Merchant Banking

• A Merchant Bank can be defined as an

institution or an organization which provides a
number of services including management of
securities issues, port folio services,
underwriting of capital issues, insurance,
credit syndication, financial advices and
project counselling, etc.
 Functions of Merchant Banks
The basic function of merchant banker or investment banker is
marketing corporate and other securities.
The activities or services performed by merchants banks, in India,
to include:
• Project promotion services.
• Project finance.
• Management and marketing of new issues.
• Underwriting of new issues.
• Syndication of credit.
• Leasing finance.
• Corporate advisory services.
• Providing venture capital
• Operating mutual funds and off shore funds
• Investment management or portfolio
management services.
• Bought out deals.
• Management of and dealing of commercial paper.
• Investment services for non-resident- Indians.
• Servicing of issues,etc.
 Merchant Banking in India
Merchant banking services in our country are provided by the
following type of organizations:
1) commercial banks and their subsidiaries.
2) Foreign banks including National Grindlays Bank, City Bank,
Hongkong Bank, etc.
3) All India Financial Institutions and Development banks such
as, ICICI, IFCI, IDBI.
4) State level Financial Institutions such as State Industrial
Development Corporation (SIDC’s)
5) Private Financial Consultancy Firms and Brokers
6) Technical Consultancy Organizations
 Classification of Merchant Bankers
The SEBI has classified ‘merchant bankers’ under four categories for
the purpose of registration
1. Category 1 Merchant Bankers. These merchant bankers can act
as issue manager, advisor, consultant, underwriter and
portfolio manager. (Rs. 5 Crore)
2. Category 2 Merchant Bankers. Such merchant bankers can act
as advisor, consultant, under writer and portfolio manager.
They can act as issue manager of their own firm. (Rs. 50 lakhs)
3. Category 3 Merchant Bankers they are allowed to act as under
writer, advisor and consultant only. (Rs. 20 lakhs)
4. Category 4 Merchant Bankers. A category 4 merchant banker
can merely act as consultant or advisor to as issue of capital.
(Nil).
 Government Policy
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.
Following are the some of the important guide lines issued by SEBI.
 A merchant bank shall make all efforts to protect the interest of
investors.
 A merchant banker shall maintain high standards of integrity, dignity and
fairness in the conduct of its business.
 A merchant banker shall fulfill its obligations in a prompt, ethical, and
professional manner.
 A merchant bank shall not discriminate amongst its clients.
 A merchant banker shall avoid conflict of interest and make adequate
discloser of its interest.
General Obligations and Responsibilities
The following are the some of the important obligations and
responsibilities of the merchant bankers:
1. Merchant banker not to associate with any business other than
that of the securities market.
2. Maintenance of books of accounts, records, etc.
3. Submission of half- yearly results.
4. Report on steps taken on auditor’s report.
5. Appointment of lead merchant bankers.
6. Restriction on appointment of lead managers.
7. Responsibility of lead managers.
8. Underwriting obligations.