Professional Documents
Culture Documents
Merchant Bank: Bachelor of Commerce (Banking & Insurance)
Merchant Bank: Bachelor of Commerce (Banking & Insurance)
MERCHANT BANK
SEMESTER-V
Submitted in Partial Fulfillment of the requirement for the award of the Degree of
Bachelor of Commerce
(Banking & Insurance)
By
BHARATI .N. SAH
PROJECT GUIDE
MR. NAVIN SARAF
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Merchant Banking
ACKNOWLEDGEMENT
We would like to thanks our parents, family members & all our
college friendswho gave us all the support and always came forward
whenever helping hand was needed.
Once again, we thanking all to them who directly & indirectly help us
for completing this project.
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Merchant Banking
EXECUTIVESUMMARY
Although merchant banking activity was ushered in two decades ago, it was only
in 1992 after the formation of Securities and Exchange Board of India that it is
defined and a set of rules and regulations in place. Today a merchant banker is
who has the ability to merchandise that is, create or expand a need and fulfill
capital requirements.
I have given an overview about the financial markets and the role of merchant
bankers in the growth of these markets. My project covers how the merchant banks
works, rules & regulations laid by SEBI & its impact on the merchant banking
activities. Their importance in the economy is expected to grow even further in the
coming years with an increasing proportion of household savings getting invested
in corporate & other securities. Hence, my project covers the challenges and
advantages, which India will get and is getting by merchant banking activities. I
have covered several services provided by Merchant Bankers & the role of
Merchant bankers in providing those services to the business world.
Finally, the top players, which exist in merchant banking, are also covered; their
services are also been focused. To get the practical knowledge about merchant
banking activities I have interviewed visited State bank of India, Kotakmahindra
bank and SPA Merchant bankers ltd.
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Merchant Banking
EVOLUTION OF BANKING
The banking system in India is based upon the British Banking System which is
largely branch banking. Commercial Banks in India were started during the latter
half of the 19th century. Three Presidency Banks dominated the banking sector i.e.
BANK OF BENGAL, BANK OF BOMBAY, and BANK OF MADRAS. These
banks were setup by a special charter of the British Government.
The above three banks were later amalgamated to form one bank called, the
IMPERIAL BANK OF INDIA under the Imperial Bank of India Act, 1920. The
Imperial Bank carried on the business of commercial banking as well as managed
the public debt office of the Central and the State Government. The government
continued to handle the issuance of currency notes and coins until Reserve Bank of
India was set up in 1935.
The second half of the 19th century saw the establishment of a number of private-
sector banks such as Bank of Baroda, Allahabad Bank, and Punjab National Bank.
At that time there was an indiscriminate growth of smaller banks in the private
sector. These banks were set up by merchants and traders who combined trading
with banking.
The progress of any economy mainly depends on the efficient financial system of
the country. Indian economy is no exception financial system of the country. The
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.
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Merchant Banking
DEFINITION OF BANKING
The Oxford Dictionary defines bank as “an establishment for the custody of
money, which it pays out on a customer’s order”
Banking Company of India has been defined in the Banking Companies Act,1949
as, “one which transacts the business of banking which means the accepting for the
purpose of lending or investment of deposits of money from the public, repayable
on demand or otherwise and withdraw by cheque, draft, order or otherwise”
The term merchant banking is used differently in different countries and so there is
no precise definition for it. In London, merchant banker refers to those who are
members of British Merchant Banking and Securities House Association who carry
on consultation, leasing, portfolio services, assets management, Euro credit, loan
syndication etc. In America, merchant banking is concerned with mobilizing
savings of people and directing the funds to business enterprise.
The poet war period witnessed the rapid growth of merchant banking through the
innovative instrument like Euro dollar and the growth of various financial centers
like Singapore, Hong Kong, Bahrain, Kuwait, Dubai etc.
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In India prior to the enactment of Indian Companies Act, 1956, managing agents
acted as issue houses for securities, evaluated project reports, planned capital
structure and to some extent provided venture capital for new firms. Few share
broking firms also functioned as merchant bankers.
The need for specialized merchant banking service was felt in India with the rapid
growth in the number and size of the issues made in the primary market. The
merchant banking services were started by foreign banks, namely the National
Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in
its report in 1972 recommended the setting up of merchant banking institutions.
This marked the beginning of specialized merchant banking in India.
To begin with, merchant banking services were offered along with other traditional
banking services. In the mid-eighties, the Banking Regulation Act was amended
permitting commercial banks to offer a wide range of financial services through
the subsidiary rule. The State Bank of India was the first Indian Bank to set-up
Merchant Banking Division followed by Bank of India, Bank of Baroda, Canara
bank, Punjab National Bank and UCO Bank. The merchant banking gained
prominence during 1983-84 due to new issue boom.
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Important reason for the growth of merchant banking is due to exerting excess
demand on the sources of funds forever expanding industry and trade.
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
Merchant banks can play highly significant role in mobilizing funds of savers to
investible channels assuring promising return on investments activity.
With the growth of merchant banking profession corporate enterprises in both
public and private, sectors would be able to meet the growing requirements for
the funds for establishing new enterprises, undertaking
expansion/modernization/diversification of the existing enterprises.
Merchant banks have been procuring impressive support from capital market
for the corporate sector for financing their projects.
Merchant bankers advise the investors of the incentives available in the form of
tax relief’s, other statutory relaxations, good return on investment and capital
appreciation in such investment to motivate them to invest their savings in
securities.
Thus, the merchant bankers help industry and trade to raise funds, and the
investors to invest their saved money in sound and healthy concerns with
confidence, safety and organizations for higher yields.
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Merchant Banking
The role of merchant banker is dynamic in the wake of diverse nature of merchant
banking services. Merchant banker’s dynamism lies in promptly attending to the
corporate problems and suggests ways and means to solve it. The nature of
merchant banking services is development oriented and promotional to help the
industry and trade to grow and survive. Merchant banker is, therefore, dedicated to
achieve this objective through his dynamism. He is always awake to renew his
skills, 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.
He has to keep pace with the changing environment where Government rules,
regulations and policies affecting business conditions frequently change; where
science and technology create new innovations in production processes of
industries envisaging immediate renovations, diversification, 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.
Merchant banker has to think and devise new instruments of financing industrial
projects. He has to assume wider responsibilities of saving industrial units from
going sick and guiding industries to be set up industrially backward areas to
eliminate regional imbalances in industrial development of the country. He has to
guide the wider section of the community possessing surplus money to invest in
corporate securities and other productive investment channels. He has to help the
industry in different forms to ensure that it runs risk free and devoid of uncertainty
by assisting the has to watch the interest and win over the confidence of the
Government, its agencies, along with the entrepreneurs, the investors and the
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To discharge the above role, a merchant banker has t be dynamic. For this reason, a
merchant banker is sometimes, called M.B i.e. Moving Bottom, i.e., one who never
sits at one place, always moving- attending meetings and meeting clients and
constituents, doing business and getting business by attending meetings and
conferences, imparting knowledge to others and acquiring new knowledge to
maintain his supremacy in possession of latest information. His role depicts a
personality cult, which is unique and envious to be followed by others.
The Securities and Exchange Board of India (SEBI) has stated that merchant
bankers must be involved more closely in the market making process as share
brokers do not have the requisite expertise to evaluate the fundamentals of the
scrips before taking over the role of market makers. Further, share brokers
generally being partnership; firms do not have the financial clout which is
necessary for market making activity. Resultantly, the SEBI has suggested that any
member of the stock exchange along with one merchant banker registered with
SEBI could act as a market maker.
The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate
greater movement, which could only be achieved through the institution of market
makers. Market makers would also create a market for the scrip’s by offering two
way quotes to the investors. A minimum of ten scrip’s has been proposed by SEBI
for the market makers.
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The capital adequacy requirement for category I, merchant banker is that the net
worth should not be less than Rs.1 crore.
The banker would be allowed for:
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
subscription and act as Advisor, Consultant, Manager, underwriter or portfolio
manager.
The category III, Merchant Banker should have a minimum network of Rs.20 lakhs
to meet the capital adequacy requirements. The possible activities are to act as
underwriter, adviser and consultant to an issue.
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The financial institution in India could not meet the demand for long-term funds
required by the ever expanding industry and trade. The corporate sector
enterprises, therefore, meet their requirements through issue of shares and
debentures in the capital market. To raise money from capital market, promoters
bank upon merchant bankers who manage the whole show by rendering
multifarious services. The merchant bankers also advise the investors of the
incentives available in the form of tax reliefs and other statutory obligations.
Corporate Counseling
Project Counseling
Capital Restructuring
Credit Syndication
Issue Management and Underwriting of public Issue
Public Issue Through Prospectus
Marketing
Pricing Issue
Managers, Consultants or Advisers to the Issue
Portfolio Management
Advisory Service Relating to Mergers and Takeovers
Foreign Currency Financing(Off Shore Finance )
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CORPORATE COUNSELING
It aims at rejuvenating old-line companies and ailing units, and guiding existing
units in locating areas of growth and diversification. A merchant Banker as
managerial economists guides the client on aspects of organizational goals
locational factors, organization size and operational scale, choice of product and
market survey, forecasting for a product cost reduction and cost analysis allocation
of resources investment decisions capital management and expenditure control
pricing methods and marketing strategy, etc. As a financial and investment expert a
merchant banker guides corporate clients in areas covering financial reporting,
project measurement, working capital management, financial requirements and
sources of finance, evaluating financial alternatives, rate of return and cost of
capital, besides providing basic corporate services such as financial rearrangement,
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Guidance
Project formation
O
B Implementation
J
E
C
T Modernization
I
V
E Diversification
S
Mobilising Resources
Raising Working
Capital
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6. Arranging for the approval of the financial institutions/ banks for schemes of
rehabilitation involving financial reliefs, etc.
7. Providing assistance in getting soft loans from financial institutions for capital
expenditure, and the requisite credit facilities from the bank.
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PROJECT COUNSELING
The financing mix is to be decided keeping in view the rules, regulations and
norms prescribed by the government or followed by financial institutions. The
projects are appraised, as to the location, technical, commercial and financial
viability of the project. Project counseling also includes filling up of application
forms with relevant information for obtaining funds from financial institutions.
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2. Role Clarity
Things are not clear for two people working in the same room unless clear
distinction between responsibilities is made. Detail out expectations and roles of
EVERYONE down to the last resource in detail. For most part people on both
sides have not seen each other’s face or known each other personally so nothing
should be assumed!
3. Communication
Nothing is more important than regular and sustained communication. It can help
to have a Weekly conference call between different groups at the start of the week
and a complete Project status conference call at the end of the week to check
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status. People need to vent out their feelings and exchange their minds - let them!
Indians, and most Asians, are in general non-confrontational so being extra patient
and sensitive with the offshore resources while eliciting views. More than normal
communication helps catch potential problems early on.
Encourage the team members to create their detailed profile in the Project Portal (if
you have one) along with their pictures. It helps to “personalize” the name people
deal with. Use an IM (maybe Skype?) as the most preferred communication on real
time basis - it can be fast and real-time.
5. Detailed Tracking
Prepare three or four different metric charts, for example, on number of test cases,
defects opened, rework efforts, number of rebuilds, frequency of defect arrival,
duration of resolution, composite effort logged during the week, etc. Make sure
people fill the metrics and circulate to all stake-holders. People need to appreciate
each other’s work and know the faulting metrics.
6. Detailed Planning
Provide cushion in schedules and committed dates. There is always some
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unexpected/urgent activity which will hurt the on-going task. We are talking about
a different nation here where a lot of things may happen differently. The vacation
and holiday schedules for the offshore members should be obtained well in
advance and built in into the work plan.
Make sure that the combined team schedule is known to everyone and posted on a
common drive/access area. Have your build schedule ready for the month in
advance. This will help developers plan in advance what code they want to check
in. No last minute rush or hitch.
7. Transition Planning
Plan your transition very meticulously; viz. skills, machines, docs etc. Many
people are not given opportunity to learn what they are expected to do. The out-
going people don’t like to spend any effort on hand-over, as they have no more
stakes left in the project. Make sure that people who have made sacrifices of
leaving their families and come on a project in a different
culture - most of them for the first time - feel appreciated for the work that was
accomplished.
8. It’s a Partnership
Normally, the onshore people tend to take a view that since they are facing the
customer so they should decide what is good for project. Do not let onshore people
dominate or “boss” the off-shore team. If off-shore team looses motivation or
interest, the whole thing falls flat. As it is, off-shore team is working on limitations
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of not seeing the client, give them as much “light” as possible on how things are
here. Do not hide things from them. Let them feel a part of marketing team too. Do
not treat them as back office boys. Bring them in front line as equal partners.
9. Rotation
Have a rotation of people between off-shore and on-site team. They will appreciate
each other. The bottomline, therefore, is prepare and plan well and be tuned into
the cultural differences to use the strengths of the synergies!!
CAPITAL RESTRUCTURING
Activities that are carried out to assist projects in achieving their maximum
potential through effective capital structuring and to suggest various strategies to
widen and restructure the capital base, diversify operations and implement schemes
for amalgamations, merger or change in business status are collectively known as
Capital Restructuring Services’.
Under the gamut of capital restructuring services merchant bankers provide advice
to companies governed by FERA on disinvestments to their maximum advantage
and restructuring the capital for ailing or sick units. Capital restructuring is
undertaken by analyzing the capital structure ratios and the debt service coverage,
with overall impact on fund-generating capacity of the client corporate unit.
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1. Examining the capital structure of the client company to determine the extent
of capitalization required.
5. Critically examining tax implications where the proposal involves offer for sale.
6. Suggesting the ideal capital restructuring for sick units and advising the client
companies on the extent and means of bringing fresh capital into business.
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CREDIT SYNDICATION
2. Drawing up a financing plan for the total project cost which conforms to the
requirements of the promoters and their collaborators, financial institutions and
banks, government agencies and underwriters.
3. Preparing loan application for financial assistance from term lenders/ financial
institutions/ banks and monitoring their progress including pre-sanction
negotiations.
5. Follow-up of term loan application with the financial institutions and banks and
obtaining the approval for their respective share pf participation.
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Mumbai, March 29
RELIANCE Industries Ltd has concluded a loan syndication of $250 million (Rs
1,125 crore). The transaction is the first major syndication since Moody's upgraded
India'sratings to Investment grade.
The lead arrangers for the syndication were ANZ Investment Bank, BA Asia Ltd,
Credit Lyonnais, DBS Bank Ltd, Hong Kong and Shanghai Banking Corporation
Ltd and Mizuho Financial Group, a news release said. The deal was sub-written by
three banks - Arab Investment Company S. A. A., Bank of Tokyo Mitsubishi Ltd
and NORD/LB NordeutscheLandesbankGirozentrale, Singapore Bras risks of
lending increase due to rising interest rates, banks are also looking at loan
syndication as an important contributor to their fee income.
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Public limited companies can raise capital by issue of shares and debentures from
the public. For this purpose they have to complete a certain procedure, which is
laid down in the Companies Act, 1956 as well as Securities and
Exchange Board of India. The public issue of shares or debentures can be managed
by category I Merchant Bankers and constitute the most important aspect of their
services. The public issue of companies involves marketing of issues.
Pre-issue management:
issue.
d) Advise to company to appoint auditors and legal advisors.
f) Obtaining consents from all parties and agencies acting for the issue to be
enclosed with the prospectus.
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c) To ensure that the refund orders, allotment letters are issued within prescribed
time limit.
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MARKETING
After dispatch of prospectus to SEBI, the merchant bankers arrange 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.
Publicity campaign covers the preparation of all publicity material and brochures,
prospectus, announcement, advertisement in the press, radio, TV, investors
conference etc. The merchant bankers help choosing the media, determining the
size and publications in which the advertisement should appear.
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Merchant Banking
PRICING OF ISSUES
The SEBI guidelines 1992 for capital issues have opened the capital market to free
pricing of issues. Pricing of issues is done by companies themselves in consultation
with the merchant bankers. Pricing of issue is part of the pre issue management.
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The managers to the issue assist in the drafting of prospectus, application of 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 are free to appoint one or more
agencies as managers to the issue. SEBI guidelines insist that all issues should be
managed by atleast one authorised merchant banker. Ordinarily, not more than two
merchant bankers should be associated as lead managers, advisers and consultants
to a public issue. In issues of over Rs. 100 crores, upto a maximum of four
merchant bankers could be associated as managers.
PORTFOLIO MANAGEMENT
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Merchant Banking
Merchant Bankers provide portfolio management service to their clients. Today the
investor is very prudent. Every investor is interested in safety, liquidity and
profitability of his investment. But investors cannot study and choose the
appropriate securities. They need expert guidance. Merchant bankers have a role to
play in this regard. They have to conduct regular market and economics surveys to
know,
1) Monetary and fiscal policies of the government.
2) Financial statements of various corporate sectors in which the investments have
to be made by the investments.
3) Secondary market position, i.e., how the share market is moving
4) Changing pattern of the industry.
5) The competition faced by the industry with similar type of industries.
The merchant bankers have to analyse the surveys and help the prospective
investors in choosing the shares. The portfolio managers generally will have to
classify the investors based on capacity and risk they can take and arrange
appropriate investment. Thus, portfolio management plans successful investment
strategies for investors.
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The various functions that form part of this activity are as follows.
1) Undertaking management audits to identify areas of corporate strength and
weakness in order to help formulate guidelines and directions for future growth.
2) Conducting exploratory studies on a global basis to locate overseas markets
foreign collaborations and prospective joint venture associates.
3) Examining the pros and cons of proposals and formulating schemes for
financial reconstruction, merger and acquisition.
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5) Arranging foreign currency loans under buyer’s credit scheme for importing
goods.
7) Providing assistance in obtaining export credit facilities from EXIM bank for
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export of capital goods, and arranging for the necessary government approvals and
clearance.
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term and short term funds. They assist in bill discounting, placement of
Commercial Paper, arrange line of credit, place inter corporate deposits. They act
as intermediaries. They liaison with raring agencies for rating of CP and ICDs.
Merchant bankers undertake the following activities as part of providing this type
finance:-
1. Assessment of working capital requirements.
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involved.
Term Loans
To support capital expenditures for setting up new ventures as also for expansion,
renovation etc.
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Corporate Loans
For a variety of business related purposes to corporates.
Export Credit
To Corporates / Non Corporates
In order that the bill accepting and discounting takes place on sound lines it is
imperative that the firms involved command a good reputation and financial
standing. Further collecting credit information and rating the credit-worthiness of
the parties concerned are very much part of this function. In developed money
market like London and New york, there are specialized agencies such as discount
houses and acceptance houses, that play an active role in promotion of this
function. In India, RBI takes special care in developing the bill market.
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VENTURE CAPITAL
A specially designed capital as form of equity financing for funding high-risk and
high-reward projects, is known as “venture capital.” Originated in the USA in the
1950s, when business magnates like Rockefeller financed new technology
companies. The concept became more popular during the sixties and seventies,
when several private enterprises undertook the financing of high-risk and high
reward projects in India. Venture capital companies have largely contributed to the
technological and industrial revolution.
and ICICI are managed in venture capital financing, and the developed a number
of special schemes for this purpose.
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LEASE FINANCING
Example of Leasing
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MUTUAL FUNDS
Institutions and agencies that are engaged in the mobilization of the savings of
innumerable investors for the purpose of channeling them into productive
investments of a wide variety of corporate and other securities are called ‘Mutual
Funds’. UTI is the first and the largest mutual fund in the country. The mutual
funds industry has a large number of players, both in the public as well as the
private sector.
Commercial banks are also making rapid strides in the realm of mutual funds
business.
Some of the services rendered by mutual funds are as follows.
1) Mopping up public savings.
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a joint venture between Prudential Plc, Europe's leading insurance company and
ICICI Bank, India's premier financial institution.
Prudential Plc holds 55 per cent of the asset management company and the balance
by ICICI Bank. In a span of just over six years, Prudential ICICI Asset
Management Company has emerged as one of the largest asset management
companies in the country.
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Merchant bankers extend the following services as part of providing relief to sick
industries.
1) Rejuvenating old-lines and ailing units by appraising their technology and
process, assessing their requirements and restructuring their capital base.
2) Evolving rehabilitation packages which are acceptable to financial institutions
and banks.
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Merchant Banking
Formal merchant banking activity in India was originated in 1969 with Merchant
Banking Division set up 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. Other foreign banks like City Bank, Chartered Bank also
assumed the merchant banking activity in India. State Bank of India started
merchant banking in 1973 followed by ICICI in 1974. Both these Indian merchant
bankers emerged as leaders in merchant banking having done significant business
during the period of 1974-1987 in comparison to foreign banks. The early and
mid-seventies witnessed a boom in the growth of merchant banking organizations
in the country with various commercial banks, financial institutions, and broker’s
firms entering in to the field of merchant banking.
The early growth of merchant banking in the country is assigned to the Foreign
Exchange Regulation Act, 1973 (FERA) where under large number of foreign
companies operating in India were required to dilute their foreign holdings in order
to continue business in the country.
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2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization
of merchant bankers. Small but professional and specialized merchant bankers who
do not have a net worth of Rs.1 crore may have to close down their business. The
entry is denied to young, specialized professionals into merchant banking business.
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4. Applicant has to be a body corporate and should not be an NBFC carrying out
activities other than those of merchant bankers as specified above. It should not
accept or hold public deposits. At least 2 merchant banking experienced persons
should be in employment.
5. Should fulfill capital adequacy criteria as specified by SEBI from time to time.
6. Merchant banker other than a bank or a [ public financial institution] who has
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been granted a certificate of registration under these regulations should not carry
on any business other than that in the securities market.
7. Every merchant banker should furnish to the Board half- yearly unaudited
financial results when required by the Board with a view to monitor the capital
adequacy of the merchant banker.
8. All the issues should be managed by at least one merchant banker functioning
as the lead merchant banker.
Officer should immediately and independently report to the Board any non-
compliance observed by him.
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CURRENT SCENARIO
Merchant banking is an area that we need to build and grow in the years to come.
As India forms part of the global village, it becomes increasingly necessary for us
to look at this business in a more holistic manner.
Obviously, international players with strong domestic partners such as DSP Merrill
Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with experienced
organizations like Enam and institutional backed investment bankers such as ICICI
Securities, etc., are the ones who have expertise, muscle, and placement power in a
greater measure than relatively new entrants.
The red hot economy is the obvious starting point. India is likely to end the year
with GDP growth in excess of 7 percent. Companies and private equity investors
are sitting on large piles of cash. In 2006 deal activity was largely restricted to the
IT and Telecom sectors.
Thus, while there is a steady flow of deals, there is now a shortage of talent to do
the job.
Merchant Banking activity was formally initiated into the Indian capital
markets when Grindlays Bank received the license from Reserve Bank in 1967.
Grindlays which started with management of capital issues, recognized the needs
of emerging class of entrepreneurs for diverse financial services ranging from
production planning and system design to market research. Apart from meeting
specially, the needs of small-scale units it provided management constancy
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services to large and medium sized companies. Following Grindlays Bank, Citi
Bank set-up its Merchant Banking division in 1970. The division took up the task
of assisting new entrepreneur and existing units in the evaluation of new projects
and raising funds through borrowing and issue of equity. Management consultant
services were also offered. Consequent to the recommendations of Banking
Commission in1972, that Indian bank should start Merchant Banking Division in
1972. In the initial years the SBI’s objective was to render corporate advice and
assistance to small and medium entrepreneurs
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Merchant Banking
The Merchant Banking scenario in developed countries like USA and UK are
different from Indian Merchant Banking activities. The Merchant banker is also
called as Investment Bankers. A brief outline of Merchant Banking in USA and
UK has shown in the following paragraphs.
Merchant Banks in UK
In United Kingdom, Merchant Banks came on the scene in the late eighteenth
century and early nineteenth century. Industrial revolution made England into a
powerful trading nation. Rich merchant houses that made their fortunes in a
colonial trade diversified into banking. Their principle activity started with the
acceptance of commercial bills pertaining to domestic as well as international
trade. The acceptance of the trade bills and their discounting gave rise to
acceptance houses, discount houses, and issue houses. Merchant Bankers initially
included acceptance houses, discount houses and issue houses. A Merchant
Banker was primarily a merchant rather than his customers entrusted banker but
him with funds. Merchant Banks in UK:
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They also used to finance sovereign government through grant of long-term loans.
Since the end of Second World War commercial banks in Western Europe have
been offering multiple services including Merchant Banking services to their
individual and corporate clients. British banks set-up division or subsidiaries to
offer their customers Merchant Banking services.
Merchant banks make the primary markets in USA, arrange mergers and
acquisitions, undertake global, custody, proprietary trading and market making,
niche business, fund management and advisory services to governments and firms.
The increased regulation and control of domestic operations gave a fillip to large
US banks to undertake Merchant Banking functions in international capital
markets. The US investments Banks have extended their operations to the
international level. They are largely responsible for the development of the Euro-
dollar market in the securities and globalization of capital markets. They have a
prominent presence in London and other European financial centers. Merchant
Banks have today a strong parent, a strong balance sheet and a strong international
network to play a global role.
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Merchant bankers are individual experts who organize and manage the merchant
banks. The operations of merchant banks are, therefore, influenced by the
personality trait of these individuals. For the success of merchant bank’s
operations, the qualities which merchant bankers should have are discussed
below:-
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a merchant banker mixes with the people, gathers information, obtains business
mandate and renders satisfactory services to the clients. Friendliness and
cooperation must flow as natural traits in the merchant banker to win the trust of
the clients.
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To the Investors
Investor protection is fundamental to a healthy growth of the Capital Maerket.
Protection is not to be conceived as that of compensating for the losses suffered.
The responsibility of the Merchant Banker in ensuring the completeness of the
disclosures is of paramount importance in view of the fact that entire reliance is
based on offer Document either Prospectus or Letter of Offer because an
independent agency like a Merchant Banker has done the scrutiny.
Capital structuring
The Merchant Bankers while designing the capital structure take into account
the various factors such as Leverage effect on earnings per share, the project
cost and the gestation period, cash flow ability of the company, the cost of
capital, the considerations of management control, size of the company, and
general economic factors. These exercise are done mainly in order to meet the
fund requirement of the company taking due cognizance of the investor’s
preference.
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Legal aspect
The factors that are looked into in case of the legal aspects are:
Compliance with the SEBI guidelinesand the various guidelines issued by the
Ministry of Finance and Department of CompanyAffairs.
Pending litigation’s towards tax liabilities or any criminal/civil prosecution any
of the directors for any offenses.
Fair and adequate disclosures in the prospectus.
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The term ‘Merchant Banking’ originated in the 18th and early 19th centuries in the
United Kingdom when trade between countries was financed by bills of exchange
drawn on the principal merchant houses. With the increase in international trade,
the established merchants started the practice of lending their names to the new
comers and accepting the bills of exchange on their behalf. They would charge a
commission for the purpose and thus acceptance business became the hallmark of
Merchant Bankers. Once these banks had gained the confidence of the
government, they also entrusted with the job of issuing bonds in the London
market.
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1. ENAM
Equity debt/syndication:
Corporate Restructuring: -
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ENAM also provide the seed stage services, value creation services and IPO’s
advisory services which are represented below:
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2. ICICI SECURITIES
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Infrastructure Advisory: -
ICICI Securities Limited has a dedicated infrastructure vertical focused on
assisting clients in identifying and capitalising on the opportunities thrown up
by the all pervasive boom in the Indian infrastructure sector.
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4. CITIGROUP
Citigroup Corporate and Investment Banking achieve the extraordinary for our
clients around the world. No financial institution is more committed to advancing
the goals of its clients—our diverse and talented staff in more than 100 countries
advises companies, governments and institutions on the best ways to realize their
strategic objectives. We create solutions for and provide the broadest possible
capital and market access to thousands of issuer and investor clients. And no
institution better executes the increasingly complex payment and cash management
solutions required in today's global economy. The features Citigroup are as
follows: -
Over the years, Citigroup has established a track record of outstanding business
milestones such as Cash Management, pioneered by Citigroup in 1986 and
utilized by over 900 Corporates with through-puts totaling around $ 35 billion
(8% of India's GDP).
It is India's largest foreign bank in the FX (foreign exchange) market with a 14
per cent market share.
As the leading custodian, Citibank has over $22 billion of custody assets under
management.
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DSP Merrill Lynch Limited (DSPML), among India's leading investment banking
and brokerage company, is a culmination of a long standing relationship between
DSP Financial Consultants Ltd., and Merrill Lynch & Co., the leading international
capital raising, financial management and advisory company. DSPML is a full
service investment bank and broking company with leadership position in M&A,
Capital
Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory
services. Euro money Magazine has ranked DSPML as the "Best Domestic
Securities firm in India" for the last four consecutive years. This Transaction
heralds DSPML as a key player in the private equity market. The service features
of DSPML are as follows: -
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Through direct market's group, DSPML offers investors access to every major
initial or subsequent public offering.
DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked
offerings across domestic and international markets. By leveraging their
extensive knowledge of local markets and global resources, they have delivered
innovative and customized solutions to their clients.
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Decades ago UPFC has taken a humble step for the industrial development
of U.P. by providing term loan assistance to small & medium scale units. Since
then it has acquired a matured professional approach in Industrial Financing,
several small-scale units nurtured by UPFC has groomed into big enterprises.
In order to meet the challenges of liberalized policy of the Government & Changed
economic Scenario, UPFC has started Merchant Banking & other financial
Services to serve its valued clients. UPFC, a category-I Merchant Banker with
unmatched expertise in project appraisal and term lending offers a whole gamut of
Merchant Banking Services.
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4. Advisory services: UPFC, with its long experience, advises its clients for
various advisory services such as capital Structuring, loan syndication etc.
5. Project certification: UPFC also certifies the projects going to capital
markets for raising funds. This is a specialized activity of the Corporation.
6. Other financial services: As a part of its commitment to provide
professionalized financial services to its clients, UPFC also offers Bill
Discounting, Equipment Leasing & Hire Purchase Services, Short- term loan,
Brand Equity loan, etc to meet diversified requirements of it's clients
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7. JM Morgan Stanley
US$ 20MM fund raising for Nipuna Services (a BPO subsidiary of Satyam
Computer Services)
Rs. 3,219 MM preferential allotment of equity shares/ warrants in Bajaj Auto
Finance Limited to financial investors and the promoter, Bajaj Auto Limited.
JM Morgan Stanley has a dedicated group that regularly interacts with over 40
financial investors in India as well as overseas.
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Time and again the Merchant banking Industry in India witnessed, experienced and
underwent significant changes. The very purpose for which these firms are
commences their services should be taken care of and they should mould their
policy decision and activities to move in tune with the main objectives of
Investor’s protection and to create healthy environment in capital markets. No
doubt, Merchant Banking firms are subject to a host of control measures,
regulations and rules framed and guided by SEBI. To some extent, frequent
changes and /or amendments to policies and control measures, though needed for
smooth working of the securities Industry, proves to be detrimental to the very
existence of the Merchant Banking system in the country. The SEBI’s Act 1992
confers power upon SEBI to supervise and control the affairs of the Merchant
Banking firms in India.
The various studies which had been undertaken in India for evaluating the
performance of Merchant Banking firms and the implications of these on securities
industry. No single study has been emerged so far pertaining to the evaluation of
Merchant Banking firms and in-depth study on their activities as well as
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Merchant Bankers have reason to believe they will be handicapped without the
marketing support. But the worst sufferer would be the investor, especially the
small investor it is this class, which forms the backbone of the capital market. As a
result of the ban, the small investor would be deprived of the opportunity to study
the corporate profile of the Issuer. In the absence of adequate information, they
will have to depend on manipulated facts and information fed by unreliable
sources.
Besides, there are larger issuers arising out of SEBI’s action. From the point of
view of liberalisation of the economy, SEBI has taken a retrograde step. A market
economy flourished through bigger markets, higher sales and lesser profits. To
achieve this performance, a company needs an aggressive marketing plan and
advertising effort is the main thrust to such a plan. No marketing plan can be
worthwhile unless it is backed by an effective advertising plan. The ban imposed
by SEBI nips the marketing plan in the bud.
For the merchant banking division, the development of new services to meet the
changing market conditions is an ongoing process. Today the entire merchant
banking industry in India is faced with the challenge of attracting Non-resident
Indian (NRI) investments into India particularly under the scheme for portfolio
investments through stock exchanges. Despite the several policy liberalizations
which have been announced by the Government in the past year, the response from
NRIS, to date is far below expectations. One important reason for the poor
response to the portfolio investment scheme is quite clearly the lack of information
with the non-resident investor perturbed regarding the changing conditions in the
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Indian stock markets. The Merchant Banking divisions is now in the process of
introducing a comprehensive portfolio advisory service which will try to fill up this
information gap, offer expert counseling on investment opportunities undertake to
buy / sell orders, periodically evaluate the portfolio and look after all the
administrative formalities, such as attending to tax returns, collections and
remittances of dividends, etc. in compliance with the Reserve Bank of India’s and
Securities and Exchange Board of India (SEBI) guidelines.
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Conclusion
Merchant banking essentially involves selling an issue for a company and handling
related work. in the wake of liberalization of the financial sector, we are seeing
certain merchant banking prospects emerging – be it an Indian company or foreign
or a multinational, playing in the primary and secondary markets competitively.
They are the prima donnas of the primary stage. There are about 1200 merchant
bankers in the country of which the SEBI has granted registration to 790 merchant
bankers in four different categories. SEBI also granted registration to 36
underwriters and 8 portfolio managers on the basis of its rules and regulations,
1993, upto the end of March 1995. They compete on an average for about RS.
15,000 crore every year. They act as lead managers, co-managers, financial
advisors, etc. The domination of the public sector continues, with seven of the top
ten managers coming from
its ranks. The mushroom growth of merchant banks has given rise to unethical
means to sell shares. For a healthy growth of the market operation, the SEBI
should enforce strict control on merchant banks and remove the weeds of
manipulation and corruption in the market. Stipulation of proper checks and
regulation will raise the confidence of investing public in the dynamic and vibrant
market mechanism which will be in the larger interests of the society as well as of
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economy.
Infact, merchant banks should replace brokers in trading, in course of time so that
the market operations will be beneficial both to the industrial sector and investor as
well as other operations in the primary and secondary markets. And the merchant
bankers should also pass on the profits to investors, depositors and shareholders
equitably.
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 what are 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 system.
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BIBLIOGRAPHY
BOOKS REFFERED
Merchant Banker – H.R. SUNEJA
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WEBILOGRAPHY
www.google.co.in
www.yahoo.com
www.economictimes.com
www.jmmorgansranley.com
www.dspml.com
www.sebi.com
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