Merchant banking

Companies raise capital by issuing securities in the market. Merchant bankers act as
intermediaries between the issuers of capital and the ultimate investors who purchase
these securities.

Merchant banking… is the financial intermediation that matches the entities that need
capital and those that have capital. It is a function that facilitates the low of capital in the
market.

“ Any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as manager;
consultant adviser; or one rendering corporate advisory services in relation to such
activities in the management”.

“An organization that underwrites securities for corporations, advices such clients on
mergers, and is involved in the ownership of commercial ventures”.

Origin of Merchant Banking in India

• In 1857, the chartered mercantile bank of india started its operations.During the
19 th century, the foreign bankers operated in India through the popular agency house
called East India House.
• National Grindlays Bank opened its branch in 1967.
• SBI floated its merchant banking division in 1972.
• Some of the banks which started Merchant banking are Central bank of India,
BOI, syndicate bank, BOB, Standard chartered bank, ICICI, IFCI and IDBI etc.

Functions of a merchant banker…

The following comprise the main functions of a merchant banker:

• Management of debt and equity offerings- This forms the main function of the
merchant banker. He assists the companies in raising funds from the market. The
main areas of work in this regard include: instrument designing, pricing the issue,
registration of the offer document, underwriting support, marketing of the issue,
allotment and refund, listing on stock exchanges.
• Placement and distribution- The merchant banker helps in distributing various
securities like equity shares, debt instruments, mutual fund products, fixed
deposits, insurance products, commercial paper to name a few. The distribution
network of the merchant banker can be classified as institutional and retail in
nature. The institutional network consists of mutual funds, foreign institutional
investors, private equity funds, pension funds, financial institutions etc. The size
 of such a network represents the wholesale reach of the merchant banker. The
retail network depends on networking with investors.
• Corporate advisory services- Merchant bankers offer customised solutions to
their clients financial problems. The following are the main areas in which their
advice is sought:
Financial structuring includes determining the right debt-equity ratio and gearing
ratio for the client, the appropriate capital structure theory is also framed.
Merchant bankers also explore the refinancing alternatives of the client, and
evaluate cheaper sources of funds. Another area of advice is rehabilitation and
turnaround management. In case of sick units, merchant bankers may design a
revival package in coordination with banks and financial institutions. Risk
management is another area where advice from a merchant banker is sought. He
advises the client on different hedging strategies and suggests the appropriate
strategy.
• Project advisory services- Merchant bankers help their clients in various stages of
the project undertaken by the clients. They assist them in conceptualising the
project idea in the initial stage. Once the idea is formed, they conduct feasibility
studies to examine the viability of the proposed project. They also assist the client
in preparing different documents like the detailed project report.
• Loan syndication- Merchant bankers arrange to tie up loans for their clients. This
takes place in a series of steps. Firstly they analyse the pattern of the client’s cash
flows, based on which the terms of borrowings can be defined. Then the merchant
banker prepares a detailed loan memorandum, which is circulated to various
banks and financial institutions and they are invited to participate in the syndicate.

The banks then negotiate the terms of lending on the basis of which the final
allocation is done.
• Providing venture capital and mezzanine financing- Merchant bankers help
companies in obtaining venture capital financing for financing their new and
innovative strategies.

Registration of merchant bankers…

Registration with SEBI is mandatory to carry out the business of merchant banking in
India. An applicant should comply with the following norms:

• The applicant should be a body corporate

• The applicant should not carry on any business other than those connected with
the securities market
• The applicant should have necessary infrastructure like office space, equipment,
manpower etc.
• The applicant must have at least two employees with prior experience in merchant
banking
• Any associate company, group company, subsidiary or interconnected company
of the applicant should not have been a registered merchant banker
 • The applicant should not have been involved in any securities scam or proved
guilt for any offence

Merchant Banker- Categories

To act as a merchant banker, a person or firm should hold a certificate granted by the
regulator- the securities and exchange board of India. SEBI regulations provide for 4
categories of Merchant Bankers;

• Category I: It Will take up activities associated with issue

management. The capital adequacy norm for them is 5 crores.
• Category II: Allowed to carry the roles of advisor, consultant, co-
manager, underwriter and portfolio manager; The capital adequacy norms for them is
50 Lakhs.
• Category III: Allowed to act as underwriter, advisor, and consultant.
The capital adequacy norm for them is 20 Lakhs.
• Category IV: Only allowed to act as advisor or consultant.

Scope of merchant banking activities…

Merchant banking activity helps:

• In channelising the financial surplus of the general public into productive

investment avenues
• To coordinate the activities of various intermediaries to the share issue such as the
registrar, bankers, advertising agency, printers, underwriters, brokers etc.