Infrastructural Financial Market

UNITEDWORLD SCHOOL OF LAW
MARKETING MANAGEMENT ASSIGNMENT
ON
Merchant Bank and its Roles and Responsibility
For
Internal Evaluation
Submitted to
CA Nitesh Nanavati
Prepared by
PALAK KATTA
BBA-LLB SEM-2
Batch-2019-2024
Roll No.-1006AL0067
1
DECLARATION
The text reported in the project is the outcome of my own efforts and no part of this project assignment has
been copied in any unauthorized manner and no part of it has been incorporated without due acknowledgement.
PALAK KATTA
2
TABLE OF CONTENTS
DECLARATION................................................................................................................................................................ 2
INTRODUCTION..............................................................................................................................................................4
History of Merchant Banks................................................................................................................................................5
WHO IS A MERCHANT BANKER?...............................................................................................................................6
 How Does a Merchant Bank Work?......................................................................................................................6
MERCHANT BANKING IN INDIA.................................................................................................................................7
 Merchant Banking Regulations.............................................................................................................................7
 Classifications of Merchant Bankers.....................................................................................................................7
ROLE OF MERCHANT BANKING................................................................................................................................8
RESPONSIBILITIES.......................................................................................................................................................11
3
INTRODUCTION
In modern terms, a merchant bank is a firm or financial institution that invests equity capital directly in
businesses and often provides those businesses with advisory services. A merchant bank offers the same
services as an investment bank, however, it typically services smaller clients and makes direct equity
investments in them.1
Merchant banks mainly work with small-scale enterprises that are unable to raise funds through an initial public
offering (IPO) by providing bridge financing, equity financing, and corporate credit products. They also issue
and sell securities on behalf of corporations through private placements to refined investors who require less
regulatory disclosure. Large merchant banks place equity privately with other financial institutions by acquiring
a considerable share of ownership from companies with a significant potential for high growth rate to seal the
gap between venture capital and public stock.2
A merchant bank is a company that conducts underwriting, loan services, financial advising, and fundraising
services for large corporations and high net worth individuals. Unlike retail or commercial banks, merchant
banks do not provide services to the general public. They do not provide regular banking services like checking
accounts and do not take deposits.3
These banks are experts in international trade, which makes them specialists in dealing with multinational
corporations. Some of the largest merchant banks in the world include J.P. Morgan, Goldman Sachs, and
Citigroup.4
These banks provide consultancy on matters pertaining the finances, marketing, management, and law. Such
consultancy services assist starting of businesses, raise finance, modernise, expand or restructure a business,
revival of sick units as well as provide assistance to companies in registering, buying and selling shares. They
do not perform the functions of depositories or retail lender institutions. They are, instead, intermediaries. They
also often assist international transactions that involve multinational corporations.5
1
https://corporatefinanceinstitute.com/resources/careers/companies/merchant-bank/ accessed on 8 April 2020
2
3
https://www.investopedia.com/terms/m/merchantbank.asp accessed on 8 April 2020
4
ibid
5
https://blog.ipleaders.in/essential-role-merchant-bankers/ accessed on 8 April 2020
4
Let's say Company ABC–based in the United States—wants to buy Company XYZ in Germany, it would hire a
merchant bank to facilitate the process. That bank would advise Company ABC on how to structure the
transaction. It may also help ABC in the financing and underwriting process.6
History of Merchant Banks
The history of merchant banks can be traced back to Italy in the late Medieval times as well in France in the
17th and 18th centuries. Merchant banks began operating as organized money markets consisting of merchants
financing the transactions of other merchants. French merchant Marchand Banquer invested all his profits by
integrating the banking business into his merchant activities and became a merchant banker.7
In the United Kingdom, merchant banks started in the early 18th century. The oldest merchant bank in the
United Kingdom is Barings Bank, which was established by a German-originated family of bankers and
merchants. It was founded in 1762 and was the second oldest merchant bank in the world after Berenberg Bank.
The bank was, at one time, referred to as the sixth great European power after Germany, Russia, United
Kingdom, Austria, and France after it helped finance the US government during the 1812 War.8
The growth of trade and industries in the 19th century led to the emergence of merchant banks in the United
States. The first merchant banks in the United States were JP Morgan & Co and Citi Bank. The industry was
mainly dominated by German-Jewish immigrant bankers and Yankee houses with close ties to expatriate
Americans who settled in London as merchant bankers. However, with the growth of the financial world,
corporations overshadowed family-owned businesses in the banking business. The corporations included
merchant banking as one of their areas of interest, a characteristic that banks hold until today.9
It was in 1967 that National Grindlays Bank introduced the concept of merchant banks in India. In 1972, the
State Bank of India became the first Indian Commercial Bank to set up a separate Merchant Banking
Division. 10
6
https://www.investopedia.com/terms/m/merchantbank.asp accessed on 8 April 2020
7
8
9
ibid
10
5
WHO IS A MERCHANT BANKER?
• A merchant banker is one who is a critical link between a company raising fund and the investors.
• Merchant banker is one who underwrites corporate securities and advices on issues like corporate mergers.
• The merchant banker may be in the form of a bank, a company, firm or even a proprietary concern.
• Merchant Banker understands the requirements of the business concern and arranges finance with the help of
financial institutions, banks, stock exchanges and money market.11
As per SEBI rules, a merchant banker refers to,
“any person who is engaged in the business of issue management either by making arrangement regarding
buying, selling or subscribing to securities or acting as manager, consultant or rendering corporate advisory
services in relation to such issue management”.12
 How Does a Merchant Bank Work?
Like investment banks, merchant banks are not depository/retail lender institutions. Rather, merchant banks are
intermediaries that provide brokerage, fund-raising, and financial advisory services on a large scale to
businesses and a smaller scale to wealthy individuals. For this reason, they often assist in international
transactions involving entities such as multinational corporations.13
To illustrate the role of a merchant bank, suppose a multinational corporation XYZ is considering the purchase
of a smaller company in another country. Company XYZ will likely solicit the services of a merchant bank for
advice on how to best approach the acquisition process. In addition, the merchant bank may also assist in the
financing of the acquisition, providing underwriting or loan services.14
11
https://www.slideshare.net/RahulMailcontractor/merchant-banking-72725419 accessed on 8 April 2020
12
https://accountlearning.com/merchant-bankers-definition-services-offered-categories/ accessed on 8 April 2020
13
https://investinganswers.com/dictionary/m/merchant-bank accessed on 8 April 2020
14
https://investinganswers.com/dictionary/m/merchant-bank accessed on 8 April 2020
6
MERCHANT BANKING IN INDIA
In India, Merchant Bank services were formally started by an already well-established National Grindlays
Bank in 1967, through its merchant banking division. Although it did not offer many financial services, but it
was a start. Following in the footsteps, Citibank also set up a merchant banking department in 1970 and
the State Bank of India in 1972. In the years to come, most of the commercial banks in India, like the ICICI
Bank, IDBI Bank, Syndicate Bank, Canara Bank, Bank of Baroda, Bank of India and many others set up their
own merchant banking divisions to compete in this growing market. Later, private individuals and consultancy
firms, both national and international also entered this race.15
 Merchant Banking Regulations
Merchant Banking Regulations According to Securities and Exchange Board of India (Merchant Bankers)
Rules, 1992, it is mandatory for a merchant banker to hold a certificate of registration granted by the Securities
and Exchange Board of India.
If a person/ organization wants to carry or undertake any of the authorized activities, has to get registered under
the regulations. To obtain the certificate of registration, one has to apply in the prescribed form and fulfil two
set of norms (a) operational capabilities and (b) capital adequacy norms.16
 Classifications of Merchant Bankers
The following are the categories of merchant bankers:
1. Category I – can carry on all activities relating to management of issues such as preparation of prospectus,
determining financial structure, conduct of market surveys, raising funds from capital market, raising of funds
through new instruments, arranging bought out deals and to provide advice on: mergers and amalgamations,
loan syndication, technology tie-ups, working capital finance, venture capital, lease finance, fixed deposit
management, factoring, portfolio management of mutual funds, rehabilitation of sick units etc.17
2. Category II – to act as advisor, consultant, co-manager, underwriter and portfolio manager.
3. Category III – to act as underwriter, advisor and consultant to an issue.
15
lawtimesjournal.in/merchant-banking-in-india/ accessed on 10 April 2020
16
17
7
4. Category IV – to act only as advisor or consultant to an issue.18
ROLE OF MERCHANT BANKING
The basic function of a merchant banker is marketing corporate and other securities. Now they are required to
take up some allied functions also. A merchant bank now takes up the following functions:
A. Promotional activities: In India, merchant bankers play the role of promoter of industrial enterprises.
They help entrepreneurs in conceiving ideas, identifying projects, preparation of feasibility reports, getting
Government approvals as well as incentives, etc. Merchant bankers may, at times, also provide assistance in
financial and technical collaborations and joint ventures.19
B. Raising finance: Merchant Bankers help their clients in raising finance by way of issue of a debenture,
shares, bank loans, etc. They tap both the domestic as well as the international markets. Finance raised by
this method may be used for commencing a new project or business or it may even be used for expansion
and modernization of an existing business.20
C. Brokers in Stock Exchange: Merchant bankers buy and sell shares in the stock exchange on behalf of the
clients. They additionally conduct researches on equity shares, advise the clients on the share to be
purchased, the time of purchase, quantity of such purchase and the time for selling these shares. Mutual
funds offer merchant banking services, large brokers, investment banks, and venture capitals.21
D. Issue Management: In the past, the function of a merchant banker had been mainly confined to the
management of new public issues of corporate securities by the newly formed companies, existing
companies (further issues) and the foreign companies in dilution of equity as required under FERA In this
capacity the merchant banks usually act as sponsor of issues.22
They obtain the consent of the Controller of Capital Issues (now, the Securities and Exchange Board of
India) and provide a number of other services to ensure success in the marketing of securities. The services
provided by them include the preparation of the prospectus, underwriting arrangements, appointment of
18
19
20
Ibid
21
ibid
22
https://www.ilearnlot.com/merchant-banking-functions-origin-and-evolution/55268/amp/ accessed on 10 April 2020
8
registrars, brokers and bankers to the issue, advertising and arranging publicity and compliance of listing
requirements of the stock-exchanges, etc.
They act as experts of the type, timing, and terms of issues of corporate securities and make them
acceptable for the investors on the one hand and also provide flexibility and freedom to the issuing
companies.23
E. Credit Syndication: Merchant banks provide specialized services in preparation of the project, loan
applications for raising short-term as well as long-term credit from the various bank and financial
institutions, etc. They also manage Euro-issues and help in raising funds abroad.24
F. Portfolio Management: It refers to the effective management of Securities i.e., the merchant banker helps
the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account
while advising on investment in different securities. The merchant banker also undertakes the function of
buying and selling of securities on behalf of their client companies. Investments are done in such a way that
it ensures maximum returns and minimum risk.25
G. Equity Underwriting: Large companies often employ the services of merchant banks in acquiring capital
through the stock market. Equity underwriting is achieved by evaluating the amount of stock to be issued,
the value of the business, the use of proceeds, and the timing of issuance of the new stock. Merchant banks
handle all the necessary paperwork and liaison with the appropriate marketing division to advertise the
stock.26
H. Project management: Merchant bankers offer help to clients in several ways in the process of project
management. They offer advice regarding the location of the project, preparation of project report, in
carrying out feasibility studies, planning out the financing of the project, tapping sources of such finance,
information regarding incentives and concessions from the government.27
I. Advise on modernisation and expansion: Merchant bankers advise on amalgamations, mergers,

acquisitions, takeovers, foreign collaborations, diversification of business, technology up-gradation, joint-
ventures, etc.28
23
https://www.ilearnlot.com/merchant-banking-functions-origin-and-evolution/55268/amp/ accessed on 10 April 2020
24
25
26
27
28
ibid
9
J. Handling government consent for industrial projects: A merchant banker completes all formalities for
his or her client, about government permission to expand and modernize business (necessary for companies)
and commencing new businesses (necessary for business people).29
K. Special assistance to entrepreneurs and small companies: Merchant banker advises entrepreneurs and
small companies on availability and existence of business opportunities, concessions, incentives and
government policies and helps them to take advantage of this option available to them, to the best of their
capabilities.30
L. Services to PSU’s: Merchant banker offers numerous services to public sector undertakings and units and
their public utilities. They assist in raising capital (long-term), in the marketing of securities, in foreign
collaborations as well as in arranging for long-term finances from lending institutions.31
M. Revival of sick units: A merchant bank helps in reviving sick industrial units. They negotiate with various
agencies such as banks, long-term lending institutions, and the Board for Industrial and Financial
Reconstruction (BIFR). They also plan and execute full revival packages.32
N. Portfolio management of sick units: Merchant bankers offer revival services to companies that issue the
securities as well as investors. These bankers advise clients, which are usually institutional investors, on
investment decisions. They undertake purchase and sale of securities to provide them with portfolio
management services. Some of these bankers are operating mutual funds as well as offshore funds.33
O. Corporate restructuring: These services of merchant bankers include mergers, acquisitions (about
existing units), the sale of units and disinvestment. These procedures demand proper negotiations, thorough
preparation of numerous documents and completion of lengthy legal formalities. Merchant bankers fulfill
all these formalities on behalf of the clients.34
P. Money market operations:

A merchant bank deals with as well as underwrites short-term instruments like:
 government bonds
29
30
31
32
ibid
33
ibid
34
ibid
10
 certificate of deposit issued by banks and financial institutions
 commercial paper issued by large corporate firms
 treasury bills issued by the government (in India by the Reserve Bank of India)35
Q. Leasing and finance services: Merchant banks also assist leasing and financing services. A lease refers to
a contract that exists between a lessor and a lessee, by which the lessor permits the use of a specific asset
that belongs to him or her(like equipment, land) by the lessee for a specified period. There is a fee charged
by the lessor charges, which is referred to as the rentals. Several merchant bankers offer leasing and
financing facilities to the customers. Some banks also keep venture capital funds to assist entrepreneurs.
These banks also help the companies to raise finance through public deposits.36
R. Servicing issues: Merchant bankers now also act as the paying agents for service of the debt- securities and
act as the registrars as well as the transfer agents. In this way, they maintain the registers of the shareholders
and the debenture holders and also arrange the payment of dividend and or the interest that is due to them.37
S. Management of dividend and interest: Merchant banks help the clients in the management of the interest
on the debentures or loans, as well as the dividend on the shares. In addition to this, they advise the client
with respect to the timings (whether interim or annual) of the dividend as well as the rate of the dividend.38
RESPONSIBILITIES
Merchant banker should not to be associated with any business other than that of the securities market. 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 high standards of integrity and fairness in all
his dealings with his 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 the clients, possible sources of
conflict of duties and interest, while providing services.39
35
36
37
38
39
https://www.citeman.com/5558-obligations-and-responsibilities-of-merchant-banks.html accessed on 10 April 2020
11
He cannot make any statement or become privy to any act, practice unfair competition, which is likely to be
harmful to the interest of other merchant bankers or is likely to place such other merchant bankers in a
disadvantageous position in relation to him, while competing for or executing any assignments.
He should not make any exaggerated statement, whether oral or written, to the client either about his
qualification or his capability to render certain services or his achievements in regard to services rendered to
other clients.40
Every merchant banker shall keep and maintain the following books of accounts, records and documents
namely:
• A. a copy of balance sheet at the end of each accounting period
• b. A copy of profit and loss account for that period
• c. A copy of auditor’s report on the accounts of that period
• d. a statement of financial position
• Submission of half-yearly results.
• Report on steps taken on auditor’s report.
• Acquisition of shares prohibited.
• Information to the Board.
• Disclosure to the Board41
BIBLIOGRAPHHY
40
https://www.citeman.com/5558-obligations-and-responsibilities-of-merchant-banks.html accessed on 10 April 2020
41
12
WEBSITES:
https://corporatefinanceinstitute.com/resources/careers/companies/merchant-bank/
https://www.investopedia.com/terms/m/merchantbank.asp
https://blog.ipleaders.in/essential-role-merchant-bankers/
https://www.slideshare.net/RahulMailcontractor/merchant-banking-72725419
https://accountlearning.com/merchant-bankers-definition-services-offered-categories/
https://investinganswers.com/dictionary/m/merchant-bank
https://www.ilearnlot.com/merchant-banking-functions-origin-and-evolution/55268/amp/
https://www.citeman.com/5558-obligations-and-responsibilities-of-merchant-banks.html
13

Infrastructural Financial Market

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Infrastructural Financial Market

Uploaded by

Copyright:

Available Formats

UNITEDWORLD SCHOOL OF LAW

MARKETING MANAGEMENT ASSIGNMENT

Merchant Bank and its Roles and Responsibility

History of Merchant Banks................................................................................................................................................5

WHO IS A MERCHANT BANKER?...............................................................................................................................6

 How Does a Merchant Bank Work?......................................................................................................................6

MERCHANT BANKING IN INDIA.................................................................................................................................7

 Merchant Banking Regulations.............................................................................................................................7

 Classifications of Merchant Bankers.....................................................................................................................7

ROLE OF MERCHANT BANKING................................................................................................................................8

History of Merchant Banks

As per SEBI rules, a merchant banker refers to,

 How Does a Merchant Bank Work?

 Merchant Banking Regulations

 Classifications of Merchant Bankers

The following are the categories of merchant bankers:

2. Category II – to act as advisor, consultant, co-manager, underwriter and portfolio manager.

3. Category III – to act as underwriter, advisor and consultant to an issue.

ROLE OF MERCHANT BANKING

I. Advise on modernisation and expansion: Merchant bankers advise on amalgamations, mergers,

P. Money market operations:

• A. a copy of balance sheet at the end of each accounting period

• b. A copy of profit and loss account for that period

• c. A copy of auditor’s report on the accounts of that period

• d. a statement of financial position

• Submission of half-yearly results.

• Report on steps taken on auditor’s report.

• Acquisition of shares prohibited.

• Information to the Board.

• Disclosure to the Board41

You might also like