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Merchant Banking

Merchant Banking-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 low of capital in the
market.
• Ministry of Finance: “Any person who is
engaged in the business of issue
management either by making
arrangements regarding selling, buying
or subscribing to securities as manager,
consultant, advisor or rendering
corporate advisory service in relation to
such issue management”
• Banking commission Report-1972
a) Necessity
b) Distinct from commercial Banks
c) Investment Management and Advisory
services
d) Medium and small savers
e) Manage
Merchant Banking in India
• Grindlays Banks-1967
Management of capital issue
Production planning, system design to
market research
Management consultancy
• Citibank-1970
• SBI-1972
Services rendered
• Organising finance for investment in
projects
• Assistance in financial management
• Acceptance of house business
• Raising Eurodollar loans and issue of
foreign currency bonds
• Financing export of capital goods,
hydropower
• Financing of hire-purchase
transaction, leasing
Regulation
• Merchant Bankers Regulations of
Securities and Exchange Board of
India
• Company Act 1956
• Listing guidelines of Stock Exchanges
• Securities Contracts (Regulation) Act,
1956

• Formation of divisions
• Subsidiaries companies
Structure
• Category-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
to act as adviser, consultant, manager,
underwriter, portfolio manager.
Structure
• Category II
that is, to act as adviser, consultant, co-
manager, underwriter, portfolio
manager;
• 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.
Registration with SEBI
• Around 250 Merchant Bankers
• Abolished all categories and
maintained Category-I
• Separate registration for
underwriters and portfolio manager
• Segregation between fee based and
Fund based activities
Registration with SEBI
• Registration with SEBI is mandatory to carry out the
business of merchant banking in India. An applicant
should comply with the following norms:

 The applicant should be a body corporate


 The applicant should not carry on any business other than
those connected with the securities market
 The applicant should have necessary infrastructure like office
space, equipment, manpower etc.
 The applicant must have at least two employees with prior
experience in merchant banking
 Any associate company, group company, subsidiary or
interconnected company of the applicant should not have been
a registered merchant banker
 The applicant should not have been involved in any securities
scam or proved guilt for any offence
 The applicant should have a minimum net worth of Rs.5 crores
Authorized Activities
• Issue Management
Preparation of prospectus
Information relating to the issue
• Determining financing structure
• Tie-up of finances and final allotment
and/or refund of subscription
• Corporate advisors to the issue
• Consultants or advisors to issue and
underwriting
Terms of Authorization
• Authorization is valid for an initial period of 3
years
• Authorization fee, annual fee and renewal fee
• All issues should be managed by at least one
authorized merchant bankers, functioning as sole
manager or lead manager
• MB expected to exercise due diligence
independently
• Involvement of MB in post-issue management
• Adhere a code of conduct prescribed by SEBI
• MB may be cancelled or suspended for suitable
duration
• MB regulations integrate issue management with
underwriting
General Obligations and
Responsibilities
• Maintenance of books of accounts, records and
documents
• Copy of the balance sheet, auditor’s report and
statement of financial position
• Responsibilities of lead Manager
• Underwriting obligation
• Submission of due diligence certificate
• Insider Trading
• Acquisition of shares
Main functions of a merchant
banker
• Management of debt and equity
offerings- This forms the main function of the merchant
banker. He assists the companies in raising funds from the
market. The main areas of work in this regard include:
instrument designing, pricing the issue, registration of the offer
document, underwriting support, marketing of the issue,
allotment and refund, listing on stock exchanges.
• Placement and distribution- The merchant
banker helps in distributing various securities like equity shares,
debt instruments, mutual fund products, fixed deposits, insurance
products, commercial paper to name a few. The distribution
network of the merchant banker can be classified as institutional
and retail in nature. The institutional network consists of mutual
funds, foreign institutional investors, private equity funds, pension
funds, financial institutions etc. The size of such a network
represents the wholesale reach of the merchant banker. The retail
Functions
• Corporate advisory services- Merchant bankers offer
customized solutions to their clients financial problems. The
following are the main areas in which their advice is sought:

Financial structuring includes determining the right debt-
equity ratio and gearing ratio for the client, the appropriate
capital structure theory is also framed.
• Merchant bankers also explore the refinancing
alternatives of the client, and evaluate cheaper
sources of funds.
• Another area of advice is rehabilitation and
turnaround management. In case of sick units, merchant
bankers may design a revival package in coordination with
banks and financial institutions.
• Risk management is another area where advice from a
merchant banker is sought. He advises the client on
different hedging strategies and suggests the appropriate
strategy.
Functions
• Project advisory services-
 conceptualizing the project idea
 feasibility studies
 Preparing different documents like the detailed project
report.
• Loan syndication-
 Tie up loans for their clients
 Analyze the pattern of the client’s cash flows
 Prepares a detailed loan memorandum This takes
place in a series of steps. Firstly they, based on
which the terms of borrowings can be defined. Then
the merchant banker, which is circulated to various
banks and financial institutions and they are invited
to participate in the syndicate.