You are on page 1of 34



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,
Projects scrutinize & persuade merger proposals.
In banking, 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. The term can
also be used to describe the private equity activities of banking.
According to Cox, D. merchant banking is defined as, merchant
banks are the financial institutions providing specialist services
which generally include the acceptance of bills of exchange,
corporate finance, portfolio management and other banking
The Notification of the Ministry of Finance defines a merchant
banker as, any person who is engaged in the business of






regarding selling, buying or subscribing to securities as







advisory service in relation to such issue management.

In short, merchant bankers assist in raising capital and advice on
related issues.


Title of the study: - The present study is titled as A


Objective of the study:- The following are the objective of

the study
To study the qualities of merchant banking
To know the importance and need of merchant banking
To know the scope of merchant banking.

Period of the study:-The period of the present study is

FEB 2016.

Limitations of the Study:-The present study has got all

the limitations of explanatory study method.

Data and Methodology:-For the purpose of the present

study I had referred internet, books, newspaper to collect

Merchant Bank
A merchant bank deals with the commercial banking needs of
international finance, long term company loans, and stock
underwriting. 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, or in the business
of wholesale banking. This is because merchant banks tend to
deal primarily with other merchant banks and other large financial
The most familiar role of the merchant bank is stock underwriting.

A large company that wishes to raise money from investors through the stock
market can hire a merchant bank to implement and underwrite the process. The
merchant bank determines the number of stocks to be issued, the price at which the
stock will be issued, and the timing of the release of this new stock. The merchant
bank files all the paperwork required with the various market authorities, and is
also frequently responsible for marketing the new stock, though this may be a joint
effort with the company and managed by the merchant bank. For really large stock
offerings, several merchant banks may work together, with one being the lead

By limiting their scope to the needs of large companies, merchant banks can focus
their knowledge and be of specific use to such clients. Some merchant banks
specialize in a single area, such as underwriting or international finance.

Many of the largest banks have both a retail division and a merchant bank division.
The divisions are generally very separate entities, as there is very little similarity
between retail banking and what goes on in a merchant bank.

Although your life is probably affected every day in some way by decisions made
in a merchant bank, most people reading this article are unlikely ever to visit or
deal directly with a merchant bank. Merchant banks operate behind the scenes and
away from the spotlight.


Merchant banking originated through the entering of London merchants in foreign
trade through acceptance of bill. Later, the merchants assisted the Government of
under developed countries in raising long terms through floatation of bonds in
London money market. Over a period they extended their activities to domestic
business of syndication of long term and short term finance, underwriting of new
issues, acting as registrars and share transfer agents, debenture trustees, portfolio
managers, negotiating agents for mergers, takeovers etc.

Merchant Banking in India Historical Perspective:

Till 18th century moneylenders, moneychangers, village merchants (maharanis), &

saucers performed the function of banks & merchant banks. They also issued &
discounted bills of exchange (handiest) & bank draft. They gave loans on mutual
trust, on mortgage of lands, ornaments & other property. JAGAT SHETH (17201773AD, BENGAL) HABIB & SONS which is now HABIB BANK (founded in
1941, now is in PAKISTAN). These were the organized merchant bankers in recent
history of INDIA.
Merchant Banking is an activity that includes corporate finance activities, such as
advice on complex financings, merger and acquisition advice (international or
domestic), and at times direct equity investments in corporations by the banks.
Merchant banks are private financial institution. Their primary sources of income
are PIPE financings and international trade. Their secondary income sources are
consulting, Mergers & Acquisitions help and financial market speculation. Because
they do not invest against collateral, they take far greater risks than traditional
banks. Because they are private, do not take money from the public and are
international in scope, they are not regulated.
Anyone considering dealing with any merchant bank should investigate the bank
and its managers before seeking their help.
The reason that businesses should develop a working relationship with a merchant
bank is that they have more money than venture capitalists. Their advice tends to
be more pragmatic than venture capitalists. It is rare for a merchant bank to fail.
The last major failure was Barings Bank (1992). It failed because of unsupervised
trading of copper futures contracts and buybacks. When the Dot Com Bubble burst
in 2001, scores of venture capital firms failed. The greatest merchant bank failure
in history was the Knights Templar. After the Crusades, the Order became
immensely wealthy controlling and funding the trade between the Middle East and
Western Europe. They foolishly loaned money to the French Government. To avoid
repaying the money, King Louie had the Pope declare the Order heretics.
Thousands of monks lost their lives, but France balanced its budget.
To understand Merchant Banks, you should know something of their history.
Modern merchant banking started in Italy during the 7th Century. The banking

practices evolved from the financing structure of the Silk Road Trading that
predates the Roman Empire.
The basic financing structure was the advance payment for goods by merchant
bankers at a great discount to the delivery value of those goods. In the case of Italy
and then Germany, wheat was the product. The merchant banks purchased the
wheat soon after planting. They accepted the risk of crop failure.

They profited when they sold the wheat. In most countries today, the national
government accepts the risk through government crop insurance.
As the British Empire expanded in the 18th and 19th Centuries, merchant banks
prospered in London. For instance, merchant bankers funded Canadas Hudson
Bay Company. This period saw the rise of such merchant banks as Schroders,
Warburgs or Rothschilds. Amsterdam benefited from the trade created by the
Dutch East Indian Company. Since the 18th century, the role of the merchant
banker has been considerably broadened to include a composite of modern day
skills. Such skills are inherently entrepreneurial, managerial, financial and

Today, North American merchant banks have taken the form of "boutiques"whereby, each offers its own specialized services. The hallmarks of these merchant
bank boutiques are that they typically charge fees payable in cash and/or the
client's stock for each service rendered. You can find a merchant bank that meets
any reasonable set of needs.

Importance and Need of merchant banking

Important reason for the growth of merchant banking has been developmental
activity throughout the country, exerting excess demand on the sources of funds for
ever expanding industry and trade, thus, leaving a widening gap under
bridged between the supply and demand of inventible funds. All Indian financial
institutions and experienced resources constraint to meet the ever increasing
demands for funds from the corporate sector enterprises. 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. With the growing demand for funds there was pressure on capital

market that enthused the commercial banks, share brokers and financial consultant
firms to enter into the field of merchant banking and share the growing capital
markets. With the result, all the 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. 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
Notwithstanding the above facts, the need of merchant banking institutions is felt
in the wake of huge public savings lying still untapped. 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.

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, undertaking expansion/modernization/diversification
of the existing enterprises. This reinforces the need for a vigorous role to be played
by merchant banks.
Merchant banks have been procuring impressive support from capital market
for the corporate sector for financing their projects. This is evidenced from the
increasing amount raised form the capital market by the corporate enterprises year
after year.

In view of multitude of enactments, rules and regulations, guidelines and offshoot

press release instructions brought out by the government from time to time
imposing statutory obligations upon the corporate sector to comply with all those
requirements prescribed therein, the need of skilled agency existed which could
provide counseling in these matters in a package form. Merchant bankers, with
their skills, updated information and knowledge, provide this service to the
corporate units and advise them on such requirements to be complied with for
raising funds from the capital market under different enactments viz. Companies
Act, Income-tax Act, Foreign Exchange Regulation Act, Securities Contracts
(Regulation) Act and various other corporate laws and regulations. Merchant
bankers advise the investors of the incentives available in the form of tax reliefs,
other statutory relaxations, good return on investment and capital appreciation in
such investment to motivate them to invest their savings in securities of the
corporate sector.

Main Objectives Of Merchant Bankers

Merchant bankers render their specialized assistance in achieving the main
objectives which are presented below:

To carry on the business of merchant banking, assist in the capital formation,

manage advice, underwrite, provide standby assistance, securities and all kinds of
investments issued, to be issued or guaranteed by any company, corporation,
society, firm, trust person, government, municipality, civil body, public authority
established in India.



The main object of merchant banker is to create secondary market for bills
and discount or re-discount bills and acts as an acceptance house.


Merchant bankers another objective is to set up and provide services for the
venture capital technology funds.


They also provide services to the finance housing schemes for the
construction of houses and buying of land.


They render the services like foreign exchange dealer, money exchange, and
authorized dealer and to buy and sell foreign exchange in all lawful ways in
compliance with the relevant laws of India.


They will invest in buying and selling of transfers, hypothecate and deal
with dispose of shares, stocks, debentures, securities and properties of any other

Obligations and Responsibilites

Merchant bankers have the following obligations and responsibilities.

Merchant banker should maintain proper books of accounts, records and

submit half yearly/annual financial statements to the SEBI within stipulated period
of time.



No merchant banker should associate with another merchant banker who is

not registered in SEBI.


Merchant bankers should not enter into any transactions on the basis of
unpublished information available to them in the course of their professional


Every merchant banker must submit himself to the inspection by SEBI when
required for and submit all the records.


Every merchant banker must disclose information to the SEBI when it

requires any information from them.


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, obligations, relating
to such issues with particular reference to disclosures allotment, refund etc.

Qualities of merchant bankers:To be a successful merchant banker, following qualities are



Knowledge: Thorough understanding of technical issues















expertise is a key thing a merchant banker must know. Delivery of

his services depends on his basic understanding of these issues.


Capital market familiarity: Merchant banker should be well

versed with stock markets, their movements. He should track imp
happenings in the market on ongoing basis.


Liasioning ability: Merchant bankers are required to liaison

with SEBI, RBI, the stock exchanges, depositories and other
government authorities for public issue related duties. It is
imperative that a merchant bank maintains excellent rapport with
all of them and also close relations even at informal levels. This
only can see speedy and favorable clearances by the authorities









requirements. Standard solutions and products may not solve

problems sometimes. Merchant bankers should do out of box
thinking and be able to do financial engineering. They can device
new financial instruments and get approved from the authorities.










Integrity: Merchant banker has valuable and confidential

information of its customers. 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.


Scope for merchant banking in India:-

Scope for merchant banking depends upon size of the

market, restriction-liberation, banking policies, corporate
culture, and corporate dynamics.

1. Size and dynamics of the market: Indian market is

growing. In fact India is one of the largest emerging markets.
Obviously, public issues, FDI, debt raising are on rise. Lots of
new and green fried projects are happening. Merchant
bankers have lots space to contribute.


Restrictions-liberalization: more liberal the market is,

more the things left to be decided by the corporate. Merchant
bankers assist in decision making and hence their scope
increases. With significant market freedom, merchant bankers
work has increased many folds.


Banking policies: RBI prefers that commercial banks do not

indulge in merchant banking business directly. They should setup

a subsidiary for the purpose. This limits scope of commercial

banks and gives space to merchant bankers. This policy also








commercial bankers to get involved in IPOs, placement of

debentures, etc. Indian scenario is favorable to merchant bankers.


Corporate culture: corporate can do project appraisal,

strategic restructuring in house as well. If the corporate prefer
third-party independent assessment, then only they will engage
merchant bankers. Otherwise merchant bankers role is only
statutory as in issue management. India inc. apparently prefers
and is happy with merchant bankers work.


Corporate dynamics: more happening in business gives

more opportunities to merchant bankers. Mergers, takeover
acquisition, new Greenfield projects, fund raising for government
institutions, active money market are all providing better business
prospectus to merchant bankers.




Formal merchant activity in India was originated in 1969 with the merchant
banking division setup by the Grindlays Bank, the largest foreign bank in the
country. The main service offered at that time to the corporate enterprises by the
merchant banks included the management of public issues and some aspects of
financial consultancy. Following Grindlays Bank, Citibank set up its merchant
banking division in 1970.The division took up the task of assisting new
entrepreneurs and existing units in the evaluation of new projects and raising funds
through borrowing and equity issues. Management consultancy services were also
offered. Merchant bankers are permitted to carry on activities of primary dealers in
government securities. Consequent to the recommendations of Banking
Commission in 1972, that Indian banks should offer merchant banking services as
part of the multiple services they could provide their clients, State Bank of India
started the Merchant Banking Division in 1972. In the initial years the SBIs
objective was to render corporate advice and assistance to small and medium


The commercial banks that followed State Bank of India were Central Bank of
India, Bank of India and Syndicate Bank in 1977.Bank of Baroda, Standard
Chartered Bank and Mercantile Bank in 1978 and United Bank of India, United
Commercial Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank
in late 70s and early 80s. Among the development banks, ICICI started merchant
banking activities in 1973 followed by IFCI (1986) and IDBI (1991).


In India a common organizational setup 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, Canara Bank, Punjab National Bank,
Bank of India, etc. Some firms are also organized by financial and technical
consultants and professionals. Securities and Exchange 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 setup Indias merchant banking organizations can be categorized
into four groups 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 setup plays a
role on the lines of government priorities and policies.

(B) Banker Base

These merchant bankers function as division/subsidiary of banking organization.
The parent banks are either nationalized commercial bank 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
banking related operations also like providing investment and portfolio
management services.
(D) Private Base
These merchant banking firms are originated in private sector. 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 sector merchant banking firms
have come up either as the sole proprietorship or public limited companies. Many
of these firms were in existence for quite some times before they added a new


activity in the form of merchant banking services by opening new divisions on the
lines of commercial banks and All India Financial Institutions.


1. Formation of the Business Organization

SEBI act, 1992 does not prescribe any specific form of business organization to
carry on the activities as merchant banker. However, the types of organizations are
listed below:

Sole proprietorship


Partnership firm


Hindu Undivided Family (HUF)


Corporate Enterprises


Co-operative Society
Generally it is preferred that the Merchant Banking outfit be a registered company.
Merchant Banks are generally setup as subsidiary companies of banks (Public or
Private). For example, SBI caps, ICICI Securities etc.
2. Adoption of a viable business plan
All the basic tests required to find out whether the business to be undertaken is
viable or not are also applicable to a Merchant Banking setup. Capital adequacy,
profitability, growth opportunities and current market size are some of the factors
which need to be looked into.

3. Registration of Merchant Bankers


Application for grant of certificate

An application for grant of a certificate needs to be made to SEBI .
The application can be made for any one of the following categories of the
merchant banker namely:-

Category I, that is
(i) to carry on any activity of the issue management, which will inter-alia consist of
preparation of prospectus and other information relating to the issue, determining
financial structure, tie-up of financiers and final allotment and refund of the
subscription; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.

Category II, that is, to act as adviser, consultant, co- manager, underwriter,
portfolio manager;

Category III, that is to act as underwriter, adviser, consultant to an issue;

Category IV, that is to act only as adviser or consultant to an issue.


To carry on the activity as underwriter or portfolio manager a separate certificate of

registration needs to be obtained from SEBI.

a Application to conform to the requirements

The application should conform to all the requirements under the SEBI guidelines,
otherwise it may be rejected.
a Furnishing






The Board may require the applicant to furnish further information or clarification
regarding matters relevant to the activity of a merchant banker for the purpose of
disposal of the application. The applicant or its principal officer may appear before
the Board for personal representation.
a Consideration of application
The Board shall take into account for considering the grant of a certificate, all
matters, which are relevant to the activities relating to merchant banker and in
particular the applicant complies with the following requirements, namely:

the applicant shall be a body corporate other than a nonbanking financial company


the merchant banker who has been granted registration by

the Reserve Bank of India to act as a Primary or Satellite dealer
may carry on such activity subject to the condition that it shall not
accept or hold public deposit

the applicant has the necessary infrastructure like adequate

office space, equipments, and manpower to effectively discharge
his activities

the applicant has in his employment minimum of two

persons who have the experience to conduct the business of the
merchant banker

a person directly or indirectly connected with the applicant

has not been granted registration by the Board;

the applicant fulfils the capital adequacy requirement is as


The capital adequacy requirement should not be less than the net worth of the
person making the application for grant of registration. The networth shall be as


Category I

Rs. 5, 00, 00,


Category II

Rs. 50, 00, 000

Category III

Rs. 20, 00, 000

Category IV


the applicant, his partner, director or principal officer is not

involved in any litigation connected with the securities market
which has an adverse bearing on the business of the applicant
and have not at any time been convicted for any offence involving
moral turpitude or has been found guilty of any economic offence

the applicant has the professional qualification from an

institution recognised by the Government in finance, law or
business management

grant of certificate to the applicant is in the interest of

E .Procedure for Registration
The Board on being satisfied that the applicant is eligible shall grant a certificate.
On the grant of a certificate the applicant shall be liable to pay the fees as

a Payment of fees and the consequences of failure to pay



Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
Where a merchant banker fails to pay the Annual fees as provided in Schedule II,
the Board may suspend the registration certificate, whereupon the merchant banker
shall cease to carry on any activity as a merchant banker for the period during
which the suspension subsists.
The Merchant Bank can commence business on acquisition of a Certificate of
Registration from the SEBI after completion of the above mentioned formalities.

Code of Conduct
According to the 13 Regulation of the SEBI of 1992 (Merchant bankers),
every merchant banker should comply with following codes of conduct. They



The merchant banker must observe high integrity and fairness in all his


He shall render at all times high standard of services, exercise due diligence,
exercise independent professional judgement.


If necessary, he must disclose to his clients the possible source of conflict of

duties and interests.


The merchant banker should not indulge in unfair practice or unfair

competition with other merchant bankers.


He should not make any exaggerated statement about his capacity or



He should always Endeavour to give the best possible advise and prompt
efficient and cost effective service.


He should maintain the secrecy of all the confidential information received

during the course of service to his client.


He should not engage in the creation of a false market or price rigging or


Guidelines of SEBI

After the obligations of the CCI, the place was occupied by a legal organ called as
Securities and Exchange Board of India. The issue of capital and pricing of
issues by companies has become free of prior approval. The SEBI has issued
guidelines for the issue of capital by the companies. The guidelines broadly covers
the requirement of the first issue by a new or the first issue of a new company set
up by the existing company, the first issue by the existing private companies and
public issues by the existing listing companies. The SEBI is the most powerful
organization to control and lead both the primary market and secondary market.
The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented below:

If any Companys other income exceeds 10 per cent of the total income, the
details should be disclosed.


The Company should disclose any adverse situation which affects the
operations of the Company and occurs within one year prior to the date filing of
the offer document with the Registrar of Companies or Stock Exchange.


The Company should also disclose the information regarding the capacity
utilization of the plant for the last 3 years.


The Promoters of the Company must maintain their holding at least at 20 per
cent of the expanded capital.


The minimum application money payable should not be less than 25 per cent
of the issue price.


The company should disclose the time normally taken for the disposal of
various types of investors grievances.


The Company can make firm allotments in public issues as follows:

Indian mutual funds (20%),

FIIS (24%),

Regular employees of the company (10%),

Financial institution (20%).


The Company should disclose the safety net scheme or buy back
arrangements of the shares proposed in public issue. This scheme is applicable to a
limited number of 500 shares per allottee and the offer should be valid for a period
of at least 6 months from the date of dispatch of securities.


According to the guidelines, in case of the public issues, at least 30

mandatory collection centres should be established.


According to the SEBI guidelines regarding rights issue, the Company

should give advertisements in not less than two news-papers about the dispatch of
letters of offer. No preferential allotment may be made along with any rights issue.


The Company should also disclose about the fee agreed between the lead
managers and the Company in the memorandum of understanding.


Progress of Merchant Banking in India:Upto 1970, there were only two foreign banks which
performed merchant banking operations in the country. SBI was
the first Indian commercial bank and ICICI the first
financial institution to take up the activities in 1972 and
1973 respectively. As a result of buoyancy in the capital market
in 1980s some commercial banks set up their subsidiaries to
operate exclusively in merchant banking industry. In addition, a
number of large stock broking firms and financial consultants also
entered into business. Thus, by the end of the end of 1980s there
were 33 merchant bankers belonging to three major







institutions, and private firms. Merchant banking functions of

these institutions was related only to management of new capital
Merchant banking industry which remained almost stagnant
and stereotyped for over two decades, witnessed an astonishing
growth after the process of economic reforms and deregulation of
Indian economy in 1991. The number of merchant banks
increased to 115 by the end of 1992-93 300 by the end of 199330

94 and 501 by the end of August, 1994. all merchant bankers

registered with SEBI under four different categories include 50
commercial banks, 6 all Indian financial institutions ICICI, IFCI,
IDBI, IRBI, Tourism Finance corporation of India, infrastructure
Leasing and Financial Services Ltd. and private merchant bankers.
In addition to Indian Merchant Bankers, a large number of
reputed international Merchant Bankers like Merrill Lynch, Morgan
Stanley, Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are
operating in India under authorization of SEBI. As a result of
proliferation, Indian Merchant

Bankers are faced with severe competition not only among

themselves but also with the well developed global players.



The merchant banker plays a vital role in channelising the
financial surplus of the society into productive investment
avenues. Hence before selecting a merchant banker, one must
decide, 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.
It can be said that this project helped me to understand
every details about Merchant Banking and in future how its going
to get emerged in the Indian economy. Hence, Merchant Banking
can be considered as essential financial body in Indian financial


Market development is predicted on a sound, fair and

transparent regulatory framework. To sustain the growth of the
market and crystallize the growing awareness and interest into a
committed, discerning and growing awareness and interest into
an essential to remove the trading malpractice and structural
inadequacies prevailing in the market, and provide the investors
an organized, well regulated market.