MERCHANT BANKING

History of Merchant Banking in

India
• Were started only in 1967 by National
Grindlays.
• Bank followed by Citi Bank in 1970.
• The State Bank of India was the first Indian
commercial bank to set up a separate
merchant banking division in 1972.
• Later, the ICICI set up its merchant
banking division in 1973 followed by a
number of other commercial banks like
Canara Bank, Bank of Baroda, Bank of
India, Syndicate Bank, Punjab National
Bank, Central Bank of India, UCO Bank,
etc.
• FERA regulations in 1973, which required a large number of
foreign companies to dilute their shareholdings in India
• a number of development banks and financial institutions such
as IFCI and IDBI have also entered this field.
• Some leading banks have floated wholly owned subsidiaries for
carrying out these activities.
• Private brokers and financial consultancy firms have also been
quite active in the field of merchant banking
Following types of organisations
(i) Commercial banks and their subsidiaries.
(ii) Foreign banks including National Grindlays Bank, Citi Bank,
Hongkong Bank etc
(iii) All India Financial Institutions and Development Banks such as,
ICICI, IFCI, IDBI.
(iv) State Level Financial Institutions, such as, State Industrial
Development Corporations (SIDC’s) and State Financial Corporations.
(v) Private Financial Consultancy Firms and Brokers, such as J.M.
Financial and Investment Services Ltd.; DSP Financial Consultants,
Fnam Financial Consultants, Kotak Mohindra, Ceat Financial Services,
etc.
• (vi) Technical Consultancy Organisations

• (vii) Professional Merchant Banking Houses, such as VMC

Project Technologies.
Merchant banking in India can be
categorised in four broad sections:
• 1. To provide long-term source of funds required by the
corporate sector. The merchant banker primarily came into
being as corporate counsellors for restructuring base of capital,
thereafter for issue management and underwriting of the same.
• 2. Project counselling which includes credit-syndication and the
working capital.
• 3. Capital structuring.
• 4. Portfolio management.
• Since August 1990, merchant bankers engaged in issue
management, corporate advisory services, underwriting and
portfolio management have to obtain authorisation from the
Securities and Exchange Board of India (SEBI) after meeting the
requirements of capital adequacy norms
• Deregulation and liberalisation of the industry in India has
accounted for changes in the financial sector. With the passage
of time merchant banking activities have changed in line with
the changing need pattern of the enterprises in the wake of
economic development.
Merchant Banking Regulations:

• SEBI (Merchant Bankers’) Regulation Act, 1992 defines a

‘merchant banker’ as “any person who is engaged in the
business of issue management either by making arrangements
regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory
service in relation to such issue management”.
• At present no organisation can act as a ‘merchant banker’
without obtaining a certificate of registration from the SEBI.

• However, It must be noted that a person/ organisation has to

get himself registered under these regulations if he wants to
carry on or undertake any of the authorised activities, i.e., issue
management assignment as manager, consultant, advisor,
underwriter or portfolio manager.
• To obtain the certificate of registration, one had to apply in the
prescribed form and fulfill two sets of norms

• (i) operational capabilities

• (ii) capital adequacy norms.

Classification of Merchant Bankers:
The SEBI has classified ‘merchant bankers’ under four categories for the
purpose of registration:
1. Category I Merchant Bankers:
These merchant bankers can act as issue manager, advisor, consultant, underwriter
and portfolio manager.
2. Category II Merchant Bankers:
Such merchant bankers can act as advisor, consultant, underwriter and portfolio
manager. They cannot act as issue manager of their own but can act co-manager.
3. Category III Merchant Bankers:
They are allowed to act as underwriter, advisor and consultant only. They can neither
undertake issue management of their own nor they act as co-manager. They cannot
undertake the activities of portfolio management also.
4. Category IV Merchant Bankers:
A category IV merchant banker can merely act as consultant or advisor to an issue of
capital.
Capital Adequacy Norms:

• SEBI has prescribed capital adequacy norms for registration of

the various categories of merchant bankers. The capital
adequacy is expressed in terms of minimum net worth, i.e.,
capital contributed to the business plus free reserves.
The following are the capital adequacy
norms as laid down by SEBI:
Fees:

• According to the SEBI (Merchant Bankers) Amendment

Regulations, 1999, w.e.f. 30.9.1999, every merchant banker shall
pay a sum of Rs. 5 lakhs as registration fees at the time of grant
of certificate by the Board. The fee shall be paid by the merchant
banker within 15 days of receipt of intimation from the Board.

• Further, a merchant banker to keep registration in force shall

pay renewal fee of Rs. 2.5 lakhs every three years from the
fourth year from the date of initial registration.
Government Policy for Merchant Banking:

• The Government issued policy guidelines for merchant bankers

to ensure sufficient physical infrastructure, necessary expertise,
good financial standing, professional integrity and fairness in
their transactions. The merchant bankers have to be competent
to serve the investors also.

• On 1st March, 1993 new policy guidelines have been issued by

SEBI for the merchant bankers to ensure greater transparency
in their operations and to make them accountable so as to
protect the investor’s interest. The guidelines relate to pre-issue
obligations, underwriting, advertisements and post-issue
obligations of the merchant bankers.
  Functions Performed by Merchant
Bankers
 1. Corporate Counselling 
2. Project Counselling 
3. Capital Restructuring Services 
4. Portfolio Management 
5. Issue Management 
6. Loan/Credit Syndication 
7. Arranging Working Capital Finance 
8. Bill Discounting and Acceptance Credit 
9. Lease Finance 
10. Venture Capital 
11. Public Deposits 
12. Specialised Services.
Function # 1. Corporate Counselling

• This service is, usually, provided free of charge to a corporate

unit. Merchant bankers render advise to corporate enterprises
from time to time in order to improve performance and build
better image/reputation among investors and to increase the
market value of its equity shares.

• Counselling is provided in the form of opinions, suggestions and

detailed analysis of corporate laws as applicable to the business
unit.
Areas of corporate counselling 
(a) After considering the existing Government’s economic and licensing
policies, it guides the corporate units as to areas of diversification.
(b) Detailed market analysis so as to evaluate profitability of each
product line, its growth or demand at present and in future. On the
basis of analysis it advises whether to continue/expand or
discontinue any product line.
(c) helps in reviving the old-line projects and sick units by assessing
their requirements, studying their manufacturing process and
technology in terms of its obsolescence. Based on their studies,
merchant banker advises on the restructuring or reorganisation of
capital base.
Function # 2. Project Counselling:

• Project counselling broadly covers the study

of the project and providing advisory
services on the project viability and
procedural steps to be followed for its
implementation
(i) Development of an idea of a project or review of the
project idea/project profile.

(ii) Preparation of project report after considering its

financial, economic and market feasibility.

(iii) Estimation of the cost of the project.

(iv) Deciding the means of financing and the composition

of various types of securities.
(v) Studying the procedural aspects of project implementation.

(vi) Provide assistance in obtaining government consent for

implementation of the project.

Sometimes, merchant banks also encourage and guide Indian

entrepreneurs to make investment in Indian projects in India and
joint ventures overseas by offering all possible help in project
appraisal and implementation.
(i) Identification of potential investment opportunities.
(ii) Capital structuring.
(iii) Shaping the pattern of financing.
(iv) Negotiating with foreign collaborations and making all necessary
arrangements.
(v) Amalgamations, mergers and takeovers.
(vi) Profitability study of the project and preparation of feasibility
reports.
(vii) Assisting clients in preparing the applications for financial
assistance to All India Financial Institutions/Banks.
(viii) Assisting the clients in seeking approvals from the Government of
India for foreign technical and financial collaboration agreements.
(ix) Guiding young entrepreneurs as to investment opportunities in
India.
Function # 3. Capital Restructuring Services:

• Merchant banks render different capital restructuring services

to the corporate units depending upon the circumstances a
particular unit is facing.
(i) Examination of the capital structure of corporate unit to
decide the extent of capitalisation.

(ii) In case of bonus issue, it helps the clients in preparing the

Memorandum for Controller of Capital Issue (CCI) and in
obtaining his consent.

(iii) For companies governed by Foreign Exchange Regulation Act

(FERA), merchant bankers suggest an alternative capital
structure which is in conformity with the legal requirements. It
also advises company on disinvestment issues to their maximum
advantage.
(iv) For sick units, it suggests appropriate capital structure which
will help the unit in revival. It also advise as to the extent and
means of bringing fresh capital into business.

(v) Merchant bankers also render advise on mergers, takeovers

and amalgamations and help in their implementation.

(vi) Merchant bankers also identify the areas of diversification of

the existing production systems and suggest various strategies to
widen and restructure the capital base accordingly.
Function # 4. Portfolio Management:

• Merchant banks offer services not only to the companies issuing

the securities but also to the investors. They advise their clients,
mostly institutional investors, regarding investment decisions as
to the quantum of amount of security and the type of security in
which to invest.

• Merchant banks render necessary services to the

investors by advising on the optimum investment mix,
(i) Objectives of the investment.

(ii) Tax bracket applicable to the investor.

(iii) Need for maximising return.

(iv) Capital appreciation etc.

• Merchant bankers even undertake the function of purchase and

sale of securities for their clients so as to provide them portfolio
management services. Some merchant bankers are managing
mutual funds and off share funds also.
Services to Indian Nationals:
(a) The sale and purchase of securities
(b) Investing and purchase of securities
(c) Investing and managing fixed deposits
(d) Trust funds, pension funds and provident fund investments
and their review
(e) Safe custody of securities in India and overseas
(f) Reinvesting the returns collected from investments in some
profitable avenues
(g) other investment advisory services etc
Services to Non-Resident Indians:
• In order to attract foreign capital resources for being invested in
India, Union Government has offered various incentives to
(NRIs) and (PIORA).

• Merchant banks provide special services on this account to

encourage the NRIs to invest their savings in Indian industry.
(i) Advice on selection of investment.
(ii) Critical evaluation of investment portfolio.
(iii) Securing approval from RBI for the purchase/sale of
securities.
(iv) Hold securities in safe custody.
(v) Maintaining investment records and complying with ceiling
requirements.
(vi) Collecting and remitting interest and dividend on investment.
(vii) Providing tax counselling and filing tax returns.
(viii) Evaluation of investment portfolio periodically at the request
of investors.
(ix) Circulation of investment news for the benefit of the investors.
Function # 5. Issue Management:
• functions 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 foreign companies in dilution of equity as required under
FERA.

• In this capacity, the merchant bank usually acts as a sponsor of

issues. They obtain consent of the Controller of Capital Issues
(CCI) now, SEBI and provide a number of other services to
ensure success in the marketing of securities.
(i) Preparation of the prospectus.
(ii) Preparation of a plan and budget to estimate total expenditure of
the issue.
(iii) Preparation of CCI (Controller of Capital Issues) application and
providing assistance in obtaining consent of the CCI.
(iv) Selection of institutional and broker underwriters and
underwriting agreements.
(v) Appointment of registrars, brokers and bankers to the issue.
(vi) Advertising and arranging publicity agency for post and pre-issue.
(vii) Selection of issue house.
(viii) Compliance of listing requirements of stock exchanges.
(ix) Act as co-ordinator with underwriter’s brokers and bankers to the
issue and stock exchanges.
(x) Merchant banker advises the client whether to go for
(a) A fresh issue or
(b) Additional issue or
(c) Bonus issue or
(d) A right issue of equity or preference or both, if both then, in
what proportion it is to be made.

If debentures are to be issued, it advises on the type of

debentures, whether convertible or non-convertible, whether
redeemable or non-redeemable or whether linked with equity or
preference shares etc.
• Merchant banks also performs the function of taking a decision
as to the size and timing of the public issue in the light of
prevailing market conditions, press coverage, underwriting
support from brokers institutional underwriters etc.

• Thus, merchant bankers not only 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.
Function # 6. Loan/Credit
Syndication:
• Merchant bankers provide specialised services in preparation of
project, loan applications for raising short-term as well as long-
term credit from various banks and financial institutions for
financing the project or meeting the working capital
requirements.

• They also manage Euro-Issues and help in raising funds abroad.

(i) Estimation of the total costs/expenditure on the project.

(ii) Preparing a financial plan to meet the total cost of the project
keeping into consideration the requirements of the promoters
and their collaborators, financial institutions, banks, government
agencies and underwriters.

(iii) Assisting the clients in the preparation of loan applications

for financial assistance from term lenders/financial
Institutions/banks and monitoring their progress.

(iv) Making selection of the institutions/banks for participation in

financing.
(v) Follow-up of the term loan application with the financial institutions
and banks and obtaining the satisfaction for their share of participation.

(vi) Merchants banks help in expediting legal documentation formalities

listed by the participating financial institutions and banks and help in
completion of formalities also.

(vii) Merchant banks also help in estimating the working capital

requirements and assist the client in negotiating for the sanction of
appropriate facilities.

(viii) Arrange bridge finance which could be either as a part of the main
loan sanctioned to the client by the term lenders or it could be amount
against the issue of capital or may be both.
Function # 7. Arranging Working Capital Finance:

• Used to be a part of the commercial bank’s function.

• But some banks like Canara Bank, Grindlays Bank and Central
Bank of India have started including working capital finance.

• Provided usually for new ventures or for existing companies

through issue of debentures.
Canara Bank renders advisory
service
(i) Estimation of working capital requirements.
(ii) Assistance in preparing the application for credit facilities for
submission to the bankers and Reserve Bank of India.
(iii) Assistance in negotiations for sanction of appropriate credit
facilities.
(iv) Helps in expediting documentation and other formalities for
disbursements.
(v) Advises the client for issue of debentures for meeting the
increased long term working capital requirements of the client
company.
Function # 8. Bill Discounting and Acceptance Credit:

• In foreign countries, acceptance credit and bill discounting

function is another important area which is recognised as a
merchant banking activity.

• India this facility is not provided to the corporate units by the

merchant bankers.

• Banking Commission 1972, in its report had recommended the

establishment of acceptance and discount house in India
following the development of bill market.
A bill of exchange accepted by a house of established reputation
automatically becomes acceptable to the seller of goods and to the
lenders of money even though they do not have any knowledge of
the creditworthiness of the drawer of the bill.

Proposed functions of merchant banker would include

the following:

(i) Finding out the reputation and financial standing of the

acceptor.
(ii) The existence of a system for collection of information on
borrowers.
• Commercial banks can undertake acceptance and discount
business because they have the necessary expertise and broad
network of branches.

• But at present only bill discounting facility is available to

commercial banks under the RBI’s formalised scheme for credit
accommodations and under refinancing schemes. Indian
merchant bankers have still to formulate the practices and
procedure so that efficient services could be offered in
acceptance and bill discounting.
Function # 9. Lease Finance:
• Many merchant bankers also provide leasing and finance
facilities to their customers.

• Leasing is an arrangement that provides a firm with the use and

control over assets without buying and owning the same. It is a
form of renting assets
• Lease is a contract between the owner of the asset (lessor) and
the user of the asset called the lessee, whereby the lessor gives
the right to use the asset to the lessee over an agreed period of
time for a consideration called the lease rental.

• The lease contract is regulated by the terms and conditions of

the agreement. The lessee pays the lease rent periodically to the
lessor as regular fixed payments over a period of time. The
rentals may be payable at the beginning or end of a month,
quarter, half-year or year.
• The lease rentals can also be agreed both in terms of amount
and timing as per the profits and cash flow position of the
lessee. At the expiry of the lease period, the asset reverts back to
the lessor who is the legal owner of the asset. However, in long-
term lease contracts, the lessee is generally given an option to
buy or renew the lease.

• Merchant bankers assist their clients by providing finance for

the acquisition of asset taken on lease.
Function # 10. Venture Capital:
• Many merchant bankers maintain venture capital funds to assist
the entrepreneurs who lack capital to be risked. Capital funds
may be provided for unproven ideas, products technology-
oriented or start-up funds.

• Venture capital has emerged as a new merchant banking

activity. It is a form of equity financing especially designed for
funding high risk and high reward projects.
 Function # 11. Public Deposits:

• Merchant bankers also help companies in raising finance by way

of public deposits.
Function # 12. Specialised Services:

Provide corporate advisory services on issues like mergers and

amalgamation, takeovers, tax matters, recruitment of executives
and cost and management audit etc.

Many merchant bankers have also started making of bought out

deals of shares and debentures.
• The activities of the merchant bankers are increasing with the
change in the money market.

• These specialised services which all the merchant banks in India

have not been able to render excepting the ICICI, Canara Bank
and Grindlays Bank and Punjab National Bank (PNB).
(i) Advice and assistance in negotiating terms and conditions of
acquisitions and mergers

(ii) Expert advice on valuation of the amount of purchase

consideration and its nature

(iii) Help in expediting legal documentation process and obtaining

official approval

(iv) Carry out management audits to identify areas of strength and

weaknesses of a corporate unit

(v) Assist in formulating guidelines and plans for future growth

Canara Bank  specialised services in
relation to merger and amalgamation
(i) Determining the strengths and weaknesses and their financial
implications.
(ii) Deciding suitable form of organisation.
(iii) Assist the client company in preparation of the proposal
draft, legal documentation.
(iv) Assistance in obtaining approval from various authorities.
(v) Co-ordinating the activities of solicitors, accountants,
valuators & other professionals involved in merger and
Amalgamation
Punjab National Bank
(i) Assessing pros and cons of proposals for financial reconstruction,
merger amalgamation.

(ii) Assistance in preparation and formulation of scheme of financial

restructuring

(iii) Obtaining consent from shareholders, depositors, creditors,

government and other authorities

(iv) Monitoring implementation of schemes of merger and amalgamation