MERCHANT BANKING IN INDIA INTRODUCTION Financial services are an important component of financial system.

The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after the implementation of “Liberalization, privatization and globalization”. Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role as specialized agencies. The resources raising functions remains to be the primary business of a merchant banker. The primary market holds the key to rapid capital formation, growth in industrial productions and exports. There has to be accountability to the end use of funds raised from the market. The increase in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where it requires a specialized skill in handling the situation. The merchant bankers have a social responsibility to in building an industrial structure in India. Merchant bankers assist corporate in raising capital. They assist in issue of Shares, syndicating loans, public issue of debentures. They do not provide funds. They only assist. They also actively arrange working capital, appraisal Projects scrutinize & persuade merger proposals. In INDIA merchant bankers is a body corporate who carries on any activity of the issue management, which consist of preparing prospectus & other information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities market. There is no official category in investment banking.

underwriting of new issues. D. In short. portfolio managers. portfolio management and other banking services”. . The Notification of the Ministry of Finance defines a merchant banker as. corporate finance. Later. buying or subscribing to securities as manager. consultant. takeovers etc.DEFINITION: In banking. advisor or rendering corporate advisory service in relation to such issue management”. “merchant banks are the financial institutions providing specialist services which generally include the acceptance of bills of exchange. merchant banking is defined as. a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money. “any person who is engaged in the business of issue management either by making arrangements regarding selling. Over a period they extended their activities to domestic business of syndication of long term and short term finance. negotiating agents for mergers. merchant bankers assist in raising capital and advice on related issues. According to Cox. debenture trustees. The term can also be used to describe the private equity activities of banking. acting as registrars and share transfer agents. the merchants assisted the Government of under developed countries in raising long – terms through floatation of bonds in London money market. History and Origin of Merchant Banking In India ORIGIN Merchant banking originated through the entering of London merchants in foreign trade through acceptance of bill.

Indian banks started banking services as a part of multiple services they offered to clients from 1972. Merchant Banking is an activity that includes corporate finance activities. They gave loans on mutual trust. its scope includes assisting new entrepreneur. production planning. raising funds through borrowing and issuing equity. Because they do not invest against collateral.Merchant Banking in India – Historical Perspective: Till 18th century moneylenders. they are not regulated. Mergers & Acquisitions help and financial market speculation. Citibank setup its merchant banking division in 1970. village merchants (maharanis). In the initial years the . moneychangers. merger and acquisition advice (international or domestic). Their secondary income sources are consulting. do not take money from the public and are international in scope. evaluating new projects. It provides management consulting services as well. They also issued & discounted bills of exchange (handiest) & bank draft. and at times direct equity investments in corporations by the banks. Merchant Banking in India – Post Independence: In 1967. BENGAL) HABIB & SONS which is now HABIB BANK (founded in 1941. ornaments & other property. on mortgage of lands. Because they are private. Their primary sources of income are PIPE financings and international trade. State bank of India started the merchant banking division in 1972. Merchant banks are private financial institution. system design and also market research. RBI issued its first merchant banking license to grind lays started with management of capital issues. they take far greater risks than traditional banks. now is in PAKISTAN). & saucers performed the function of banks & merchant banks. These were the organized merchant bankers in recent history of INDIA. such as advice on complex financings. JAGAT SHETH (1720-1773AD.

Co. Merchant Bank A merchant bank deals with the commercial banking needs of international finance. long term company loans.objective was to render corporate advice and assistance to small and medium entrepreneurs. leaving a widening gap under bridged between the supply and demand of inventible funds. exerting excess demand on the sources of funds for ever expanding industry and trade. With the growing demand for funds there was pressure on capital market that enthused the commercial banks. Commercial banks and foreign development finance institutions have organized them through formation of division. Some of them have equity stake of foreign merchant bankers. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for funds from the corporate sector enterprises. With the result. or registered themselves as private ltd. A merchant bank does not have retail offices where one can go and open a savings or checking account. A merchant bank is sometimes said to be a wholesale bank. nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public ltd. share brokers and financial consultant firms to enter into the field of merchant banking and share the growing capital markets. Merchant banking activities are organized and undertaken in several forms. Importance and Need of merchant banking Important reason for the growth of merchant banking has been developmental activity throughout the country. This is because merchant banks tend to deal primarily with other merchant banks and other large financial institutions. thus. companies. or in the business of wholesale banking. all the . In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures. and stock underwriting.

He is always awake to renew his skills. With the growth of merchant banking profession corporate enterprises in both public and private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirements for funds for establishing new enterprises. Merchant banker’s dynamism lies in promptly attending to the corporate problems and suggest ways and means to solve it. dedicated to achieve this objective through his dynamism. There has been a mushroom growth of financial consultancy firms and broker firms doing advisory functions as well as managing public issues in syndication with other merchant bankers. therefore. This reinforces the need for a vigorous role to be played by merchant banks.commercial banks in nationalized and public sector as well as in private sector including the foreign banks in India have opened their merchant banking windows and are competing in this field. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is. Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments and thus can help in meeting the widening demand for investible funds for economic activity. develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. the need of merchant banking institutions is felt in the wake of huge public savings lying still untapped. Role of Merchant Banker The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. He has to keep pace with the changing . Notwithstanding the above facts. undertaking expansion/modernization/diversification of the existing enterprises.

underwrite. To carry on the business of merchant banking. diversifications. securities . e. where science and technology create new innovations in production processes of industries envisaging immediate renovations. 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. b. manage advice. Requirements for setting up a merchant banking outfit 1. However.environment where government rules. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be setup in industrially backward areas to eliminate regional imbalances in industrial development of the country. d. the types of organizations are listed below: a. Sole proprietorship Partnership firm Hindu Undivided Family (HUF) Corporate Enterprises Co-operative Society Main Objectives Of Merchant Bankers Merchant bankers render their specialized assistance in achieving the main objectives which are presented below: 1. provide standby assistance. assist in the capital formation. Formation of the Business Organization SEBI act. regulations and politics affecting business conditions frequently change. c. Merchant banker has to think and devise new instruments of financing industrial projects. modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms.

debentures. construction of houses and buying of land. 2. 1. 4. They will invest in buying and selling of transfers. The main object of merchant banker is to create secondary market for Merchant banker’s another objective is to set up and provide services for They also provide services to the finance housing schemes for the They render the services like foreign exchange dealer. 5. bills and discount or re-discount bills and acts as an acceptance house. hypothecate and deal with dispose of shares. public authority established in India. 2. 3. money exchange. 4. Every merchant banker must submit himself to the inspection by SEBI Every merchant banker must disclose information to the SEBI when it when required for and submit all the records. government. . corporation. firm. 5. No merchant banker should associate with another merchant banker Merchant bankers should not enter into any transactions on the basis of who is not registered in SEBI. 3. 6. unpublished information available to them in the course of their professional assignment. records and submit half yearly/annual financial statements to the SEBI within stipulated period of time. society. and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. securities and properties of any other company. trust person. Merchant banker should maintain proper books of accounts.and all kinds of investments issued. municipality. to be issued or guaranteed by any company. civil body. requires any information from them. the venture capital technology funds. Obligations and Responsibilities Merchant bankers have the following obligations and responsibilities. stocks.

Business planning stage: Equity raising: 1)project feasibility study 2)advice on capital structuring 3)preparation of prospectus and liaison with SEBI 4)pricing decisions 5)marketing in the capacity of lead managers 6)underwriters to the issue 7)post issue management 8)assistance in ADR/GDR Debt raising: 9)management of debenture issue 10)preparation Working capital raising: Strategic advice: of bankable proposal and syndication of loan 11)assistance in arranging optimal capital finance 12)advice acquisitions 13)corporate structuring advice on mergers and Merchant bankers provide services as follows: . 10. relating to such issues with particular reference to disclosures allotment. obligations. 11. them.6. All merchant bankers must abide by the code of conduct prescribed for Every merchant banker who acts as lead manager must enter into an agreement with the issuer setting out mutual rights. liabilities. Services of Merchant Bankers In India:9. 8. refund etc. 7.

In these circumstances. 13. Non-Resident Investment Counseling And Management Acceptance Credit And Bill Discounting Advising On Mergers. Underwriting 6. 12. Broadly a merchant banker can provide the following services: 1. the corporate sector enterprises had the only alternative to avail themselves of the capital market services for meeting the long-term fund requirements through capital issues of equity and debentures. Leasing 10. 11. Project Counseling And Pre-Investment Studies 3. Bankers 7.SERVICES PROVIDED BY MERCHANT BANKS: (in detail) The development activity through the country had exerted excess demand on the sources of funds by the ever expanding industry and trade which could not be met by the All India Financial Institutions. Issue Management 5. Credit Syndication And Project Finance 4. Corporate Counseling 2. The need of merchant banker is also felt in the wake of huge untapped public savings as merchant bankers can play a highly significant role in mobilizing funds from savers to invest in channels assuring promising return on investments and thus narrow down the gap between demand for and supply of investible funds. Amalgamations And Take-Over Arranging Offshore Finance . The growing demand for funds from capital market has enthusied many organizations to enter into the field of merchant banking for managing the public issues. Portfolio Management 8. Venture Capital Financing 9.

15. Standard solutions and products may not solve problems sometimes. Innovation is required even to address stringent legal requirements. Innovation: Corporate may approach with unique requirements. financial expertise is a key thing a merchant banker must know. understanding of legal and statutory requirements. RBI. following qualities are necessary: 1. Merchant bankers should do out of box thinking and be able to do financial engineering. Delivery of his services depends on his basic understanding of these issues. They can device new financial instruments and get approved from the authorities. Liasioning ability: Merchant bankers are required to liaison with SEBI. their movements. Fixed Deposit Broking Relief To Sick Industries Qualities of merchant bankers:- To be a successful merchant banker. It is imperative that a merchant bank maintains excellent rapport with all of them and also close relations even at informal levels. Knowledge: Thorough understanding of technical issues related to business. 2. Capital market familiarity: Merchant banker should be well versed with stock markets. 3. depositories and other government authorities for public issue related duties.14. . the stock exchanges. 4. appreciation of business acumen. He should track imp happenings in the market on ongoing basis. This only can see speedy and favorable clearances by the authorities.

Banking policies: RBI prefers that commercial banks do not indulge in merchant banking business directly.5. In fact India is one of the largest emerging markets. This limits scope of commercial banks and gives space to merchant bankers. etc. restrictionliberation. banking policies. more the things 2. Merchants bankers should take utmost care that the information is not leaked and also not consumed for the purpose other than for which it was disclosed to the merchant banker. 3. Size and dynamics of the market: Indian market is growing. corporate culture. Merchant bankers have lots space to contribute. Lots of new and green fried projects are happening. placement of debentures. They should setup a subsidiary for the purpose. With significant market freedom. FDI. left to be decided by the corporate. Scope for merchant banking in India:Scope for merchant banking depends upon size of the market. merchant bankers work has increased many folds. . 1. public issues. debt raising are on rise. Obviously. This policy also results in fair business practices. Indian scenario is favorable to merchant bankers. Restrictions-liberalization: more liberal the market is. Merchant bankers assist in decision making and hence their scope increases. and corporate dynamics. Integrity: Merchant banker has valuable and confidential information of its customers. Some countries allow commercial bankers to get involved in IPO’s.

by the end of the end of 1980’s there were 33 merchant bankers belonging to three major segments viz. Progress of Merchant Banking in India:Upto 1970. IRBI. opportunities to merchant bankers. India inc. commercial banks. witnessed an astonishing growth after the process of economic reforms and deregulation of Indian economy in 1991. Corporate dynamics: more happening in business gives more 5. apparently prefers and is happy with merchant bankers work. takeover acquisition. As a result of buoyancy in the capital market in 1980’s some commercial banks set – up their subsidiaries to operate exclusively in merchant banking industry.4.. The number of merchant banks increased to 115 by the end of 1992-93 300 by the end of 1993-94 and 501 by the end of August. there were only two foreign banks which performed merchant banking operations in the country. Thus. Corporate culture: corporate can do project appraisal. If the corporate prefer third-party independent assessment. SBI was the first Indian commercial bank and ICICI the first financial institution to take up the activities in 1972 and 1973 respectively. and private firms. IDBI. strategic restructuring in house as well. 6 all Indian financial institutions – ICICI. Otherwise merchant banker’s role is only statutory as in issue management. a number of large stock broking firms and financial consultants also entered into business. IFCI. In addition. all India financial institutions. Tourism Finance . then only they will engage merchant bankers. Merchant banking industry which remained almost stagnant and stereotyped for over two decades. active money market are all providing better business prospectus to merchant bankers. all merchant bankers registered with SEBI under four different categories include 50 commercial banks. new Greenfield projects. Mergers. 1994. fund raising for government institutions. Merchant banking functions of these institutions was related only to management of new capital issues.

and private merchant bankers. infrastructure Leasing and Financial Services Ltd. Indian Merchant 7. In addition to Indian Merchant Bankers. Morgan Stanley. are operating in India under authorization of SEBI. Goldman Sachs.corporation of India. As a result of proliferation. a large number of reputed international Merchant Bankers like Merrill Lynch. Bankers are faced with severe competition not only among themselves but also with the well developed global players. Jardie Fleming Kleinwort Benson etc. 6. .

one must decide. It can be said that this project helped me to understand every details about Merchant Banking and in future how it’s going to get emerged in the Indian economy. Market development is predicted on a sound. discerning and growing awareness and interest into an essential to remove the trading malpractice and structural inadequacies prevailing in the market. well regulated market. . fair and transparent regulatory framework. To sustain the growth of the market and crystallize the growing awareness and interest into a committed. the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the client will ensure success. Merchant Banking can be considered as essential financial body in Indian financial system. Hence before selecting a merchant banker. Hence. and provide the investors an organized.CONCLUSION The merchant banker plays a vital role in channelising the financial surplus of the society into productive investment avenues.