MERCHANT BANKING

WHAT IS MERCHANT BANKING ?

Merchant Banking is a combination of Banking + consultancy services. It provides

consultancy to its clients for financial, marketing, managerial and legal matters.

In short, merchant banking provides a wide range of services for starting until running a

business. It acts as Financial Engineer for a business.

There is a distinction between a commercial bank and a merchant bank.

MERCHANT BANKER DEFINITION - SEBI
The first authoritative definition for the term ‘Merchant Banker’ has been given in the Rule 2
(e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, -

“ A Merchant Banker means 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, Adviser of rendering Corporate Advisory Service in relation to such Issue
Management”.
MERCHANT BANKING HISTORY
During the seventeenth and most of the eighteenth century international finance was centered on
Amsterdam.

Amsterdam merchants became the first masters identified with the emergent profession of
Merchant Bankers.

In India merchant banking services were started only in 1967 by National Grindlays Bank
followed by Citi Bank in 1970.

The SBI was the first Indian Commercial Bank having set up separate Merchant Banking Division
in 1972.
MERCHANT BANKS LIST IN INDIA
Allianz Securities Ltd

Standard Chartered

Citigroup

ICICI Securities

Bajaj Consultants P Ltd

Ind Bank Merchant Services Ltd

The Mysore Merchant Co Op Bank Ltd

FUNCTIONS OF MERCHANT BANKING
Promotional Activities - Promoter of industrial enterprises in identification of projects,
preparing feasibility reports, obtaining Government approvals and incentives, etc.

Credit Syndication - Specialized services for raising short-term as well as long- term credit from
various bank and financial institutions, etc.

Portfolio Management - Merchant banks offer services not only to the companies issuing the
securities but also to the investors [ Institutional Investors ]. Purchase and sale of securities for
their clients so as to provide them portfolio management services.
CONTINUED
Leasing and Finance - Maintain VC funds to assist the entrepreneurs and also help companies
in raising finance by way of public deposits.

Other Specialized Services - Provide corporate advisory services on issues like mergers and
amalgamations, tax matters, recruitment of executives and cost and management audit, etc.

Activities of the merchant bankers are increasing with the change in the money market.
NEED & IMPORTANCE IN INDIA
Demand on the sources of funds forever expanding industry and trade.

Corporate sector had the only alternative for meeting their long-term financial requirements.

Due to growing demand for funds there was pressure on capital market that gave rise to the field of
merchant banking.

Both public and private, sectors would be able to meet the growing requirements -
expansion/modernization/diversification of the existing enterprises.

Merchant bankers advise the investors of the incentives available in the form of tax relief‘s, other
statutory relaxations
ROLE OF MERCHANT BANKERS
Promptly attending to the corporate problems and suggests ways and means to solve it.

Development oriented and promote industry and trade, to grow and survive.

Develop expertise in new areas so as to equip himself with the knowledge and techniques.

Keep pace with the changing environment where Government rules, regulations and
policies.
ROLE OF MERCHANT BANKERS
Merchant banker has to think and devise new instruments of financing industrial projects.

Guide the wider section of the community possessing surplus money to invest in
corporate securities.

Bridge the communication gap between different sections and resolve the problem being
faced in different areas concerned
QUALITIES OF GOOD MERCHANT
BANKERS
Leadership

Aggressive Action

Cooperation And Friendliness

Contacts

Attitude Towards Problem Solving

Passion For Acquiring New Skills, Information and knowledge

MERCHANT BANKERS COMMISSION
A Merchant Banker can charge 0.5% as the maximum as commission for whole of the issue.
They can charge project appraisal fees.
A lead manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in excess of
Rs.25 crore.
Brokerage commission 1.5%.
Other expenses like advertising, printing, Registrar‘s expenses, stamp duty etc., in
connection with the issue can be reimbursed from its clients.
PROBLEMS OF MERCHANT BANKERS
SEBI guidelines have authorized merchant bankers to undertake issue related activities
only with an exception of portfolio management.

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

Non co-operation of the issuing companies in timely allotment of securities and refund
of application money is another problem of merchant bankers.
REGULATION
There are 43 regulations lead by SEBI on merchant bankers in 1992 act.
These are classified into 5 chapters.
1. Preliminary
2. Registration of Merchant Bankers
3. General Obligations and Responsibilities
4. Procedures for Inspection
5. Procedures for action in case of default
Preliminary:
Need for Regulation:
The merchant banker's regulations, which regulate the raising of funds in the primary market,
would assure for the issuer market for raising resources at low cost, effectively and easily, ensure
high degree of protection of investors interest.

 The regulations provide for the merchant bankers a dynamic and competitive market with the
high standard of professional competence, dignity, integrity and solvency.

The regulations promote a primary market, which is fair, efficient, and flexible, and inspire
confidence.
Registration of Merchant Bankers
Categories of the Merchant Bankers
Requirements for Granting of Certificate
Capital Adequacy Requirement
Procedure for Registration
Renewal of Certificate
Obligations & Responsibilities:
Code of Conduct

Maintenance of Books of Accounts, Records, etc.

Submission of Half Yearly Results

Appointment of Lead Merchant Bankers & Restrictions

Responsibilities of Lead Managers

Underwriting Obligations

Appointment of Compliance Officers

Procedure for Inspection
SEBI’s right to inspect
Notice before inspection
Submission of Reports to the SEBI
Appointment of Auditors
Procedure for Action incase of Default
Suspension of Registration
Cancellation of Registration
Show-cause notice and order
Effect of Suspension & cancellation of Registration of
Merchant Bankers
Publication of Order of Suspension
PRIVATE EQUITY
Equity capital that is not quoted on a public exchange.

 Private equity consists of investors and funds that make investments directly into
private companies.

Capital for private equity is raised from retail and institutional investors.

The majority of private equity consists of institutional investors and accredited

investors who can commit large sums of money for long periods of time. 
PRIVATE EQUITY Entry & Exit
PE enter during flourishing stage of business.

Exit Routes:
Selling their stake to new similar investors.
Selling their stake to promoters themselves.
Selling their stake thru IPO.
ANGEL INVESTORS
“An angel investor or angel (also known as a business angel or informal
investor or angel funder) is an affluent individual who provides capital for a
business start-up, usually in exchange for convertible debt or ownership equity. ”

An investor who provides financial backing for small start-ups or entrepreneurs. 
Angel investors are usually found among an entrepreneur's family and friends. 
The capital they provide can be a one-time injection of seed money or ongoing support
to carry the company through difficult times.
ANGEL INVESTORS Entry & Exit
Angel Investors enter during seed capital stage(Initial capital requirement stage).

Exit Routes:
Selling their stake thru IPO.
Selling their holdings as part of a merger or acquisition by bigger company.
Selling thru strategic sale.
VENTURE CAPITAL
Money provided by investors to startup firms and small businesses with perceived long-term
growth potential.

This is a very important source of funding for startups that do not have access to capital
markets.

It typically entails high risk for the investor, but it has the potential for above-average returns.

This form of raising capital is popular among new companies or ventures with limited
operating history, which cannot raise funds by issuing debt. 
VENTURE CAPITAL entry & exit
VCs enter during seeding and flourishing stages of business.

Exit Routes:
Selling their stake to new similar investors.
Selling their stake to promoters themselves.
Selling their stake thru IPO.