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MERCHANT BANKING

In banking, a merchant bank is a financial institution primarily engaged in offering


financial services and advice to corporations and to wealthy individuals. The term can
also be used to describe the private equity activities of banking. The chief distinction
between an investment bank and a merchant bank is that a merchant bank invests its own
capital in a client company whereas an investment bank purely distributes (and trades)
the securities of that company in its capital raising role. Both merchant banks and
investment banks provide fee based corporate advisory services including in relation to
mergers and acquisitions.

History
Merchant banks, now so called, are in fact the original "banks". These were invented in
the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers
grew in stature based on the strength of the Lombard plains cereal crops, many displaced
Jews fleeing Spanish persecution were attracted to the trade. They brought with them
ancient practices from the middle and far east silk routes. Originally intended for the
finance of long trading journeys, these methods were now utilized to finance the
production of grain.

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls
of Lombardy, alongside the local traders, and set up their benches to trade in crops. They
had one great advantage over the locals. Christians were strictly forbidden the sin of
usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in
the field, a high-risk loan at what would have been considered usurious rates by the
Church, but did not bind the Jews. In this way they could secure the grain sale rights
against the eventual harvest. They then began to advance against the delivery of grain
shipped to distant ports. In both cases they made their profit from the present discount
against the future price. This two-handed trade was time consuming and soon there arose
a class of merchants, who were trading grain debt instead of grain.

The Jewish trader performed both finance (credit) and an underwriting (insurance)
functions. He would derive an income from lending the farmer money to develop and
manufacture (through seeding, growing, weeding and harvesting) his annual crop (the
crop loan at the beginning of the growing season). He would underwrite (insure) the
delivery of the crop (through crop or commodity insurance) to the merchant wholesaler
who was the ultimate purchaser of the farmer’s harvest. And he would make
arrangements to supply this buyer through alternative sources (the merchant function) of
supply (such as grain stores or alternate producer markets), should any particular farming
district suffer a seasonal crop failure. He could also keep the farmer (or other commodity
producer) in business during a drought or other crop failure, through the issuance of a
crop (or commodity) insurance against the hazard of failure of his crop.
Thus in his underlying financial function the merchant banker (trader) would ensure the
continuous smooth flowing of the commodity (crop, wool, salt; salt-cod, etc.) markets by
providing both credit and insurance.

It was a short step from financing trade on their own behalf to settling trades for others,
and then to holding deposits for settlement of "billete" or notes written by the people who
were still brokering the actual grain. And so the merchant's "benches" (bank is a
corruption of the Italian for bench, banca, as in a counter) in the great grain markets
became centers for holding money against a bill (billette, a note, a letter of formal
exchange, later a bill of exchange, later still, a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but
often were used for the bench's own trades in the meantime. The term bankrupt is a
corruption of the Italian banca rotta, or broken bench, which is what happened when
someone lost his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned
by employing their money in the trade of the bench soon developed; in short, selling an
"interest" to them in a specific trade, thus overcoming the usury objection. Once again
this merely developed what was an ancient method of financing long distance transport of
goods.

Islam makes similar condemnations of usury as Christianity.

The medieval Italian markets were disrupted by wars and in any case were limited by the
fractured nature of the Italian states. And so the next generation of bankers arose from
migrant Jewish merchants in the great wheat growing areas of Germany and Poland.
Many of these merchants were from the same families who had been part of the
development of the banking process in Italy. They also had links with family members
who had, centuries before, fled Spain for both Italy and England.

This course of events set the stage for the rise of banking names which still resonate
today: Schroders, Warburgs, Rothschilds, even the ill-fated Barings, were all the product
of the continental grain trade, and indirectly, the early Iberian persecution of Jews. These
and other great merchant banking families dealt in everything from underwriting bonds to
originating foreign loans. Bullion trading and bond issuing were some of the specialties
of the Rothschild family.

Modern practices
Known as “accepting and issuing houses” in the U.K. and “investment banks” in the
U.S., modern merchant banks offer a wide range of activities, including portfolio
management, credit syndication, acceptance credit, counsel on mergers and acquisitions,
insurance, etc.
Of these two classes of merchant banks, the U.S. variant initiates loans and then sells
them to investors Even though these companies call themselves "merchant banks," they
have few, if any, of the characteristics of former merchant banks.

Merchant Banking
Merchant banking may be defined as, “an institution which covers a wide range of activities such as
management of customer services, portfolio management, credit syndication, acceptance credit,
counselling, insurance, etc.”

Merchant Banks are popularly known as “issuing and accepting houses”. They offer a package of
financial services. Unlike in the past, their activities are now primarily non-fund based. One of the
basic requirements of merchant banks is highly professional staff with skills and worldwide contacts.
The basic function of merchant banks is marketing corporate and other securities, that is
guaranteeing sales and distribution of securities.

All the aspects- origination, underwriting and distribution of the sale of industrial securities are
handled by them. They are experts and good judges of the type, timing and terms of issues and
make them acceptable to investors under prevailing preferences and market conditions, and at the
same time afford the borrowing company, flexibility and freedom that it needs to meet possible
future contingencies. They guarantee the success of issues by underwriting them. They also provide
all the services related to receiving applications, allotment, collecting money, sending share
certificates and so on.

The merchant banker normally does not assume all the risk himself while underwriting the issue.
Merchant banks offer services also to investors. The range of activities offered by merchant banks is
much wider than sponsoring public issues of industrial securities. They offer project finance,
syndication of credit, corporate advisory services, mutual fund investments, investment
management etc.

Registration of merchant bankers…


Registration with SEBI is mandatory to carry out the business of merchant banking in India. An
applicant should comply with the following norms:

• The applicant should be a body corporate


• The applicant should not carry on any business other than those connected with the
securities market
• The applicant should have necessary infrastructure like office space, equipment, manpower
etc.
• The applicant must have at least two employees with prior experience in merchant banking
• Any associate company, group company, subsidiary or interconnected company of the
applicant should not have been a registered merchant banker
• The applicant should not have been involved in any securities scam or proved guilt for any
offence
• The applicant should have a minimum net worth of Rs.5 crores
Functions of a merchant banker…
The following comprise the main functions of a merchant banker:

• Management of debt and equity offerings- This forms the main function of the merchant
banker. He assists the companies in raising funds from the market. The main areas of work
in this regard include: instrument designing, pricing the issue, registration of the offer
document, underwriting support, marketing of the issue, allotment and refund, listing on
stock exchanges.
• Placement and distribution- The merchant banker helps in distributing various securities like
equity shares, debt instruments, mutual fund products, fixed deposits, insurance products,
commercial paper to name a few. The distribution network of the merchant banker can be
classified as institutional and retail in nature. The institutional network consists of mutual
funds, foreign institutional investors, private equity funds, pension funds, financial
institutions etc. The size of such a network represents the wholesale reach of the merchant
banker. The retail network depends on networking with investors.
• Corporate advisory services- Merchant bankers offer customised solutions to their clients
financial problems. The following are the main areas in which their advice is sought:
Financial structuring includes determining the right debt-equity ratio and gearing ratio for
the client, the appropriate capital structure theory is also framed. Merchant bankers also
explore the refinancing alternatives of the client, and evaluate cheaper sources of funds.
Another area of advice is rehabilitation and turnaround management. In case of sick units,
merchant bankers may design a revival package in coordination with banks and financial
institutions. Risk management is another area where advice from a merchant banker is
sought. He advises the client on different hedging strategies and suggests the appropriate
strategy.
• Project advisory services- Merchant bankers help their clients in various stages of the
project undertaken by the clients. They assist them in conceptualising 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
documents like the detailed project report.
• Loan syndication- Merchant bankers arrange to tie up loans for their clients. This takes
place in a series of steps. Firstly they analyse the pattern of the client’s cash flows, based
on which the terms of borrowings can be defined. Then the merchant banker prepares a
detailed loan memorandum, which is circulated to various banks and financial institutions
and they are invited to participate in the syndicate.
The banks then negotiate the terms of lending on the basis of which the final allocation is
done.
• Providing venture capital and mezzanine financing- Merchant bankers help
companies in obtaining venture capital financing for financing their new and
innovative strategies.
Services of Merchant Banks
• Project Counselling:

Project counselling includes preparation of project reports,


deciding upon the financing pattern to finance the cost of
the project and appraising the project report with the
financial institutions or banks. It also includes filling up of
application forms with relevant information for obtaining
funds from financial institutions and obtaining government
approval.

• Issue Management:

Management of issue involves marketing of corporate


securities viz. equity shares, preference shares and
debentures or bonds by offering them to public. Merchant
banks act as an intermediary whose main job is to transfer
capital from those who own it to those who need it. After
taking action as per SEBI guidelines, the merchant banker
arranges a meeting with company representatives and
advertising agents to finalise arrangements relating to date
of opening and closing of issue, registration of prospectus,
launching publicity campaign and fixing date of board
meeting to approve and sign prospectus and pass the
necessary resolutions. Pricing of issues is done by the
companies in consultant with the merchant bankers.

• Underwriting of Public Issue:

Underwriting is a guarantee given by the underwriter that in


the event of under subscription, the amount underwritten
would be subscribed by him. Banks/Merchant banking
subsidiaries cannot underwrite more than 15% of any issue.
• Managers, Consultants or Advisers to the Issue:

The managers to the issue assist in the drafting of


prospectus, application forms and completion of formalities
under the Companies Act, appointment of Registrar for
dealing with share applications and transfer and listing of
shares of the company on the stock exchange. Companies
can appoint one or more agencies as managers to the issue.

• Portfolio Management:

Portfolio refers to investment in different kinds of securities


such as shares, debentures or bonds issued by different
companies and government securities. Portfolio
management refers to maintaining proper combinations of
securities in a manner that they give maximum return with
minimum risk.

• Advisory Service Relating to Mergers and Takeovers:

A merger is a combination of two companies into a single


company where one survives and other loses its corporate
existence. A takeover is the purchase by one company
acquiring controlling interest in the share capital of another
existing company. Merchant bankers are the middlemen in
setting negotiation between the two companies.

• Off Shore Finance:

The merchant bankers help their clients in the following


areas involving foreign currency.
(a) Long term foreign currency loans
(b) Joint Ventures abroad
(c) Financing exports and imports
(d) Foreign collaboration arrangements
• Non-resident Investment:

The services of merchant banker includes investment


advisory services to NRI in terms of identification of
investment opportunities, selection of securities, investment
management, and operational services like purchase and
sale of securities.

• Loan Syndication:

Loan syndication refers to assistance rendered by merchant


bankers to get mainly term loans for projects. Such loans
may be obtained from a single development finance
institution or a syndicate or consortium. Merchant bankers
help corporate clients to raise syndicated loans from banks
or financial institutions.

• Corporate Counselling:

Corporate counselling covers the entire field of merchant


banking activities viz. project counselling, capital
restructuring, public issue management, loan syndication,
working capital, fixed deposit, lease financing acceptance
credit, etc.
OBJECTIVES

The company was incorporated with the


following main objectives:
• Properly mobilizing the available talent, labor
and capital for the establishment, development,
expansion and diversification of productive and
employment oriented business in the rural as well
as cities and towns and to provide necessary
financial resources, technical & management
consultancy, technology & training for the same
and thereby actively contributing towards the
alleviation of poverty in the country.
• To provide quality & reliable financial services to
the general public by protecting the rights and
interest of the depositors and shareholders
• Mobilizing the financial resources from
company’s internal as well as from external sources
for the establishment, development, expansion and
diversification of agriculture, industry, service,
business and other commercially viable project in
the country and thereby helping the industrial,
business and agriculture development of the
country.
• To act as financial intermediary for the collection
of the scare financial resources spread all over the
country and mobilizing the same for the economic
development of the country through fair
competition.
What is the difference between
investment banks and merchant banks?
Merchant banks and investment banks, in their purest forms, are different kinds of financial
institutions that perform different services. In practice, the fine lines that separate the functions of
merchant banks and investment banks tend to blur. Traditional merchant banks often expand into
the field of securities underwriting, while many investment banks participate in trade financing
activities. In theory, investment banks and merchant banks perform different functions.

Pure investment banks raise funds for businesses and some governments by registering
and issuing debt or equity and selling it on a market. Traditionally, investment banks only
participated in underwriting and selling securities in large blocks. Investment banks
facilitate mergers and acquisitions through share sales and provide research and financial
consulting to companies. Traditionally, investment banks did not deal with the general public.

Traditional merchant banks primarily perform international financing activities such as foreign
corporate investing, foreign real estate investment, trade finance and international transaction
facilitation. Some of the activities that a pure merchant bank is involved in may include issuing
letters of credit, transferring funds internationally, trade consulting and co-investment in projects
involving trade of one form or another.

The current offerings of investment banks and merchant banks varies by the institution offering
the services, but there are a few characteristics that most companies that offer both investment
and merchant banking share.

As a general rule, investment banks focus on initial public offerings (IPOs) and large public and
private share offerings. Merchant banks tend to operate on small-scale companies and offer
creative equity financing, bridge financing, mezzanine financing and a number of corporate credit
products. While investment banks tend to focus on larger companies, merchant banks offer their
services to companies that are too big for venture capital firms to serve properly, but are still too
small to make a compelling public share offering on a large exchange. In order to bridge the gap
between venture capital and a public offering, larger merchant banks tend to privately place
equity with other financial institutions, often taking on large portions of ownership in companies
that are believed to have strong growth potential.

Merchant banks still offer trade financing products to their clients. Investment banks rarely offer
trade financing because most investment banking clients have already outgrown the need for
trade financing and the various credit products linked to it.
EMERGENCE OF MERCHANT BANKING
Introduction:

The Progress of any economy mainly depends on the efficient financial system of the
country. Indian economy is no exception of this. This importance of the financial
sector reforms affirms an effective means for solving the problems of economic,
financial and social in India and elsewhere in the developing nations of the world.
The progress of the securities Industry of any country depends mainly on the flow of
funds.Infact, Capital generation is the lifeblood of the capital market without which
the health and soundness of the financial system cannot be geared up and for which
well-developed capital market as well as money market is essential.

Reports in Merchant Banking in present trend:

A report document on "Merchant Banking under SEBI guidelines – A study of


Regulators in Developing Capital Markets" is the significant contribution of sarker De
and sushil Kanna. The regulations in question applied to investment or Merchant
Banking Services required for corporate issues of long-term securities in India.

Significant recommendations of the study:

* Regulation requiring all issues to be managed and certified by a Merchant Banker


chould be relaxed in case of rights offerings.

* The set of issues, which are placed through a public offering, will include all high
and low quality issues, will be placed through a rights offering.

* For the set of issues, which are placed through a public offering, further screening
can be achieved by making underwriting optional.

* For the screening mechanism in the preceding recommendation to be effective, the


current 90% subscription rule should be strengthened.

* SEBI's objectives of improving disclosure of private information and investor


protection can be achieved.

Ranking of Merchant Banking in India:

Merchant Banker OE FSS QPS QM INN


ICICI Securities 4.0 4.0 4.2 3.8 4.3
IDBI 4.2 3.2 4.5 4.0 4.8
SBI Caps 4.4. 3.9 4.6. 6.7 5.2
DPS 6.1 5.7 6.0 6.0 5.3
IFCI 6.1 5.7 6.0 6.0 6.3
Bank of Baroda 6.7 6.5 6.7 6.6 6.8
Jardine Fleming 5.8 6.2 5.9 5.0 5.5
JM Finance 6.0 6.5 5.5 5.9 5.4
ENAM 6.3 6.8 6.4 6.3 6.2
PNB Caps 6.8 6.8 6.7 6.8 6.8

Current situation
SEBI to segregate merchant banking
MUMBAI, May 30: The Securities and Exchange Board of India (SEBI) is planning to
ban merchant bankers from doing other business. This means finance companies which
are currently doing merchant banking business will have to set up new companies only
for the merchant banking business.

Currently finance companies come under the purview of the Reserve Bank of India while
their merchant banking activities are regulated by the SEBI. The SEBI move to segregate
merchant banking business from other businesses is expected to create a stir among
finance companies. If implemented, the number of merchant bankers are also likely to
come down as it will not be profitable for small finance companies to float separate
merchant banking firms.

Moreover, SEBI officials feel that the role of merchant bankers in the new scheme of
things has increased as they are involved in launching issues, book building, underwriting
and bought-out deals. Merchant bankers have to vet new issue applications before
submitting it to the SEBI.

SEBI is also looking into allegations of price rigging in several leading companies using
the money raised by CRB Mutual Fund. In another move, the market watchdog has
decided to bring about major changes in merchant banking regulations.

CRB Mutual Fund which collected Rs 229 crore through its Arihant Mangal scheme later
used this money to rig share prices of companies in the stock market.. ``We'll look into
this allegation,'' SEBI chairman D R Mehta said.

``It was a quid pro quo arrangement. While these companies chipped in funds when CRB
scheme opened for subscription, the understanding was that this money will be later used
to rig up prices of these companies,'' sources said.Two panels M P Chitale & Co in 1995
and Kalyaniwala & Mistry in 1997 -- appointed by the SEBI to inspect the books of the
CRB Mutual Fund had come out with reports indicting the actions of the fund.
List of recently updated merchant banks
in India
DSP MERRILL LYNCH LTD
Profile

Merchant Banking, Stock Broking, Primary Dealership in Government Securities, Distri-butition of


Securities
Product Category : Merchant Banking

Contact Details of Dsp Merrill Lynch Ltd.

Address Mafatlal Centre 10th Floor, Nariman Point

City Mumbai

Pincode 400021

State Maharashtra

Country India

Phone No 022 - 66328513

Fax No. 022 - 22875191

PRIME SECURITIES LTD


Debit and Equity Organisation. Issue Management Merger and Acquisition and Other advisory
Services, Stco Broking and Merchant Banking
Product Category : Merchant Banking

Contact Details of Prime Securities Ltd

Address Phoenix House , A Wing, 4th Floor, 462, Senapati Bapat Marg, Lower Parel

City Mumbai

Pincode 400013

State Maharashtra

Country India

Phone No 022 - 24981515


Fax No. 022 - 24970777

SICOM LTD
Profile

Merchant Banking Division Asso Merchant


Product Category : Merchant Banking

Contact Details of Sicom Ltd

Address Nirmal P B No11571 Nariman Point,

City Mumbai

Pincode 400021

State Maharashtra

Country India

Phone No 022 - 22023108

TATA FINANCE MERCHANT BANKERS


Profile

Finance Solutions
Product Category : Merchant Banking

Contact Details of Tata Finance Merchant Bankers Ltd

Address
15 Dubash House J N Hereda Marg Ballard Estate,

City
Mumbai

Pincode
400038

State
Maharashtra

Country
India

Phone No
022 - 22661471