INDEX

SR.NO TOPIC PG.NO

1 EXECUTIVE SUMMARY 7

2 RESEARCH METHODOLOGY 8

3 INTRODUCTION 11

5 HISTORY AND MERCHANT BANKING IN INDIA 13

7 ORGANIZATIONAL SETUP OF MERCHANT BANKERS IN INDIA 17

8 REQUIREMENT FOR SETTING UP A MERCHANT BANK OUTFIT 19

9 MAIN OBJECTIVES OF MERCHANT BANKERS 24

10 SERVICES OF MERCHANT BANKERS 25

11 OBLIGATIONS AND RESPONSIBILITIES 37

12 CODE OF CONDUCT 38

14 PROBLEMS OF MERCHANT BANKING 39

15 CURRENT AFFAIRS 41

16 DIFFERENCE BETWEEN 45

17 CASE STUDIES 49

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17.1 STATE BANK OF INDIA 50

17.2 ICICI BANK LTD. 57

17.3 PUNJAB NATIONAL BANK 61

17.3 UNION BANK OF INDIA 63

17.4 KOTAK MAHINDRA 65

17.5 IDBI BANK 68

18 ANALYSIS AND INTERPRETATION 74

19 CONCLUSION 85

18 BIBLIOGRAPHY 86

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  EXECUTIVE SUMMARY

projects that are proposed to be financed by capital issues should be impeccable because it is the
primary market that holds the key to rapid capital formation, growth in industrial production and
exports. The securities sold to the public should represent genuine claims on future cash flows and
viable assets. Merchant bankers in India have a social responsibility to help build an industrial
structure, technologically second to none in the world and financially viable.

Amidst the swift changes sweeping the financial world, Merchant Banking has emerged as an
indispensable financial advisory package. Merchant banking is a service-oriented function that
transfers capital from those who own to those who can use it. They try to identify the needs of the
investors and corporate sector and advice entrepreneurs what to do to be successful. New players are
entering in this field day by day. Merchant Banking in India has a great demand over the globe. So
many companies in India are trying their hands in this field. Some companies have built their strong
image and some are still in process to leave their mark in the international market.

Although merchant banking activity was ushered in two decades ago, it was only in 1992 after the
formation of Securities and Exchange Board of India that it is defined and a set of rules and regulations
governing it are in place. It is to be emphasized that mere rules and regulations are not enough to
evolve and nurture sound traditions and practices in merchant banking and to build a vibrant capital
market. The quality of the

RESEARCH METHODOLOGY

3
OBJECTIVES:

 To develop the ability to study the functioning of Merchant Banking in India & learn &
apply multidisciplinary concepts, tools & techniques to solve vital problems.
 To familiarize with the various services provided by Merchant Bankers.
 To compare the public & private sector company engaged in providing merchant banking
services on various grounds.
 To find out the growth potential of the Merchant Banking public & private sector
companies.
 To understand the rights & duties of a merchant banker and his contributions to the overall
banking system.

HYPOTHESIS

 It would help us to develop the ability to study the functioning of Merchant Banking in India &
learn & apply multidisciplinary concepts, tools & techniques to solve vital problems.
 It familiarizes with the various services provided by Merchant Bankers.
 They would help us to draw comparison between public & private sector companies engaged in
Merchant Banking activities.
 Based upon the comparison, it would help us to determine which sector has more growth
potential & where should one invest his/her funds to maximize the return at minimum risk.

 RESEARCH DESIGN :

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• A research design is an arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy ion procedure.
• A sample design is a definite plan for obtaining a sample from a given population.
• For carrying out my research work I would follow Exploratory cum Descriptive research
design.
• Universe and Survey Population Sampling
All the items under consideration in any field of inquiry constitute a ―universe‖ or
―population‖.

Here in this study universe and survey population sampling would be all the public & private
sector companies of India engaged in Merchant Banking operations.

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  METHODS OF DATA COLLECTION

 Primary Data usually consists of the data that are collected

afresh for the first time and thus is original in character.
Primary Data that used in the study
 Information gathered from various banks  Questionnaire
In my Questionnaire, there are 10 Questions

 Secondary Data consists of data that is collected from some existing

literature. It has been already analyzed by someone else earlier and is
derived from that source. Secondary Data that used in the study are
 Newspapers
 Websites
 Books

Analysis Pattern

 Statistical Tools- graphs & charts

 Cross Tabulation Of Data

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  INTRODUCTION

Financial services are an important component of financial system. The smooth functioning of
financial system depends upon the range of financial services extended by the providers.
Financial services in India have witnessed remarkable changes in the recent past after the
implementation of “Liberalization, privatization and globalization”.

Funds are tapped from the capital market to finance various mega industrial projects. In attracting
public savings, merchant bankers play a vital role as specialized agencies. The resources raising
functions remains to be the primary business of a merchant banker. The primary market holds the
key to rapid capital formation, growth in industrial productions and exports. There has to be
accountability to the end use of funds raised from the market. The increase in the number of
issues and amount raised the number of merchant bankers. Therefore, the field became highly
competitive market where it requires a specialized skill in handling the situation. The merchant
bankers have a social responsibility to in building an industrial structure in India.

Merchant bankers assist corporate in raising capital. They assist in issue of Shares, syndicating
loans, public issue of debentures. They do not provide funds. They only assist. They also actively
arrange working capital, appraisal, Projects scrutinize & persuade merger proposals.

The merchant banking has been defined as to what a merchant banker does. A merchant Banker
has been defined by Securities Exchange Board Of India (Merchant Banker) rules, 1992, as “Any
person who is engaged in the business of issue management either by making arrangements

7
regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor or
rendering corporate advisory services in relation to such issue management

HISTORY OF MERCHANT BANKING

 ORIGIN OF MERCHANT BANKING

The origin of merchant banking is to be traced to Italy in late medieval times and France
during the seventeenth and eighteenth centuries. The Italian merchant bankers introduced
into England not only the bill of exchange but also all the institutions and techniques
connected with an organized money market. Merchant banking consisted initially of
merchants who assisted in financing the transactions of other merchants in addition to their
own trade. In France, during seventeenth and eighteenth centuries a merchant banker (le
merchand Banquer) was not merely a trader but an entrepreneur par excellence. He
invested his accumulated profits in all kinds of promising activities. He added banking
business to his merchant activities and became a merchant banker.

 HISTORY

In late 17th and early 18th century Europe, the largest companies of the world was merchant
adventurers. Supported by wealthy groups of people and a network of overseas trading posts, the
collected large amounts of money to finance trade across parts of the world. For example, The
East India Trading Company secured a Royal Warrant from England, providing the firm with
official rights to lucrative trading activities in India. This company was the forerunner in

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developing the crown jewel of the English Empire. The English colony was started by what we
would today call merchant bankers, because of the firm's involvement in financing, negotiating,
and implementing trade transactions. The colonies of other European countries were started in
the same manner. For example, the Dutch merchant adventurers were active in what are now
Indonesia; the French and Portuguese acted similarly in their respective colonies. The American
colonies also represent the product of merchant banking, as evidenced by the activities of the
famous Hudson Bay Company. One does not typically look at these countries' economic
development as having been fueled by merchant bank adventurers. However, the colonies and
their progress stem from the business of merchant banks, according to today's accepted sense of
the word. Merchant banks, now so called, are in fact the original "banks". These were invented in
the middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in
stature on the back of the Lombard plains cereal crops many of the displaced Jews who had fled
persecution after 613 entered the trade. They brought with them to the grain trade ancient
practices that had grown to normalcy in the middle and Far East, along the Silk Road, for the
finance of long distance goods trades.

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

 MERCHANT BANKING IN INDIA

In India Merchant Banking activities started from the year 1967, following the footsteps of
similar activities in UK & USA. Currently Merchant Banking activity has mushroomed in the
Indian capital market with both public & private sector settings up their respective merchant

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Banking divisions. Currently, the total no. of merchant bankers in India are approx. 1450 with
more than 930 registered with SEBI. The SEBI authorized Merchant Bankers Include merchant
Banking divisions of All India Financial Institutions, nationalized & foreign banks, subsidies of
the commercial banks, private merchant banks engaged in stock broking, underwriting activities
& financial consultancy & investment advisory service firms.

 Grindlays Banks – 1967

 Citi banks – 1970

 SBI – 1973

 ICICI - 1974

Merchant banking in India - an overview

Companies raise capital by issuing securities in the market. Merchant bankers act as
intermediaries between the issuers of capital and the ultimate investors who purchase these
securities.

Merchant banking is the financial intermediation that matches the entities that need capital and
those that have capital. It is a function that facilitates the flow of capital in the market.

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  ORGANIZATIONAL SETUP OF MERCHANT BANKERS IN INDIA

In India a common organizational setup of merchant bankers to operate is in the form of

divisions of Indian and foreign banks and financial institutions, subsidiary companies established
by bankers like SBI, Canara Bank, Punjab National Bank, Bank of India, etc. Some firms are
also organized by financial and technical consultants and professionals. Securities and Exchange
Board of India has divided the merchant bankers into four categories based on their capital
adequacy. Each category is authorized to perform certain functions. From the point of
organizational setup India’s merchant banking organizations can be categorized into four groups
on the basis of their linkage with parent activity. They are:

(A) Institutional Base

Where merchant banks function as an independent wing or as subsidiary of various

private/Central Governments/State Governments financial institutions. Most of the financial
institutions in India are in public sector and therefore such setup plays a role on the lines of
government priorities and policies.

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(B) Banker Base

These merchant bankers function as division/subsidiary of banking organization. The parent

banks are either nationalized commercial bank or the foreign banks operating in India. These
organizations have brought professionalism in merchant banking sector and they help their parent
organization to make a presence in capital market.

(C) Broker Base

In the recent past there has been an inflow of qualified and professionally skilled brokers in
various stock exchanges of India. These brokers undertake merchant banking related operations
also like providing investment and portfolio management services.

(D) Private Base

These merchant banking firms are originated in private sector. These organizations are the
outcome of opportunities and scope in merchant banking business and they are providing skill-
oriented specialized services to their clients. Some foreign merchant bankers are also entering
either independently or through some collaboration with their Indian counterparts. Private sector
merchant banking firms have come up either as the sole proprietorship or public limited
companies. Many of these firms were in existence for quite some times before they added a new
activity in the form of merchant banking services by opening new divisions on the lines of
commercial banks and All India Financial Institutions.

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  REQUIREMENTS FOR SETTING UP A MERCHANT BANK OUTFIT

1. Formation of the Business Organization

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

a. Sole proprietorship
b. Partnership firm
c. Hindu Undivided Family (HUF)
d. Corporate Enterprises
e. Co-operative Society

Generally it is preferred that the Merchant Banking outfit be a registered company. Merchant
Banks are generally setup as subsidiary companies of banks (Public or Private). For example,
SBI caps, ICICI Securities etc.

2. Adoption of a viable business plan

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All the basic tests required to find out whether the business to be undertaken is viable or not are
also applicable to a Merchant Banking setup. Capital adequacy, profitability, growth
opportunities and current market size are some of the factors which need to be looked into.

3. Registration of Merchant Bankers

a. Application for grant of certificate

An application for grant of a certificate needs to be made to SEBI .

The application can be made for any one of the following categories of the merchant banker
namely:-

(i) To carry on any activity of the issue management, which will inter-alia consist of preparation
of prospectus and other information relating to the issue, determining financial structure, tie-
up of financiers and final allotment and refund of the subscription; and

(ii) To act as adviser, consultant, manager, underwriter, portfolio manager.

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

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• Category III, that is to act as underwriter, adviser, consultant to an issue; 
Category IV, that is to act only as adviser or consultant to an issue.

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

needs to be obtained from SEBI.

b. Application to conform to the requirements

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

c. Furnishing of information, clarification and personal representation

The Board may require the applicant to furnish further information or clarification regarding
matters relevant to the activity of a merchant banker for the purpose of disposal of the
application. The applicant or its principal officer may appear before the Board for personal
representation.

d. Consideration of application

The Board shall take into account for considering the grant of a certificate, all matters, which are
relevant to the activities relating to merchant banker and in particular the applicant complies with
the following requirements, namely: -

• the applicant shall be a body corporate other than a non- banking financial company
• the merchant banker who has been granted registration by the Reserve Bank of India to
act as a Primary or Satellite dealer may carry on such activity subject to the condition that
it shall not accept or hold public deposit

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• the applicant has the necessary infrastructure like adequate office space, equipments, and
manpower to effectively discharge his activities
• the applicant has in his employment minimum of two persons who have the experience to
conduct the business of the merchant banker
• a person directly or indirectly connected with the applicant has not been granted
registration by the Board;
• the applicant fulfils the capital adequacy requirement is as follows:

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

Category Minimum Amount

Category I Rs. 5, 00, 00, 000

Category II Rs. 50, 00, 000

Category III Rs. 20, 00, 000

Category IV Nil

• The applicant, his partner, director or principal officer is not involved in any litigation
connected with the securities market which has an adverse bearing on the business of the
applicant and have not at any time been convicted for any offence involving moral
turpitude or has been found guilty of any economic offence

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• The applicant has the professional qualification from an institution recognized by the
Government in finance, law or business management  Grant of certificate to the
applicant is in the interest of investors.

e. Procedure for Registration

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

f. Payment of fees and the consequences of failure to pay fees

Every applicant eligible for grant of a certificate shall pay such fees in such manner and within
the period specified.

Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may
suspend the registration certificate, whereupon the merchant banker shall cease to carry on any
activity as a merchant banker for the period during which the suspension subsists.

The Merchant Bank can commence business on acquisition of a Certificate of Registration from
the SEBI after completion of the above mentioned formalities.

 MAIN OBJECTIVES OF MERCHANT BANKERS

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

I. To carry on the business of merchant banking, assist in the capital formation, manage
advice, underwrite, provide standby assistance, securities and all kinds of investments
issued, to be issued or guaranteed by any company, corporation, society, firm, trust
person, government, municipality, civil body, public authority established in India.
II. The main object of merchant banker is to create secondary market for bills and discount
or re-discount bills and acts as an acceptance house.
III. Merchant banker’s another objective is to set up and provide services for the venture
capital technology funds.
IV. They also provide services to the finance housing schemes for the construction of houses
and buying of land.
V. They render the services like foreign exchange dealer, money exchange, and authorized
dealer and to buy and sell foreign exchange in all lawful ways in compliance with the
relevant laws of India.
VI. They will invest in buying and selling of transfers, hypothecate and deal with dispose of
shares, stocks, debentures, securities and properties of any other company.

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  SERVICES OF MERCHANT BANKERS:-

Business planning stage: 1) Project feasibility study

2) Advice on capital structuring

Equity raising: 3) Preparation of prospectus and

liaison with SEBI

4) Pricing decisions

5) Marketing in the capacity of lead

managers

6) Underwriters to the issue

7) Post issue management

8) Assistance in ADR/GDR

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 Debt raising: 9) Management of debenture issue

10) Preparation of bankable

proposal and syndication of loan

Working capital raising: 11) Assistance in arranging optimal capital

finance

Strategic advice: 12) Advice on mergers

and
acquisitions

13) Corporate structuring advice

 SERVICES PROVIDED BY MERCHANT BANKS: (in detail)

The development activity through the country had exerted excess demand on the sources of funds
by the ever expanding industry and trade which could not be met by the All India Financial
Institutions. In these circumstances, the corporate sector enterprises had the only alternative to
avail themselves of the capital market services for meeting the long-term fund requirements
through capital issues of equity and debentures. The growing demand for funds from capital
market has enthused many organizations to enter into the field of merchant banking for managing
the public issues.

The need of merchant banker is also felt in the wake of huge untapped public savings as
merchant bankers can play a highly significant role in mobilizing funds from savers to invest in
channels assuring promising return on investments and thus narrow down the gap between
demand for and supply of investible funds.

Merchant bankers not only provide advisory services to corporate enterprises but also advise the
investors of the incentives available in the form of tax relief and other statutory obligations.
Thus, the merchant bankers help industry and trade to raise funds, and the investors to invest

20
their saved money in sound and healthy concerns with confidence, safety and expectation of
higher yields.

 Broadly a merchant banker can provide the

following services:

1. Corporate Counseling
2. Project Counseling And Pre-Investment Studies
3. Credit Syndication And Project Finance
4. Issue Management
5. Underwriting
6. Bankers
7. Portfolio Management
8. Venture Capital Financing
9. Leasing
10. Non-Resident Investment Counseling And Management
11. Acceptance Credit And Bill Discounting
12. Advising On Mergers, Amalgamations And Take-Over
13. Arranging Offshore Finance
14. Fixed Deposit Broking

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 15. Relief To Sick Industries

 Let’s take a brief look at each of these functions:

Corporate Counseling

It includes a whole range of financial services provided by a merchant banker to a corporate unit
a view to ensure better performance, maintain steady growth and create a better image among
investors.

It covers the entire field of merchant banking activities i.e., project counseling, capital
restructuring, portfolio management and the full range of financial engineering including venture
capital, public issue management, loan syndication, working capital, fixed deposits, lease
financing, acceptance credit, etc. However, the scope of corporate counseling is limited to
suggestions and opinions leaving to the client to take corrective actions for solving its corporate
problems.

A merchant banker finds out the problems of enterprise, which shall include organizational goals
for the enterprise, size of the organization and operational scales, choice of a product, pricing,
etc, and suggests ways and means to solve those problems.

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Project Counseling

Project counseling is an important merchant banking service which includes preparation of

project reports, deciding upon the financing pattern to finance the cost of the project, appraising
the project report with the financial institutions/banks.

Project reports are prepared to obtain government approval of the project, for procuring financial
assistance from financial institutions and banks, for ensuring market for the proposed product,
for planning public issues, etc.
Financing the project cost is an important aspect of project counseling. The two sources of funds
available to finance the project cost are internal sources of funds (or owners' funds) which
includes promoter's contribution and retained earnings; and external sources of funds which
refers to the borrowed funds in the form of loans from banks, private investors and financial
institutions and in the form of debentures from the public.

Merchant banker has to decide the financing mix of the internal and external sources of funds
keeping in view the rules, regulations and norms prescribed by the government or followed by
the term lending financial institutions.

While rendering project counseling services, the merchant banker has to ensure that the
application forms for obtaining the funds from financial institutions are filled in with relevant
and appropriate information and before submitting the application, the merchant banker has to
appraise the project considering the various aspects as to the type of the project, location,
technical, commercial and financial viability of the project.

Credit Syndication

23
Once the client company has decided about the project proposed to be undertaken, the next step
is looking for the sources wherefrom the funds could be procured to implement the project.

Merchant banker has to locate the sources of funds and comply the formalities required to
procure the funds. This service rendered by the merchant banker in arranging and procuring
credit from financial institutions, banks and other lending and investment organizations for
financing the clients' project cost or meeting working capital requirement is referred to as loan
syndication or credit syndication.
Credit syndication in case of domestic borrowings is with the institutional lenders and banks.
Long and medium term funds are obtained from the All India Financial Institutions like IFCI,
IDBI etc., state level financial bodies like SFC, SIDC etc., commercial banks, mutual funds etc.
Short-term funds are also required by the firm for purchase of raw materials, payment of wages,
salaries etc. Sources of financing these short term requirements or working capital needs can be
from internal sources like internal accruals from working or operations and short term loans from
friends and relatives; or from external sources like short term borrowings from banks etc.

Issue Management and Underwriting

Management of capital issues is a professional service rendered by the skilled and experienced
merchant bankers. Previously, the managing agents for a particular corporate used to manage
public issues. The abolition of the managing agency system, the growth in the public limited
companies in number and size, the imposition of new rules and regulations regarding the public
issue of securities made it necessary for merchant bankers to play a definite role in the
management of public issues.

Public issue management involves marketing of corporate securities by offering the securities to
the public, procuring private subscription to the securities and offering securities to existing
shareholders of the company.

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As a manager to the public issue, the merchant banker, before the public issue has to obtain the
consent of the stock exchanges to the memorandum and articles of association, appoint other
managers, bankers, underwriters, brokers etc. ,advice the company to appoint auditors, solicitors
and board of directors, draft the prospectus and obtain consent from the companies legal
advisors, board of directors and other concerned parties, file the prospectus with registrar, make
an application for enlistment with stock exchanges and finally advertise for the issue.

A merchant bankers post issue activities include final allotment and/or refund of subscription
amount, calculation of underwriters liability in case of under subscription and complying the
necessary statutory requirements for listing of securities on the stock exchange.

Under writing of public issue

A fully underwritten public issue spells confidence to the investing public, which ensures a good
response to the issue. Keeping this in view companies, which float a public issue usually, desire a
full underwriting of the issue.

Underwriting is only the guarantee given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed in proportion by the underwriter. An
underwriter of the issue gets the following benefits:

• It earns a commission of the commitment given.

• It earns the right to be appointed as bankers of that issue.
• It expands its clientele by underwriting more and more issues.

• Bankers to the Issue

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The merchant banker can automatically become the banker to the issue in the following cases:

• The bank is a broker to the company

• It has given underwriting commitments.
• It acts as a manger to the issue
• The function of a banker to the issue is to accept application forms from the public
together with subscription money and transfer them to the account of the controlling
branch.

 Portfolio Management

Portfolio refers to investment in different types of marketable securities or investment papers like
shared, debentures and debenture stocks, bonds etc. from different companies or institutions held
by individuals firm or corporate units.

Portfolio management refers to managing efficiently the investment in the securities held by
professionals to others.

Merchant bankers take up management of a portfolio of securities on behalf of their clients,

providing special services with a view to ensure maximum return by such investments with a
minimum risk of loss of return on the money invested in securities.

A merchant banker while performing the services of portfolio management has to enquire of the
investment needs of the client, the tax bracket, ability to bare risk, liquidity requirements, etc.
they should study the economic environment affecting the capital market, study the securities
market and identify blue chip companies in which money can be invested. They should keep
record of latest amendment in government guidelines, stock exchange regulations, RBI
regulations, etc.

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Advisory Services Relating To Mergers and Takeovers

A merger is defined as a combination of two or more companies into a single company where
one services and other looses their corporate existence. A merger is also defied as an
amalgamation wherein the shareholders of the combining companies become substantially the
shareholders of the company formed.

A takeover is referred to as an acquisition, which is the purchase, by one company of a

controlling interest in the share capital of another existing company.

Merchant bankers are the middlemen settling negotiations between the offered and the offeror.
Their role is specific and specialized in handling the mergers and take over assignments. Being a
professional expert, the merchant banker is apt to safeguard the interest of the shareholders in
both the companies and as such his assistance is useful for both the companies, i.e. the acquirer
as well as the acquired company.

Based on the purpose of business objective, the search of the acquirer company will start for a
merger partner company. If the objective of merger is growth oriented i.e. seeking expansion in
production and market segments, utilization of existing companies or optimum utilization of
resources, then the acquirer company will select a business related company as a merger partner.

If the objective is diversification in production line or business activities, then it will select a non-
related company as a merger partner.

Once the merger partner is proposed the merchant banker has to appraise the merger/takeover
proposal with respect to financial viability and technical feasibility. He has to negotiate with the
parties and decide the purchase consideration and mode of payment. He has to comply with the
legal formalities like getting approval from the Government/ RBI; drafting the scheme of
amalgamation; getting approval of company Board, financial institution, high court if required;
arranging for the meeting etc.

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Venture Capital Financing

Financing an emerging high-risk project is called venture capital financing. Many merchant
bankers are entering into this area by also financing viable upcoming projects. The financing is
by subscription to the equity capital, while repayment is by selling the equity through stock
market when the shares are listed.

Leasing

Is there another lucrative area of financing where merchant bankers are turning? Leasing is a
viable source of financing while acquiring capital assets. The services include arrangement for
lease finance facilities for leasing companies, legal; documents and tax consultancy.

Non Resident Investment

To attract NRI investments in the primary and secondary markets, the merchant bankers provide
investment advisory services to the NRIs in terms of identification of investment opportunities,
selection of securities, portfolio management, etc. they also take care of operational details like
purchase and sale of securities securing the necessary clearance from RBI under FERA for
repatriation of dividends and interest, etc.

Acceptance Credit and Bill Discounting

Though merchant bankers world over specialize in acceptance credit and bill discounting, these
services are not currently provided by merchant bankers in India the principal reasoning being
the lack of an active market for commercial bills.

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Arranging Offshore Finance

The merchant bankers also help their clients in the following areas involving foreign currency
financing:

1. Financing Of Exports And Imports

2. Long Term Foreign Currency Loans
3. Joint Ventures Abroad
4. Foreign Collaboration Arrangements

The assistance rendered as in the case of financial services covers appraisals, negotiations,
compliance with procedural and legal aspects etc.

Management of Fixed Deposits of Companies

Recently, merchant’s bankers have begun to structure and mobilize fixed deposits for their
corporate clients. They take care of the procedural and legal aspects, and also mange the
collection and subsequent servicing of the deposits. Advice with regard to the amount to be
raised, interest charges, terms of deposits and other related issues are also offered to the client.

Relief to Sick Industries

The services offered by merchant bankers to sick industries can be

summarized as follows:

1. Assessment of capital requirements and counseling on capital restructuring; 2. Appraisal of

technological, environmental, financial and other factors causing sickness;
3. Preparations of programs and packages for rehabilitation of sick units;

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4. Providing necessary assistance where the rehabilitation package involves mergers or
amalgamation;
5. Obtaining necessary approval for implementation the rehabilitation package from the
statutory authorities;

Monitoring the implementation of the scheme of rehabilitation

 OBLIGATIONS AND RESPONSIBILITIES

 Merchant bankers have the following obligations and responsibilities

1. Merchant banker should maintain proper books of accounts, records and submit half
yearly/annual financial statements to the SEBI within stipulated period of time.
2. No merchant banker should associate with another merchant banker who is not registered
in SEBI.
3. Merchant bankers should not enter into any transactions on the basis of unpublished
information available to them in the course of their professional assignment.
4. Every merchant banker must submit himself to the inspection by SEBI when required for
and submit all the records.
5. Every merchant banker must disclose information to the SEBI when it requires any
information from them.
6. All merchant bankers must abide by the code of conduct prescribed for them.

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7. Every merchant banker who acts as lead manager must enter into an agreement with the
issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular
reference to disclosures allotment, refund etc.

 CODE OF CONDUCT

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

a) The merchant banker must observe high integrity and fairness in all his dealings.
b) He shall render at all times high standard of services, exercise due diligence, exercise
independent professional judgment.
c) If necessary, he must disclose to his clients the possible source of conflict of duties and
interests.
d) The merchant banker should not indulge in unfair practice or unfair competition with
other merchant bankers.
e) He should not make any exaggerated statement about his capacity or achievement.
f) He should always Endeavour to give the best possible advise and prompt efficient and
cost effective service.
g) He should maintain the secrecy of all the confidential information received during the
course of service to his client.

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h) He should not engage in the creation of a false market or price rigging or manipulation.

 PROBLEMS OF MERCHANT BANKING

Restriction of merchant banking activities:

SEBI guidelines have authorized merchant bankers to undertake issue related

activities and made them restrict their activities or think of separating these
activities from present one and float new subsidiary and enlarge the scope of its
activities.

Minimum net worth of Rs.1 crore:

SEBI guidelines stipulate that a minimum net worth of Rs.1 crore for authorization of
merchant bankers.

Non co-operation of issuing companies:

Non co-operation of the issuing companies in timely allotment of securities and
refund of application money is another problem faced by merchant bankers.

Merchant Banker’s Commission:

 Maximum :- 0.5%

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  Project appraisal fees
 Lead Manager :-
- 0.5% up to Rs.25 crores

- 0.2% more in excess of Rs.25 crores

 Underwriting fees

 Brokerage commission :- 1.5%

 Other expenses :- - Advertising

- Printing

- Registrar’s expenses

- Stamp duty

 CURRENT AFFAIRS

 RBI allows cash withdrawal from merchant banker terminals

Besides ATMs, customers can now also withdraw cash up to Rs1000 from terminals at different
merchant establishments, the Reserve Bank. As a further step towards enhancing the customer
convenience in using the plastic money, it has been decided to permit cash withdrawals at POS
(point of sale) terminals. To start with, this facility will be available for all debit cards issued in
India, up to Rs1000 per day," RBI said in a statement issued here.

The use of debit cards at POS terminals at different merchant establishments has been steadily
increasing, it said. This facility is available only against debit cards issued in India.
At present cash withdrawal facility using plastic cards is available only at Automatic Teller
Machines (ATMs) with the number of ATMs in the country at 44,857. There are 4,70, 237 POS
terminals in the country.
This facility may be made available at any merchant establishment designated by the bank and
would be available whether the card holder makes a purchase or not.

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  Morgan Stanley makes i-banking comeback

The joint venture between JM Financial and Morgan Stanley was inked in 1997 and formalized
in 1999. The JV had investment banking operations other than equity broking, research, wealth
management and advisory and securities distribution operations. Post the split, JM Financial
acquired the investment banking company together with its subsidiaries, which were engaged in
fixed income, equity broking, wealth management, advisory and distribution businesses of $ 20
million. The Indian partner sold its 49% holding in JM Morgan Stanley Securities (JMSPL), the
institutional equity broking company to Morgan Stanley for $ 445 million.

Bulge bracket investment banking major, Morgan Stanley has re-entered investment banking
business on its own, after parting ways with JM Financial — its former Indian partner.

 PNB aims profit of 7,500crore by 2013

The country's second largest public sector lender Punjab National Bank aims to
double its profit to Rs7,500 crore in the next four years.
"The bank has set a target to expand total business to Rs10crore and earn net profit of Rs7,500
crore by 2013," said PNB Chairman and Managing Director K C Chakrabarty, who is charge of
Deputy Governor of RBI.

The growth driver would be better asset liability management, thrust on recovery, focus on
customers and financial inclusion, he had said. Besides, the bank plans to open new line of
businesses in the current fiscal including merchant banking subsidiary.
PNB Investment Services aims to provide investment consultancy and merchant banking services
and would be operational in the next three months. Currently, these operations are run by a
division of the bank.

 ICICI Bank to oversee mergers and acquisitions



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ICICI bank and its merchant banking arm, ICICI Securities (I-Sec), have entered into an
agreement, whereby all M&A deals will be done out of ICICI Bank. The agreement goes on to
define an M&A deal as one which involves change in management control.
This arrangement replaces the earlier practice of both I-Sec and ICICI Bank working together on
M&A deals. ―Since a predominant number of people, who wish to be advised on M&A, also
look for acquisition finance, it was decided that the business should be housed in the bank,‖ I-Sec
MD Madhabi Puri Buch told ET. ―Now, if a corporate is seeking a sell mandate or a buy
mandate, where the transfer of controlling interest takes place, the deal will be done by ICICI
Bank.‖ ICICI Bank had initially entered the investment banking space in 2006. Over the past
couple of years, both the bank and its subsidiary have been vying for deals.
The new deal has taken into effect between both the entities from April 1.

 Birla Capital and Financial Services gets SEBI merchant banking

license

Birla Capital & Financial Services Ltd has been granted a merchant-banking license by the
Securities and Exchange Board of India. The license will enable the company to offer a wide
range of on-shore investment banking advisory and underwriting services in the Indian market.
The company, which is a part of the Yash Birla conglomerate, will initially concentrate on
regulated services like initial public offerings, takeover, buybacks, delisting and valuations. It
also offers non-regulated services like PE Syndication, M&A Advisory and other corporate
advisory.
Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash Birla Group that has
diversified interest in sectors like auto & engineering, textiles & chemicals and power &
electrical, education & IT.

 Primary market slowdown, affects merchant bankers’ wallet

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 The recent slowdown in the primary market has impacted not only investors but merchant
bankers as well, as there has been a significant decline of nearly 60 per cent in their
percentage fees so far this year.
"There is a clear drop in the merchant banking fees to Rs 216crore in comparison to Rs. 771crore
for the calendar year 2007, indicating a drop of 57.9 per cent on annualized basis," Nexgen
Capitals, the merchant-banking arm of brokerage firm SMC Global Securities.
Merchant bankers are those who advise the issuer about the public offer and manage the issue.
The average percentage fees has declined to 1.21 per cent so far this year from 2.24 per cent in
2007, the report added.
Reliance Power IPO of Rs 11,563 crore during this year with the merchant banking fee of Rs 50.6
crore, amounting to 0.44 per cent of the issue size had a great bearing on this trend.

 Nomura launches its investing banking operations in India

Nomura Financial Advisory and Securities (India) Private limited ('Nomura India'), a wholly-
owned subsidiary of Nomura Holdings, Inc. ('Nomura'), has launched its equity sales and trading
and investment banking operations in India. In October 2008, Nomura, a global investment
bank, acquired the majority of Lehman Brothers' employees in India, including the equities sales
and trading, equity research, fixed income liquid markets sales and trading, and investment
banking teams.
By integrating the former Lehman Brothers India franchise and obtaining its merchant banking
licence and stock exchange memberships, Nomura India said in a statement it has significantly
expanded its capabilities in India through a wide range of onshore financial solutions spanning
securities brokerage securities underwriting and advisory services.

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  THE DIFFERENCE BETWEEN

Investment banks and Merchant banks

Merchant banks and investment banks, in their purest forms, are different kinds of financial
institutions that perform different services. In practice, the fine lines that separate the functions of
merchant banks and investment banks tend to blur. Traditional merchant banks often expand into
the field of securities underwriting, while many investment banks participate in trade financing
activities.

In theory, investment banks and merchant banks perform different functions.

Pure investment banks raise funds for businesses and some governments by registering and
issuing debt or equity and selling it on a market. Traditionally, investment banks only
participated in underwriting and selling securities in large blocks. Investment banks facilitate
mergers and acquisitions through share sales and provide research and financial consulting to
companies.

Traditional merchant banks primarily perform international financing activities such as foreign
corporate investing, foreign real estate investment, trade finance and international transaction
facilitation.

Some of the activities that a pure merchant bank is involved in may include issuing letters of
credit, transferring funds internationally, trade consulting and coinvestment in projects involving
trade of one form or another.

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

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

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

 Merchant banks and Commercial banks

Merchant banks Commercial banks

1) Assist in raising capital in the form of Provide funds in the form of term
equity, preference shares, and syndicated loan and working capital.
loan working capital instruments.

2) Advisor not financer. Financing is the main business.

38
3) Do not accept chequable deposits. Demand deposits are the key
feature.

4) Mainly fees based business. Mainly fund based business

5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on risks
shields i.e. mitigation measures proposal and cannot afford to be
grossly relationship based and close
to the customer.

CASE STUDIES

BRIEF ANALYSIS OF SOME MERCHANT BANKS OF INDIA

 SBI Bank of India  ICICI Bank Ltd.

 Punjab National Bank

 Union Bank of India

 Kotak Mahindra

 IDBI BANK

39
SBI Merchant Banking Group is strongly positioned to offer perfect financial solutions to your
business. We specialize in the arrangement of various forms of Foreign Currency Credits for
Corporate.

State Bank of India is the nation's largest bank. Tracing its roots back some 200 years to the
British East India Company (and initially established as the Bank of Calcutta in 1806), the bank
operates more than 13,500 branches and over 5,000 ATMs within India, where it also owns
majority stakes in seven associate banks. State Bank of India has more than 50 offices in nearly
35 other countries, including multiple locations in the US (California), Canada, and Nigeria. The
bank has other units devoted to capital markets, fund management, factoring and commercial

40
services, and brokerage services. The Reserve Bank of India owns about 60% of State Bank of
India.

SBI being an Indian entity has no India exposure ceiling. Our Primary focus is On
Indian Clients. SBI’s seasoned Team of professionals provides you with Insightful credit
Information and helps you Maximize the Value from the transaction.

OUR PRODUCTS AND SERVICES

 Arranging External Commercial Borrowings (ECB)

 Arranging and participating in international loan syndication
 Loans backed by Export Credit Agencies
 Foreign currency loans under the FCNR (B) scheme
 Import Finance for Indian corporate

investment bank and project advisor, assisting domestic company’s fundmobilization efforts for
last many years.

We began operations in August 1986 as a wholly owned subsidiary of the State Bank of India,
which is the largest commercial bank in India. In January 1997, fresh equity shares were issued to
Asian Development Bank (ADB) and ADB now holds 13.84% stake in the equity of SBICAPS.
The distinguished parentage (with a 86.16% stake) together with the long standing association of

41
an internationally renowned financial institution like the Asian Development Bank further
enhances our image as a truly 'World Class Investment Bank'.

Our Mission - To provide Credible, Professional and Customer Focused worldclass

investment banking services.

Our Vision - To be the best India based Investment Bank.

SBI Group:
 The largest commercial bank group in India
 Position in the domestic banking sector as on 31 March 2008:
 15.44% of the aggregate deposits.
 15.28 % of total advances.
 The only Indian Bank to find a place in the Fortune Global 500 List.
 First Indian Bank to take up merchant banking in 1986.

SBI Capital Markets Limited:

 No. 1 in Asia – Pacific for Project Advisory. Rating by Thomson Project Finance
International.
 No. 1 in IPO’s, managed 700+ issues (since 1989 – source Prime Database).
 The only Indian Merchant Banker in the Global 10, Thomson Project Finance
International 2007.  Pioneer in Privatization.

Subsidiary:-

 SBICAPS Ventures Ltd.

 SBICAP Securities Ltd.
 SBICAPS (UK) Ltd.
 SBICAP Trustee Company Ltd.

42
Associates Bank:-

State Bank of State Bank of SBI Factors & SBI Commercial

Bikaner & Saurashtra Comm. (California) Bank of India
Jaipur Services Ltd. LLC

State Bank of State Bank of SBI Funds SBI

Hyderabad Travancore Management International
(P) Ltd. (Mauritius)
Ltd.

State Bank of SBI Capital SBI DFHI Indo-Nigerian

Indore Markets Ltd. Ltd. Merchant
Bank

Key Personnel:-

Board of Directors Committee of Audit Management Team

Directors Committee

Shri O. P. Bhatt Shri R. Sridharan Shri D. Shri S.

(Chairman) (Chairman) Sundaram Vishvanathan
(Chairman) (MD & CEO )
Dr. R. H. Patil Dr. R. H. Patil Shri R. Shri M. K. Nag
Sridharan (Executive Vice
President)

Shri R. Sridharan Shri S. Vishvanathan Dr R. H. Patil

(MD & CEO)
Shri Bansi S. Mehta

43
 Smt. Bharati Rao
Shri D. Sundaram
Shri Ajay Sagar
Dr. Swati A.
Piramal
Shri S.
Vishvanathan
(MD & CEO)

Awards:-

 Asia Pacific Bank of the Year Award 2009 for Leadership in Project Finance by
Thomson Reuters (PFI)
 India Loan House 2009 for Leadership in Loan Syndication by Thomson Reuters (IFR
Asia)
 Asia Pacific Oil and Gas Deal of the Year 2009 for Cairn India by Thomson Reuters
(PFI)
 African Power Deal of the Year 2009 for Morupule B by Thomson Reuters (PFI)
 Indian Power Deal of the Year 2009 for Sasan by Euromoney
 Indian Upstream Oil & Gas Deal of the Year 2009 for Cairn India by Euromoney
 Indian Road Deal of the year 2009 for Yamuna expressway by Euromoney
 Indian Telecom Deal of the Year 2009 for Aircel by Euromoney
 SAFA Best Presented Accounts Award 2008
 Award for Excellence in Financial Reporting

44
SERVICES:-

 Project Advisory & Structured Finance

SBICAP has built a formidable presence in the area of Project Finance Advisory and Funds
Syndication with several prestigious mandates in almost every sector of the industry to its credit.

Our product portfolio includes:

 Project Appraisal
 Structured Finance and Syndication
 Infrastructure Project Advisory
 Securitization
 Debt & Equity Syndication

 Capital Markets

Capital Markets Group handles transactions in the capital markets space across multiple
instrument structures.

Our product and solutions bouquet includes:

45
  Managing Initial Public Offerings and Follow-on Public offerings and Offers-for-Sale
 Managing Rights Offering, be it the traditional or the structured formats
 Qualified Institutional Placements
 Open offers, Buyback and Delisting of securities
 Offerings of convertible securities
 Public offering of Corporate structured bonds
 Arranging Private Equity to include growth capital, pre-IPO convertibles, private
investments in public equity (PIPES), mezzanine debt and equity, and equity offerings
completed as a private placement.

 Private placement of bonds

 Capital restructuring advisory services
 Advisory and arrangement services for products such as AIM Listing, Indian Depository
Receipts, ADR/GDR and other off-shore equity or bond listing options

 M&A and Advisory

The M & A product portfolio includes:

 Mergers & Acquisitions

 Private Equity
 Foreign Currency Convertible Bonds (FCCB)
 Corporate Advisory

46
You see, ICICI Bank is India's #2 bank (after State Bank of India), with more than 600 branches
and 2,200 ATMs nationwide. ICICI's retail banking group offers lending and deposit services to
small businesses and individuals. Larger businesses are served by the corporate banking group,
which offers finance services and treasury products. ICICI's rural and government banking unit
offers micro-loans and agricultural banking. Foreign operations, as well as services related to
international trade finance and expatriate Indians, fall under the international banking group.
Other ICICI offerings include online banking, asset management, and insurance.

Key numbers for fiscal year ending March, 2008:

Sale: $5,796.3M
One year growth: 99.1%
Net income: $524.1M
Income growth: 167.4%

47
ICICI Advice on Wide Varity of Product:

 Private Equity Financing

 Secondary sale transactions
 pre IPO deals

ICICI Securities Ltd is the largest equity house in the country providing end-to-end solutions
(including web-based services) through the largest non-banking distribution channel so as to
fulfil all the diverse needs of retail and corporate customers. ICICI Securities (I-Sec) has a
dominant position in its core segments of its operations - Corporate Finance including Equity
Capital Markets Advisory Services, Institutional Equities, Retail and Financial Product
Distribution.

ICICI Securities Inc., the step-down wholly owned US subsidiary of the company is a member of
the National Association of Securities Dealers, Inc. (NASD). As a result of this membership,
ICICI Securities Inc. can engage in permitted activities in the U.S. securities markets. These
activities include Dealing in Securities and Corporate Advisory Services in the United States and
providing research and investment advice to US investors.

is a SEBI Registered CAT-1 Merchant banker. ICICI Securities Inc. is also registered with the
Financial Services Authority, UK (FSA) and the Monetary Authority of Singapore (MAS).

Board of Directors:-

ICICI Securities Limited. ICICI Securities Holding Inc. ICICI Securities, Inc.

Ms. Chanda Kochhar, Ms. Anup Bagchi, Mr. Anup Bagchi,

(Chairperson) (Chairman) (Chairman)

Mr. Ketan Patel Mr. A Murugappan Mr. A Murugappan

Mr. Narendra Murkumbi Mr. Charanjit Attra Mr. Charanjit Attra

48
 Mr. Uday Chitale Mr. Subir Saha Mr. Subir Saha

Mr. Pravir Vohra Mr. Gopakumar P.,

(President)

Mr. Sonjoy Chatterjee

Ms. Madhabi Puri-Buch,

(Managing Director &
CEO)

Mr. A. Murugappan,
(Executive Director)
Mr. Anup Bagchi,
(Executive Director)

Awards & Recognition

Institutional

 ICICI Securities is awarded as the Best Investment Bank 2008 by Global Finance
Magazine
 The Corporate Finance group also was awarded a runner-up Best Merchant Banker by
Outlook Money in 2007.
 ICICI Securities (I-Sec) topped the Prime Database League Tables 2007 for money raised
through IPOs/FPOs.
 The equities team was adjudged the 'Best Indian Brokerage House-2003' by Asiamoney.

49
Retail

 ICICIdirect wins the prestigious Outlook Money - India's Best e-Brokerage House for
2009.
 ICICIdirect, the neighborhood financial superstore won the prestigious Franchise India
`Service Retailer of the Year 2008 award.
 ICICIdirect wins the prestigious Outlook Money - India's Best e-Brokerage House for
2008.
 ICICIdirect been winning the prestigious Outlook Money - India's Best eBrokerage
House for 2003-2004, 2004-2005, 2006-2007 and 2007-2008.
 ICICIdirect has also won the CNBC AWAAZ Consumer Award for the Most Preferred
Brand of Financial Advisory Services.
 Best Broker - Web 18 Genius of the Web Awards 2007
 Franchisor of the year award 2009
 Retail concept of the year awards 2009

Technology

 IDG India's CIO magazine has recognized ICICI Securities as a recipient of 2009 CIO
100 award
 Indian Bank's Association Business Technology Awards for Best Online Trading
Platform in 2006 and 2007

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  BIBLIOGRAPHY

Reference Material

 Financial Institutions & Market By Shashi K. Gupta, Nisha Aggarwal

 Merchant Banking – H.R. Machiraju

 The Rise of Merchant Banking – Stanley Chapman

 The Merchant Bankers – Joseph Wechsberg

INTERNET

www.google.com/news

www.answer.com

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www.emissarycapital.com

www.wikipedia.com www.sebi.gov.in

http://unionbankofindia.co.in

http://www.asialaw.com/Article/1988860/Merchant-Banking.html

http://www.icicisecurities.com

http://www.bobcapitalmarkets.com

http://www.pnbindia.in/subsidiaries

http://www.kotaksecurities.com http://www.canmoney.in

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