their empire made implementing such notions difficult. Some constituent states of the empire did embrace Mercantilism, most notably Prussia, which under Frederick the Great had perhaps the most rigidly controlled economy in Europe. During the economic collapse of the seventeenth century Spain had little coherent economic policy, but French mercantilist policies were imported by Philip V with some success. Russia under Peter I (Peter the Great) attempted to pursue mercantilism, but had little success because of Russia's lack of a large merchant class or an industrial base.

Wars and imperialism Mercantilism was economic warfare and was well suited to an era of military warfare. Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation's trade was to take it from another. A number of wars, most notably the Anglo-Dutch Wars and the Franco-Dutch Wars, can be linked directly to mercantilist theories. Most wars had other causes but they reinforced mercantilism by clearly defining the enemy, and justified damage to the enemy's economy. Mercantilism fueled the imperialism of this era, as many nations expended significant effort to build new colonies that would be sources of gold (as in Mexico) or sugar (as in the West Indies), as well as becoming exclusive markets. European power spread around the globe, often under the aegis of companies with government-guaranteed monopolies in certain defined geographical regions, such as the Dutch East India Company or the British Hudson's Bay Company (operating in present-day Canada). Main Points of Mercantilism-:

Promotion of National wealth and power. Importance of trade surpluses. Trade surplus leads to a net gold inflow, and thereby to greater national wealth and power. Analogy between nations and households. Encourage domestic production and exports, discourage imports. Emphasis on balance of trade surpluses. Emphasis on maximizing productivity and output. Role of government in encouraging domestic manufacturing and exports while minimizing imports Link between money supply and prices.

Major Tenets of Mercantilism-: Gold and silver are most desirable forms of wealth Accumulating these requires a trade surplus Implies a nationalistic view Import raw materials, protect with tariffs against the importation of an goods that can be produced domestically. Restrict imports of raw materials. Oppose internal taxes of any kind. Strong central government Large, hard-working labor force is critical

MERCHANT BANKING-: Merchant banking primarily involves financial advice and services for large corporations and wealthy individuals. ActivityThe Major Merchant Banking activities which the Bank offers to its clients are: Issue Management - Management of Public Issues i.e. IPOs, FPOs, Right Issues, etc. as Book Running Lead Manager Bankers to the Issue Payment of Dividend Warrants / Interest Warrants / Refund Orders Debenture Trustee Underwriting Issuing & Paying Agent Monitoring Agency Besides promoting / marketing the above Merchant Banking Business in the Bank through specialized Capital Market Services Branches, Merchant Banking Cells and identified branches, the Merchant Banking Division also looks after the following activities: Marketing of Merchant Banking Business Monitoring / Supporting Capital Market Service Branches

Activities offered -: Issue management (Managing conflict,problum) Portfolio management (Basket of stock) Credit syndication (Facility provided by investment Bank) Acceptance credit (L/C) Counsel on mergers and acquisitions Insurance

Merchant Banks in India -: Citi bank Set up its merchant banking division in India in 1970. Indian banks Started banking Services from 1972. State Bank of India started the merchant banking division in 1972. Many other banks came after this like ICICI, Canara Bank, UCO bank etc. As of today there are 135 Merchant bankers who are registered with SEBI.

Advantages-: Merchant banks perform functions that can not be carried out by businesses on their own. Merchant banks have access to traders, financial institutions, and markets that companies or individuals could not possibly reach. By using their skills and contacts, merchant banks can get the best possible deals for their clients.

Disadvantage-: Merchant banks are really only for large corporate customers, or extremely wealthy smaller businesses owned by individual clients. Not all deals carried out by merchant banks meet with unqualified success. There is always risk attached to the kinds of deal that merchant banks undertake.

MERCHANT BANKERS ASSIGNMENTS: At present, the Bank is holding following Licenses from SEBI: Merchant Banker Banker to the Issue Underwriting Debenture Trustee

1. Bankers To The Issue (Collecting Banker):

'Bankers to the Issue' business as a part of Merchant Banking business is one of the good source of low cost deposits and, therefore, concerted efforts are to be made for its development. From time to time, Merchant Banking Division is issuing instructions/ guidelines for the benefit of the field staff for the efficient and effective handling of the Banker's to Issue assignments and for the meticulous compliance of RBI / SEBI directives.

2.Payment Of Dividend Warrants / Interest Warrants (Paying Banker): Assignment of payment of dividend warrants / interest warrants is another opportunity for the bank to get short-term deposits at nominal cost. The assignment of dividend payment not only provides the free of cost float fund but also adds to the fee-based income of the Bank. The Merchant Banking Division has also got enabled a functionality of a new system in CBS branches for payment assignments, which is similar to Demand Draft Payable Account under Finacle. The product has the following unique features that ensure that the payment account of the corporate remains reconciled at any point of time: Facility for upfront uploads of the instruments issued by the companies into Core Banking system Online payment of the instruments by CBS branches Validation of instruments details by the system Online status update of paid instruments by the system Online MIS on paid/unpaid instruments at any point of time Facility to cancel lost instruments and to re-upload duplicate instruments issued in lieu thereof

3. Payment Of Refund Orders: As compared to the payment of Interest / Dividend Warrants, assignments for payment of Refund Orders is more lucrative since it involves larger amount, which at times may even run into several crores of rupees and Deposit float is likely to remain with the Bank for a longer period of time as the beneficiaries are widely spread and the Bank gets free publicity. Normally the refund bankers are decided well before the issue opens. Circle Offices should maintain close liaison with companies who are intending to come out with public issues.

4. Underwriting: Underwriting is a contingent liability and this is one sphere of Merchant banking where outlay of funds on the part of the bank may be involved. As such, it is necessary to be very careful in accepting / recommending such business. Proposals that pose clear risk of devolvement should be declined at the outset unless there is sub underwriting tie up directly or indirectly with promoters and their related investment companies or a firm commitment of buy back on reasonable terms. 5. Debenture Trustee: In terms of SEBI guidelines, all debenture issues (public rights) of the companies with the maturity period exceeding 18 months are required to have "Debenture Trustee" and its name must be stated in the prospectus of the issue. 6. Monitoring Agency: In terms of SEBI (DIP) guidelines, the Company issuing the shares to public shall make arrangements for the use of proceeds of the issue to be monitored by one of the financial institutions, in case of issues, which exceed Rs.500 crores. Though, in terms of SEBI guidelines, it is mandatory for the issuers to appoint 'Monitoring Agency' if the issue size is more than Rs.500 crores, on the insistence of Merchant Bankers and Stock exchanges, the issuers of issues of less than Rs. 500 crores are also appointing monitoring agency.

CONCLUSION-: Foreign trade as the source of surplus No analysis of production In practice Added to feudal imposts on commerce Created government-sanctioned monopolies Ostensibly to increase national wealth; but Often in practice enriched favored individuals Point of criticism and departure for later Physiocrats & Classical Economists, with emphasis upon laisser-faire, laisser-passer.