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Basics of Merchant Banking

Merchant banking is relatively new concept in the area of financial services in India. It caters to the need of trade and industry by acting as intermediary, consultant , financial and liaison agency.

The expectation that the business will generate money at some time in the future to repay the amount lent or invested, plus a return to the owner of the fund, is the basis of banking.

If the bank lends money, it is commercial banking. If the bank is agent then it brings those with money together with those who need it. It is known as investment banking, some time called as merchant banking because merchant s were the first who need this type of funding

Meaning The dictionary meaning of merchant bank is An organist ion that underwrites corporate securities and advises clients on issues like corporate mergers, etc. involves in the ownership of commercial ventures. Definition Merchant banking means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying underwriting or subscribing to the securities as underwriter, manager, consultant, advisor or rendering corporate advisory services in
relation to such issue management.

Origin of merchant banking in India

Origin of merchant banking in India National Grindlays bank in India initiated merchant banking services in1969. The Citibank followed it in 1970. The state bank of India was the first Indian commercial bank to set up a separate merchant banking division in 1973.

ICICI followed it in 1974

Management of debt equity offerings Leasing finance Bought out deals

Promotional activities

Providing ventures capital

Non resident investment

Placement and distribution

Loan syndication

Advisory services relating to mergers and acquisition

Corporate advisory services

Project advisory services


Should make all efforts to protect the interest of investors Should maintain high standards of integrity,dignity and fairness in conduct of business Should fulfill all obligations in a professional and ethical manner Should not discriminate among the clients Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue Should render best possible advice to its clients Any penal action taken by SEBI should be informed to its clients

Should inform the board about any legal proceedings initiated against it Should abide by the rules of Securities and Exchange Board of India Regulations,2003 Shall develop its own internal code of conduct for governing its internal operations Should ensure that any person it employs should have the capacity to be a merchant banker It is responsible for the act of its employees and agents Should not create false market

Corporate counseling Venture capital Project counseling


Capital restructuring

Mergers, Takeovers etc Loan syndication

Non resident investment Portfolio management

Issue management


Management of issues involves marketing of corporate securities ieequity shares, preference shares and debentures by offering them to public.
It essentially aims at converting the savings

Pre-issue activities: They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue,closing issue,launching publicity campaign etc.. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms,screening of applications, deciding allotment procedure, mailing of allotment letters,,share certficates and refund orders


Underwriting is an insurance to the company which makes public issues.Raising of external resources is easy for the issues backed by well known underwriters. MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two.For an issue of 100 crores,upto a maximum of four merchant bankers shall be appointed.They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..



It includes preparation of project reports,deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions.
LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.

PORTFOLIO MANAGEMENT : Portfolio refers to investment in different kinds of securities such as shares,debenture issued by different companies.It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return Investors are interested in safety,liquidity and profitability of his investment but they cant choose the appropriate securities.So merchant bankers help their investors in choosing the shares.They conduct regular market and economic surveys.

NRI INVESTMENT : NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : Merger is a combination of two or more companies into a singe company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.


Merchant bankers help their clients in : Long term foreign currency loan

Joint venture abroad

Financing exports and imports Foreign collaboration arrangement

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services,Kotak Mahindra, VMC Project Technologies,Morgan Stanley,Jardie Fleming,Klienwort Benson etc


Certificate from SEBI is a must.They are of four types:

Category I merchant bankers : Can act as Issue managers Category II merchant bankers : can act only as co-managers

Category III merchant bankers : can act as co-managers but cannot undertake portfolio management
Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS : Category I : Rs. 5 crores

Category II

: Rs.50 lakhs

Category III : Rs.20 lakhs Category IV : Nil


SEBIs authorization is a must to act as merchant bankers.Authorisation criteria include

Professional qualification in finace,law or business management

Infrastructure like office space,equipment and man power

Capital adequacy Past track of record,experience,general reputation and fairness in all

Every merchant banker should maintain copies of balance sheet,Profit and loss account,statement of financial position

Half-yearly unaudited result should be submitted to SEBI

Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients

SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines Every merchant banker shall appoint a Compliance Officer to monitor compliance of the Act

SEBI has the right to send inspecting authority to inspect books of accounts,records etc of merchant bankers
Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied An initial authorisation fee,an annual fee and renewal fee may be collected by SEBI A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less


SEBI stipulates high capital adequacy norms for authorisation which prevents young,specialised professionals into merchant banking business

Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problem
Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services