METHODOLOGY

 Quantitative aspect:-

Primarily various books on merchant banking were read to know various

features and principle used in working of the industry. Moreover, various magazines were
read to know about the latest happening in this field.
Websites were visited and information regarding different aspect, to get a better
knowledge on the topic was collected. Various websites were visited so as to study the
important of merchant banking in the ever rising competition in today’s world.

 Qualitative aspect:-

MR. NAVNEET (Anand rathi) was approached and interviewed, and

implementation and scope of merchant banking was understood through his expertise in
the field. Some analysis was done for different cases so as to understand different strategies
in different situation,
MR. Kotiyal (share khan) was also approached to give an insight on the future of
merchant banking in India and the current scenario
 EXECUTIVE SUMMARY
Merchant banking an overview:-

Company raises capital by issuing securities in market. Merchant bankers at as

intermediaries between the issuer of capital and the ultimate investor who purchase these
securities.
Merchant banking……. is the financial intermediation that matches the entities that
need capital and those that have capital? It is function that facilitates the flow of capital in the
market.

Scope of merchant banking activities:-

Merchant banking activities helps:

 In channel sing the financial surplus of the general public into productive investment
avenues.
 To coordinate the activities of various intermediaries to the share issue such the
registrar, banker, advertising agency, printers, underwriters, brokers etc.
 To ensure the compliance with rules and registration governing the securities market.
 Functions of a merchant banker…..

The following comprise the main functions of a merchant banker:

1. 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
includes : instrument designing, pricing the issue, registration of the offer document,
underwriting support, and marketing of the issue, allotment and refund, listing on
stock exchanges.

2. Placement and distribution:-

the merchant banker helps in distributing various securities like equity
shares ,debt instrument, mutual fund product, fixed deposit, 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
consist of mutual fund, foreign institutional investor, private equity funds, pension
fund, financial institution etc. the size of such a network represents the wholesale
reach of the merchant banker. The retail network depends on networking with
investors.

3. Corporate advisory services:-

Merchant bankers offer customized solutions to their client’s financial
problems. The following are the main areas in which their advice is sought.

4. Financial structuring:-
Includes determining the debt-equity ratio and gearing ratio for the client:
the appropriate capital structure theory is also framed. Merchant banker also
explores the refinancing alternatives of the client and evaluate cheaper source of
fund. Another area of advice is habilitation and turnaround management. In case of
 sick units, merchant banker may design a revival package in coordination with
banks and financial institution. Risk management is another area where advice from
a merchant banker is sought. He advice the client on different hedging strategies and
suggest the appropriate strategy.

5. Project advisory service:-

Merchant banker help their clients in various stage of project undertaken by
the clients. They assist them in conceptualizing 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 document like
the detail project report.

6. Loan syndication:-
Merchant banker arranges to tie up loans for their clients. This take place in a
series of step. Firstly they analyze the pattern of the clients cash flows, based on
which the terms of borrowing can be defined. Then the merchant banker prepares a
detailed loan memorandum, which is circulate to various banks and financial
institution and they are invited to participate in the syndicate. The banks then
negotiate the terms of lending on the basis of witch the final allocation is done.

Registration of merchant banker….

Registration with SEBI is mandatory to carry out the business of merchant

banking in India. An application should comply with the following norms:

 The applicant should be a body corporate.

 The applicant should not carry on 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 cores

Introduction
The history of origin and growth of merchant banking throughout the
world, as discussed in the forgoing paragraphs, has established, beyond doubts, the
fact that the role of the merchant banker had never been determined. They had
followed strategy of assuming different roles according to the need of need of time
to maintain their existence in the business environment. This is one of the reasons
that no fixed definition cold be ascribed to “MERCHANT BANKING”.
Very commonly, the merchant banking has been defined as to what a
merchant banker does. This is well convinced definition that could be given to any
service oriented industry. The definition given by different authors explaining the
meaning of merchant banking revolved around the role played by merchant banks.
There role and scope of such role have enlarged with the passage of time. The survey
of the existing literature in the foregoing pages reveals that merchant banking is a
non-banking financial activity resembling banking originated, grown and sustain in
European land, got enriched under American patronage and now being rendered
throughout the world by both banking and non-banking institution. Some of the
definitions are discussed below to locate the practical meaning of the term
“merchant banking”. Dictionary meaning of merchant banking hints at merchant
banks as an organization that underwrites securities that underwrites securities for
corporations.
Dictionary meaning of merchant banking hints at merchant banks as an
organization that underwriters securities for operation advises such clients on
mergers and is involved in the ownership of commercial venture. These
organizations are sometimes banks which are not merchants and sometimes
merchants who are not banks and sometimes houses which are neither merchants
nor banks. These definition reflects the historical formation of the merchant banking
profession as such, in which the merchants had assume banking role and
subsequently banks assume the merchant roles. Paul ferries rightly states this
phenomenon; the original label of ‘merchants and bankers was replaced by
merchant banker’s. There name lent creditability involving the other people money.
In financial history of Western Europe, Charles P Kindle Berger writes
about merchant banking as the development of banking from commerce frequently
encountered a prolonged intermediate stage known in England original as merchant
banking. The merchant banker was a banker was a merchant who lent his credit to
others. This was done in various ways viz. making advance to produces before goods
were sold, either the goods entrusted to merchant on commission for sale abroad or
received on consignment from abroad, by issuing letters of credit under which
merchants could draw bills of exchange created by trade. Most merchant banks
drifted from generalized commerce into specified commerce and from specialized
commerce into finance.
Merchant Banks, thus, in essence, are financial institution providing
specialist services which generally include the acceptance of bill of exchanges,
corporate finance, portfolio management and other banking services. It is not
necessary that a merchant banker should do all such activities to be called a
merchant bankers, one merchant bank may specialized in one activity only, and take
up other activities also, which may be complimentary or supportive to specialized
activity. For example, firms in England which are engaged in the business of
acceptance of bills are known as merchant bankers. Again, the firm which are
members of the issue House Committee in England (not necessarily be engaged in
the former activity) are also merchant banks. Thus, merchant banks despite
specialization in one activity have different roles to play in different economic
situation.
Merchant Banking is an emerging concept in the area of financial
services in India. The profession of Merchant Banking is dedicated to fulfill the
needs of trade and industries by acting as an intermediary, consultant, liaison man
and financer too. Merchant banking is a result oriented profession commanding high
degree of skills and dexterity in solving business problems, assisting in investments
and financial decision making, assisting in laying corporate strategies, assessing
capital needs and helping in producing the owed as well as borrowed funds for
achieving balanced capital structure of the client corporate un its. Merchant’s
banker’s with the confidence of investors and general public command high
reputation for passing on accurate, adequate and timely information which helps
and facilities in the functioning of capital markets, money markets & international
financial system. Merchant Bankers observe their skill as personal possession for
their comparative strengths in the profession.
 Definition

“ A merchant bank is a defined as a financial institution or an organization

that underwrites corporate securities and advice such clients on issue like corporate
mergers etc involved in the ownership of commercial venture, etc. this organization
may be bank corporate body, a firm or a priority concern”

Merchant banking in India started with management of public issues and

loan syndication and has been slowly and gradually covering activities like “project
counseling”, “portfolio management” and mergers and amalgamation of corporate
firm.
A merchant banker has been defined under the securities and exchange
board of India [merchant banker] rules,1992 as “any person who is engaged in the
business of issue management either by making arrangements regarding selling,
buying or subscribing securities as manager, consultant, advisor or rendering
corporate advisory service in relation to such issue management.
 Origin of Merchant Banking

The origin of merchant banking is traceable with the development of inters a

national trade and finance. Economic literature available on international trade and finance
contains lucid information on the evolution of merchant banking and make a fascinating
reading that provides the historical background of origin of merchant banking.
During 13th century a few families owned and managed firms engaged in coastal
trade and finance were spread throughout the European continent. The first known such
firms were Ricardo of Lucca, Medici and fogger. These firms besides their commercial
activity involving sale and purchase of commodities were engaged in banking activity also.
These firms had acted as the bankers to the kings of European status, financing costal trade
amongst European nation, borne exchange risk in the absence of any international medium
of exchange in addition to the security risk in financing the king, monarchs and the state
government engaged in the continental wars. The motivation behind their banking activity
was profit maximization and to achieve this aim they invested their funds were they
expected higher return despite high degree of risk. For this reason ,merchant bankers used
to charge rate of return for financing , the highly risky venture .In turn , they had to suffer
,very often , with heavy losses , closed down for reasons of denial of , repayments
,denouncements of obligations by debtors , credits losses and confiscations of their
properties by the kings they financed .For example , Riccardi of Lucca ,the Italian merchant
banker, had opened an office in England to serve the English Government of Edward-I of
England and had to succumb to closure when kings confiscate its properties on its refusal to
finance the war in 1924.similarly, the Medici bank of Florence was liquidate in 1494, Fugger
banker had to suffer in 1650 when Habsburg Emperors Maximillan and Charles- V deflated
in payments. There are numerous instances likewise where, and then the existing merchant
banker had to collapse, leave the activity or started another activity or started the same
activity after strengthening the financing background. Thus, merchant banking, with all the
odds, survived and continued during thirteen and sixteen centuries.

The main trading center for world trade and during the above period had remained
in Amsterdam where the Dutch trader relied, on the finance of trade, upon the expertise of
merchant banker, then knows as “commission agent”. The important service they rendered
including handling of the costal trade and for their masters goods on commission basis,
financing the owners or suppliers of the goods and the shipping agencies by expounding
their payment obligations by accepting credit in addition to the direct financing. These
commission agents did big business by making small investment in the goods
manufactured by the sellers and thus accumulated huge wealth. This gives a fillip to
merchant banking activities and involves them in acts of lending in addition to doing the
jobs on commission basis. The main borrowers of their funds were crowns, emperors and
state government, as started earlier, to whom these merchant banker continued lending for
reasons of patronage, recognition and higher expectation, despite the suffering, at their
hands and by their fellow trader. During the 17th centuries also, the
Dutch trader and banker lent heavily to finance continental wars, William of England
borrowed huge sums in Amsterdam to fight the continental wars. Many European states
Including Germany, Russia and Sweden had borrowed in Amsterdam such huge
sums during beginning of the 18th century. During Napoleonic war, margrave of hassle, the
richest merchant of Europe, had financed the germane prince: jaws of Kassel and Frankfurt
made loans to the rulers in the name of, banker. This risky investment was made with the
sole objective of profit maximization by the merchant banker.
The industrial revolution in England gave further boost to the merchant banking
activity with the growth of the home industry made goods like linen and paper. The scope
of international trade and expanded to the colonies of the new world. That is the North
America and other continents. Many more persons and firms were attracted to take up the
merchant banking activities particularly to transship the machine made goods from
European nations to other nations, developing colonies of the European nation in other
continents and bringing raw material from other nations and colonies to Europe, and to
finance such trade.
The founders of the several of the present day merchant banks who started the
business having the 18th century and early 19th century were the merchants who traded
overseas and earned reputation with their name. These prominent merchants were
requested to lend their name to the lesser known traders by accepting a bills they
guaranteed that the holder of bill will receive the full value on the date of payment. This
acceptance business has grown with the expansion of the trade through the European
nations and continuous today the banks most activity engaged in it are the number of the
acceptance house committee of London.
The merchant banker traded for centuries and retained their names and activities
in different nations by expanding their activities. For example, in Amsterdam, john & co.
were bankers in 18th century and at the same time engaged in trading of all commodities
they could sell at a profit. In Frankfurt, Meyer mashes Rothschild traded coffee, sugar,
tobacco, along with the British manufactures.
 Growth of merchant banking in India
Merchant baking activities in India originated in 1969 with the merchant banking
division set up by the grind lay bank, the largest foreign bank in the country, at the time.
The main service offer to the corporate enterprises by the merchant bank includes
management public issue and financial consultancy. Other forcing bank like city bank,
chartered bank also assumed the merchant banking activity in India. State bank of India
started merchant banking in 1973 followed by the ICICI in1974; both emerged as leader in
merchant banking with significance business during the period of 1974-1985 in
comparison to forcing banks. Mid seventies witnessed a growth of merchant banking
organization in the country with various commercial banks, financial institutions, broker
firms entering in to the field of merchant banking.
The growth in merchant banking business during the early seventies was to
forcing exchange regulation act 1973 [ FERA] where in large number of forcing companies
operating in India were required to dilute their foreign holdings In order to continue
business in the country his result in expansion in the capital markets providing enough
opportunities to merchant bankers to established themselves. The change in Indian
economy opened new doors for merchant banking business enter in diversified area of
activities, but at the same time this brought competition in merchant banking sector. This
sector has traditionally been dominated by financial institution, banks and their
subsidiaries. Now, various private sectors merchant bankers have emerged and some of
them having international reputation. Till the end of 1990, the merchant banking sector
was almost monopoly public sector institution and commercial banks, however since 1991
considerable number of private merchant banker have emerged on same. Various existing
corporate entities and non-banking finance companies have also focused their activities in
merchant banking business. Before 1990 there were less than 40 merchant banking
concerns while in 199 this number has exceeded to more than 400 firms.

Importance and need of Merchant Banking in

India

Importance reasons for the growth of merchant banks has been development
activities throughout the country, exerting excess demand on the sources of fund for ever
expanding industries and trade, thus leaving a widening gap unabridged between the
supply and demand of invisible funds. All India financial institution had experienced
constrain of resources to meet ever increasing demands for demands for funds frame
corporate sector enterprises. In such circumstances corporate sector had the only
alternative to avail of the capital market service for meeting their long term financial
requirement through capital issue of equity shares and debentures. Growing demand for
funds put pressure on capital market that enthused commercial banks, share brokers and
financial consultancy firms to enter into the field of merchant banking and share the
growing capital market. As a result all the commercial banks in nationalized and public
sector as well as in private sector including foreign banks in India have opened their
merchant banking windows and competing in this field.
Need for merchant banking is felt in the wake of huge public saving lying
untapped. Merchant banker can play highly significant role in mobilizing funds of savers to
invisible channels assuring promising returns on investment and thus can assist in meeting
the widening demand for invisible funds for economic activity. With growth of merchant
banking profession corporate enterprises in both private sectors would be able to raise
required amount of funds annually from the capital market to meet the growing
requirement for funds for establishing new enterprises, undertaking expansion,
modernization and diversification of the existing enterprises. This reinforces the need for a
vigorous role to be played by merchant banking.
 In view of multitude of enactment, rules and regulation, gridlines and offshoot
press release instructions brought out the government from time to time imposing
statutory obligations upon the corporate sector to comply with those entire requirement
prescribed there in the need of a skilled agency existed which could provide counseling in
these matters in a package form. A merchant banker with their skills updated information
and knowledge provide this service to the corporate units and advice them on such
requirement to be complied with for raising funds from the capital market under different
enactment viz. companies act, income tax act, foreign exchange regulation act, securities
contracts corporate laws and regulations. Merchant bank advice the investors of the
incentives available in the form of tax relief, other statutory relaxation, good return on
investment and capital appreciation in such investment to motivate them to invest their
savings securities of the corporate sector. Thus merchant banks help industries and trade to
rise and the investors to invest their saved money in sound and healthy concern with
confidence, safety and expectation for higher yields. Finance is the backbone of business
activities. Merchant banker make available finance for business enterprises acting as
intermediaries between them raising demand for funds and the supplies of funds besides
rendering various other services.
The following are some of the reasons why specialist merchant bank have a
crucial role to play in India.
1. Growing complexity in rules and procedures of the government.
2. Growing industrialization and increase of technologically advanced industries.
3. Need for encouragement of small and medium industrialists, who require specialist services.
4. Need to develop backward areas and states which require different criteria.
5. Exploring the possibility of joint ventures abroad and foreign market.
6. Promoting the role of new issue market in mobilizing saving from.
Where merchant banks function as an independent wing or as subsidiary of various
private/central governments/ state government financial institution. Most of the financial
institution in India is in public sector and therefore such setup plays a role on the lines of
governmental priorities and policies.
REGISTRATION PROCESS OF MERCHANT
BANKING
MERCHANT BANKER without holding a certificate of registration granted by the
Securities and Exchange Board of India cannot act as a merchant banker.
SEBI will grant certificate to Merchant banker if it follows the following condition:-
 Merchant banker should be a body corporate and should not be non banking finance
company
 They must have a necessary infrastructure for maintaining an office
 They must have employed a minimum of 2 persons with experience in merchant banking
business.
 They should not be connected with any company directly or indirectly.

Procedure for getting registration

 Failing to pay
registration
fees

Cancellation
of certificate

 CAPITAL STRUCTURE DECISION:-

The capital requirement depends upon the category. The minimum net worth requirement
for acting as merchant banker is given below:

 Category I – Rs. 5 crores

 Category II – Rs, 50 lakhs
 Category III – Rs. 20 lakhs
 Category IV – Nil
The categories for which registration may be granted are given below

 Category I – to carry on the activity of issue management and to act as adviser,

consultant, manager, underwriter, portfolio manager.
 Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager.

 Category III - to act as underwriter, adviser or consultant to an issue

 Category IV – to act only as adviser or consultant to an issue

Obligations and responsibilities

 Code of conduct:-
Every merchant banker has to abide by the code of conduct as specified
below. A merchant banker in the conduct of his business has to observe standards of
integrity and fairness of all his dealings with the clients and other merchant bankers. He
ought to render at all times high standards of service, exercise due diligence, ensure proper
care and exercise independent professional judgment. He has to, wherever necessary,
disclose to his clients, the possible sources of conflict of duties and interest, while providing
services. He cannot made any statement or become privy to any act, practice unfair
competition, which is likely to be harmful to interest of other merchant bankers or is likely
to place such other merchant banker in a disadvantageous position in relation to him, while
competing for, or executing, any assignment. He should not make any exaggerated
statement, whether oral or written, to the client either about his qualification or his
capability to other clients. A merchant banker always to endeavors to:
1) Render the best possible advice to the clients regarding clients the needs and
requirements, and his own professional skill; and
2) Ensure that all professional dealing are affected in prompt, efficient and cost
effective manner

 He should not:-
1) Divulge to other clients, press or any other party any other party confidential
information about his client, which has come to his knowledge; and

2) Deal in the securities of any client company without making disclosure to the SEBI
as per the regulations and also the Board of Directors of the client company.

 He should endeavor to ensure that:-

1) The investors are provided with true and adequate information without making
any misguided or exaggerated claims, and are made aware of attendant risks before any
investment decision is taken by them;

2) The copies of prospectus, memorandum and related literature are made available
to the investors

3) Adequate steps are taken for the fair allotment of securities and refund of
application money without delay; and
 A merchant banker should not generally and particularly in respect of
the issue of any securities be part to
a) Creation of false market;
b) Price rigging or manipulations; and
c) Passing of price sensitive information to brokers, members of stock
exchanges and other players in the capital market or take any other action which is
unethical or unfair to the investors.
Finally, he has to avoid by the provisions of the SEBI Act, its rules and
regulations which may be applicable and relevant to the activities carried on by the
merchant banker.

 Restriction on Business:-
No merchant banker, other than a bank/public financial institution (PFI)
is permitted to carryon business other than that just in the securities market with effect
from December 9, 1997.
However, a merchant banker who is registered with RBI as a Primary
Dealer/Satellite Dealer may carry on such business as may be permitted by RBI with
effect from November 1999.

 Maximum Number of Lead Managers :-

The maximum number of lead manager is related to the size of the issue. For
an issue of size less than Rs.50 crore, two managers are appointed. For size groups of Rs.50
crore to Rs.100 crore and Rs.100 corer to Rs.200 crore, the maximum permissible lead
managers are three and four respectively. A company can appoint five and five or more (as
approved by the SEBI) lead managers in case of issues between Rs.200 corer and above
Rs.400 crore respectively.

 Responsibilities of Merchant Banker:-

 Every lead manager has to enter into an agreement with the issuing
companies setting out their mutual rights, liabilities, and obligation relating to issue and in
particular to disclosures, allotment and refund. A statement specifying these is to be
furnished to SEBI at least one month before the opening of the issue for subscription. In
case of more than one-lead manager/Merchant banker, the statement of has to provide
details about their respective responsibilities. A lead merchant banker cannot manage an
issue if the issuing company is its associate. He can also not associate with a merchant
banker who does not hold a certificate of registration with the SEBI. It is necessary for a
lead manager to accept a minimum underwriting obligation of 5% of the total underwriting
commitment or Rs.25 lakh whichever is less. If he is unable to do so, he has to make
arrangements for an underwriting of an, equal amount by a merchant banker associated
with that issue under intimation to SEBI.

 Due Diligence certificate:-

The lead manager is responsible far the verification of the content of a
prospectus/letter of offer in respect of an issue and the reasonableness of the views
expressed in them. He has to submit to the SEBI at least two weeks before the opening of
the issue far subscription a due diligence certificate to the effect that
a) The prospectus/letter of after is in conformity with the documents/materials
and papers relevant to the issue,
b) All legal requirements connected with the issue have been fully complied with,
and
c) The disclosure is true, fair and adequate to enable the investors to make a well-
informed decision as to the investment in the proposed issue.

 Submission of Documents:-
The lead managers(s) to an issue has (have) to. Submit at least two weeks
before the date of filing with the registrar of companies/regional stock exchange or both
particulars of the issue, draft prospectus/letter of offer, other literature to be circulated to
the investors/shareholders, and so an to the SEBI. They have to ensure that the
modifications/suggestion made by it with respect to the information to be given to the
investors is duly incorporated. The draft prospectus/draft letter of offer should be
submitted to the SEBI along with the prescribed fee specified below:-

Issue size including premium and

Fee per document
intended retention oversubscription
Up to Rs.5 crore Rs 10,000

Rs 5 crore- Rs 10 crore Rs 15,000

Rs 50 crore- Rs 50 corer Rs 25,000

Rs 10 crore- Rs 100 corer Rs 50,000

Rs 100 crore- Rs 500 corer Rs 2,50,000

More than Rs 500 corer Rs 5,00,000

They have to continue to be associated with the issue till the subscribers
have received the share debentures certificate or the refund of excess application money.

Acquisition of shares a merchant banker is prohibited from acquiring

securities of any company on the basis of unpublished price sensitive information obtained
during the course of any professional assignment either from the client or otherwise. He
has to submit to the SEBI the complete particulars of any acquisition of securities of a
company whose issue is being managed by him within 15 days from the date of the
transaction.

 Disclosures to SEBI:-
As and when required, a merchant banker has to disclose to the SEBI:
I) His responsibilities with regard to the management of the issue,
 II) Any changes in the information/particulars previously furnished which
have a bearing and the certificate of registrations granted to it.
III) The names of the companies whose issues he has managed or has been
associated with,
IV) The particulars relating to breach of capital adequacy requirements and
V) Information relating to his activities as manager, under writer, consultant
or adviser to an issue.

 Procedure for Inspection:-

The SEBI can undertake the inspection of the books of accounts, records, and
documents of a merchant banker to ensure that the books are maintained in the manner
required, the provision of the SEBI Act, rules and regulations are being camp lied with, and
to investigate complaints from investors/other merchant bankers/any other person or any
matter having a bearing on his activities, as a merchant banker and suo moto in the interest
of securities business/investors interest into the affairs of the merchant banker.
The merchant banker has an obligation to furnish all the information called for,
allow a reasonable access to the premises, extend reasonable facility for the examination of
books/records/documents/computer data and provide copies of the some and give all
assistance to the inspecting authority in connection with the inspection.
On the basis of the inspection report and after giving him an opportunity to make an
explanation, the SEBI can all upon the merchant banker to take such measures as it deems
fit in the interest of the securities market and for due compliance with the provisions of the
SEBI can appoint a qualified auditor with the above powers of the inspection committee to
investigate into the books of accounts or the affairs and obligations of the merchant banker.

 Action in Case of Default:-

A merchant banker who fails to comply with any conditions subject to which the
certificate of registration has been granted has been granted, by the SEBI and/or
contravenes any of the provisions of the SEBI Act, rules or regulations, is liable to any of the
two penalties:
a) Suspension of registration or
b) Cancellation of registration

 Suspension of Registration:-
A penalty of suspension of registration of merchant banker maybe imposed where
the merchant banker

1) violates the provisions of the SEBI Act, rules or regulations;

2) (a) Fails to furnish any information relating to his activity as

Merchant banker as require
(b) Furnishes wrong or false information;
(c) Does not submit periodical returns as required by the SEBI;
(d) Does not cooperate in any enquiry conducted by the SEBI;
3) Fails to resolve the complaints of the investors or fails to give a
satisfactory reply to the SEBI in this behalf;
4) Indulges in manipulating or price rigging or cornering activities;
5) Is guilty of misconduct or improper or unbusiness like or unprofessional conducted
which is not in accordance with the code of conduct under the regulations;
6) Fails to maintain the capital adequacy requirement in accordance with the provisions of
the regulations;
7) Fails to pay the fees;
8) Violates the conditions of registration; and
9) Does not carry out his obligations-as specified in the regulation

 Cancellation of Registration:-
 A penalty of cancellation of registration of a merchant banker may be imposed
where:
1. The merchant banker indulges in deliberate manipulation or price rigging or cornering
activities affecting the securities market and the investor’s interest
2. The financial position of the merchant banker deteriorates to such an extent that SEBI is
of the opinion that his continuance as merchant banker is not in the interest of investors
3. The merchant banker is guilty of fraud, or is convicted of a criminal offence and
4. In case of repeated defaults of the nature leading to suspension of registration provided
that the SEBI flourish reasons for cancellation in writing.
On and from the date of suspension and cancellation of registration of the merchant banker,
he ceases to carryon any activity as a merchant banker. The order of suspension of
cancellation of certificate is published in at least two daily newspapers by the SEBI.

 Default by Merchant Bankers and Penalty Points:-

The SEBI imposes penalties for non-compliance for registration and
contravention of the regulations on the basis of which registration is suspended/cancelled.
The defaults are categorized into
(a) General,
(b) Minor,
(c) Major and
(d) Serious.

General defaults for the purpose of penalty points, the following activities are classified
under general defaults and attract one penalty point.
1) Non-receipt of draft prospectus/letter of offer from the lead manager by SEBI, before
filing with the registrar of companies/stock exchange
2) Non-receipt of interse allocation of responsibilities of lead managers in an issue by
SEBI prior to the opening of issue.
3) Non-receipt of due diligence certificate in the prescribed manner by SEBI, before
opening of the issue.
4) Failure to ensue the submission of certificate of minimum 90% subscription to the
issue.
5) Failure to ensure expediting of dispatch of refund orders, shares/debentures
certificate, filing of listing application by the issuer.

 Minor Defaults:-
The following activities are categorized under minor defaults and attract two penalty
points.
a. Advertisement, circular, brochure, press release and other issue related materials not
being in conformity with the contents of prospectus.
b. Exaggerated information or information extraneous to the prospectus is given by issuer
or associated merchant baker in any press conference, investor’s conference, broker’s
conference or other such conference/meet prior to the issue for marketing of the issue
for marketing of the issue arranged/participated by the merchant banker.
c. Failure to substantiate matters contained in highlights to the prospectus.
d. Violation of regulations relating to advertisement on capital issues.
e. Failure to exercise due diligence in verifying the contents of prospectus letter of offer.
f. Failure to provide adequate and fair disclosure to investors and objective information
about risk factors in the prospectus and other issue literature.
g. Delay in refund/allurement of securities.
h. Non-handling of investors grievances promptly
 Major Defaults:-
The following activities are categorized under major defaults and attract three
penalty points.
a) Mandatory underwriting not takes up by the managers
b) Excess number of lead managers than permissible.
c) Association of unauthorized merchant banker in an issue.

 Serious Defaults:-
The following activities are categorized under serious defaults and attract four
penalty points:
1) Unethical practice by a merchant banker and/or violation of Code of conduct.
2) Non-cooperation with SEBI in furnishing desired Information, documents, evidence as
may be called for.
A merchant banker on reaching cumulative penalty points of eight attracts action
from SEBI in terms of suspension/cancellation of authorization. To enable a merchant
banker to take corrective action, the maximum penalty points awarded in a single issue
managed by a merchant banker are restricted to four. In the event of joint responsibility,
the same penalty point is awarded to all lead managers. In the absence of receipt of inter se
allocation of responsibilities, all lead managers to the issue are awarded the penalty points.

 Defaults in Prospectus:-
In the highlights are provided, the following deficiencies attract negative points.
I. Absence of risk factors
II. Absence of listing
III. Extraneous contents to prospectus, if stated
 The maximum grading points of prospectus can be 10 and prospectuses scoring
greater than or equal to 8 points are categorized as A+, those with 6 or less than 8
points as A, those with 4 or less than 6 points as B and those with score of less than
4 points, the prospectus falls in category C

 General Negative Marks:-

If all highlights are provided in an issue

a) Risk factors should from part of highlights,-otherwise it attracts a negative points of-
1
b) Listing details, should form of part of highlights, otherwise it attracts a negative
point of-OS
c) Any matter extraneous to the contents of the prospectus, if stated in highlights
attracts a negative point of -0.5.

Organizational set up of Merchant Bankers in

India

In India a common organizational set up 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, Canada Bank, Punjab National Bank, Bank of
India, etc. some firms are also organized by financial and technical consultants and
professionals. Securities and exchanges 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 set up India’s merchant banking
organizations can be categorized into 4 group 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 set up plays a
role on the lines of governmental priorities and policies.

b) Banker Base:-
These merchant bankers function as division/ subsidiary of banking
organization. The parent banks are either nationalized commercial banks 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 baking
related operating also like providing investment and portfolio management services.

d) Private Base:-
These merchant banking firms are originated in private sectors. 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 Sectors merchant
banking firms have come up either as sole proprietorship, partnership, private
limited or public limited companies. Many of these firms were in existence for quite
 some time before they added a new activity in the form of merchant banking
services by opening new division on the lines of commercial banks and All India
Financial Institution (AIFI).

Scope of merchant banking services in India

Merchant banking is a service oriented industry. The services rendered by merchant
banks to the corporate client in India are more or less the same which are, being rendered
traditionally in U.K and other European countries by the merchant banks in U.S.A by the
investment bankers to carter to the needs of the business enterprises. India’s economy is in
the state of transition facing an entirely different environment than that faced by the
developed nations of the world. In view of these circumstances, a mark of distinction is apt
to be noted in the nature and the type of services being offered by the merchant banks in
India.

Following services provide by the merchant bankers in India:-

1. Corporate Counseling
2. Project Counseling
3. Loan Syndication
4. Management Of Capital Issues
5. Dealing In Secondary Market
6. Mutual Funds
7. Portfolio Management
8. Underwriters
9. Mergers / Amalgamations

Corporate Counseling:-
Corporate counseling denotes the advice provided by the Merchant Banking to
the corporate unit to ensure better corporate performance in terms of image building
among investors, steady growth through good working and appreciation in market
value of its equity shares. The scope of corporate counseling, capital restructuring and,
portfolio management and the full range of financial engineering includes venture
capital, public issue management, and loan syndication, working capital, fixed deposit,
lease financing, acceptance credit, etc. However counseling is limited to only opinions
and suggestions and any detailed analysis would form part of a specific service.
The scope of corporate counseling is restricted to the explanations of concepts,
procedures and laws to be observed by the client company. Requirement of any action
to be taken or compliance of statutory formalities to be made for implementation of
those suggestions would mean the demand for a specific type of service other than
corporate counseling being offered by the merchant bankers. An academic analysis of
corporate counseling present a different picture than that transpires from the literature
of the merchant bankers Firstly corporate counseling is the beginning of the merchant
banking service which every clients whether new or existing has got to avail a different
matter whether a merchant bank charges its client separately for rendering the
corporate counseling service or includes the element of fee in the other heads of
services but fro the angle of priority. Corporate counseling is first in line of the services
which a merchant banker offers and than other services.

Secondly the scope of the corporate counseling is very vast. Its coverage ranges
from the managerial economies, investments and financial management to Corporate
Laws and the related legal aspects of the organizational goals, locations factors,
organizational size and operational scale, choice of product and market survey,
forecasting of product, cost reduction and cost analysis, allocation of resources,
investment decisions, capital management and expenditure control, pricing methods
and marketing strategy, etc. As financial and liivestment experts, a merchant banker has
to guide the corporate clients in areas covering financial reporting, project
measurements, working capital management, financial requirements and the sources of
finance, evaluating financial alternatives, rate of returns and cost of capital besides basic
corporate changes of financial rearrangement, Reorganization, mergers and
acquisitions, etc. are the areas to be covered.

Corporate laws should basically cover the legal aspects including the various
legal formalities involved in areas of corporate finance being raised from the financial
institutions, banks and the general pubic in the form of loan, new issues of equity or
debentures respectively
 PROJECT COUNSELLING:-
Project counseling services may be rendered independently or maybe, it relates
to project finance and broadly covers the study of the project and offering advisory
assistance on the project viability and procedural steps for its implementation broadly
including following aspects:- general review of he project ideas/ project profile, advice
on procedural aspects of project implementation, review of technical feasibility of the
project on the basis of the report prepared by own experts r by the outside consultants,
selecting Technical consultancy Organization (TCO) for preparing project reports and
market survey, or review of the project reports or market survey report prepared by the
TCO, preparing project report form financial angle, and advice and act on various
procedural steps including obtaining government consents for implementation of
projects. This assistance can include obtaining of the following
approvals/licenses/permission/grants etc form the govt. agencies viz. letter of intent,
industrial license and DGTD registration and government approval for foreign
collaboration.
In addition to above, the facility providing guidance to Indian entrepreneurs for
making investment projects in India and in Indian joint ventures overseas is also
covered under this activity.
Besides the above services, project counseling may include identification of
potential investments avenues, precise capital structuring shaping the pattern of
financing, arranging and negotiating foreign collaborations, amalgamations, mergers
and takeover, financial study of the project and preparation of viability reports, to advice
on the framework of institutional guidelines and laws governing corporate finance,
assistance in the preparation of project profiles and feasibility studies based on
preliminary project ideas in order to indicate the potential. These reports would cover
the technical, financial and economic aspects of the project from the point of view of
their acceptance by the financial institutions and banks; advising and assisting clients in
preparing the applications for obtaining letters of intent, industrial license and DGTD
registrations etc, seeking approvals form the government of India for foreign technical
and financial collaboration agreements, guidance on investment opportunities for
entrepreneurs coming to India.
Pre-investment studies are directed mainly for the prospective investor. These
are the objective and detailed feasibility explanation of which the principal aim is to arm
the clients with the sound foundation of facts and figures to evaluate the alternative
avenues open for capital investments form the pint of view of growth and profit
prospects. Some of the critical issues that a study of this genre deals will include an in-
depth investigation of environment and regulatory factors, location of raw material,
supplies, demand projections and financial requirements. Such a study would assess the
financial and economic viability of a given project and help the clients to identify and
short list those projects that are built upon his inherent strength son as to accentuate
corporate profitability and growth in long run.
Grind lays bank has specialization in pre investment studies and it conducts such
studies for foreign companies’ whishing to participate in joint ventures in India and
 offers a package of services including advice on the extent of participation, government
regulatory factors and an environmental scan of particular industries in India

LOAN SYNDICATION:-
Credit syndication also known as credit procurement and project finance services.
The main task involved in credit syndication is to raise to rupee and foreign currency loans
with the banks and financial institutions both in India and abroad. It also arranges the
bridge finance and the resources for cost escalations or cost Overruns.
Broadly, the credit syndications include the following acts;
(a) Estimating the total costs
(b) Drawing a financing plan for the total project cost-conforming to the requirements
of the promoters and their collaborators. Financial institutions and banks, government
agencies and underwriters.
(c) Preparing loan application for financial assistance from term lenders/financial
institutions/banks and monitoring their progress including the pre-sanction negotiations.
(d) Selecting the institutions and banks for participation in financing.
 (e) Follow-up of the term loan application with the financial institutions and banks and
obtaining the satisfaction for their respective share of participation.
(f) Arranging bridge finance.
(g) Assisting in completion of formalities for drawl of term finance sanctioned by
institution expediting legal documentation formalities drawing up inter-se agreements
etc. prescribed by the participating financial institutions and banks.
(h) Assessing the working capital requirements.
Preparing the necessary application for a successful issue management the close liaison
and coordination with the various constituents of the public issue is an essential condition
that warrants full cooperation of all the parties affecting the cost and prospects f the issue.
Merchant banks, acting as ‘Manager’ to the issue has to settle the fee for
Advocate/solicitors’ advice, accountants certification, broker’s and banks charges,
underwriters’ commission, printers’ charges and advertising and publicity expenses and
coordinates with syndicated merchant bankers and principal brokers, stock exchanges, etc.
The responsibility for all this rests upon the merchant banker. If proper coordination is not
done, the success of the issue may be rendered unassured.

Management OF Capital ISSUES:-

The capital issue are managed are category-1 merchant banker and constitutes
the most important aspects of their services. The public issue of corporate securities
involves marketing of capital issues of new and existing companies, additional issues of
existing companies including rights issue and dilution of shares by letter of offer,. The
public issues are managed by the involvement of various agencies i.e. underwriters,
brokers, bankers, advertising agency, printers, auditors, legal advisers, registrar to the
issue and merchant bankers providing specialized services to make the issue of the
success. However merchant banker is the agency at the apex level than that plan,
coordinate and control the entire issue activity and direct different agencies to
contribute to the successful marketing of securities. The procedure of the managing a
public issue by a merchant banker is divided into two phases, viz;
(A) Pre-issue management
(B) Post-issue management

(A) Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:-

(1) Obtaining stock exchange approvals to memorandum and articles of
associations.
(2) Taking action as per SEBI guide lines
(3) Finalizing the appointments of the following agencies:
 Co-manager/Advisers to the issue
 Underwriters to the issue
 Brokers to the issue
 Bankers to the issue and refund Banker
 Advertising agency
 Printers and Registrar to the issue

(4) Advise the company to appoint auditors, legal advisers and broad base Board of
Directors
(5) Drafting of prospectus
(6) Obtaining approvals of draft prospectus from the company’s legal advisers,
underwriting financial institutions/Banks
(7) Obtaining consent from parties and agencies acting for the issue to be enclosed
with the prospectus.
(8) Approval of prospectus from Securities and Exchange Board of India.
(9) Filing of the prospectus with Registrar of Companies.
(10) Making an application for enlistment with Stock Exchange along, with copy of
the prospectus.
(11) Publicity of the issue with advertisement and conferences.
(12) Open subscription list.
(B) Post-issue Management:-
Steps involved in post-issue management are:-
(1) To verify and confirm that the issue is subscribed to the extent of 90%
including devolvement from underwriters in case of under subscription
(2) To supervise and co-ordinate the allotment procedure of registrar to the issue
as per prescribed Stock Exchange guidelines
(3) To ensure issue of refund order, allotment letters / certificates within the
prescribed time limit of10 weeks after the closure of subscription list
(4) To report periodically to SEBI about the progress in the matters related to
allotment and refunds
(5) To ensure he listing of securities at Stock Exchanges.
(6) To attend the investors grievances regarding the public issue

The Merchant Bankers for managing public issue can negotiate a fee subject to a
ceiling. This fee is to be shared by all lead managers, advisers etc.
0.5% of the amount of public issues up to Rs.25 crores 0.2% of the amount exceeding
Rs.25crores, if more than one Merchant bankers are managing the issue.

MUTUAL FUNDS
A Mutual Fund is a special type of investment institution which collects or pools
the savings of the community and invests large funds in variety of Blue-chip Companies
which are selected from a wide range of industries with the objects of maximizing
returns/incomes on investments. E.g. Unit Trust of India (UTI), Sri Ram Mutual Fund,
Morgan Stanley Growth Fund (foreign mutual fund), etc. Mutual Funds are basically a
trust which mobilize savings from the people and invest them in a mix of corporate and
government securities. Money collected by the investors is invested in various issues of
primary and secondary markets in order to gain profits on such investments
It is a Trust, which combines the investments of various investors having similar
financial goals. The Trust issues units to the investors in the proportion of their
investments. A fund manager then invests these funds in different types of assets,
which provide returns in the form of dividends, interests, and capital appreciation. This
is distributed to the various investors in the proportion of their contribution to the
pool funds.
Ordinary investors, who want to invest their savings, neither understand the
complexities of financial markets nor have the time to watch, research, and analyse
different equities, securities or any other investments opportunities that are available
in the market.
At present, all the markets viz. the debt market, the equity market, the money
market, real estates, derivatives, and the market dealing with the other assets have
now reached a stage where a minimal information affect the markets. Besides this, the
economy has opened up and global events influence their performance.
It is very difficult for a lay person to keep track of various investments,
transactions, brokerages etc.
In the present scenario mutual funds are some of the most efficient financial
instruments as it offers above services like managing investments at a very low cost.

What is NAV?
NAV of the Fund is the market value of all the assets of the Fund subtracting the
Liabilities. NAV reflects the Fund that will be available to the shareholders if the Fund
is liquidated and all the liabilities are paid. In the mutual fund industry NAV refers to
Net Asset Value per unit holder, which NAV of the Fund divided by the outstanding
number of the units. It shows the performance of the Fund.

Calculation of NAV = Net Asset Value of the fund sum of market value of
shares/debentures + Liquid assets/cash Dividends/interest accrued – All liabilities
Net asset value per unit =NAV of the fund / Outstanding number of units

Market value of the shares and debentures is calculated by multiplying

the number of shares/units by the closing price of the shares/debentures. The closing
 price will be of the previous day of the stock exchange from where the shares have
been purchased.
If the shares were not traded in the previous day in that stock exchange,
then the closing price of the shares of any other stock exchange is taken where the
shares were traded.
If the shares were not traded in any stock exchange the previous day, then
the closing price of the shares when they were last traded is taken.
For untraded shares, the value has to be determined by the other
methods such as Book Value, comparable company approach, etc.
Value of the illiquid bond is estimated on the basis of yields of
comparable liquid bonds.

Benefits of Investing in Mutual Funds

1) Professional management of the investments:-

Each Mutual fund appoints an experienced and professional funds manager
and several research analyst, who research before investing, thus adding value to the
common investor. These professional constantly keep track of the market changes
and news, predict the impact they will have on the investments and take quick
decision regarding the adjustments to be made in the portfolio.

2) Low costs of Investments:-

Due to the large amount of funds manages, very low costs accrue per investor.
Mutual fund achieves economics of scales in research, transactions and investments.
It lowers the cost of brokerage, custodial and other charges.
3) Diversification :-
A common investor has limited money, which he can invest only in a few
securities and faces a great risk. If their values go down, the investor loses all his
money. Since Mutual Funds have huge amounts of funds to invest, the Fund manager
invests in the securities of many industries and sectors; ( called diversifying the
risk ). This diversification reduces the risk involved because all the sectors and
industries will never go down at the same time. Investors get this diversification by
investing a small amount in Mutual Funds.

4) Convenient record keeping and administration: -

Mutual funds take care of all record keeping including paperwork. It
also deals with the problem of bad deliveries, broker’s commission etc.

5) Various types of Schemes:-

Mutual Funds offer various types of schemes such as regular income plan,
growth plan, equity funds, debt Funds, and balanced Funds. So an investors can
select a plan according to his needs.

6) Flexibility:
mutual funds offers various schemes, giving the investor the option to shift
from one scheme to another at various times depending on his needs, the risk he is
willing to take, and the type of return the wants.

7) Scope for good return:

mutual fund invest in various industries and sectors, therefore the portfolio
gets diversified, resulting in mutual funds generating equitable return.

8) Enables investing in high value stocks:

 the individual investors have less money to invest and cannot invest in high
value stocks such as Infosys. With Rs 12000 an investors can purchase only 2 shares
of infosis, which is like putting all his eggs in one basket. Mutual funds have huge
amount of funds and can invest in these high value stocks. The benefits from this
high value stock can pass on to all the investors.

9) Easy liquidity:
mutual fund provides easy liquidity. In the case of open-ended scheme units
can be purchased/sold at NAV from/to the mutual fund on any day. In the case of
closed-ended funds units are traded on the stock exchange at the market prices, or
the investors can repurchase the units from the mutual fund at the prevailing NAV
related prices.

10) Tax benefits:

there are certain schemes that offer tax benefits o the customers. So the
investor also tax benefits from mutual fund.

11) Provides transparency:

mutual funds keep the customers informed about the competition of all the
investments in various asset classes from time to time. During the launch of the
mutual fund the offer document provides information on the objective of the funds,
cost to be incurred, entry/exist load to be charged to the investor, risk associated
with the funds, & detail about the fund mariners, sponsors, members of trust etc.

12) Regulated by SEBI:

just like equities, mutual funds are also regulated by the SEBI. This is to
safeguard the interests of investor.
 Portfolio manager
portfolio managers are defined as persons who, in pursuance of a contract with
client, advise/ direct undertake on their behalf the management/ administration of
portfolio of securities/ funds of clients. The term portfolio means the total holding of
securities belonging to any person. The portfolio management can be…

 Discretionary: the first type of portfolio management permits the exercise of

discretion in regard to investment/ management of the portfolio of the securities
/funds.
 Non-discretionary: the non-discretionary portfolio manager should manage the
funds in accordance with the direction of client.

In order to carry on portfolio management services, a certificate of registration from

SEBI is mandatory. But for category 1 and 2 merchant banker a separate registration is not
required to act as a portfolio manager. They have, however, To carry on the portfolio
management activity within the framework of SEBI regulations applicable to portfolio
managers. The SEBI regulation applicable to portfolio manager. The SEBI is authorized to
grant and renew certificate of registration as a prior permission to portfolio managers on
the payment of the requisite registration/renewal fee. A certificate/ renewal of registration
is valid for three years. An application for renewal must be made three months before the
expiry of the validity of the certificate. The annual registration fee payable to SEBI was Rs
2.5 lakh for the first two year and Rs. 1 lakh for the third year. The renewal fee was rs
75,000 per annum. After November 1999, the registration fee and renewal fee after every
three years in Rs. 5 lakh respectively. The portfolio manager is also to give an undertaking
to take adequate steps for the redresses of grievance of clients within one month of the
receipt of complaint, keep SEBI informed about the number, nature, and other particular of
complaints and abide by its rules and regulations.

Procedure for Registration

While considering the application for registration made in the prescribed form, the
SEBI takes into accounts all matters relevant to the activities relating to portfolio manger
and in particular.

a) Necessary infrastructure like adequate office staff, equipment and manpower to

discharge his activities.

b) Has in employment a minimum of two persons with experience to conduct portfolio

management business.

c) A person directly/ indirectly connected with the applicant, that is,

associated/subsidiary/inter-connected pr Group Company has not been granted
registration;
d) Capital adequacy of not less than net worth of Rs. 50 lakh in term of capital plus free
reserves.

e) The applicant/ partner/ director/principal officer has not been convicted for nay
offence involving moral turpitude/ guilty of any economic offence;

f) The applicant/partner/director/partner/ principal officer is not involved in any

litigation connected with the securities market;

g) The applicant has professional qualification in finance/law/accounting/business

management; and

h) Grant of certificate is in the interest of the investors.

General Obligations and Responsibilities

 Code of Conduct:-

A portfolio manger has to, in the conduct of business; observe high standards of
integrity and fairness in all his dealing with his clients and other portfolio managers. The
money received by him from a client for an investment purpose should be deployed as soon
as possible and money due and payable to a client should be paid forthwith.

A portfolio manager has to render at all times high standards of services, exercise
due diligence, ensure proper-care and exercise independent professional judgment. He
should either avoid any conflict of interest in his investment or disinvestment decision, or
where any conflict of interest arises; ensure fair treatment of all his customers. He must
disclose to the client, possible sources of conflict of duties and interest, while providing
unbiased services. A portfolio manger should not place his interest above those of his
clients.
 He should not make any statement or become privy to any act, practice or unfair
competition, which i! Likely to be harmful to the interest of other portfolio mangers or is
likely to place them in a advantageous position in relation to the portfolio manager himself,
while competing for or executing any assignment.

Any exaggerated statement, whether oral or written, should not be made ‘by him to
client other about the qualification or the capability to- render certain services or his
achievements in regards to services n rendered to the other clients.

At the time of entering into contract, he should been in writing from the clients his
interest in various corporate bodies which enable him to obtain unpublished price-
sensitive information of the, body corporate.
A portfolio manger should not disclose to any clients or press any confidential
information about his clients, which has come in his knowledge.
Where necessary and in the interest of the clients, he should take adequate’ steps for
the registration of the transfer of the clients’ securities and for claiming and receiving
dividends, interest payment and other right accruing to the client. He must also make
necessary action for the conversion of securities and subscription/ renunciation of/or
rights in accordance with the clients’ instruction.

 A portfolio manger has to endeavor to:-

a) Ensure that the investors are provided with true and adequate information without
making any misguiding or exaggerated claims and are made aware of attendant risks
before any investment decision is taken by them;

b) Render the best possible advice to the client having regards to the client’s needs and
the environment and his own professional skills;

c) Ensure that all professional dealing are affected in prompt, efficient and cost
effective manager.
 A portfolio manger should not be party to:-
a) Creation of false market in securities;

b) Price rigging or manipulation of securities;

c) Passing of price sensitive information to brokers, members of the stock COI

exchanges and any other intermediaries in the capital market or take any other
action which in prejudicial to the interest of the investors. No portfolio manager or
any of its directors, partners or managers should either on their respective accounts
or through their associates or family members, relatives enter into any transaction
in securities of the companies on the basis of published price sensitive information
obtained by them during the course of any professional assignment.

 Contract with Clients:-

Every portfolio manger is required, before taking up an assignment of management

of portfolio on behalf of a client, is enter into an agreement with such client clearly defining
the inter se relationship, and setting out their mutual rights, liabilities and obligation
relating to the management of the portfolio of the client. The contract should, inter alias,
contain.

i. The investment objectives and the services to be provided

ii. Areas of investment and restrictions, if any, imposed by the client with regards to
investment in a particular company or industry;

iii. Attendant risks involved in the management of the portfolio;

iv. Period of the contract and provision of early termination, if any;

 v. Amount to be invested;

vi. Procedure of setting the client’s accounts including the form of repayment on
maturity or early termination of contract;

vii. Fee payable to the portfolio manger;

viii. Custody of securities.

The funds of all clients must be placed by the portfolio manger in a separates accounts
to be maintained by him in a scheduled commercial bank. He can charges an agreed fee
from the client for rendering portfolio management services without guaranteeing or
assuring, either directly or indirectly, any return and such fee should be independent of
the returns to the clients and should not be on return sharing basis.

 General Responsibilities;-

The discretionary portfolio manager should individually and independently

manage the funds of each client in accordance with the need of the client in a manner,
which does not partake the character of a mutual fund, whereas the non-discretionary
portfolio manager should manage the funds in accordance with the direction of client.
He should act in a fiduciary capacity with regard to the client funds and transact in
securities in within the limitation placed by the client himself with regard to dealing to
securities under the provisions of the reserve bank of India act, 1934. He should not
derive any direct or indirect benefit out of the client funds or securities. he cannot
pledge or give on loan securities held on behalf of client to a third person, without
obtaining a written permission from his client. He should ensure proper timely handling
of complaints from his client and take appropriate action immediately.

 Investment of clients money:-

 The portfolio manager should not accept money of securities from his client from
his client for a period of less than one year. Any renewal of portfolio funds the maturity
of the indicial period is deemed as a fresh placement for a minimum period of one year.
The portfolio funds can be withdrawn or taken back by the portfolio client at his risk
before the maturity date of the contract under the following circumstances..

 Voluntary or compulsory termination of portfolio management service by the

portfolio manager.
 Suspension or termination of registration of portfolio manager by the SEBI.
 Bankruptcy or liquidation in case the portfolio manager is a body corporate.
 Permanent disability, lunacy or insolvency in case the portfolio manager is an
individual.
The portfolio manager can invest funds of his clients in money market instrument or
as specified in the contract, but not in bill discounting, bedlam financing or for the
purpose of lending or placement with corporate or non-corporate bodies.
While dealing with clients funds, he should not indulge in speculative transaction,
that is, not enter into any transaction for the purchase or sale of any securities in which
transaction is periodically or ultimately settled otherwise than by actual delivery or
transfer of security. He may enter into transaction on behalf of the client for the specific
purpose of meeting margin requirements only if the contract so provides and the client
is made aware of, the attendant risk of such transaction.
He should ordinarily purchase all sell securities separately for each client. However,
in the event of aggregation of purchase or sales for economy of scale, inter se allocation
should be done on a pro rata basis and at weighted average price of the days
transaction. The portfolio manager should not keep any position open in respect of
allocation of sales or purchase affected in a day.
Any transaction of purchase or sale including that between the portfolio managers
own account and client accounts or between two clients account should at the
prevailing market price. He should segregate each clients fund and portfolio securities
and keep them separately from his own funds and securities and be responsible for the
 safekeeping of clients fund and securities. He may hold the belonging to the portfolio
account in his own name on behalf of his client’s only if, the contract so provides and in
such an event his record and reports to the client should clearly indicate that the
securities are held by him on behalf of the portfolio account.

 Maintenance of book of accounts / records:

Every portfolio manager must keep am maintain the following book of accounts,
records and documents.
 A copy of balance sheet at the and of each accounting period.
 A copy of the profit and loss account for each accounting period.
 A copy of the auditor report on the account for each accounting period.
 A statement of financial position and
 Record in support of every investment transaction or recommendation which
indicate the data, fact and opinion leading to that investment decision.
After the end of each accounting period, copies of the balance sheet, profit and loss
account and such other documents for any other preceding five accounting year when
required must be submitted to the SEBI. Half yearly unedited financial result, when
required with a view to monitor the capital adequacy have to be submitted to the SEBI
the books of account and other record and document must be preserved for a minimum
period off five years.

 Disclosure to SEBI :
A portfolio manager must disclose to SEBI a and when required the following
information.
 Particulars regarding the management of a portfolio.
 Any information or particulars previously furnished, which have a bearing on the
certificate granted to him.
 The name of the clients whose portfolio he has managed and
 Particulars relating to the capital adequacy requirement
 Underwriters
Another important intermediary in the new issue/primary market is the
underwriters to the issues of capital who agree to take u securities which are not fully,
subscribed. They make a commitment to get the issue subscribed either by other or by
them. Through underwriting is not mandatory after April 1995, its organization is an
important element of the primary market. Are appointed by the issuing companies in
consultation with the lead manager/ merchant banker to the issues. A statement to the
effect that in the opinion of the lead manager, the underwriters asset are adequate to
meet their obligation should be incorporated in the prospectus certificate.

 Registration

To act as underwriter, a certificate of registration must be obtained from the SEBI

in granting the registration, the SEBI considers all matters relevant relating to the
underwriting and in particular,
a. The necessary infrastructural like adequate office space, equipment and manpower to
effectively discharged the activity:
b. Past experience in underwriting/ employment of at least two persons with experience
in underwriting:
c. Any person directly/ indirectly connect with the applicant is not registered with the
SEBI as underwriter or previous application of any such person has been rejected or
any disciplinary action has been taken against such person under the SEBI
act/rules/regulation.
d. Capital adequacy requirement of not less than the net worth ( CAPITAL + free reserve)
of Rs. 20 lakh: and
e. The applicant/ director/ principle officer/ partner has been convicted of offence
involving moral turpitude or found guilty of any economic offence. Fee underwriters,
had to, for grant or renewal of registration, pay a fee to the SEBI from the date of initial
grant of certificate, Rs 2 lakh for the first and second year and Rs 1 lakh for the third
year. A fee of Rs 20,000 was payable every year to keep the certificate in force or for its
renewal. Since 1999 the registration fee has been raised to Rs 5 lakh. To keep the
registration in force, renewal fee of Rs 1 lakh. Every three years from the forth year the
date of initial registration is payable. Failure to pay the fee would result in the
suspension of the certificate of registration.

General obligations and responsibilities:

1) Code of conduct :

Every underwriter has at all time to abide by a code of conduct; he has to

maintain high standard of integrity, dignity and fairness in all his dealings with his
clients and, other underwriters in the conduct of his business. He has to ensure that
he and his personal act in an ethical manner in all dealing with the issuers of capital.
An underwriter has to rendered high standard of service exercise due diligence,
ensure proper care and exercise independent professional judgment. He must
disclose to the issuer his possible source/ potential areas of conflict of duties and
interest of other underwriters to place them in a disadvantageous position in
relation to him while competing for/carrying out any assignment. He must not make
any written or oral statement to misrepresent…
 The service that he to be capable of performing for the issuer/ or has
rendered to other issuer or
  He underwriting commitment

He should not divulge to other issuer/ any party any confidence information
about his issuer, which forms the come to his knowledge and deal in securities of any
issuer without disclosing to the SEBI or to the board of director of the issuer. An
underwriter should not willfully make untrue statement/suppress material fact in
any document, reports, papers or information furnished to the SEBI.

a) Agreement with clients:

Every underwriter has to enter into an agreement with the issuing company.
The agreement, among others, provides for the period during which the agreement
is in for amount of underwriting obligations, the period within which the
underwriter has to subscribe to the after being intimated by/on behalf of the issue,
the amount of commission/ brokerage, and detail of arrangement, If any , made by
the underwriter for fulfilling the underwriting obligations.
b) General responsibilities :

An underwriter cannot derive any direct or indirect benefit from

underwriting the issue other than by the underwriting commission. The maximum
obligation under all writing agreements of an underwriter cannot exceed 20 times
his net worth, underwriters have to subscribe for securities under the agreement
within 45 days of the receipt of intimation from he issuer.

c) Inspection and disciplinary proceedings:

The framework of the SEBI right to undertake the inspection of the book of
account, other record documents of the underwriters, the procedure for inspection
and obligation of the underwriters is on the same pattern as applicable to the lead
manager
 d) Action in case of default :

The liability for action in case of default arising out of

 Non-compliance with any conditions subject to which registration was granted,
 Contravention of any provision of the SEBI act/rules/ regulation underwriter involves
the suspension/cancellation of registration: the effect of suspension/ cancellation on
the lines followed by the SEBI in case of lead manager.

MERGERS /AMALGAMATION:
The terms merger and amalgamation are used interchangeably as a form of business
organization to seek external growth of business. A merger is a combination of two or more
firms in which only one firm would survive and the other would cease to exist, its asset/
liabilities being taken over by surviving firm. And amalgamation is an arrangement in
which the asset/liability of to or more firm to form a new entity or absorption of one/more
firm with another. The out come of this arrangement is that the amalgamating firm is
dissolved/wound-up and losses it identity and its shareholders become shareholders of the
amalgeted firm. Although the merger/amalgamation of firm in India is governed by he
provision of the companies act, 1956, it does not defined this term. The income tax act ,
1961, stipulates to pre-requisite for amalgamation through which the amalgeted company
seeks to avail the benefit of set of / carry forward of losses and unabsorbed depreciation of
the amalgamating company against its future profits u/s 72A ,namely,
1. All the property and liabilities of the amalgamated company / companies
immediately before amalgamation should vest with/ become the liabilities of the
amalgamated company and
2. The shareholders other than amalgamated company/its subsidiary holding at list
90% value of shares/ voting power in the amalgamating company should become
shareholders of the amalgamated company by virtue of amalgamation. The scheme of
merger, income tax implications of amalgamation and financial evaluation are discussed in
the section.
Following the economic reforms in India in the post-1991 period, there is a
discernible trend among promoters and established corporate group towards
consolidation of market share and diversification into new areas through
acquisition/takeover of companies but in a more pronounced manner through
mergers/amalgamation. Although the economic consideration in terms of motive and
effect of these are similar, the legal procedure involved are difficult. The merger and
amalgamation of corporate constitute a subject matter of the companies act, the courts and
law and there are well-laid down procedure for valuation of share and right of investor. The
acquisition/takeover bids fall under the purview of SEBI. The terms merger and
amalgamation on the one hand and acquisition and takeover on the other are treated here
synonymously. Section one of the chapter covers the framework of merger/amalgamation
including financial evaluation. The regulatory framework governing acquisition/takeover
is described in section two.
 Scheme of merger/amalgamation:
Whenever two or more companies agree to merge with each other, they have to
prepare a scheme of amalgamation. The acquiring company should prepare the scheme in
consultation with its merchant banker/ financial consultant. The main contents of a model
scheme, are listed below

 Description of the transfer and the transfer company and the business of transferor.
 Their authorized, issue and subscribed/ paid-up capital
 Basis of scheme; the main terms, of the scheme in self’-contained paragraph on the
recommendation of valuation report, covering transfer of asset/liabilities, transfer
date, reduction or consolidation of capital, application to financial institution as lead
institution for permission and so on.
 Change of name, object clause and accounting year .
  Protection of employment
 Dividend position and prospectus
 Management: board of director banking their number and participation and transfer
company’s director on the board
 Application under section 391and 394 of the companies act, 1956, to obtain high
course approval
 Expenses of amalgamation
 Condition of the scheme to become effective and operative, effective date of
amalgamation
The basis of merger/ amalgamation in the scheme should be the report of the
value’s of asset of both the merger partner companies. The scheme should be
prepared on the basis of the values report; reports of the charter accountant
engaged for financial analysis and fixation of exchange ratio, report of auditors and
audited account of both the companies prepared up to the appointed date. It should
be ensured that the scheme is just and equitable to the shareholders, employees of
each of the amalgamating company and to the public.

Qualities of a Good Merchant Banker

Merchant Bankers are individual’s experts who organize and manage the
merchant banks. The operation of a merchant bank is influenced by the personality, traits of its
merchant bankers. Their qualities are:

1) Leadership:-
In order to interact with their clients and communicate effectively
merchant bankers should possess all relevant skills and update knowledge.

2) Aggressive action:-
Merchant bankers always looking for new business opportunities. On
locating a business opportunity and after obtaining the assignment from the clients,
a merchant banker has to be prompt in grasping the client’s problems and to provide
a better choice amongst alternative solutions. A good merchant banker is one who
 does not allow his clients to think anything outside except what has been advised
and thus holding the clients interest for the present as well as for the future.

3) Co-operation and Friendliness:-

Co-operation and friendliness coupled with persuasiveness must flow as
natural traits in the merchant banker in order to win over the trust of their clients
just like a doctor or a lawyer who retains their clients permanently. A good merchant
banker has to share the thoughts of his clients with sympathetic gestures and offer
suggestions without any greed or favors.

4) Contacts:-
A merchant banking business mainly depends upon the sociable nature
and wider contacts. The scope of contact of a merchant banker covers:
(a) His own organization
(b) Central and State Government Offices (c) Banks,
(c) Financial Institutions,
(d) Promoters/Directors/Owners/Chief Executives of the public and private
enterprises,
(e) Printers,
(f) Advertising Agencies,
(g) Brokers and Stock Exchange Dealers,
(h) Advocates and Solicitors
(i) Members of the press, etc.
Merchant bankers have to widen the contacts and continue to maintain them by
meeting people in personal, in special gatherings and through writing to them .

5) Attitude towards problem solving:-

A good quality of a merchant banker is to be skilled in human relations
particularly in the inter-personal behavior. A merchant banker should have a
positive approach to understand the difficulties, adverse circumstances and the
viewpoints of others. Effective communication and proper feedback are the pre-
 requisites for creating a positive attitude towards problem solving which could be
gained partly through the learning process and partly as an inborn personality trait.

6) Inquisitiveness for acquiring new skills, information and knowledge:-

Merchant bankers survive by providing the information required by their
needy clients. Therefore they must keep themselves updated with the latest
information in the area of the service product which they market.

Development stages of Merchant Banking

firms
In the merchant banking organization in the following chart, the firm of
merchant banker and individual stock broker have been included as they have been
contributing jointly to the growth of the profession of merchant banking. But most of these
firms are not well developed to show stage of maturity. Most of them are still in the start-up
and early growth stages. This is easily dissemble from the following projection of the
development stages

Principal financing
Stages in development
Unit Organizational setup source
of merchant banking

Very loose organization,

founders and associates
1 Start-up Own investment
involved in the
management

2 Early growth
3 Accelerating growth
4 Sustaining growth
Emerging formal
organization, founders, or
Individual investment
professional manager in
management
Formal organization with Firms investment with
professional, manager or banks backing in terms of
founder loan
Corporate finance from
Complex organization with
bank plus equity funds
professional manager
from public

Multilayer complex Matching finance available

5 maturity
management organization from all possible sources

Market potential of merchant banking services

Merchant banking in the country has come to be primarily associated with the
capital markets. With deregulation of Indian markets there are several new sectors open to
private investment which have consequently created an opportunity for private financing.
The need for this banking is not currently met, by their commercial banks or the financial
institutions and hence there is a huge gap which needs to be filled. This gap can be met
through capital markets or a range of finance products and hence a good scope exists for
the various services offered by a merchant banker. The establishment of SEBI and the
abolition of the office of Controller of Capital Issues (CCI) in 1992 heralded in area of free
market pricing of equity shares. Merchant bankers in particular have been assigned a
greater responsibility in the fixation of issue price & premium, if any. In the CCI regime
merchant bankers had restricted role to play in that regard. The role was confined mainly to
getting clearance from the CCI & to ensuring the success of capital issue through marketing
efforts. There were also no disclosure norms. Merchant bankers were seldom held
accountable for the correctness of the information disclosed in the prospectus & letter of
offer but with issuance of comprehensive guidelines for free market pricing, code of
conduct for merchant bankers, etc. by SEBI role of merchant bankers has considerably
increased.
An outstanding development in history of Indian capital market was opening up
in 1992 by allowing financial institutions to invest in the primary & secondary markets &
also permitting Indian companies to directly tape foreign capital markets through Euro
Issues. The result was so encouraging that within less than 2 years to march 1994 the total
inflow of foreign capital through these routes reached to about $5 billion. It was estimated
that this figure may go up to $35-$40 billion by the turn of the century. Though, at the initial
stage the Indian merchant banker have played supportive role has almost all of the euro
issue have been laid managed by foreign merchant banker, but in future they may play
major role by their increasing participation as managers/lead managers. Foreign direct
investment (FDI) has also investments by NRI have risen considerably due to number of
incentives offered to them. They need the service of merchant bankers to advice them for
their investments in India. Further increasing investments in joint ventures abroad by
Indian corporations also require expert service of merchant banker. For the first time in
India the concept of debt market has set to work through NSE & OTCI. Experts feel that the
estimated capital issues of Rs.4000 crores in 1994-95, a good portion may be raised
through debt instruments. The development of debt market will offer tremendous
opportunity to, Merchant Bankers. Recently, Indian Capital Market has also witnessed
innovations in the financial instruments such as non-convertible debentures with
detachable warrants, cumulative convertible preference shares, zero coupon bonds,
secured premium notes, suction rated bonds, etc. This has further extended the role of
Merchant bankers as market makers for these instruments.
 Level of Competition
The rapid growth in the primary capital market has led to an even greater
proliferation of Merchant Bankers. The number of Merchant Bankers has increased from
only 33 in the year 1989-90 to 405 in 1993-94. Presently, the number of Merchant Bankers
in different categories registered with SEBI is 501 (August 1994). Considering a total
number of public issues in the year 1994-95, a Merchant Banker on average viedlor 3.5
issues. Therefore a tough competition exists in the line off issue management. The high
level of competition in Merchant Banking business especially issue management is evident
from the fact that out of 140 Category-I merchant Bankers in 1992-93 only 66 were able to
manage an issue.
Merchant Banking business is handled by a few established players and for
the others there is a heavy competition. Therefore, their survival dependent on innovative
capital issue structuring and other income generating activities like leasing, high-purchase,
investments and dealings in secondary market operations.
As a result of liberalization and globalization, competition in corporate sector
is becoming intense. For their survival and growth, companies are reviewing their
strategies, structures and functioning. This had led to corporate restructuring including
mergers, acquisitions, splits, divestments and financial restructuring. This area of corporate
advisory services which is largely in the hands of private consultancy firms, also offers good
opportunity to Merchant Bankers to extend the area of operations.
Environmental factors affecting merchant
banking services

Schematic view of environmental factors

Affecting Merchant Banking Services

ENVIRONMENTAL FACTORS
-Open for change-
Merchant Banking Services

THE USERS OF SERVICES

 General Technology Legal Aspect Demand
Economic Scientific Law & for
Conditions Innovations Regulations Services

THE MERCHANT BANKERS

-Open for entry-

The merchant bankers are a part of economics structure of the nation and they
function in an environment which is influenced inter alias by the following important
factors:
(1)The general economics condition, prevailing in the country presenting an economics
environment, affects the functioning of every economic or social organization. These
economic conditions assimilate the boom and prosperity, the depression and recessionary
impacts on industry trade and commerce.
(2)The technology and scientific innovations are responsible for onward shifting of the
entire developmental process to a state of higher development. Besides, the technological
development also helps the system to use information processing and communication
techniques to overcome limitations or restrictions of time and space, and provide better
services.
(3)The ‘law and regulations’ affect the functioning and relationship with users of the
services of the organization. Besides complying to various legal formalities the merchant
bankers exist the legal framework. Both creation of law and regulation of law is the
network within which the government and merchant bankers have to abide by the legal
norms which have the characteristics of change depending upon the moods of the public
system. (I.e. the government) and public interest.
(4)Demand for merchant banking services is one of the environmental factors that affect
the merchant banking functioning in two respects viz. the competitive forces exist for
merchant banking units and there remains a demand for the quality service to be provided
to the users.
Demand will change subject to changes in others environment factors,
particularly under the influence of technological development taking place. The coverage of
rural areas and small business is the present day need of environmental through geared
professionalism. The merchant banking professionalism requires new response in
education and training conforming to the dynamics of the change. Professional
development programs have got be reshaped to suggest merchant banks to render more
specialized services.
 Conclusion
The merchant banking business has increased over a short
period of time and with continued economic reforms. However, a stiff
competition exists in this line and survival will depend upon the financial
skills and spectrum of financial services and instruments offered by the
Merchant Banker. Hence, Merchant Banking Service is taking shape for
turbulent times.
Merchant banking is an activity initially undertaken by a few
large commercial banks in India, and it is now being adopted or undertaken
by a few large commercial banks in India, and it is now being adopted or
undertaken by practically every commercial bank through its Merchant
Banking Department. The range of activities covered under merchant
banking very wide indeed. The merchant banks offer a package of financial
services. Unlike in the past, their activities are now primarily non-fund based.
Therefore, they do not require much capital. One of the basic requirements of
merchant banking is a highly professional staff and worldwide contacts.
Merchant banking is usually international in character.

- Mandar