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Merchant Banking in India

Introduction Financial services are an important component of financial system. The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after the implementation of Liberalization, privatization and globalization. Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role as specialized agencies. The resources raising functions remains to be the primary business of a merchant banker. The primary market holds the key to rapid capital formation, growth in industrial productions and exports. There has to be accountability to the end use of funds raised from the market. The increase in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where it requires a specialized skill in handling the situation. The merchant bankers have a social responsibility to in building an industrial structure in India. Merchant bankers assist corporate in raising capital. They assist in issue of shares, syndicating loans, public issue of debentures. They do not provide funds. They only assist. They also actively arrange working capital, appraisal Projects scrutinize & persuade merger proposals. 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.

In Britain merchant bankers & investment bankers are synonymous. In the U.S., Merchant bank means as investment bank which is wellequipped to handle multinational corporations. In INDIA merchant bankers is a body corporate who carries on any activity of the issue management, which consist of preparing prospectus & other information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities market. There is no official category in investment banking.

Definition In banking, a Merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money. The term can also be used to describe the private equity activities of banking. Definition of a Merchant Banker The merchant bankers are those financial intermediaries involved with the activity of transferring capital funds to those borrowers who are interested in borrowing. They guarantee the success of issues by underwriting them. Merchant Banks are popularly known as issuing and accepting houses. Unlike in the past, their activities are now primarily non-fund based (Fee based). They offer a package of financial services. The basic function of merchant banks is marketing corporate and other securities that are guaranteeing sales and distribution of securities and also other activities such as management of customer

services, portfolio management, credit syndication, acceptance credit, counseling, insurance, etc. According to Cox, D. Merchant banking is defined as Merchant banks are the financial institutions providing specialist services which generally include the acceptance of bills of exchange, corporate finance, portfolio management and other banking services. The Notification of the Ministry of Finance defines a Merchant banker as 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 or advisor or rendering corporate advisory service in relation to such issue management. In short, Merchant bankers assist in raising capital and advice on related issues. Original Definition: A Merchant Bank is a British term for a bank providing various financial services such as accepting bills arising out of trade, providing advice on acquisitions, mergers, foreign exchange, underwriting new i s s u e s and portfolio management. The Focus Definition: A Merchant Bank can be generall y d escribed as a financial services company with a private equity investment arm offering investment banking and ancillary services as well. Because a merchant bank acts not only as an advisor and broker but also as a principal, a merchant bank has a longer term approach than a typical investment ban k and is h i g h l y concerned with the viability of each investment opportunity and providing the right advice for a strong partnership with each client company. In banking, a merchant bank is a traditional term for an Investment Bank. It can also be used to describe the private equity activities of banking. This article is a bout the history of banking as developed by merchants, from the Middle Ages onwards. Amidst the swift changes sweeping the financial world, Merchant Banking has emerged as an indispensable financial advisory package. Merchant banking is a service-oriented function that transfers capital from those who own to those who can u se it. They try to identify t he needs of the investors & corporate sector & a dvice entrepreneurs what to do to be successful.

The merchant banking has been defined as to what a merchant banker does. A merchant banker has been defined by SEBI (Merchant Banker) rules, 1992, as 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 or advisor or rendering corporate advisory service in relation to such issue management. TRADATIONAL MERCHANTBANKING Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained to an individual or a banking house whose primary function was to facilitate the business process between a product and the financial requirements for its development. Merchant banking services span from the earliest negotiations from a transaction to i ts actual consummation between buyer and seller. In particular, the merchant banker acted as a capital sources whose primary activity w as directed towards a c ommodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce "collectable" profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and se l ler in a transaction. Who are merchant bankers? -Merchant banks are private financial institution. -Their primary sources of income are PIPE (Private Investment In Public Entities) financings and international trade. -Their secondary income sources are consulting, Mergers &Acquisitions help and financial market speculation. -Because they do not invest against collateral, they take far greater risks than traditional banks. -Because they are private, do not take money from the public and are international in scope, they are not regulated. -Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help. -The reason that businesses should d evelop a working relationship w ith a merchant bank. is that they hav e m ore money than venture capitalists. Their a dvice tends t o b e m ore pragmatic than v enture capitalists.

SIGNIFICANCEOF THE STUDY It would help us to d evelop the ability to study the functioning of Merchant Banking in India & learn & apply multidisciplinary concepts, tools & techniques to solve vital problems. It familiarizes w ith the various services provided by Merchant Bankers. They would help us to d raw comparison between public & private sector companies engaged in Merchant Banking activities. Based u pon the comparison, it wo uld help us to d etermine which sector has more growth potential & where should one invest his/her funds t o maximize the return at minimum risk. Developments in Merchant Banking Establishments In India y Setting up of banks Subsidiaries: In order to meet the growing demand for broad-based financial services from the corporate sector more effectively, the merchant banking division of the nationalize banks have stated forming independent subsidiaries. These subsidiaries offer more specialized services with proffecinal expertise & skills .SBI capital market ltd. Wasincorporated as the first such subsidiary o f sbi on 2july, 1986. Then CAN BANK finacial services ltd was set up as wholly ownedsubsidiary of canrabank in 1987. PNB CapitalMarket was promotedby PNBduringMid 1988.Many more subsidiaries arebeing setupby another nationalisebanks. y Reorganisation of private Firms: Expecting tough Competition fromgrowing numberof merchantbanking subsidiary o f nationalised banks, private merchant bankers have also started reorganising t heir activities e.g., J.M financial &investment consultancy ltd., 20th century finance corporation ltd., LKP merchant finacing ltd are someof the private sector firmsof merchant bankers who have taken steps to reorganise their activities. y Establishment of SUA: In order toeducate andprotect the interest of investor , t oprovide informationabout new issues of capital market, toevolve a c ode of c onduct for underwriters & tor ender legal & other services to members & public, theSTOCKBROKER UNDERWRITER ASSOCIATION(SUA) w as esteblished in 1984. y Discount & Finance House ofIn dia(DFHI) DFHI was incorporated as a company under the company act 1956 with anauthorised& paid up capitalof rs 100 crore.Outof this rs 51 crores

hasbeen contributedbyRBI, rs 16 croresbt finacialinstitions & 33 croresby public sectorbanks.Itwo uld also have lineof credit from public sectorbanks , refinance facility from theRBI in order to meet the working capital requirement. DFHI aims at providing liquidity in money market as it deals mainly in commercial bills. y Credit Rating Information Services ofIn dia Ltd.(CRISIL) CRISIL hasbeen setupin 1987 to provide help to investors, merchantbankers, underwriters,brokers,banks & finacial institutions etc. CRISIL ratees various t ypes of instruments such as debt, Equity, & Fixedr eturns ecurity offeredto the public.It help the investor in t aking investment decisions. y Stock-HoldingC orporationof India L td.(SHC) SHCwas setupin 1986 by the all indianfinancial institutions t o take care of safe custody, deliver y o f shares & collection of sale proceedsof the securities. The setting up ofSHC is boundto affect the capital market in a future. LeadingMerchant Bankers in India y In Public Sector: SBIC apit a l Markets Ltd., Merchant Banking Divisions of IDBI& IFCI, P NB Capital Services Ltd., Bankof Maharashtra, etc. y In PrivateSector: ABN AMRO, ICICI Bank Ltd, Axis Bank Ltd., Kotak Mahindra Capital Co., BajajCapit a l,Re liance Security Ltd., YesbankLtd, Tata capital market ltd., JM F inancial Co. andDCM Financial Services Ltd etc. y Foreign Players: GoldmanS ACH ( India)SecurityPvt. Ltd.,Morgan Stanley Indianco. P vt. Ltd., Barclays Security IndianPvt. Ltd., Bank ofAmerica,Deutsche Bank, Citi Group Global Market IndianPvt. Ltd.,Fedex Security Ltd.

Scope of Merchant banking activities:1. In channel transfer the financial surplus of the general public into productive investment avenues. 2. To coordinate the activities of various intermediaries to the share issue such as the registrar, banker, advertising agency, underwriters, brokers etc. 3. To ensure the compliance with rules and registration governing the securities market. History and origin of Merchant Banking in India Origin Merchant Banking originated through the entering of London merchants in foreign trade through acceptance of bill. Later, the merchants assisted the Government of underdeveloped countries in raising long- terms through floatation of bonds in London money market. Over a period they extended their activities to domestic business of syndication of long term and short term finance, underwriting of new issues, acting as registrars and share transfer agents, debenture trustees and portfolio managers, negotiating managers for mergers, takeovers etc. Merchant Banking in India Historical Perspective: Till 18th century moneylenders, moneychangers and village merchants performed the function of banks and Merchant Banks. They issued and discounted bills of exchange and bank draft. They gave loans on mutual trust, on mortgage of lands, on ornaments and other property. Jagat Sheth (1720-1733 AD, Bengal) Habib &Sons which is now Habib Bank (founded in 1941, now is in Pakistan). These were the organized merchant bankers in recent history of India. Merchant Banking is an activity that includes corporate finance activities, such as advice on complex financings, merger

and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks. Merchant banks are private financial institution. Their primary sources of income are PIPE financings and international trade. Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation. Because they do not invest against collateral, they take far greater risks than traditional banks. Because they are private, do not take money from the public and are international in scope, they are not regulated. Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help. The reason that businesses should develop a working relationship with a merchant bank is that they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists. It is rare for a merchant bank to fail. The last major failure was Barings Bank (1992). It failed because of unsupervised trading of copper futures contracts and buybacks. When the Dot Com Bubble burst in 2001, scores of venture capital firms failed. The greatest merchant bank failure in history was the Knights Templar. After the Crusades, the Order became immensely wealthy controlling and funding the trade between the Middle East and Western Europe. They foolishly loaned money to the French Government. To avoid repaying the money, King Louie had the Pope declare the Order heretics. Thousands of monks lost their lives, but France balanced its budget. To understand Merchant Banks, you should know something of their history. Modern merchant banking started in Italy during the 7th Century. The banking practices evolved from the financing structure of the Silk Road Trading that predates the Roman Empire. The basic financing structure was the advance payment for goods by merchant bankers at a great discount to the delivery value of those goods. In the case of Italy

and then Germany, wheat was the product. The merchant banks purchased the wheat soon after planting. They accepted the risk of crop failure. They profited when they sold the wheat. In most countries today, the national government accepts the risk through government crop insurance. As the British Empire expanded in the 18th and 19th Centuries, merchant banks prospered in London. For instance, merchant bankers funded Canadas Hudson Bay Company. This period saw the rise of such merchant banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from the trade created by the Dutch East Indian Company. Since the 18th century, the role of the merchant banker has been considerably broadened to include a composite of modern day skills. Such skills are inherently entrepreneurial, managerial, financial and transactional. Today, North American merchant banks have taken the form of "boutiques"whereby, each offers its own specialized services. The hallmarks of these merchant bank boutiques are that they typically charge fees payable in cash and/or the client's stock for each service rendered. . You can find a merchant bank that meets any reasonable set of needs. Merchant Banking in India- Post Independence: In 1967, RBI issued its first Merchant Banking license to grind lays started with management of capital issues, production planning, system design and also market research. It provides management consulting services as well. Citibank setup its Merchant Banking division in 1970. Its scope includes assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity. Indian Banks started banking services as a part of multiple services they offered to clients from 1972. State Bank of India started its Merchant Banking division in 1972. In the initial years the objective was to render corporate advice and assistance to small and medium entrepreneurs. Merchant Banking activities are organized and undertaken in several forms. Commercial Banks and foreign development finance institutions have organized them through formation of division; nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into Public Ltd. Company or registered themselves into Public Ltd. Companies. Some of them have equity stake of foreign Merchant Bankers.

Merchant Bank A merchant Bank deals with Commercial Banking needs of international finance, long term company loans and stock underwriting and stock underwriting. A merchant Bank does not have retail offices where one can go and open a savings or checking account. A merchant Bank is sometimes said to be a wholesale bank or in the business of wholesale Banking. This is because tend to deal primarily with other merchant Banks and other large financial institutions. The most familiar role of merchant Bank is stock underwriting. A large company that wishes to raise money from investors through the stock market can hire a merchant Bank to implement and underwrite the process. The Merchant Bank determines the number of stocks to be issued, the price at which the stock will be issued and the timing of release of this new stock. The Merchant Bank files all the paperwork required with the various market authorities and is also frequently responsible for marketing the new stock, though this may be a joint effort with the company and managed by Merchant Bank. For really large stock offerings, several merchant Banks may work together, with one being the lead underwriter. By limiting their scope to the needs of large companies, merchant Banks can focus their knowledge and be of specific use to such clients. Some merchant Banks specialize in a single area such as underwriting and international finance. Many of the largest Banks have both a retail division and a merchant Bank division. The divisions are generally very separate entities, as there is very little similarity between retail Banking and what goes on in a merchant Bank. Although your life is probably affected every day in some way by decisions made in a merchant Bank. Merchant Banks operate behind the scenes and away from the spotlight.
Objectives of Merchant Banking in Prevailing Economy:

* To study the significance of Merchant Banking towards the development of securities industry. * To analyze issue management regulations. * To analyze the functions of Merchant Banking in relation to rules and regulations of SEBI. * To evaluate the performance of Merchant Bankers, both activity performance and operational and financial performance. * To draw a conclusion and suggestions based on the analysis and experiences.

Nature of merchant banking: Merchant banking is skill based activities and involves serving every financial need of every client. It requires focused skill-base to provide for the requirements of the client. SEBI has made the quality of man-power as one of the criteria for registration as merchant banker. These skills should not be concentrated in issue management and underwriting alone, which may have an adverse impact on business. Merchant bankers can turn to any of the activities mentioned above depending upon resources, such as capital, foreign tie-ups for overseas activities and skills. The depth and sophistication in merchant banking business are improving since the avenues for participating in capital market activities have widened from issue management and underwriting to private placement, bought out deals (BODS), buy-back of shares, merges and takeovers. The services of merchant bank cover project counseling, pre investment activities, feasibility studies, project reports, design of capital structure, issue management, underwriting, loan syndication, mobilization of funds from Non-Resident Indians, foreign currency finance, mergers, amalgamation, takeover, venture capital, buy back and public deposits. A Category-1 merchant banker can undertake issue management only. Separate registration is not necessary to carry on the activity as underwriter. Characteristics of Merchant Banking:
y y y y y y y y y y y

High proportion of decision makers as a percentage of total staff. Quick decision process. High density of information. Intense contact with the environment. Loose organizational structure. Concentration of short and medium term engagements. Emphasis on fee and commission income. Innovative instead of repetitive operations Sophisticated services on a national and international level. Low rate of profit distribution. High liquidity ratio.

Qualities of a Merchant Banker:

y y

Ability to analyze Abundant knowledge

y y y

Ability to built up relationship Innovative approach Integrity To be a successful Merchant Banker, following qualities are necessary: 1. Knowledge : Thorough understanding of technical issues related to business, understanding of legal and statutory requirements, appreciation of business acumen; financial expertise is a key thing a merchant banker must know. Delivery of his services depends on his basic understanding of these issues. 2. Capital market familiarity: Merchant banker should be well versed with the stock markets, their movements. He should track important happenings in the market on an ongoing basis. 3. Liasioning ability: Merchant bankers are required to liaison with SEBI, RBI, the stock exchanges, depositories and other government authorities for public issue related duties. It is imperative that a Merchant bank maintains excellent rapport with all of them and also close relations even at informal levels. This only can see speedy and favorable clearances by the authorities. 4. Innovation: Corporate may approach with unique requirements. Standard solutions and products may not solve problems sometimes. Merchant bankers should do out of box thinking and be able to do financial engineering. They can device new financial instruments and get approved from the authorities. Innovation is required even to address stringent legal requirements. 5. Integrity: Merchant banker has valuable and confidential information of its customers. Merchant bankers should take utmost care that the Information is not leaked also not consumed for the purpose other than for which it was disclosed to the merchant banker.

Requirements for setting up a Merchant Banking outfit 1. Formation of the Business Organization SEBI Act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the types of organizations are listed below: y Sole proprietorship y Partnership firm

y Hindu Undivided Family(HUF) y Corporate Enterprises y Co-operative Society Generally it is preferred that Merchant Banking outfit be a registered company. Merchant Banks are generally setup as subsidiary companies of banks (Public or Private). E.g. ICICI Securities. 2. Adoption of a viable business plan All the basic tests required to find out whether the business to be under taken is viable or not are also applicable to a Merchant Banking setup. Capital adequacy, profitability, growth opportunities and current market size are some of the factors which need to be looked into. 3. Registration of Merchant Bankers a. Application for grant of certificate An application for grant of a certificate needs to be made to SEBI . The application can be made for any one of the following categories of the merchant banker namely: Category I, that is (i) to carry on any activity of the issue management, which will inter-alia consist of 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.

Category II, that is, to act as adviser, consultant, co- manager, underwriter, portfolio manager; Category III, that is to act as underwriter, adviser, consultant to an issue; Category IV, that is to act only as adviser or consultant to an issue. To carry on the activity as underwriter or portfolio manager a separate certificate of registration needs to be obtained from SEBI. b. Application to conform to the requirements The application should conform to all the requirements under the SEBI guidelines, otherwise it may be rejected. c. Furnishing of information, clarification and personal representation The Board may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker for the purpose of disposal of the application. The applicant or its principal officer may appear before the Board for personal representation.

d. Consideration of application The Board shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely: the applicant shall be a body corporate other than a non- banking financial company the merchant banker who has been granted registration by the Reserve Bank of India to act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit the applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities the applicant has in his employment minimum of two persons who have the experience to conduct the business of the merchant banker a person directly or indirectly connected with the applicant has not been granted registration by the Board; the applicant fulfils the capital adequacy requirement is as follows: The capital adequacy requirement should not be less than the net worth of the person making the application for grant of registration. The net worth shall be as follows, Category Minimum Amount Category I Rs. 5, 00, 00, 000 Category II Rs. 50, 00, 000 Category III Rs. 20, 00, 000 Category IV Nil

the applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant and have not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence the applicant has the professional qualification from an institution recognised by the Government in finance, law or business management

grant of certificate to the applicant is in the interest of investors e. Procedure for Registration The Board on being satisfied that the applicant is eligible shall grant a certificate. On the grant of a certificate the applicant shall be liable to pay the fees as prescribed. f. Payment of fees and the consequences of failure to pay fees Every applicant eligible for grant of a certificate shall pay such fees in such manner and within the period specified. Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may suspend the registration certificate, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists. The Merchant Bank can commence business on acquisition of a Certificate of Registration from the SEBI after completion of the above mentioned formalities.

Importance and need of Merchant Banking Need of Merchant Banking y Growing industrialization y Helps small and medium enterprises y Growing complexity in rules and procedure y Exploring possibility of joint ventures y Promoting new issue market for saving mobilisation The need of merchant banking services in India arises from the fact that high level industrialization is taking place in the country. So, there is need for skilled professionals who can take care of various finance-related needs of the advanced industrial sectors. These specialist services are also of great importance for the small and medium sized enterprises to help them operate smoothly.

Most of the rural areas still lack industrial advancement and the main reasons for this include lack of funds and information. The merchant banking services help the entrepreneurs to come up with industrial setups in these areas. Besides, the merchant banks help the entrepreneurs to explore the joint venture opportunities in the foreign markets. Important reason for the growth of Merchant Banking has been developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap under bridged between the supply and demand inventible funds. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for funds from the corporate sector sector. In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their long- term financial requirements through capital issues of equity and debentures. With the growing demand for funds there was pressure on the capital market that enthused the commercial banks, share brokers and financial consultant firms to enter into the field of Merchant Banking and share the growing capital markets. With the result, all the commercial banks in nationalized and public sector as well as in private sector including the foreign banks have opened their Merchant Banking windows and are competing in this field. There has been a mushroom growth of financial consultancy firms

and broker firms doing advisory functions as well as managing public issues in syndication with other Merchant Bankers. Notwithstanding the above facts, the need of Merchant Banking institutions is felt in the wake of huge public savings lying still untapped. Merchant Banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments and thus can help in meeting the widening demand for investible funds for economic activity. With the growth of merchant banking profession corporate enterprises in both public and private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirements for funds for establishing new enterprises, undertaking expansion, modernization and diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by merchant banking. Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. This is evidenced from the increasing amount raised form the capital market by the corporate enterprises year after year. In view of multitude of enactments, rules and regulations, guidelines and offshoot press release instructions brought out by the government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the need of skilled agency existed which could provide counseling in these matters in a package form. Merchant bankers, with their skills, updated information and knowledge, provide this service to the corporate units and advise them on such requirements to be complied with for raising funds from the capital market under different enactments viz. Companies Act, Income-tax Act, Foreign Exchange Regulation Act, Securities Contracts (Regulation) Act and various other corporate laws and regulations. Merchant bankers advise the investors of the incentives available in the form of tax reliefs, other statutory relaxations, good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities of the corporate sector. Thus merchant banks help industries and trade to rise and the investors to invest their saved money in sound and healthy concern with confidence, safety and expectation for higher yields. Finance is the backbone of business activities. Merchant banker make available finance for business enterprises acting as intermediaries between them raising demand for funds and the supplies of funds besides rendering various other services.

The following are some of the reasons why specialist merchant bank have a crucial role to play in India.
y y y y y y

Growing complexity in rules and procedures of the government. Growing industrialization and increase of technologically advanced industries. Need for encouragement of small and medium industrialists, who require specialist services. Need to develop backward areas and states which require different criteria. Exploring the possibility of joint ventures abroad and foreign market. Promoting the role of new issue market in mobilizing saving from.

Where merchant banks function as an independent wing or as subsidiary of various private/central governments/ state government financial institution. Most of the financial institution in India is in public sector and therefore such setup plays a role on the lines of governmental priorities and policies.

Role of Merchant Banker The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant bankers dynamism lies in promptly attending to the corporate problems and suggest ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where government rules, regulations and politics affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversifications, modernizations or replacements of existing plant and machinery or other equipments putting new

demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be setup in industrially backward areas to eliminate regional imbalances in industrial development of the country. He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the promoters with his knowledge and skills to resolve the problems being faced by them. He has to watch the interest and win over the confidence of the government, its agencies, along with the entrepreneurs, the investors and the whole community. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has to be dynamic. In the days ahead, merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of the corporate sector, the industry and the economy as a whole which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

Qualifications of Merchant Bankers

Given all these serious financial tasks, an individual must possess certain qualities, abilities, and skills before he can be considered as a good merchant banker. These qualifications are not only useful for people who wish to become merchant bankers, but also for business owners and company heads who may be looking for a good merchant bank. Merchant bankers should have adequate and significant experience in the field, and have handled notable projects during his or her career. It is also important for merchant bankers to be good in gathering all the important information about the client company (such as product information, operations, industry, and management). Skilled merchant bankers are also capable of generating funds or

capital not only for the client company, but also for the merchant bank itself. The job also requires merchant bankers to be good strategy makers, creative planners, and adequately experienced in acquisitions and mergers. Main Objectives of Merchant bankers Merchant bankers render their specialized assistance in achieving the main objectives which are presented below: 1. To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India. 2. The main object of merchant banker is to create secondary market for bills and discount or re- discount bills and acts as an acceptance house. 3. Merchant bankers another objective is to set up and provide services for the venture capital technology funds. 4. They also provide services to the finance housing schemes for the construction of houses and buying of land. 5. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. 6. They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

The growth of Merchant Banking in India Formal Merchant Banking activity in India was originated in 1969 with the Merchant Banking division set up by the Grindlays Bank, the largest foreign Bank in the country. The main service offered at that time to the corporate enterprises by the Merchant Banks included the management of public issues and some aspects of financial consultancy. Following Grindlays Bank, Citibank set up its Merchant Banking division in 1970. The division

took up the task of assisting new entrepreneurs and existing units in the evaluation of new projects and raising funds through borrowing and equity issues. Management consultancy services were also offered. Merchant Bankers are permitted to carry on activities of primary dealers in government securities. Consequent to the recommendations of Banking Commission in 1972, that Indian Banks should offer Merchant Banking services as part of the multiple services they could provide their clients. State Bank of India started its Merchant Banking division in 1972. In the initial years the objective was to render corporate advice and assistance to small and medium entrepreneurs. The Commercial banks that followed State Bank of India were Central Bank of India, Bank of India and syndicate Bank in 1977. Bank of Baroda, Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of India, United Commercial bank, Punjab National Bank, Canara Bank and Indian Overseas Bank in late 70s and early 80s. Among the development banks, ICICI started Merchant Banking activities in 1973 and followed by IFCI(1986) and IDBI(1991). Organizational set up of Merchant Bankers in India In India a common organizational set up of Merchant Bankers to operate is in the form of divisions of Indian and foreign banks and financial institutions, subsidiary company established by bankers like State Bank of India, Canara Bank, Punjab National Bank, Bank of India etc. Some firms are also organized by financial and technical consultants and professionals. Securities and Exchange Board of India (SEBI) has divided the Merchant Bankers into 4 categories based on their capital adequacy. Each category is authorized to perform certain functions. From the point of organizational set up Indias Merchant Banking organizations can be categorized into 4 groups on the basis of their linkage with the parent activity. They are: (A) Institutional Base Where Merchant Banks function as an independent wing or as subsidiary of various private/ Central Governments/ State Governments financial institutions. Most of the financial institutions in India are in public sector and therefore such set up plays a role on the lines of Government priorities and policies. (B) Banker Base These merchant bankers function as division/subsidiary of banking organization. The parent banks are either nationalized commercial bank or the foreign banks operating in India. These organizations have brought professionalism in merchant

banking sector and they help their parent organization to make a presence in capital market. (C) Broker Base In the recent past there has been an inflow of qualified and professionally skilled brokers in various stock exchanges of India. These brokers undertake merchant banking related operations also like providing investment and portfolio management services. (D) Private Base These merchant banking firms are originated in private sector. These organizations are the outcome of opportunities and scope in merchant banking business and they are providing skill-oriented specialized services to their clients. Some foreign merchant bankers are also entering either independently or through some collaboration with their Indian counterparts. Private sector merchant banking firms have come up either as the sole proprietorship or public limited companies. Many of these firms were in existence for quite some times before they added a new activity in the form of merchant banking services by opening new divisions on the lines of commercial banks and All India Financial Institutions. Functions of Merchant Banking Organizations - Distribution of securities like equity shares, mutual funds, insurance products and so on. - Providing assistance to the enterprises to raise funds from the market. - Loan syndication for the clients is another important function performed by these organizations. - Corporate advisory and project advisory services are other important merchant banking services offered by these organizations. The Role of Merchant Banking

Merchant banking refers to a form of banking that both commercial and investment banks participate in. It involves trading unregistered securities including stock, bonds and private equity securities. Merchant banking serves large businesses, including international corporations, and some wealthy individuals. However, its role in the economy can affect consumers at all levels.
1. Buying Debt

Some merchant banking activity involves buying debt, either from other banks or businesses. A bank that engages in merchant banking purchases debt securities, which represent outstanding debts to consumers such as home buyers, car buyers and small businesses. Merchant banking allows one institution to purchase the debt from the bank that issued the loan, allowing that bank to make new loans and letting the purchasing institution profit from the interest that the borrowers pay, or suffer losses if borrowers default. Merchant banks also make loans directly to businesses and wealthy individuals. These are usually large, long-term loans that would be unavailable elsewhere. They feature complex terms and allow borrowers to fund major investments or expansion projects. For example, if a large business wishes to expand overseas, it may work with a merchant bank to fund the endeavor, paying back the money it borrows over a number of decades with new international revenue. Because of the risk involved in merchant bank loans, banks become heavily involved in the process.

2. Making Loans

3. Managing Risk

Another major role of merchant banks is managing risk for customers. Merchant banks have access to many different markets, including securities markets and brokers that individuals and businesses would not otherwise have access to. The scale of their investment power allows merchant banks to distribute their investments widely, reducing the amount of risk that the investors they represent need to take on.

4. Driving Markets

As a direct result of their investing to manage risk and create wealth for their customers, merchant banks drive markets. The money they invest in private equity securities, stocks and bonds alters the prices of these financial instruments and affects what other investors must pay for them. Likewise, when merchant banks experience crisis, as during the 2008-2009 recession, the falling value of their securities causes markets to fall.

Obligations and Responsibilities Merchant bankers have the following obligations and responsibilities 1. Merchant banker should maintain proper books of accounts, records and submit half yearly/annual financial statements to the SEBI within stipulated period of time. 2. No merchant banker should associate with another merchant banker who is not registered in SEBI. 3. Merchant bankers should not enter into any transactions on the basis of unpublished information available to them in the course of their professional assignment. 4. Every merchant banker must submit himself to the inspection by SEBI when required for and submit all the records. 5. Every merchant banker must disclose information to the SEBI when it requires any information from them.

6. All merchant bankers must abide by the code of conduct prescribed for them. 7. Every merchant banker who acts as lead manager must enter into an agreement with the issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular reference to disclosures allotment, refund etc. Code of Conduct According to the 13 Regulation of the SEBI of 1992 (Merchant bankers), every merchant banker should comply with following codes of conduct. They are: a) The merchant banker must observe high integrity and fairness in all his dealings. b) He shall render at all times high standard of services, exercise due diligence, exercise independent professional judgement. c) If necessary, he must disclose to his clients the possible source of conflict of duties and interests. d)The merchant banker should not indulge in unfair practice or unfair competition with other merchant bankers. e) He should not make any exaggerated statement about his capacity or achievement. f) He should always Endeavour to give the best possible advise and prompt efficient and cost effective service. g) He should maintain the secrecy of all the confidential information received during the course of service to his client. h) He should not engage in the creation of a false market or price rigging or manipulation. CODE OF CONDUCT FOR MERCHANT BANKERS 1. A Merchant Banker shall make all efforts to protect the interests of investors. 2. A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. 3. A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner. 4. A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.

5. A Merchant Banker shall endeavor to ensure thata. Inquiries from investors are adequately dealt with; b. Grievances of investors are redressed in a timely and appropriate manner; c. Where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system. 6. A Merchant Banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision. 7. A Merchant Banker shall endeavor to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. 8. A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer. 9. A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. 10. A Merchant Banker shall not make any statement, either oral or written, which would misrepresent the services that the Merchant Banker is capable of performing for any client or has rendered to any client. 11. A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its interest. 12. A Merchant Banker shall put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, shall take reasonable steps to resolve the same in an equitable manner. 13. A Merchant Banker shall make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest while acting as Merchant Banker which would impair its ability to render fair, objective and unbiased services.

14. A Merchant Banker shall always endeavor to render the best possible advice to the clients having regard to their needs. 15. A Merchant Banker shall not divulge to anybody either orally or in writing, directly or indirectly, any confidential information about its clients which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force. 16. A Merchant Banker shall ensure that any change in registration status / any penal action taken by the Board or any material change in the Merchant Bankers financial status, which may adversely affect the interests of clients / investors is promptly informed to the clients and any business remaining outstanding is transferred to another registered intermediary in accordance with any instructions of the affected clients. 17. A Merchant Banker shall not indulge in any unfair competition, such as weaning away the clients on assurance of higher premium or advantageous offer price or which is likely to harm the interests of other Merchant Bankers or investors or is likely to place such other Merchant Bankers in a disadvantageous position while competing for or executing any assignment. 18. A Merchant Banker shall maintain arms length relationship between its merchant banking activity and any other activity. 19. A Merchant Banker shall have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients, investors and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions. 20. A Merchant Banker shall not make untrue statement or suppress any material fact in any documents, reports or information furnished to the Board. 21. A Merchant Banker shall maintain an appropriate level of knowledge and competence and abide by the provisions of the Act, regulations made there under, circulars and guidelines, which may be applicable and relevant to the activities carried on by it. The merchant banker shall also comply with the award of the Ombudsman passed under Securities and Exchange Board of India (Ombudsman) Regulations, 2003.

22. A Merchant Banker shall ensure that the Board is promptly informed about any action, legal proceedings etc., initiated against it in respect of material breach or non compliance by it, of any law, rules, regulations, directions of the Board or of any other regulatory body. 23. (a) A Merchant Banker or any of its employees shall not render, directly or indirectly, any investment advice about any security in any publicly accessible media, whether real-time or non real-time, unless a disclosure of his interest including a long or short position, in the said security has been made, while rendering such advice. (b) In the event of an employee of the Merchant Banker rendering such advice, the merchant banker shall ensure that such employee shall also disclose the interests, if any, of himself, his dependent family members and the employer merchant banker, including their long or short position in the said security, while rendering such advice. 24. A Merchant Banker shall demarcate the responsibilities of the various intermediaries appointed by it clearly so as to avoid any conflict or confusion in their job description. 25. A Merchant Banker shall provide adequate freedom and powers to its compliance officer for the effective discharge of the compliance officers duties. 26. A Merchant Banker shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in carrying out their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings and interests etc. 27. A Merchant Banker shall ensure that good corporate policies and corporate governance are in place. 28. A Merchant Banker shall ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed (including having relevant professional training or experience) 29. A Merchant Banker shall ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it in the conduct of its business, in respect of dealings in securities market.

30. A Merchant Banker shall be responsible for the acts or omissions of its employees and agents in respect of the conduct of its business. 31. A Merchant Banker shall ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis. 32. A Merchant Banker shall not be a party to or instrumental for a. Creation of false market; b. Price rigging or manipulation or; c. Passing of unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange to any person or intermediary in the securities market.

Guidelines of SEBI After the obligations of the CCI, the place was occupied by a legal organ called as Securities and Exchange Board of India . The issue of capital and pricing of issues by companies has become free of prior approval. The SEBI has issued guidelines for the issue of capital by the companies. The guidelines broadly covers the requirement of the first issue by a new or the first issue of a new company set up by the existing company, the first issue by the existing private companies and public issues by the existing listing companies. The SEBI is the most powerful organization to control and lead both the primary market and secondary market.

The SEBI has announced the new guidelines for the disclosures by the Companies leading to the investor protection. They are presented below: a) If any Companys other income exceeds 10 per cent of the total income, the details should be disclosed. b) The Company should disclose any adverse situation which affects the operations of the Company and occurs within one year prior to the date filing of the offer document with the Registrar of Companies or Stock Exchange.

c) The Company should also disclose the information regarding the capacity utilization of the plant for the last 3 years. d) The Promoters of the Company must maintain their holding at least at 20 per cent of the expanded capital. e) The minimum application money payable should not be less than 25 per cent of the issue price. f) The company should disclose the time normally taken for the disposal of various types of investors grievances. g) The Company can make firm allotments in public issues as follows:  Indian mutual funds (20%), 2 FIIS (24%), 3 Regular employees of the company (10%), 4 Financial institution (20%). h) The Company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities. i) According to the guidelines, in case of the public issues, at least 30 mandatory collection centres should be established. j) According to the SEBI guidelines regarding rights issue, the Company should give advertisements in not less than two news- papers about the dispatch of letters of offer. No preferential allotment may be made along with any rights issue. k) The Company should also disclose about the fee agreed between the lead managers and the Company in the memorandum of understanding.

The Difference between Investment banks and Merchant banks Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks tend to blur. Traditional merchant banks often expand into the field of securities underwriting, while many investment banks participate in trade financing activities.

In theory, merchant banks and investment banks perform different functions. Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated in underwriting and selling securities in large blocks. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. Traditionally investment banks did not deal with the general public. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting and coinvestment in projects involving trade of one form or another. The current offering of merchant banks and investment banks varies by the institution offering services, but there are a few characteristics that most companies that offer both investment and merchant banking share. As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small- scale companies and offer creative equity financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential. Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it.
Merchant banks Vs Commercial banks 1) Merchant banks assist in raising capital in the form of equity, preference

shares, and syndicated loan working capital instruments whereas Commercial banks provide funds in the form of term loan and working capital. 2) Merchant banks are Advisor not financer whereas Financing is the main business of Commercial banks. 3) Merchant banks do not accept chequable deposits whereas

Demand deposits are the key feature of Commercial banks. 4) Merchant banks deals with mainly fees based business whereas Commercial banks deals with mainly fund based business. 5) Merchant banks being advisors, they are closer to the customers and get to know risks of the transaction s properly. They work on risks shields i.e. mitigation measures. Commercial banks being lenders, they are more cautions, assess risks in lending proposal and cannot afford to be grossly relationship based and close to the customer. 6) Most of work Merchant banks get is about management of equity issues in the capacity of lead manager, underwriter, piercing of issue, book running, and liaisoning with SEBI. Commercial banks majority business is of terms lending and bank deposits. Services of Merchant bankers in India:Merchant bankers provide services as follows: Business planning stage: 1) project feasibility study 2) advice on capital structuring Equity raising: 1) preparation of prospectus and liaison with SEBI 2) pricing decisions 3) marketing in the capacity of lead managers 4) underwriters to the issue 5) post issue management 6) assistance in ADR/GDR 1) management of debenture issue 2) preparation of bankable proposal and syndication of Loan Working capital raising: 1) assistance in arranging optimal capital finance. Strategic advice: 1) advice on mergers and acquisitions 2) corporate structuring advice Services provided by Merchant banks: The development activity through the country had exerted excess demand on the sources of funds by the ever expanding industry and trade which could not be met by All India Financial Institutions. In these circumstances, the corporate sector enterprises had the only alternative to avail themselves of the capital market Debt raising:

services for meeting the long-term fund requirements through capital issues of equity and debentures. The growing demand for funds from capital market has enthused many organizations to enter into the field of merchant banking for managing the public issues. The need of merchant banker is also felt in the wake of huge untapped public savings as merchant bankers can play a highly significant role in mobilizing funds from savers to invest in channels assuring promising return on investments and thus narrow down the gap between demand for and supply of investible funds. Merchant bankers not only provide advisory services to corporate enterprises but also advise the investors of the incentives available in the form of tax relief and other statutory obligations. Thus, the merchant bankers help industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence, safety and expectation of higher yields. The Necessity of Merchant Banking Services The economy of the country is often afflicted with different unpredictable conditions like inflation, unemployment, stagnation and so forth. The need to sustain a steady growth is necessary for corporations and individuals which is possible only with a long term strategy and financial options. The merchant banking services provide solutions and financial options. These banks provide advisor services to clients based on a particular fee. They also provide other financial services to mergers and clients. It is the only financial institute that invests its capital in the clients' company. It acts as an intermediary between those who possess capital and those who need capital. To help their clients with a number of financial options, the merchant banking services operate in a number of countries all over the world. In this manner the clients have the opportunity to

survey the different financial options to ensure better growth.

Broadly a merchant banker can provide the following services: 1. Corporate Counseling 2. Project Counseling and Pre-Investment Studies 3. Credit Syndication and Project Finance 4. Issue management 5. Underwriting 6. Bankers 7. Portfolio management 8. Venture capital financing 9. Leasing 10. Non-Resident Investment Counseling and Management 11. Acceptance credit and Bill discounting 12. Advising on Mergers, Amalgamations and Take-over 13. Arranging offshore finance 14. Fixed Deposit broking 15. Relief to Sick Industries Lets take a brief look at each of these functions: 1.Corporate Counseling - Corporate counseling denotes the advice provided by the Merchant
Banking to the corporate unit to ensure better corporate performance in terms of image building among investors, steady growth through good working and appreciation in market value of its equity shares. The scope of corporate counseling, capital restructuring and, portfolio management and the full range of financial engineering includes venture capital, public issue management, and loan syndication, working capital, fixed deposit, lease financing, acceptance credit, etc. However counseling is limited to only opinions and suggestions and any detailed analysis would form part of a specific service. The scope of corporate counseling is restricted to the explanations of concepts, procedures and laws to be observed by the client company. Requirement of any action to be taken or compliance of statutory formalities to be made for implementation of those suggestions would mean the demand for a specific type of service other than corporate counseling being offered by the merchant bankers. An academic analysis of corporate counseling present a different picture than that transpires from the literature of the merchant bankers Firstly corporate counseling is the beginning of the merchant banking service which every clients whether new or existing has got to avail a different matter whether a merchant bank charges its client separately for rendering the

corporate counseling service or includes the element of fee in the other heads of services but fro the angle of priority. Corporate counseling is first in line of the services which a merchant banker offers and than other services. Secondly the scope of the corporate counseling is very vast. Its coverage ranges from the managerial economies, investments and financial management to Corporate Laws and the related legal aspects of the organizational goals, locations factors, organizational size and operational scale, choice of product and market survey, forecasting of product, cost reduction and cost analysis, allocation of resources, investment decisions, capital management and expenditure control, pricing methods and marketing strategy, etc. As financial and liivestment experts, a merchant banker has to guide the corporate clients in areas covering financial reporting, project measurements, working capital management, financial requirements and the sources of finance, evaluating financial alternatives, rate of returns and cost of capital besides basic corporate changes of financial rearrangement, Reorganization, mergers and acquisitions, etc. are the areas to be covered. Corporate laws should basically cover the legal aspects including the various legal formalities involved in areas of corporate finance being raised from the financial institutions, banks and the general pubic in the form of loan, new issues of equity or debentures respectively. 2. Project Counseling - Project counseling services may be rendered independently or maybe, it relates to project finance and broadly covers the study of the project and offering advisory assistance on the project viability and procedural steps for its implementation broadly including following aspects:- general review of he project ideas/ project profile, advice on procedural aspects of project implementation, review of technical feasibility of the project on the basis of the report prepared by own experts r by the outside consultants, selecting Technical consultancy Organization (TCO) for preparing project reports and market survey, or review of the project reports or market survey report prepared by the TCO, preparing project report form financial angle, and advice and act on various procedural steps including obtaining government consents for implementation of projects. This assistance can include obtaining of the following approvals/licenses/permission/grants etc form the govt. agencies viz. letter of intent, industrial license and DGTD registration and government approval for foreign collaboration. In addition to above, the facility providing guidance to Indian entrepreneurs for making investment projects in India and in Indian joint ventures overseas is also covered under this activity. Besides the above services, project counseling may include identification of potential investments avenues, precise capital structuring shaping the pattern of financing, arranging and negotiating foreign collaborations, amalgamations, mergers and takeover, financial study of the project and preparation of viability reports, to advice on the framework of institutional guidelines and laws governing corporate finance, assistance in the preparation of project profiles and feasibility studies based on preliminary project ideas in order to indicate the potential. These reports would cover the technical, financial and economic aspects of the project from the point of view of their acceptance by the financial institutions and banks; advising and assisting clients in preparing the applications for obtaining letters of intent, industrial license and DGTD

registrations etc, seeking approvals form the government of India for foreign technical and financial collaboration agreements, guidance on investment opportunities for entrepreneurs coming to India.

Pre-investment studies are directed mainly for the prospective investor. These are the
objective and detailed feasibility explanation of which the principal aim is to arm the clients with the sound foundation of facts and figures to evaluate the alternative avenues open for capital investments form the pint of view of growth and profit prospects. Some of the critical issues that a study of this genre deals will include an in-depth investigation of environment and regulatory factors, location of raw material, supplies, demand projections and financial requirements. Such a study would assess the financial and economic viability of a given project and help the clients to identify and short list those projects that are built upon his inherent strength son as to accentuate corporate profitability and growth in long run. Grind lays bank has specialization in pre investment studies and it conducts such studies for foreign companies whishing to participate in joint ventures in India and offers a package of services including advice on the extent of participation, government regulatory factors and an environmental scan of particular industries in India. 3. Loan syndication - Credit syndication also known as credit procurement and project finance services. The main task involved in credit syndication is to raise to rupee and foreign currency loans with the banks and financial institutions both in India and abroad. It also arranges the bridge finance and the resources for cost escalations or cost Overruns. Broadly, the credit syndications include the following acts; (a) Estimating the total costs (b) Drawing a financing plan for the total project cost-conforming to the requirements of the promoters and their collaborators. Financial institutions and banks, government agencies and underwriters. (c) Preparing loan application for financial assistance from term lenders/financial institutions/banks and monitoring their progress including the pre-sanction negotiations. (d) Selecting the institutions and banks for participation in financing. (e) Follow-up of the term loan application with the financial institutions and banks and obtaining the satisfaction for their respective share of participation. (f) Arranging bridge finance. (g) Assisting in completion of formalities for drawl of term finance sanctioned by institution expediting legal documentation formalities drawing up inter-se agreements etc. prescribed by the participating financial institutions and banks.

(h) Assessing the working capital requirements. Preparing the necessary application for a successful issue management the close liaison and coordination with the various constituents of the public issue is an essential condition that warrants full cooperation of all the parties affecting the cost and prospects of the issue. Merchant banks, acting as Manager to the issue has to settle the fee for Advocate/solicitors advice, accountants certification, brokers and banks charges, underwriters commission, printers charges and advertising and publicity expenses and coordinates with syndicated merchant bankers and principal brokers, stock exchanges, etc. The responsibility for all this rests upon the merchant banker. If proper coordination is not done, the success of the issue may be rendered unassured.

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, and marketing of the issue, allotment and refund, listing on stock exchanges.

Capital Restructuring Services Merchant banks render different capital restructuring services to the corporate units depending upon the circumstances a particular unit is facing. It may include the following services: y Examination of the capital restructure of corporate unit to decide the extent of capitalization. y In case of bonus issue, it helps the clients in preparing the Memorandum for Controller of Capital Issue (CCI) and in obtaining his consent. y For companies governed by Foreign Exchange Regulation Act (FERA), merchant bankers suggest an alternative capital structure which is in conformity with the legal requirements. It also advises company on divestment issues to their maximum advantage. y For sick units, it suggests appropriate capital structure which will help the unit in revival. It also advises as to the extent and means of bringing fresh capital into business. y Merchant bankers also render advise on mergers, takeovers and amalgamations and help in their implementation.

y Merchant bankers also identify the areas of diversification of the existing production systems and suggest various strategies to widen and restructure the capital base accordingly. Issue Management and Underwriting Management of capital issues is a professional service rendered by the skilled and experienced merchant bankers. Previously, the managing agents for a particular corporate used to manage public issues. The abolition of the managing agency system, the growth in the public limited companies in number and size, the imposition of new rules and regulations regarding the public issue of securities made it necessary for merchant bankers to play a definite role in the management of capital issues. Public issue management involves marketing of corporate securities by offering securities to the public, procuring private subscription to the securities and offering securities to existing shareholders of the company. As a manager to the public issue, the merchant banker, before the public issue has to obtain the consent of the stock exchanges to the memorandum and articles of association, appoint other managers, bankers, underwriters, brokers etc., advice the company to appoint auditors, solicitors and board of directors, draft the prospectus and obtain consent from the companies legal advisors, board of directors and other concerned parties, file the prospectus with Registrar of Companies, make an application for enlistment with stock exchanges and finally advertise for the issue. A merchant bankers post issue activities include final allotment and/or refund of subscription amount, calculation of underwriters liability in case of under subscription and complying the necessary statutory requirements for listing of securities on the stock exchange. Underwriting of public issue A fully underwritten public issue spells confidence to the investing public, which ensures a good response to the issue. Keeping this in view companies, which float a public issue usually, desire a full underwriting of the issue.

Underwriting is only the guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed in proportion by the underwriter. An underwriter of the issue gets the following benefits: 6. It earns a commission of the commitment given. 7. It earns the right to be appointed as bankers of that issue. 8. It expands its clientele by underwriting more and more issues. Bankers to the issue The merchant banker can automatically become the banker to the issue in the following cases: y y y y The Bank is a broker to the company. It has given underwriting commitments. It acts as a manager to the issue. The function of a banker to the issue is to accept application forms from the public together with subscription money and transfer them to the account of the controlling branch

Portfolio management Portfolio refers to investment in different types of marketable securities or investment papers like shares, debentures and debenture stocks, bonds etc. from different companies or institutions held by individuals firm or corporate units. Portfolio management refers to managing efficiently the investment in the securities held by professionals to others. Merchant bankers take up management of a portfolio of securities on behalf of their clients, providing special services with a view to ensure maximum return by such investments with a minimum risk of loss of return on the money invested in securities. A merchant banker while performing the services of portfolio management has to enquire the investment needs of the client, the tax bracket, ability to bare the risk, liquidity requirements, etc. they should study the economic environment affecting the capital market, study the securities market and identify blue chip companies in which money can be invested. They should keep record of latest amendment in government guidelines, stock exchange regulations, RBI regulations, etc. Advisory services relating to Mergers and Take-over

A merger is defined as a combination of two or more companies into a single company where one services and other looses their corporate existence. A merger is also defied as an amalgamation wherein the shareholders of the combining companies become substantially the shareholders of the company formed. A takeover is referred to as an acquisition, which is the purchase, by one company of a controlling interest in the share capital of another existing company. Merchant bankers are the middlemen settling negotiations between the offered and the offeror. Their role is specific and specialized in handling the mergers and taker over assignments. Being a professional expert, the merchant banker is apt to safeguard the interest of the shareholders in both the companies and as such his assistance is useful for both the companies, i.e. the acquirer as well as the acquired company. Based on the purpose of business objective, the search of the acquirer company will start for a merger partner company. If the objective of merger is growth oriented i.e. seeking expansion in production and market segments, utilization of existing companies or optimum utilization of resources, then the acquirer company will select a business related company as a merger partner. If the objective is diversification in production line or business activities, then it will select a non- related company as a merger partner. Once the merger partner is proposed the merchant banker has to appraise the merger/ takeover proposal with respect to financial viability and technical feasibility. He has to negotiate with the parties and decide the purchase consideration and mode of payment. He has to comply with the legal formalities like getting approval from the Government/RBI; drafting the scheme of amalgamation; getting approval of Company Board, financial institution, high court if required; arranging for the meeting etc. Venture capital financing Financing an emerging high risk project is called Venture capital financing. Many merchant bankers are entering into this area by also financing viable

upcoming projects. The financing is by subscription to the equity capital, while repayment is by selling the equity through the stock market when the shares are listed. Leasing Leasing is a viable source of financing while acquiring capital assets. The services include arrangement for lease finance facilities for Leasing Companies, legal; documents and tax consultancy. Non-Resident I Investment To attract NRI investments in primary and secondary markets, the merchant bankers provide investment advisory services to the NRIs in terms of identification of investment opportunities, selection of securities, portfolio management etc. they also take care of operational details like purchase and sale of securities securing the necessary clearance from RBI under FERA for repatriation of dividends and interest, etc. Acceptance credit and Bill discounting Though merchant bankers world over specialize in acceptance credit and bill discounting, these services are not currently provided by merchant bankers in India the principal reasoning being the lack of an active market for commercial bills. Arranging offshore finance The merchant bankers also help their clients in the following areas involving foreign currency financing: 1. Financing of Exports and Imports 2. Long term Foreign Currency Loans

3. Joint Ventures Abroad 4. Foreign Collaboration Arrangements The assistance rendered as in the case of financial services covers appraisals, negotiations, compliance with procedural and legal aspects etc. Management of Fixed Deposit of Companies Recently, merchants bankers have begun to structure and mobilize fixed deposits for their corporate clients. They take care of the procedural and legal aspects, and also manage the collection and subsequent servicing of the deposits. Advice with regard to the amount to be raised, interest charges, terms of deposits and other related issues are also offered to the client. Relief to Sick Industries The services offered by merchant bankers to Sick Industries can be summarized as follows: 1. Assessment of capital requirements and counseling on capital restructuring; 2. Appraisal of technological, environmental, financial and other factors causing sickness; 3. Preparations of programs and packages for rehabilitation of Sick units; 4. Providing necessary assistance where the rehabilitation package involves mergers or amalgamation; 5. Obtaining necessary approval for implementation the rehabilitation package from the statutory authorities; 6. Monitoring the implementation of the scheme of rehabilitation. 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. Working Capital Finance The finance required for meeting the day- to day expenses of an enterprise is known as Working Capital Finance. 1. Assessment of working capital requirements. 2. Preparing the necessary application to negotiations for the sanction of appropriate credit facilities. 3. Assisting, co-coordinating and expediting documentation and other formalities for disbursement. 4. Advising on the issue of debentures for augmenting long-term requirements of working capital. Mutual funds Mutual funds are institutions that mobilize the savings of innumerable investors for the purpose of channeling them into productive investments in a wide variety of corporate and other securities. Some of the services rendered by Mutual funds are as follows: 1. Mopping up public savings. 2. Investing the funds in a diversified portfolio of shares and debentures belonging to well managed and growing companies. 3. Earning investors a steady return on investments with an assurance of capital appreciation. Project Appraisal The evaluation of industrial projects in terms of alternative variants in technology, raw materials, production capacity and location of plant is known as Project Appraisal. Financial Appraisal Financial Appraisal involves assessing the feasibility of a new proposal for setting up a new project or the expansion of existing production facilities.

Financial Appraisal is undertaken through an analysis which takes into account the financial features of a project, including sources of financing. Financial analysis helps trace the smooth operation of the project over its entire life cycle. Technical Appraisal Technical Appraisal is primarily concerned with the project concept in terms of technology, design, scope and content of the plant, as well as inputs are infrastructure facilities envisaged for the project. Basically, the project should be able to deliver a marketable product from the resources deployed, at a cost which would leave a margin that would be adequate to service the investment, and also plough back a reasonable amount into the project to enable the enterprise to consolidate its positions. Economic Appraisal Economic Appraisal of a project deals with the impact of the project on economic aggregates. This may be classified under two broad categories. The first deals with the effect of the project on employment and foreign exchange, and the second deals with the impact of the project on net social benefits or welfare. Management of capital issues
The capital issue are managed are category-1 merchant banker and constitutes the most important aspects of their services. The public issue of corporate securities involves marketing of capital issues of new and existing companies, additional issues of existing companies including rights issue and dilution of shares by letter of offer,. The public issues are managed by the involvement of various agencies i.e. underwriters, brokers, bankers, advertising agency, printers, auditors, legal advisers, registrar to the issue and merchant bankers providing specialized services to make the issue of the success. However merchant banker is the agency at the apex level than that plan, coordinate and control the entire issue activity and direct different agencies to contribute to the successful marketing of securities. The procedure of the managing a public issue by a merchant banker is divided into two phases, viz;
y y

Pre-issue management Post-issue management

Pre-Issue Management:Steps required to be taken to manage pre-issue activity is as follows:(1) Obtaining stock exchange approvals to memorandum and articles of associations.

(2) Taking action as per SEBI guide lines (3) Finalizing the appointments of the following agencies:
y y y y y y

Co-manager/Advisers to the issue Underwriters to the issue Brokers to the issue Bankers to the issue and refund Banker Advertising agency Printers and Registrar to the issue

(4) Advise the company to appoint auditors, legal advisers and broad base Board of Directors (5) Drafting of prospectus (6) Obtaining approvals of draft prospectus from the companys legal advisers, underwriting financial institutions/Banks (7) Obtaining consent from parties and agencies acting for the issue to be enclosed with the prospectus. (8) Approval of prospectus from Securities and Exchange Board of India. (9) Filing of the prospectus with Registrar of Companies. (10) Making an application for enlistment with Stock Exchange along, with copy of the prospectus. (11) Publicity of the issue with advertisement and conferences. Open subscription list. Post-issue Management:Steps involved in post-issue management are:(1) To verify and confirm that the issue is subscribed to the extent of 90% including devolvement from underwriters in case of under subscription (2) To supervise and co-ordinate the allotment procedure of registrar to the issue as per prescribed Stock Exchange guidelines (3) To ensure issue of refund order, allotment letters / certificates within the prescribed time limit of10 weeks after the closure of subscription list

(4) To report periodically to SEBI about the progress in the matters related to allotment and refunds (5) To ensure he listing of securities at Stock Exchanges. (6) To attend the investors grievances regarding the public issue The Merchant Bankers for managing public issue can negotiate a fee subject to a ceiling. This fee is to be shared by all lead managers, advisers etc. 0.5% of the amount of public issues up to Rs.25 crores 0.2% of the amount exceeding Rs.25crores, if more than one Merchant bankers are managing the issue.

Scope for merchant banking in India:

Scope for merchant banking depends upon size of the market, restrictionliberation, banking policies, corporate culture, and corporate dynamics. 4. Size and dynamics of the market: Indian market is growing. In fact India is one of the largest emerging markets. Obviously, public issues, FDI, debt raising are on rise. Lots of new and green fried projects are happening. Merchant bankers have lots space to contribute. Domestic and foreign investors are setting up their business here. Many public and private issues are coming up. 5. Restriction- liberalization: more liberal the market is, more the things left to be decided by the corporate. Merchant bankers assist in decision making and hence their scope increases. With significant market freedom, merchant bankers work has increased many folds. 6. Merchant banking policies: RBI prefers that commercial banks do not indulge in merchant banking business directly. They should setup a subsidiary for the purpose. This limits scope of commercial banks and gives space to merchant bankers. This policy also results in fair business practices. Some countries allow commercial bankers to get involved in IPOs, placement of debentures, etc. Indian scenario is favorable to merchant bankers. 7. Corporate culture: Corporate can do project appraisal, strategic restructuring in house as well. If the corporate prefer third-party independent assessment, then only they will engage merchant bankers. Otherwise merchant bankers role is only statutory as in issue management. India inc. apparently prefers and is happy with merchant bankers work.

8. Corporate dynamics: More happening in business gives more opportunities to merchant bankers. Mergers, takeover acquisition, new Greenfield projects, fund raising for government institutions, active money market are all providing better business prospectus to merchant bankers. 9. Changing policy of foreign investments y Liberalization of policies y Foreign investments would require expert services of Merchant banks for project appraisal, financial management, financial restructuring etc. 7. Development of Debt market: Good portion of capital can be raised through debt instruments. 8. Entry of Foreign Institutional investment y Indian capital market is globalised y Foreign Institutional investments are permitted to invest in India. y They need Merchant banks to advise them for their invite in India. y Increasing number of Joint Ventures also require expert services of Merchant banks. 9. Innovations in Financial Instruments : y New Financial Instruments have come up y Merchant banks are market makers for these instruments. 10. Corporate Restructuring

y Liberalization and globalization y Competition in corporate sector becoming intense. 11. Companies reviewing their strategies, structure and functioning etc. leading to corporate restructuring. 12. Disinvestment : y It means reduction of some kind of asset of a firm for achieving either financial or ethical objectives. y Motive of disinvestment is to obtain funds. The scope could be extended to:1.Advising the company on designing of its Capital Structure. 2. Advising the company on the instrument to be offered to the public. 3. Pricing of the instrument. 4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ROC/ Stock 5. Exchanges and other regulatory authorities. 6. Assisting the company in marketing the issue. 7. In channelizing the financial surplus of the general public into productive investment avenues. 8. To coordinate the activities of various intermediaries to the share issue such as the registrar, Bankers, advertising agency, printers, underwriters, brokers etc. 9. To ensure the compliance with rules and regulations governing the securities market. THEFACTORS ONWHICH GROWTH OF MERCHANTBANKING DEPENDS: Planning and industrial policy of the country i.e. India in this case Prevailing Economic condition of the country. Regulatory system of the market and economy prevailing in India.

y y y y

y Confidence of the people, traders, buyers, marketers, business houses, financial institutions etc. y The economic environment of the outside world. y Competition among the existing players and theupcoming entrants.

Difference between Commercial Banking &Merchant Banking:

y y y y y y COMMERCIAL BANKING Deals with Debt & Debt related finance. Asset oriented. Generally avoid risks. MERCHANT B ANKING Deals with Equity & Equity related finance. Management oriented. Willing to accept risks.


y SBI Bank of India y ICICI Bank Ltd. y Punjab National Bank

y Bank of Baroda y Union Bank of India

y Kotak Mahindra y Canara Bank y IDBI BANK

State Bank of India

SBI Merchant Banking Group is strongly positioned to offer perfect financial solutions to your business. We specialize in the arrangement of various f orms of Foreign Currency Cr edits for Corporate. State Bank of India is the nation's largest bank. Tracing its roots back some 200years to the British East India Company (and initially established as the Bank of Calcutta in 1806), the bank operates more than13, 500branches and over 5,000ATMs within India, where it also owns majority stakes in seven associate banks. State Bank of India has more than 50offices in nearly 35other countries, including multiple locations in the US (California), Canada, and Nigeria. The bank has other units devoted to capital markets, fund management, factoring and commercial services, and brokerage services. The Reserve Bank of India owns about 60%ofState Bank of India. SBI being an Indian entity has no India exposure ceiling. Our Primary focus is On Indian Clients. SBI s seasoned Team of professionals provides you with Insightful credit Information and helps you Maximize the Value from the transaction. OUR PRODUCTS AND SERVICES y Arranging External Commercial Borrowings (ECB) y Arranging and participating in international loan syndication y Loans backed by Export Credit Agencies y Foreign Currency Loans under the FCNR(B) scheme y Import Finance for Indian Corporate SBI Capital Markets LIMITED (SBICAPS) i s India's leading investment bank and project advisor, assisting domestic company s fund-mobilization ef forts for last many years. We began operations in Au gust 1986 as a wholly owned subsidiary o f the State Bank of India, which is the largest commercial bank in India. In January 1997, fresh equity shares were issued to Asian Development Bank (ADB) and ADB now holds 13.84% stake in the equity o f SBICAPS. The distinguished parentage (with a 86.16% stake) together with the long standing association of an internationally renowned financial institution like the Asia Development Bank further enhances our image as a truly 'World Class Investment Bank'. Our Mission - To provide Credible, Professional and CustomerFocused world-class investment banking services. Our Vision - To be the best India based Investment Bank. SBI Group:

The largest commercialbankgroupi nIndia Position in thedomesticbanking sector ason 31March 2008: 15.44%of the aggregatedeposits. 15.28 %of total advances. TheonlyIndian Bank to find a placei n theFortuneGlobal 500 List. First IndianBank t ot a ke up merchant banking in 1986. SBI Capital Markets Limited: No. 1 in Asia Pacific for Project Advisory.Rating byT homsonP roject Finance International. No. 1 in IPOs, managed700+ issues (since 1989 source Prime Database). TheonlyIndian Merchant Bankeri n theGlobal 10, Thomson ProjectFinance International 2007. Pioneeri n P riva tiza tion. Subsidiary:SBICAPS Ventures Ltd. SBICAP Securities Ltd. SBICAPS(UK)Ltd. SBIC AP Trustee Company Ltd.

The largest commercialbankgroupi nIndia Position in thedomesticbanking sector ason 31March 2008: 15.44%of the aggregatedeposits. 15.28 %of total advances. TheonlyIndian Bank to find a placei n theFortuneGlobal 500 List. First IndianBank t ot a ke up merchant banking in 1986. SBI Capital Markets Limited:

No. 1 in Asia Pacific for Project Advisory.Rating byT homsonP roject Finance International. No. 1 in IPOs, managed700+ issues (since 1989 source Prime Database). TheonlyIndian Merchant Bankeri n theGlobal 10, Thomson ProjectFinance

ProjectAdvisory &Structured Finance SBICAP has built a formidable presencein the areaof Project Finance Advisoryand Funds Syndication with several prestigious mandates ina lmost everyse ctor of the industryto its credit. Our product portfolio includes:

Structured Finance and Syndication Infrastructure Project Advisory Securitisation Debt & E quit y Syndication Ca p i t a lM a rket s CapitalMarketsGroup handles transactionsin the capital markets space across multiple instrument structures. Our product and solutions bouquet includes: Managing Initial Public Offerings and Follow-onPublicofferings and Offers-forSale ManagingRights Offering, beit the traditionalor the structured formats QualifiedInstitutional Placements Open o ffers, Buyback and Delisting of securities Offeringsof convertible securities

Publicoffering of Corporate structuredbonds

Arranging Private Equity to includegrowth capital, pre-IPOconver tibles, private investments inpublic e quity( PI PES), mezzanine de bt a ndequity, a ndequity offerings c ompleted as a private placement.

Private placementofbonds Capital restructuring advisory services

Advisoryandar r angement services for products such as AIMListing, Indian Depository Receipts, ADR/GDR and otheroff-shore equity o r bondlisting options
M& Aa
The M& A

nd Advisory

product portfolio includes:

Mergers & Acquisitions

Private Equity
ForeignCurrencyConvertible Bonds ( FCCB)


Need for regulation 1. The merchant bankers 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.

2. The regulations provide for the merchant bankers a dynamic and competitive market with the high standard of professional competence, dignity, integrity and solvency. 3. The regulations promote a primary market, which is fair, efficient and flexible, and inspire confidence. MERCHANT BANKING REGULATIONS : 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 Action in case of default A merchant banker who fails to comply with any conditions subject to which the certificate of registration has been granted, by the SEBI and/or contravenes any of the provisions of the SEBI Act, rules or regulations, is liable to any of the two penalties: a) Suspension of registration or b) Cancellation of registration Suspension of registration:A penalty of suspension of registration of merchant banker may be imposed where the merchant banker

1) violates the provisions of the SEBI Act, rules or regulations; 2) Fails to furnish any information relating to his activity as Merchant banker as require; Furnishes wrong or false information; Does not submit periodical returns as required by the SEBI; Does not cooperate in any enquiry conducted by the SEBI; 3) Fails to resolve the complaints of the investors or fails to give a satisfactory reply to the SEBI in this behalf; 4) Indulges in manipulating or price rigging activities; 5) Is guilty of misconduct or improper or unbusiness like or unprofessional conducted which is not in accordance with the code of conduct under the regulations; 6) Fails to maintain the capital adequacy requirement in accordance with the provisions of the regulations; 7) Fails to pay the fees; 8) violates the conditions of registration; and 9) Does not carry out his obligations as specified in the regulation Cancellation of registration

A penalty of cancellation of registration of a merchant banker may be imposed where: 4. The merchant banker indulges in deliberate manipulation or price rigging activities affecting the securities market and investors interest. 5. The financial position of the merchant banker deteriorates to such an extent that SEBI is of the opinion that his continuance as merchant banker is not in the interest of investors. 6. The merchant banker is guilty of fraud, or is convicted of a criminal offence and 7. In case of repeated defaults of the nature leading to suspension of registration provided that the SEBI flourish reasons for cancellation in writing. On and from the date of suspension and cancellation of registration of the merchant banker, he ceases to carry on any activity as a merchant banker. The order of suspension of cancellation of certificate is published in at least two daily newspapers by the SEBI. Default by Merchant bankers and Penalty Points:The SEBI imposes penalties for non- compliance for registration and contravention of the regulations on the basis of which registration is suspended/cancelled. The defaults are categorized into a) b) c) d) General, Minor, Major and Serious. General defaults for the purpose of penalty points, the following activities are classified under general defaults and attract one penalty point.

1) Non- receipt of draft prospectus/ letter of offer from the lead manager by SEBI, before filing with the registrar of companies/stock exchange 2) Non- receipt of interse allocation of responsibilities of lead managers in an issue by SEBI prior to the opening of an issue. 3) Non- receipt of due diligence certificate in the prescribed manner by SEBI, before opening of an issue. 4) Failure to ensue the submission of certificate of minimum 90% subscription to the issue. 5) Failure to ensure expediting of dispatch of refund orders, shares/ debentures certificate, filing of listing application by the issuer. Minor Defaults:The following activities are categorized under minor defaults and attract two penalty points. a. Advertisement, circular, brochure, press release and other issue related materials not being in conformity with the contents of prospectus. b. Exaggerated information or information extraneous to the prospectus is given by issuer or associated merchant banker in any press conference, investors conference, brokers conference or other such conference/meet prior to the issue for marketing of the issue arranged/ participated by the merchant banker. c. Failure to substantiate matters contained in highlights to the prospectus. d. Violations of regulations relating to advertisement on capital issues. e. Failure to exercise due diligence in verifying the contents of prospectus letter of offer.

f. Failure to provide adequate and fair disclosure to investors and objective information about risk factors in the prospectus and other issue literature. g. Delay in refund/allurement of securities. h. Non- handling of investors grievances promptly. Major Defaults:The following activities are categorized under major defaults and attract three penalty points. a) Mandatory underwriting not taken up by the managers b) Excess number of lead managers than permissible. c) Association of unauthorized merchant banker in an issue. Serious Defaults:The following activities are categorized under serious defaults and attract four penalty points: 1) Unethical practice by a merchant banker and/or violation of Code of conduct. 2) Non- cooperation with SEBI in furnishing desired information, documents, evidence as may be called for. A merchant banker on reaching cumulative penalty points of eight attracts action from SEBI in terms of suspension/cancellation authorization. To enable a merchant banker to take corrective action, the maximum penalty points awarded in a single issue managed by a merchant banker are restricted to four. In the event of joint responsibility, the same penalty point is awarded to all lead managers. In the absence of receipt of inter se allocation of responsibilities, all lead managers to the issue are awarded the penalty points.

Merchant Banking Operations In today's diverse and unpredictable economy, the need for a sustained profit plan and long term growth strategy has become essential for both individuals and corporations. Merchant banking principally involves providing financial services and advice for individuals and corporations. Merchant banking operations consists of providing clients with a variety of financing options to sustain long term growth. Merchant banks tend to have operations in a variety of countries throughout the world allowing them to offer an extensive network distribution to help their clients explore opportunities with alternative finance options. In banking, a merchant bank is a financial institution that primarily invests its own capital in a client's company. Merchant banks provide fee based corporate advisory services for mergers

and acquisitions, as well as other financial services. Merchant banking operations focus on commercial international finance, stock underwriting, and long-term company loans. These banks work with financial institutions with their primary function being stock underwriting. They also work in the area of private equity where the securities of a company are not available for public trading. The most common private equity investment strategies include venture capital, leveraged buyouts, distressed investments, growth capital, and mezzanine capital. Leveraged buyout generally means that they acquire majority control over existing or mature corporations. Growth capital and venture gains means they invest in newer or rising corporations without acquiring majority control. Today, merchant banks are involved in a number of tasks such as credit syndication, portfolio management, mergers and acquisitions counseling, and acceptance of credit, etc. Their investments include private equity, structured equity, and bridge debt. They generally invest in private or public companies to finance growth, acquisitions, and management/leveraged buyouts and recapitalizations. In some cases, they provide an invested company with short-term financing for a particular project, or provide short-term liquidity. Merchant Banking operations can focus on a particular country or they can expand their operations in other countries. They can assist sustainable companies undergoing a financial restructuring requiring short-term liquidity. These banks provide their partners with financial analysis, capital structuring and strong industry relationships. They provide the corporate lending, leveraged finance, and investment banking and industry expertise. Merchant Banking operations provide all types of domestic and foreign banking transactions, corporate finance services, product knowledge, and management services. Global merchant banking operations provide individual and

corporate investors with the opportunity to participate globally for access to international investment opportunities, providing global companies access to a particular market, and opportunities for co-investment. When searching to partner with a Merchant Banking Service Company in order to enhance your business operations, you should find a well established, full-service merchant financial services company. You want a large, credible firm that can demonstrate a good track record. Ask the merchant banks how long they have been in business and who some of their customers are, particularly from your market, so they can demonstrate their experience and understanding of your needs. Merchant banking operations provide the support, knowledge, and resources to effectively assist clients and corporations with improving, expanding, and sustaining their business and business investments. Merchant Bankers in India: There are 135 Merchant bankers who are registered with SEBI now in India. There are public sector, Private sector and foreign players registered with SEBI. The below are the examples of few of the Merchant bankers in each of the Public, private and foreign players. Public sector Merchant Bankers: SBI CAPITAL MARKETS LTD PUNJAB NATIONAL BANK BANK OF MAHARASHTRA IFCI FINANCIAL SERVICES LTD KARUR VYSYA BANK LTD, STATE BANK OF BIKANER AND JAIPUR Private Sector Merchant Bankers: ICICI SECURITIES LTD AXIS BANK LTD.(FORMERLY UTI BANK LTD.) BAJAJ CAPITAL LTD TATA CAPITAL MARKETS LTD ICICI BANK LTD RELIANCE SECURITIES LIMITED KOTAK MAHINDRA CAPITAL COMPANY LTD


BARCLAYS BANK PLC CITIGROUP GLOBAL MARKETS INDIA PVT. LTD. DSP MERRILL LYNCH LTD FEDEX SECURITIES LTD Major difference between Merchant banking and Investment Banking Sources of revenue could be [a] Fund based source & [b] Fee based source The fund based income is that revenue gained from interest, lease rental, and as well as income from capital market investments. The fee-based income is that source gained from banking, advisory services, custodial services etc. The major difference between the Merchant bankers and Investment Bankers is: Merchant Banking is purely fee based. Investment banking is both fee based and fund based. A merchant banker can undertake only those activities, which are relating to securities market and which do not require registration / have been granted exemption from registration as an NBFC from RBI. In particular a merchant Banker can undertake the following activities Managing of public issue of securities Underwriting connected with the public issue Management Services acting like as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues Managing advising on international offerings of dept / equity i.e. GDR, ADR, bonds and other instruments Private placements of securities Primary or satellite dealership of GOVT securities

Corporate advisory services relate to securities market eg: takeovers acquisitions and disinvestments Stocking broking Advisory services for projects and Project appraisals. Syndication of rupee term loans International financial advisory services. Project counseling and pre investment activities Undertaking Feasibility studies Issuing Project reports Design of capital structure Mobilization of funds from NRIs Foreign currency finance Mergers and takeovers Venture capital services Buy back and public deposits

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:
y y

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 The applicant should have a minimum net worth of Rs.5 crores

The various categories for which registration can be obtained are: 1) Category I to carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. 2) Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager. 3) Category III - to act as underwriter, adviser or consultant to an issue 4) Category IV to act only as adviser or consultant to an issue The capital requirement for carrying on activity as merchant banker: The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker is given below: Category I Rs. 5 crores

Category II Rs, 50 lakhs Category III Rs. 20 lakhs Category IV Nil Procedure for getting registration:

An application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the application and on being satisfied, issues a certificate of registration in Form B of the SEBI (Merchant Bankers) Regulations, 1992. Registration fee payable to SEBI: Rs. 5 lakhs which should be paid within 15 days of date of receipt of intimation regarding grant of certificate. Validity period of certificate of registration is three years from the date of issue. Three months before the expiry period, an application along with renewal fee of 2.5 lakhs should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the application and on being satisfied renew certificate of registration for a further period of 3 years.

Most of the banks have now opened up Merchant Banking departments. It is a British concept introduced by Grindlays Bank in 1969. Following the footlines of Grindlays Bank, in India, a number of banks have set up mmechant banking. State Bank of India, Bank of Baroda, Bank of India, Canara Bank, Indian Bank, Indian Overseas Bank and Syndicate Bank have organised merchant banking division. Services of Merchant banking division: 1. Project counselling Merchant banking offers project counselling such as preinvestment and feasibility studies to identify a project. 2. Liaison work

It undertakes work for entrepreneurs. Merchant banking divisions help them in getting government consent, letter of intent, industrial licences etc. 3. Project reports After exploring means and sources of finance, merchant banking divisions prepare project reports. 4. Financial plan Merchant banking divisions prepare a viable financial plan. They also file applications for loan. 5. Corporate financing Merchant banking departments specializes in domestic corporate financing. It deals with public issue activities such as preparation and issue of prospectus, underwriting of capital issues and acting as managers to new issues. 6. Corporate restructure The services of merchandising divisions are of a fairly wide range. They examine the propasals for mergers and amalgamations of companies and arrangement of loans or short-term finance. 7. Expansion/diversification Small Scale Industries may undertake expansion and diversification programmes. Such planning involves structural changes in the form of organisation.Their capital base also needs to be expanded. Merchant banking division provides assistance to small scale industries in the area of expansion or diversification. 8. Foreign collaboration Merchant banking divisions have international connections. They assist in arranging foreign exchange elements required by industries for their projects. They also helps in obtaining loan from banks and other institutions outside India. 9. Dealing in foreign exchange business Commercial banks acts as an intermediary in the settlement of debt within a country. Such settlement is possible through the medium of a cheque or draft or a

credit instument. Likewise it acts as an intermefisry in foreign debts. For this purpose the commercial banks maintain a foreign exchange department. It is manned by specialists in this line. For this purpose banks have branches in other countries. Whenever they have no branches of their own they maintain accounts with correspondent banks. SEBI Regulations for Merchant Bankers Merchant Bankers have been barred from undertaking activities other than related to the securities market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19, 1997 to provide that: a. The applicant should be a fit and proper person; b. A merchant banker has to seek separate registration for its underwriting or portfolio management activities; c. The categorization of merchant bankers I, II, III and IV has been dispensed with; d. A merchant banker, other than a bank or a public financial institution, has been prohibited from carrying any activities not pertaining to the securities market; and e. The applicant should be a body corporate other than non-banking finance company. The Merchant Bankers Regulations were amended on January 21, 1998 to provide time up to June 30, 1998 to sever its activities or hive off its activities not pertaining to the securities market. The Reserve Bank of India has exempted merchant banking companies from the provisions of Reserve Bank of India Act, 1934 relating to compulsory registration (section 451A), maintenance of liquid assets (section 451B), creation of reserve fund (section 451C ) and all the provisions of the recent DMerchant banking companies, to be eligible for the above exemption, are required to satisfy the following conditions: i. such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are carrying on the business of merchant banker in accordance with the Rules / Regulations framed by the SEBI; ii. they acquire securities only as part of their merchant banking business; iii. they do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act, 1934; iv. they do not accept / hold public deposits. Maintenance of books of accounts, records etc.

(1)Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:(a) a copy of balance sheet as at the end of each accounting period; (b) a copy of profit and loss account for that period; (c) a copy of the auditor's report on the accounts for that period; and (d) a statement of financial position. (2) Every merchant banker shall intimate to the Board the place where the books of accounts, records and documents are maintained. (3) Without prejudice to sub- regulation (1), every merchant banker shall, after the end of each accounting period furnish to the Board copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the Board. Submission of Half-yearly results Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker. Maintenance of books of account, records and other documents The merchant banker shall preserve the books of accounts and other records and documents maintained under regulation 14 for a minimum period of five years. Report on steps taken on Auditor's report Every merchant banker shall within two months from the date of the auditors' report take steps to rectify the deficiencies, made out in the auditor's report. Appointment of lead merchant bankers (1) All issues should be managed by at least one merchant banker functioning as the lead merchant banker: Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential. (2) Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual

rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund. Restriction on appointment of lead managers The number of lead merchant bankers may not, exceed in case of any issue of Size of issue No. of Merchant Bankers (a) Less than rupees fifty crores-Two (b) Rupees fifty crores but less than rupees one hundred crores-Three (c) Rupees one hundred crores but less than rupees two hundred crores-Four (d) Rupees two hundred crores but less than rupees four hundred crores-Five (e) Above Rupees four hundred crores five or more as may be agreed by the board Responsibilities of lead managers (1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription: Provided that, where there are more than one lead merchant bankers to the issue the responsibilities of each of such lead merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription. (2) No lead merchant banker shall, agree to manage the issue made by any body corporate, if such body corporate is an associate of the lead merchant banker. Lead merchant banker not to associate with a merchant banker without registration A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue. Underwriting obligations (1) In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum Underwriting obligation of five percent of the total underwriting commitment or rupees twenty-five lakhs,

whichever is less: Provided that, if the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement for having the issue underwritten to that extent by a merchant banker associated with the issue and shall keep the Board informed of such arrangement. Submission of due diligence certificate The lead merchant banker, who is responsible for verification of the contents of a prospectus or the Letter of Offer in respect of an issue and the reasonableness of the views expressed therein, shall submit to the Board at least two weeks prior to the opening of the issue for subscription, a due diligence certificate in Form C. Documents to be furnished to the Board (1) The lead manager responsible for the issue shall furnish to the Board, the following documents, namely: (i) particulars of the issue; (ii) draft prospectus or where there is an offer to the existing shareholders, the draft letter of offer; (iii) any other literature intended to be circulated to the investors, including the shareholders; and (iv) such other documents relating to prospectus or letter of offer as the case may be. (2) The documents referred to in sub-regulation (1) shall be furnished at least two weeks prior to date of filing of the draft prospectus or the letter of offer, as the case may be, with the Registrar of Companies or with the Regional Stock Exchanges, or with both. (3) The lead manager shall ensure that the modifications and suggestions, if any, made by the Board on the draft prospectus or the Letter of Offer as the case may be, with respect to information to be given to the investors are incorporated therein. Payment of fees to the Board

The draft prospectus or draft letter of offer referred to in regulation 24 shall be submitted along with such fees and in such manner as may be specified in Schedule IV] Continuance of association of lead manager with an issue The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to be associated with the issue till the subscribers have received the share or debenture certificates or refund of excess application money; Provided that where a person other than the lead manager is entrusted with the refund or allotment of securities in respect of any issue, the lead manager shall continue to be responsible for ensuring that such other person discharges the requisite responsibilities in accordance with the provisions of the Companies Act and the listing agreement entered into by the body corporate with the stock- exchange. Acquisition of shares prohibited No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise. Information to the Board Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of anybody corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction. Disclosures to the Board A merchant banker shall disclose to the Board as and when required, the following information, namely: (i) his responsibilities with regard to the management of the issue; (ii) any change in the information or particulars previously furnished, which have a bearing on the certificate granted to it; (iii)the names of the body corporate whose issues he has managed or has been associated with; (iv) the particulars relating to breach of the capital adequacy requirement as specified in regulation 7;

(v) relating to his activities as a manager, underwriter, consultant or adviser to an issue as the case is. Appointment of compliance officer (1) Every merchant banker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc., issued by the Board or the Central Government and for redressed of investors grievances. (2) The compliance officer shall immediately and independently report to the Board any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on \ in the draft prospectus or the Letter of offer as the case may be, do not recur.

Environmental factors affecting merchant banking services

The merchant bankers are a part of economics structure of the nation and they function in an environment which is influenced inter alias by the following important factors: (1)The general economics condition, prevailing in the country presenting an economics environment, affects the functioning of every economic or social organization. These economic conditions assimilate the boom and prosperity, the depression and recessionary impacts on industry trade and commerce. (2)The technology and scientific innovations are responsible for onward shifting of the entire developmental process to a state of higher d e v e lo p me n t . Be s i d e s , t h e t e c h n o l o g i c a l d e v e l o p me n t a ls o h e l p s t he system to use information processing and communication techniques to overcome limitations or restrictions of time and space, and provide better services. (3)The law and regulations affect the functioning and relationship with users of the services of the organization. Besides complying to various legal formalities the merchant bankers exist the legal framework. Both c re a t io n o f la w a nd re g u l a t i o n o f l a w is t h e ne t w o rk w i t h i n w h i c h t he g o ve r n me n t a n d me rc h a nt b a n k e rs ha v e t o a b i d e b y t he l e ga l n o r ms which have the characteristics of change depending upon the moods of the public system. (i.e. the government) and public interest. (4)D e ma n d fo r me rc h a nt b a n k i n g s e r v i c e s is o n e o f t h e e n v i ro n me n t a l factors that affect the merchant banking functioning in

two respects viz. the competitive forces exist for merchant banking units and there remains a demand for the quality service to be provided to the users. Demand will change subject to changes in others environment factors, particularly under the influence of technological development taking p la c e . T h e c o ve ra ge o f r u ra l a re a s a n d s ma l l b us i n e s s is t h e p re s e n t d a y need of environmental through geared professionalism. The merchant b a n k i n g p ro fe s s i o n a l is m re q u i r e s ne w re s p o ns e i n e d u c a t i o n a n d t ra i n i n g conforming to the dynamics of the change. Professional development programs have got be reshaped to suggest merchant banks to render more specialized services.

SEBI Guidelines for Merchant Bankers It should be clearly noted that merchant banking has been statutorily brought within the framework of the Securities and Exchange Board of India under SEBI (Merchant Bankers) Regulations, 1992. 1) In terms of guidelines issued during April 1990, all merchant bankers will require authorization by SEBI to carry out business. The Criteria for Authorization Includes: (a) Professional qualification in finance, law or business management; (b) Infrastructure like adequate office space, equipment and manpower; (c) Employment of two persons who have the experience to conduct business of merchant bankers; (d) Capital adequacy; (e) Past track record, experience, general expectation and fairness in all transactions. 2) SEBI issued further guidelines classifying the merchant bankers in four categories based on the nature and range of activities and their responsibilities to SEBI investors and issue of securities. SEBI has issued revised guidelines on December 22, 1992 classifying the activities of merchant bankers as follows: The first category consists of merchant bankers who carry on any activity of issue management which will inter alia consists of preparation of prospects and other information relating to the issue, determining financial structuring tie-up of financiers and final allotment and refined of subscription and to act in the capacity of managers, advisor or consultant to an issue, portfolio manager and underwriter. The second category consists of those authorized to act in the capacity of co-manager/ advisor, consultant underwriter to an issue or portfolio manager. The third category consists of those authorized to act as underwriter, advisor or consultant to an issue. The fourth category consists of merchant bankers who act as advisor or consultant to an issue.

Minimum net worth for first category is Rs.1crore, second category Rs.50 lakhs, third category Rs.20 lakhs. (3) As initial authorization fee, an annual fee and renewal fee may be collected by SEBI. (4) All issues must be managed at least at one authorized banker, functioning as the sole manager or the Lead Managers. But for issue over Rs. 100 cr. and above, the number of Lead Managers may go up to a maximum of four; the specific responsibilities of each Lead Manager must be submitted to SEBI prior to the issue. (5) The lead merchant banker holding a certificate under category I shall accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs.25 lakhs whichever is less. (6) Each merchant banker is required to furnish to the SEBI half yearly unaudited financial results when required by it with a view to monitor the capital adequacy of the merchant banker. (7) SEBI has prescribed a code of conduct to the merchant bankers. The bankers must perform his duties with highest standards of integrity and fairness in all his dealings. He will render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. The merchant banker and his personnel will act in an ethic manner in all dealings with the investors, clients and fellow bankers. All merchant bankers must adhere to the code of conduct. (8) The above guidelines will be administered by SEBI and it will supervise the activities of merchant bankers. (9) SEBI has been vested with power to suspend or cancel the authorization in case of violation of the guidelines. (10) To ensure transparency and accountability in the operation of merchant banker and to protect the investors, a number of obligations and responsibilities have been imposed on them. It has been decided to ask merchant bankers to enter into agreement with corporate body setting out their mutual right, liabilities and obligations relating to an issue particularly on disclosure, allotment and refund, maintenance of books of accounts and submission of half yearly reports to SEBI. (11) Inspections shall be conducted by SEBI to ensure that provisions of the regulations are properly complied with and to investigate complaints from customers. It is obligatory on the part of merchant bankers to furnish all the details bought by the investigating team. The regulations, however, indicate that the Board would give reasonable notice to merchant bankers before undertaking inspection. On the basis of inspection report, the Board will communicate the contents of the report to concerned merchant banker to give him/her an opportunity to put forth his or her submissions. On receipt of the explanations, if any of the

merchant bankers the SEBI would advise merchant bankers to take any measures that it may deem fit and to comply with the provisions of the regulations. The notification procedure relating to the action to be initiated against merchant banks in case of difficulty has been detailed out. The regulations empower SEBI to take action against defaulting bankers such as suspension/ cancellation of registration. In case of deliberate manipulation or price rigging or cornering activities or deterioration in the financial position, the Board is empowered to cancel the registration of the merchant banker. Under the regulation, the SEBI is empowered to suspend a registration of a member banker in case the merchant banker furnishes wrong or false information, fails to resolve the complaints of the investors etc. The penalty of suspension or cancellation of registration can be imposed by SEBI only after holding an enquiry and giving sufficient opportunity to the merchant banker being heard. Any merchant banker aggrieved by an order of SEBI can however, appeal to the Union Government. In September, 1997, SEBI brought about some major changes in SEBI (Merchant Bankers) Rules and Regulations, 1992. Accordingly, only corporate bodies will be allowed to function as merchant bankers. Moreover, the multiple categories of merchant bankers shall be abolished and there will be just one entity viz. Merchant Banker. The merchant bankers presently functioning as Merchant Bankers Category II, III and IV shall have an option to either upgrade themselves as Merchant Bankers (Presently Merchant Banker Category I) or seek separate registration as underwriters or Portfolio Managers. Under respective regulations, the merchant bankers will be prohibited from carrying out fund- based activity other than those related exclusively to capital markets. In effect, the activities undertaken by NBFCS such as accepting deposits, leasing and bill discounting would not be allowed to be undertaken by a merchant banker. So far, we dealt with the general outline of merchant banking and SEBI guidelines for the functioning of merchant bankers in India. Now let us turn our attention to the study of Public Issue Management. 2.4 Public Issue Management Meaning: The management of securities of corporate sector offered to public on regular basis, and existing shareholders on a rights basis is known as public issue management. Issue management is an important function of merchant bankers and lead managers. In simple terms, the management of issues for raising funds through various types of instruments by companies is known as Issue Management. The function of capital issues management in India is carried out by merchant bankers who have the requisite professional skill and competence. In fact, one of their major functions is issue management.

Factors such as tremendous growth in the number and size of the public listed companies, and the complexity arising due to the ever-increasing SEBI requirements have all attributed to the increasingly significant role played by merchant bankers in the recent past. Importance: A fast growing economy like India offers tremendous scope for issue management and the merchant bankers provide their skills and expertise to companies in the management of capital issues. This essentially aims at channeling household savings into corporate sector through the issue of corporate securities. Companies raise funds for the purposes of financing new projects, expansion/ modernization/ diversification of existing units and organizing long term resources for working capital purposes. Let us now analyze the categories of securities issue. 2.5 Categories of Securities Issue We know that corporate enterprises use several sources for raising funds from the capital market. Issue of securities is an important mode of raising such finances. Security issue takes the following forms: Public Issue Rights Issue Private Placement Let us analyze each in detail. 2.6 Public Issue of Securities When capital funds are raised through the issue of prospects, it is called the public issue of securities. It is the most common method of raising funds in the capital market. It should be clearly noted that a security issue may take place either at par or at a premium or at a discount. The prospectus has to disclose all the essential facts about the company to the prospective purchases of the shares. Further, the prospects must conform to the format set out in schedule II of the Companies Act, 1956, besides taking into the account SEBI guidelines. SEBI insists on the adequacy of the disclosure of information that should serve as the basis for investors to make a decision about the investment of their money. 2.7 Rights Issue When shares are issued to the existing shareholders of a company on a privileged basis it is called Rights Issue. The existing shareholders have a pre-emptive right to subscribe to the new issue of shares. Rights shares are offered as additional issues by corporates to further capital funds. Such shares are offered in proportion to the capital paid up on the shares held by them at the time of offer.

It is to be noted that the shareholders although privileged to be offered the issue are under no legal obligation to accept the offer. Right shares are usually offered on terms advantageous to the shareholders. 2.8 Private Placement When the issuing company sells securities directly to the investors, especially institutional investors, it takes the form of private placement. In this case, no prospectus is issued, since it is presumed that the investors have sufficient knowledge and experience and are capable of evaluating the risks of the investment. Private placement covers shares, preference shares and debentures. The role of the financial intermediary such as the merchant bankers and lead managers, assume greater significance in private placement. They involve themselves in the task of preparing an offer memorandum and negotiating with investors. Private placement obviously commands an advantage over the public issue on the following grounds. Speed and confidentiality of issue: 1. Access to capital market more quickly than public issue which may take 6 months to one year. Time taken by private placement is just 2 to 3 months. Less expensive method of raising capital because of few compliance procedures. 2. Advantageous to small companies which cannot afford a public issue because of expenses involved. 3. Ideally suited to companies which need only a relatively limited amount of capital funds. 4. Not influenced by the prevailing bull or a bear phases of the stock market. Institutional investors have a more stable attitude towards the regular issue of securities in private placement market. 2.9 Activities involved in Public Issue Management Any financial institution/intermediary which can carry out the activities connected with issue management, is registered with SEBI, and can follow its regulations and guidelines, is capable of venturing into issue management. Issue management is an important activity for merchant bankers. Well, there are several activities that have to be performed by the issue manager in order to raise money from the capital market. Adequate planning needs to be done while chalking out an appropriate marketing strategy. Pre- Issue Activities: 1. Signing of MOU: Signing of MOU between the client company and the merchant bankers issue management activities marks the award of the contract.

2. Obtaining Appraisal Note: An appraisal note containing the details of proposed capital outlay of the project and the sources of funding is either prepared in-house or obtained from external appraising agencies, viz. financial institutions, banks etc. A project may be funded either by borrowing money from outside agencies or by injecting capital. 3. Optimum Capital Structure: The levels of capital that would maximize the shareholders value and minimize the overall cost of capital have to be determined. This has to be done in consideration of the nature and size of the project. Equity funding is preferable especially when the project is capital- intensive. 4. Convening Meeting: A meeting of the Board of Directors of the issuing company is convened. This is followed by an EGM of its members. Why this meeting? The purpose of these meetings is to decide the various aspects related to the issue of securities. An application to RBI, seeking its permission is made, where capital issue of shares is to be offered to NRIs/ OCBs or FIIs. 5. Appointment of Financial Intermediary: Financial intermediaries such as underwriters, Registrars etc. have to be appointed. Necessary contracts need to be made with the underwriter to ensure due subscription to the offer. 6. Preparing Documents: As part of the issue management procedure, the documents to be prepared are initial listing application for submission to those stock exchanges where the issuing company intends to get its securities listed. MOU with Registrar, with bankers to the issue, with advisors to the issue and co-managers to the issue, agreement for purchase of properties etc. This will have to be sent for inclusion in the prospects. 7. Due Diligence Certificate: The Lead Manager issues a due diligence certificate which certifies that the company has seriously followed all legal requirements, has exercised utmost care while preparing the offer document and has made a true, fair and adequate disclosure in the draft offer document. 8. Submission of Offer Document: The draft offer document along with the due diligence certificate is filed with SEBI. The SEBI, in turn, makes necessary corrections in the offer document and returns the same with relevant observations, if any, within 21 days from the receipt of the offer document. 9. Finalisation of Collection Centers: In order to collect the issue application forms from the prospective investors, the Lead Manager finalizes the collection centers. 10. Filing with ROC: The offer document completed in all respects after including SEBI observations is filed with Registrar of Companies (ROC) to obtain acknowledgement. 11. Launching the Issue: The process of marketing the issue starts once the legal formalities are completed and statutory permission for issue of capital is obtained. The Lead Manager has to

arrange for the distribution of public issue stationary to various collecting banks, brokers, investors etc. The issue is opened for public immediately after obtaining the observation letter from SEBI, which is valid for a period of 365 days from the date of issue. Conducting press conferences, brokers meets, issuing advertisements in various newspapers and mobilizing brokers marks the launching of a public issue. The announcement regarding opening of issue is also required to be made through advertising in news papers, 10 days before the opening of public issue. 12. Promoters Contribution: A certificate to the effect that the required contribution of promoters has been raised before from a Chartered Accountant must be duly filed with the SEBI. 13. Issue of Closure: An announcement regarding the closure of the issue should be made in the newspapers. Post - Issue Activities: These activities are undertaken immediately after the closure of the issue- who should manage these activities? The Lead Manger has to manage the post-issue activities. Certificates such as Certificate of 90% sale script from registration and final collection certificate from bankers are to be obtained. The major activities covered are: 1. Finalization of Basis of Allotment: If the public issue is over-subscribed to the extent of greater than 5 times, a SEBI nominated Public Representative is required to participate in the finalization of Basis of Allotment (BOA). In case of rights issue that is over-subscribed greater than two times, a SEBI nominated Public Representative is required to participate in the finalization of BOA. If it is under-subscribed, information regarding accepted applications is formalized and Regional Stock Exchanges are approached for finalization of BOA. 2. Dispatch of Share Certificates: Immediately after finalizing the BOA, share certificates are dispatched to the eligible allotees, and refund orders are made to unsuccessful applications. In addition, a 78 days report is to be filed with SEBI. Permissions for listing of securities is also obtained from the Stock Exchange. 3. Advertisement: An announcement in the newspaper has to be made regarding the basis of allotment, the number applications received and date of dispatch of share certificates and refund order etc. What is meant by book-building? Book-building means a process by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the

determination of the quantum of such securities to be issued by means of a notice/circular/advertisement/ document orientation or offer document. A company proposing to issue capital through book- building has to comply with the requirements detailed below: 75 Percent Book- building Process: In an issue of securities to the public through a prospects, the option for 75 percent book- building is available subject to the following important conditions; The option of book-building is available to all body corporates that are otherwise eligible to make an issue of capital to the public as an alternative to and to the extent of the percentage of issue, which can be reserved for firm allotment. The issuer company can either reserve the securities for firm allotment or issue the through the book-building process should be separately identified/ indicated as placement portion category, in the prospects. The securities available to the public should be separately identified as net offer to the public. The requirement of minimum 25% of the securities to be offered to the public is also applicable. Underwriting is mandatory to the extent of the net offer to the public. 2.10 Offer to Public through Book-building Process An issuer company may make an issue of securities to the public through a prospectus in the following manner.100% of the net offer to the public through the book-building process or75% of the net offer to the public through the book- building process and 25 % in the price determined through book -building. The Lead Merchant Bankers should act as the Lead Book Runner and offer eligible merchant bankers. 2.11 Additional Disclosures Apart from meeting the disclosure requirements as specified in the SEBI guidelines as noted earlier, the following disclosures should also be suitably made. The particulars of the syndicate members along with the details of registrars, bankers to the issue and so on. The following Statement under the Basis for Issue Price: The issue price has been determined by the issuer in consultation with the book runners on the basis of the assessment of market demand for the offered securities by way of book building. Underwriting: In case the issuer company is making an issue of securities to the public through book-building, the entire net offer ( i. e. 100% and 75% respectively) should be compulsorily underwritten by the syndicate members/ book runners.

Procedure for Bidding: The bid should be open for at least five days and not more than 10 days which may be extended to 13 days in case the price band is revised. Bidding Form: There should be a standard bidding form to ensure uniformity and accuracy. It should contain information about the investor and price and number of securities that the investor wishes to bid for. Allocation/ Allotment Procedure: In case of issue of 100 % of the net offer to the public through 100% book-building process (i) at least 25% of the net offer to the public should be available for allocation to retail individual investors, (ii) at least 25% to non institutional investors ( i. e. investors other than retail individual investors and QIBS) and (iii) not more that 50% t QIBS. However, 50% of the issue size should be mandatorily allotted to the QIBS in case of a Public issue by an unlisted company through book-building.

Progress of Merchant banking in India: Upto 1970, there were only two foreign banks which performed merchant banking operations in the country. SBI was the first Indian commercial bank and ICICI the first financial institution to take up the activities in 1972 and 1973 respectively. As a result of buoyancy in the capital market in 1980s some commercial banks set-up their subsidiaries to operate exclusively in merchant banking industry. In addition, a number of large stock broking firms and financial consultants also entered into business. Thus, by the end of the end of 1980s there were 33 merchant bankers belonging to three major segments viz., commercial banks, all India financial institutions, and private firms. Merchant banking functions of these institutions was related only to management of new capital issues. Merchant banking industry which remained almost stagnant and stereotyped for over two decades witnessed an astonishing growth after the process of economic reforms and deregulation of Indian economy in 1991. The number of merchant banks increased to 115 by the end of 1992-93 300 by the end of 1993-94 and 501 by the end of August, 1994. All merchant bankers registered with SEBI under four different categories include 50 commercial banks, 6 all Indian financial institutions- ICICI, IFCI, IDBI, IRBI, Tourism Finance Corporation of India, infrastructure leasing and Financial Services Ltd. and private merchant bankers. In addition to Indian merchant bankers, a large number of reputed international

Merchant bankers like Merrill Lynch, Morgan and Stanley, Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India under authorization of SEBI. As a result of proliferation, Indian Merchant Bankers are faced with severe competition not only among themselves but also with the well developed global players.

RBI allows cash withdrawal from merchant banker terminals Besides ATMs, customers can now also withdraw cash up to Rs1000 from terminals at different merchant establishments, the Reserve Bank. As a further step towards enhancing the customer convenience in using the plastic money, it has been decided to permit cash withdrawals at POS (point of sale) terminals. To start with, this facility will be available for all debit cards issued in India, up to Rs1000 per day," RBI said in a statement issued here. The use of debit cards at POS terminals at different merchant establishments has been steadily increasing, it said. This facility is available only against debit cards issued in India. At present cash withdrawal facility using plastic cards is available only at Automatic Teller Machines (ATMs) with the number of ATMs in the country at 44,857. There are 4, 70,237 POS terminals in the country. This facility may be made available at any merchant establishment designated by the bank and would be available whether the card holder makes a purchase or not. Morgan Stanley makes i-banking comeback The joint venture between JM Financial and Morgan Stanley was inked in 1997 and formalized in 1999. The JV had investment banking operations other than equity broking, research, wealth management and advisory and securities distribution operations. Post the split, JM Financial acquired the investment banking company together with its subsidiaries, which were engaged in fixed income, equity broking, wealth management, advisory and distribution businesses of $ 20 million. The Indian partner sold its 49% holding in JM Morgan Stanley Securities(JMSPL), the institutional equity broking company to Morgan Stanley for$ 445 million. Bulge bracket investment banking major, Morgan Stanley has reentered investment banking business on its own, after partying ways with JM Financial-its former Indian partner.

Problems and hurdles:Not many but some problems are faced by Indian merchant bankers.  Industry compartmentalization : company which is in merchant banking business would have expertise in underwriting, hire purchase, leasing, and portfolio management, money-lending. But RBI does not permit merchant banking firms to get into these activities. So the same promoters have to setup different companies for different purposes. Management cost increases and expertise pooling i.e. multiple use of same talent is not possible.  Malafide practices : Indian corporate culture is bettering but still many corporate have excessively friendly approach. Favored allotment of shares, tampering with project appraisal report to bankers is common. Corporate like to use merchant bankers for malafide intentions. This gives growth to more boutique fly-by-day firms. Giant professional or multinational merchant bankers are cautious in their approach to Indian market.  Regulations : though regulations are much better now, there is still scope for further improvement. Merchant bankers can be made more accountable and responsible. Professional qualification focused on merchant banking is not available. Industry is not well organized and all the players do not play the same tune. This is specially evident in comparison with insurance industry and mutual funds industry.

Conclusion The merchant banker plays a vital role in channelising the financial surplus of the society into productive investment avenues. Hence before selecting a merchant banker, one must decide, the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the client will ensure success.

It can be said that this project helped me to understand every details about Merchant Banking and in future how its going to get emerged in the Indian economy. Hence, Merchant Banking can be considered as essential financial body in Indian financial system. Market development is predicted on a sound, fair and transparent regulatory framework. To sustain the growth of the market and crystallize the growing awareness and interest into a committed, discerning and growing awareness and interest into an essential to remove the trading malpractice and structural inadequacies prevailing in the market, and provide the investors an organized, well regulated market. The merchant banking business has increased over a short period of time and with continued economic reforms. However, a stiff competition exists in this line and survival will depend upon the financial skills and spectrum of financial services and instruments offered by the Merchant banker. H e nc e , M e rc h a nt Ba n k i n g Se r v i c e is t a k i n g s h a p e f o r turbulent times. M e r c h a n t b a n k i n g i s a n a c t i v i t y i n i t i a l l y undertaken by a few large commercial banks in India, and it is no w being adopted or u n d e rt a k e n b y a fe w large c o m me r c ia l b a n k s i n I nd i a , a nd i t is n o w b e i n g a d o p t e d o r u n d e rt a k e n b y practically every commercial bank through its Merchant Ba n k i n g D e p a rt me n t . T h e ra n g e o f a c t i v i t i e s c o v e re d u n d e r merchant banking very wide indeed. The merchant banks offer a p a c k a g e o f f i n a n c i a l s e r v i c e s . U n l i k e i n t h e p a s t , t h e i r activities are now primarily non-fund based. Therefore, they do n o t r e q u i r e m u c h c a p i t a l . O n e o f t h e b a s i c r e q u i r e m e n t s o f merchant banking is a highly professional staff and worldwide contacts. Merchant banking is usually international in character.