Merchant and investment banking

services
MBA 3
Amity university

Aarohi Dave
 Merchant bank - Meaning
• A merchant bank is a financial institution that conducts underwriting, loan services,
financial advising, and fundraising services for large corporations and high-net-worth
individuals (HWNIs).
• Merchant banks specialize in international trade, providing services for multinational
corporations.
• Example of some of the largest merchant banks in the world include
J.P. Morgan Chase,
Goldman Sachs, &
Citigroup
• According to Dictionary of Banking & Finance
“A bank which arranges loans to companies, deals in international finance, buys & sells
shares, launches new companies on the stock exchanges but does not provide normal
banking services to the general public”.
 Merchant bank - Meaning

 Merchant Banking Definition as per SEBI,

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.

 The word ‘issues’ in the definition refers to an offer for sale/ purchase of securities by any
Body-Corporate/other person or group of persons on its / his / their behalf to, or from the
public or, from the holders of the securities through a Merchant Banker.
 Merchant banking in India
 Originated with the establishment of the merchant banking division of Grindlay’s Bank in
1969

 Other foreign banks like Citi Bank, Standard Chartered bank etc. also started merchant
banking operations

 SBI started merchant banking in 1973

 ICICI started merchant banking in 1974

 Subsequently other banks also started

Merchant Banking Services
 Issue Management
 Pre-issue Management
 Post-issue Management
 Underwriting
 Private Placement of Securities
 Corporate Advisory Service Relating To Mergers/ Acquisitions/ Takeovers/
Disinvestment Etc.
 Project Appraisal
 Credit Syndication
 Book Building
 Portfolio Management Services Etc.
 REGULATIONS OF MERCHANT
BANKING
The merchant banking activity in India is governed by SEBI (Merchant Bankers)
Regulations, 1992. Registration with SEBI is mandatory to carry out the
business
of merchant banking in India. An applicant should comply with the following
norms:
1.The applicant should be a corporate body.
2.The applicant should not carry on any business other than those connected
with the securities market.
3.The applicant should have necessary infrastructure like office space,
equipment, manpower, etc.
REGULATIONS OF MERCHANT
BANKING
4. The applicant must have at least two employees with prior experience in
merchant banking,

5. Any associate company, group company, subsidiary or interconnected company

of the applicant should not have been a registered merchant banker.

6. The applicant should not have been involved in any securities scam or proved
guilt for any offence.

7. The applicant should have a minimum net worth Rs. 5 Crores

Categories of Merchant Banker
 (a) Category I:
(i) to act as lead manager and carry on any activity of the issue management,
including 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
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.
 (b) Category II:
to act as adviser, consultant, co- manager, underwriter, portfolio manager;
 (c) Category III:
to act as underwriter, adviser, and consultant to an issue;
 (d) Category IV:
to act only as adviser or consultant to an issue
CAPITAL ADEQUACY NORMS

Category Minimum Amount of Net Worth

 I Rs. 5, 00, 00, 000

 II Rs. 50, 00, 000

 III Rs. 20, 00, 000

 IV Nil
Note: With effect from December 9, 1997, different categories of merchant bankers were
abolished
 
 Lead Merchant Banker
 All public issues should be managed by at least one merchant banker as lead manager
 No merchant banker is necessary in the case of rights issue of shares not exceeding Rs.50
lakhs to the existing shareholders
 The number of merchant bankers in a public issue is limited to :

Size of issue and No. of Merchant Bankers

(a) Less than Rs. 50 crores: Two
(b) Rs.50 crores but less than Rs.100 crores: Three
(c) Rs. 100 crores but less than Rs. 200 crores: Four
(d) Rs. 200 crores but less than Rs. 400 crores: Five
(e) Above Rs. 500 crores: Five or more as may be agreed by SEBI.
Responsibilities of Lead Merchant Banker
 The responsibilities relating to disclosure, allotment and refund should be clearly defined,
allocated and determined before undertaking the public issue
 Statement showing responsibilities should be filed with SEBI at least one month before
opening of the subscription
 Lead managers should not agree to manage the public issue by their associate/sister
concerns
 Lead managers should not associate with merchant bankers without registration
 Minimum underwriting obligation of five percent of the total underwriting commitment
or Rs. Twenty five lakhs whichever is less.
 Submission of due diligence certificate to SEBI at least two weeks prior to the opening of
the issue
Responsibilities of Lead Merchant Banker
 Lead merchant banker should submit the following documents to SEBI at least two weeks
prior to the filing of the draft prospectus or letter of offer with the Registrar of Companies
or the Regional Stock Exchange or both:
 Particulars of the issue
 Draft prospectus/ letter of offer
 Any other literature intended to be circulated among investors/ shareholders
 Such other documents relating to prospectus/ letter of offer as the case may be
 Responsibility to continue till the subscribers receive the share certificate/ debenture
certificate or refund of application money
 Prohibition from entering into securities of body corporates based on unpublished price-
sensitive information during the contract period.
Responsibilities of Lead Merchant Banker
 Disclosure requirements to SEBI
 His responsibilities with regard to the management of the issue;
 Any change in the information or particulars previously furnished, which have a bearing on
the certificate granted to it;
 The names of the body corporate whose issues he has managed or has been associated with;
 The particulars relating to breach of the capital adequacy requirement as specified in SEBI
Regulations;
 Information relating to his activities as a manager, underwriter, consultant or adviser to an
issue as the case may be.
 Appointment of Compliance Officer
 Payment of Fees to SEBI
 Registration Fee: Rs. 5 lakhs
 Annual Renewal Fee; Rs. 2.5 lakhs (to be paid from the fourth year of initial registration
onwards)
CODE OF CONDUCT
 Ensure adequate disclosure enabling the investor to take appropriate decision
 Ensure that the investors are provided with true and adequate information
 Ensure that the copies of prospectus/ offer letter/ other related literature are made
available to the investors at the time of public issue of shares
 Should not discriminate among its clients
 Should not make any statement which represents the services of merchant bankers
 Avoid conflict of interest
 Resolve any conflict of interest situation in an equitable manner
 Disclosure of potential areas of conflict of interest to the clients
 Render the best possible advice to the clients
 Ensure that the confidential information of clients not divulged with out the
permission of the client
 CODE OF CONDUCT
 Inform any action/ material changes which may affect the interest of the investors to
them promptly
 Shall not indulge in any unfair competition
 Maintain arms length between merchant banking activity and other activity
 Have internal control measures to prevent theft, fraud, financial misappropriations,
dishonest acts, professional misconduct or omissions
 Shall not make untrue statement or suppress material facts
 Shall have updated knowledge of the provisions of the Act and rules and regulations
relevant to their activity
 Inform SEBI about any action, legal proceedings etc. initiated against the merchant
banker
 Merchant banker or its employees shall not render any investment advice about any
security in any publicly accessible media
 CODE OF CONDUCT
 Demarcate the activities of various intermediaries
 Freedom and power to the compliance officer
 Implement own internal code of conduct
 Ensure good corporate policies and good corporate governance
 Ensure fit and proper for its employees
 Ensure that adequate resources are available for diligent supervision
 Shall be responsible for the acts or omissions of the employees
 Access to all information by the senior management, particularly the decision makers
 Shall not be party to or instrumental for:
 Creation of false market
 Price-rigging or manipulation
 Passing of unpublished price sensitive information about any listed securities to any person or
intermediary in the security market
Books of Accounts and Records

 a copy of balance sheet as at the end of each accounting period;

 a copy of profit and loss account for that period;

 a copy of the auditor's report on the accounts for that period;

 a statement of financial position and

 intimate SEBI the place where these books of accounts, documents and

records are maintained.

Role of Merchant Banker in Issue Management

 Initial Public Offer (IPO) is the first time share issue by a company

 Merchant bankers act as Lead Managers, Underwriters, Registrars etc. in IPOs

 IPO market in India is booming for the last five years

Pre-issue Obligations of Merchant Banker

 Exercising due diligence to the effect that all the aspects of offering, veracity and adequacy of
disclosure in the offer documents have been done in a satisfactory manner.

 Payment of the requisite fee along with draft offer document filed with SEBI.
Pre-issue Obligations of Merchant Banker
 Submission of the following documents with the offer document to SEBI
 Memorandum of Understanding entered into between the lead merchant banker and the issuer company
 Equitable distribution of rights, obligation and responsibilities among the merchant bankers involved in
the public issue
 Ensure that the underwriters pay the agreed amount incase of devolvement
 Submission of due diligence certificate to SEBI along with draft prospectus together with the following
documents
 A certificate stating that the issuer company has complied with conditions as stipulated in the SEBI
Regulations.
 A certificate stating that all amendments, suggestion or observations made by SEBI have been
incorporated in the offer document;
 A fresh "due diligence" certificate at the time of filing the Prospectus with the Registrar of
Companies.
 A fresh certificate immediately before the opening of the issue that no corrective action on its part is
needed.
 A fresh certificate after the issue has opened but before closes for subscription.
Pre-issue Obligations of Merchant Banker
 In the case of a listed company the following Certificates duly signed by the Company
Secretary or a Chartered Accountant have to be submitted to SEBI along with the draft
offer documents
 All refund orders of the previous issues were dispatched within the prescribed time and
in the prescribed manner;
 All security certificates were dispatched to the allottees with in the prescribed time and
in the prescribed manner;
 The securities were listed on the Stock Exchanges as specified in the offer documents.
 Undertaking to SEBI by the issuer regarding the promoters’ or promoter group’s
interest
 Submission of list of promoters or promoter group by the issuer to SEBI
Pre-issue Obligations of Merchant Banker
 Appointment of Intermediaries
 Lead Merchant Bankers

 Bankers to the Issue

 Registrars to the Issue

 Underwriters

 Advertisers

 Printers

 Legal Counsel

 Expert panel

 Other intermediaries
Pre-issue Obligations of Merchant Banker
 Publication of offer documents
 Pre-issue advertisements
 IPO grading
 Dispatch of issue materials
 No complaints certificate
 Mandatory collection centers
 Authorized collection agents
 Advertisement for rights post issues
 Appointment of compliance officer
 Abridged prospectus
 Agreements with depositories
 Branding of securities
Post-issue Obligations of Merchant Banker
 Post-issue monitoring reports
 3 day monitoring report in case of issue through book building route
 3 day monitoring report in other cases
 Final post issue monitoring report
 Redressal of investor’s grievances
 Co-ordination with intermediaries
 Monitoring of underwriting obligations
 Bankers to the issue – ensuring that the application money received are
kept in a separate bank account
 Post-issue advertisements
 Basis of allotment
 Reservation for retail individual investors
Post-issue Obligations of Merchant Banker
 Other responsibilities
 Dispatch of share certificates/ refund orders
 Completion of demat credit
 Completion of listing formalities
 Payment of interest in the case of delayed dispatch of allotment letters/ refund orders
 Release of post-issue advertisement

 Getting trading permission from the respective stock exchanges

Summary
 Merchant banking refers to the activities of the intermediaries facilitating a public issue
of shares
 Merchant banking activity in India is regulated by SEBI

 SEBI has issued extensive guidelines on merchant banking and the merchant bankers
have to abide by these guidelines
 Only those merchant bankers who have registered with SEBI are entitled to participate
in public issue of shares
 The merchant banking activities are classified as pre-issue activities and post-issue
activities.
 While pre-issue activities involve getting approvals and issue procedures, post-issue
activities are the reporting process