Merchant Banking

INTRODUCTION
The history of origin and growth of merchant banking throughout the world, as discussed in the forgoing paragraphs, has established, beyond doubts, the fact that the role of the merchant banker had never been determined. They had followed strategy of assuming different roles according to the need of need of time to maintain their existence in the business environment. This is one of the reasons that no fixed definition cold be ascribed to MERCHANT BANKING. Very commonly, the merchant banking has been defined as to what a merchant banker does. This is well convinced definition that could be given to any service oriented industry. The definition given by different authors explaining the meaning of merchant banking revolved around the role played by merchant banks. There role and scope of such role have enlarged with the passage of time. The survey of the existing literature in the foregoing pages reveals that merchant banking is a non-banking financial activity resembling banking originated, grown and sustain in European land, got enriched under American patronage and now being rendered throughout the world by both banking and non-banking institution. Some of the definitions are discussed below to locate the practical meaning of the term merchant banking. Dictionary meaning of merchant banking hints at merchant banks as an organization that underwrites securities that underwrites securities for corporations. Dictionary meaning of merchant banking hints at merchant banks as an organization that underwriters securities for operation advises such clients on mergers and is involved in the ownership of commercial venture. These organizations are sometimes banks which are not merchants and sometimes merchants who are not banks and sometimes houses which are neither merchants nor banks. These definition reflects the historical formation of the merchant banking profession as such, in which the merchants had assume banking role and subsequently banks assume the merchant roles. Paul ferries rightly states this phenomenon; the original label of merchants and bankers was replaced by merchant bankers. There name lent creditability involving the other people money. In financial history of Western Europe, Charles P Kindle Berger writes about merchant banking as the development of banking from commerce frequently encountered a prolonged intermediate stage known in England original as merchant banking. The merchant banker was a banker was a merchant who lent his credit to others. This was done in various ways viz. making advance to produces before goods were sold, either the goods entrusted to

Merchant Banking
merchant on commission for sale abroad or received on consignment from abroad, by issuing letters of credit under which merchants could draw bills of exchange created by trade. Most merchant banks drifted from generalized commerce into specified commerce and from specialized commerce into finance. Merchant Banks, thus, in essence, are financial institution providing specialist services which generally include the acceptance of bill of exchanges, corporate finance, portfolio management and other banking services. It is not necessary that a merchant banker should do all such activities to be called a merchant bankers, one merchant bank may specialized in one activity only, and take up other activities also, which may be complimentary or supportive to specialized activity. For example, firms in England which are engaged in the business of acceptance of bills are known as merchant bankers. Again, the firm which are members of the issue House Committee in England (not necessarily be engaged in the former activity) are also merchant banks. Thus, merchant banks despite specialization in one activity have different roles to play in different economic situation. Merchant Banking is an emerging concept in the area of financial services in India. The profession of Merchant Banking is dedicated to fulfill the needs of trade and industries by acting as an intermediary, consultant, liaison man and financer too. Merchant banking is a result oriented profession commanding high degree of skills and dexterity in solving business problems, assisting in investments and financial decision making, assisting in laying corporate strategies, assessing capital needs and helping in producing the owed as well as borrowed funds for achieving balanced capital structure of the client corporate un its. Merchants bankers with the confidence of investors and general public command high reputation for passing on accurate, adequate and timely information which helps and facilities in the functioning of capital markets, money markets & international financial system. Merchant Bankers observe their skill as personal possession for their comparative strengths in the profession.

Merchant Banking
DEFINITION
A merchant bank is a defined as a financial institution or an organization that underwrites corporate securities and advice such clients on issue like corporate mergers etc involved in the ownership of commercial venture, etc. this organization may be bank corporate body, a firm or a priority concern Merchant banking in India started with management of public issues and loan syndication and has been slowly and gradually covering activities like project portfolio management and mergers and amalgamation of corporate firm. A merchant banker has been defined under the securities and exchange board of India [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 securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. counseling,

ORIGIN OF MERCHANT BANKING

The origin of merchant banking is traceable with the development of inters a national trade and finance. Economic literature available on international trade and finance contains lucid information on the evolution of merchant banking and make a fascinating reading that provides the historical background of origin of merchant banking. During 13th century a few families owned and managed firms engaged in coastal trade and finance were spread throughout the European continent. The first known such firms were Ricardo of Lucca, Medici and fogger. These firms besides their commercial activity involving sale and purchase of commodities were engaged in banking activity also. These firms had acted as the bankers to the kings of European status, financing costal trade amongst European nation, borne exchange risk in the absence of any international medium of exchange in addition to the security risk in financing the king, monarchs and the state government engaged in the continental wars. The motivation behind their banking activity was profit maximization and to achieve this aim they invested their funds were they expected higher return despite high degree of risk. For this reason ,merchant bankers used to charge rate of return for financing , the highly risky venture .In turn , they had to suffer ,very often , with heavy losses , closed down for reasons of denial of , repayments ,denouncements of 3

Merchant Banking
obligations by debtors , credits losses and confiscations of their properties by the kings they financed .For example , Riccardi of Lucca ,the Italian merchant banker, had opened an office in England to serve the English Government of Edward-I of England and had to succumb to closure when kings confiscate its properties on its refusal to finance the war in 1924.similarly, the Medici bank of Florence was liquidate in 1494, Fugger banker had to suffer in 1650 when Habsburg Emperors Maximillan and Charles- V deflated in payments. There are numerous instances likewise where, and then the existing merchant banker had to collapse, leave the activity or started another activity or started the same activity after strengthening the financing background. Thus, merchant banking, with all the odds, survived and continued during thirteen and sixteen centuries. The industrial revolution in England gave further boost to the merchant banking activity with the growth of the home industry made goods like linen and paper. The scope of international trade and expanded to the colonies of the new world. That is the North America and other continents. Many more persons and firms were attracted to take up the merchant banking activities particularly to transship the machine made goods from European nations to other nations, developing colonies of the European nation in other continents and bringing raw material from other nations and colonies to Europe, and to finance such trade. The founders of the several of the present day merchant banks who started the business having the 18th century and early 19th century were the merchants who traded overseas and earned reputation with their name. These prominent merchants were requested to lend their name to the lesser known traders by accepting a bills they guaranteed that the holder of bill will receive the full value on the date of payment. This acceptance business has grown with the expansion of the trade through the European nations and continuous today the banks most activity engaged in it are the number of the acceptance house committee of London.

Merchant Banking
GROWTH OF MERCHANT BANKING IN INDIA
Merchant banking activities in India originated in 1969 with the merchant banking division set up by the grind lay bank, the largest foreign bank in the country, at the time. The main service offer to the corporate enterprises by the merchant bank includes management public issue and financial consultancy. Other forcing bank like city bank, chartered bank also assumed the merchant banking activity in India. State bank of India started merchant banking in 1973 followed by the ICICI in1974; both emerged as leader in merchant banking with significance business during the period of 1974-1985 in comparison to forcing banks. Mid seventies witnessed a growth of merchant banking organization in the country with various commercial banks, financial institutions, broker firms entering in to the field of merchant banking. The growth in merchant banking business during the early seventies was to forcing exchange regulation act 1973 [ FERA] where in large number of forcing companies operating in India were required to dilute their foreign holdings In order to continue business in the country his result in expansion in the capital markets providing enough opportunities to merchant bankers to established themselves. The change in Indian economy opened new doors for merchant banking business enter in diversified area of activities, but at the same time this brought competition in merchant banking sector. This sector has traditionally been dominated by financial institution, banks and their subsidiaries. Now, various private sectors merchant bankers have emerged and some of them having international reputation. Till the end of 1990, the merchant banking sector was almost monopoly public sector institution and commercial banks, however since 1991 considerable number of private merchant banker have emerged on same. Various existing corporate entities and non-banking finance companies have also focused their activities in merchant banking business. Before 1990 there were less than 40 merchant banking concerns while in 199 this number has exceeded to more than 400 firms.

Merchant Banking
IMPORTANCE AND NEED OF MERCHANT BANKING IN INDIA

Importance reasons for the growth of merchant banks has been development activities throughout the country, exerting excess demand on the sources of fund for ever expanding industries and trade, thus leaving a widening gap unabridged between the supply and demand of invisible funds. All India financial institution had experienced constrain of resources to meet ever increasing demands for demands for funds frame corporate sector enterprises. In such circumstances corporate sector had the only alternative to avail of the capital market service for meeting their long term financial requirement through capital issue of equity shares and debentures. Growing demand for funds put pressure on capital market that enthused commercial banks, share brokers and financial consultancy firms to enter into the field of merchant banking and share the growing capital market. As a result all the commercial banks in nationalized and public sector as well as in private sector including foreign banks in India have opened their merchant banking windows and competing in this field. Need for merchant banking is felt in the wake of huge public saving lying untapped. Merchant banker can play highly significant role in mobilizing funds of savers to invisible channels assuring promising returns on investment and thus can assist in meeting the widening demand for invisible funds for economic activity. With growth of merchant banking profession corporate enterprises in both private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirement 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. In view of multitude of enactment, rules and regulation, gridlines and offshoot press release instructions brought out the government from time to time imposing statutory obligations upon the corporate sector to comply with those entire requirement prescribed there in the need of a skilled agency existed which could provide counseling in these matters in a package form. A merchant banker with their skills updated information and knowledge provide this service to the corporate units and advice them on such requirement to be complied with for raising funds from the capital market under different enactment viz. companies act, income tax act, foreign exchange regulation act, securities contracts corporate

Merchant Banking
laws and regulations. Merchant bank advice the investors of the incentives available in the form of tax relief, other statutory relaxation, good return on investment and capital appreciation in such investment to motivate them to invest their savings 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. 1. Growing complexity in rules and procedures of the government. 2. Growing industrialization and increase of technologically advanced industries. 3. Need for encouragement of small and medium industrialists, who require specialist services. 4. Need to develop backward areas and states which require different criteria. 5. Exploring the possibility of joint ventures abroad and foreign market. 6. 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.

Merchant Banking
REGISTRATION PROCESS OF MERCHANT BANKING

MERCHANT BANKER without holding a certificate of registration granted by the Securities and Exchange Board of India cannot act as a merchant banker. SEBI will grant certificate to Merchant banker if it follows the following condition: Merchant banker should be a body corporate and should not be non banking finance company They must have a necessary infrastructure for maintaining an office They must have employed a minimum of 2 persons with experience in merchant banking business. They should not be connected with any company directly or indirectly.

OBLIGATIONS AND RESPONSIBILITIES

Code of conduct:Every merchant banker has to abide by the code of conduct as specified below. A merchant banker in the conduct of his business has to observe standards of integrity and fairness of all his dealings with the clients and other merchant bankers. He ought to render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He has to, wherever necessary, disclose to his clients, the possible sources of conflict of duties and interest, while providing services. He cannot made any statement or become privy to any act, practice unfair competition, which is likely to be harmful to interest of other merchant bankers or is likely to place such other merchant banker in a disadvantageous position in relation to him, while competing for, or executing, any assignment. He should not make any exaggerated statement, whether oral or written, to the client either about his qualification or his capability to other clients. A merchant banker always to endeavors to: 1) Render the best possible advice to the clients regarding clients the needs and requirements, and his own professional skill; and 2) Ensure that all effective manner professional dealing are affected in prompt, efficient and cost

Merchant Banking
He should not:1) Divulge to other clients, press or any other party any other party confidential information about his client, which has come to his knowledge;

2) Deal in the securities of any client company without making disclosure to the SEBI as per the regulations and also the Board of Directors of the client company.

He should endeavor to ensure that:1) The investors are provided with true and adequate information without making any misguided or exaggerated claims, and are made aware of attendant risks before any investment decision is taken by them. 2) The copies of prospectus, memorandum and related literature are made available to

the investors. 3) Adequate steps are taken for the fair allotment of securities and refund of

application money without delay; and A merchant banker should not generally and particularly in respect of the issue of any securities be part to a) Creation of false market; b) Price rigging or manipulations

Restriction on Business:No merchant banker, other than a bank/public financial institution (PFI) is permitted to carryon business other than that just in the securities market with effect from December 9, 1997. However, a merchant banker who is registered with RBI as a Primary Dealer/Satellite Dealer may carry on such business as may be permitted by RBI with effect from November 1999.

Maximum Number of Lead Managers :The maximum number of lead manager is related to the size of the issue. For an issue of size less than Rs.50 crore, two managers are appointed. For size groups of Rs.50 crore to Rs.100 crore and Rs.100 corer to Rs.200 crore, the maximum permissible lead 9

Merchant Banking
managers are three and four respectively. A company can appoint five and five or more (as approved by the SEBI) lead managers in case of issues between Rs.200 corer and above Rs.400 crore respectively.

Responsibilities of Merchant Banker:Every lead manager has to enter into an agreement with the issuing companies setting out their mutual rights, liabilities, and obligation relating to issue and in particular to disclosures, allotment and refund. A statement specifying these is to be furnished to SEBI at least one month before the opening of the issue for subscription. In case of more than one-lead manager/Merchant banker, the statement of has to provide details about their respective responsibilities. A lead merchant banker cannot manage an issue if the issuing company is its associate. He can also not associate with a merchant banker who does not hold a certificate of registration with the SEBI. It is necessary for a lead manager to accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs.25 lakhs whichever is less. If he is unable to do so, he has to make arrangements for an underwriting of an, equal amount by a merchant banker associated with that issue under intimation to SEBI.

Submission of Documents:The lead managers(s) to an issue has (have) to. Submit at least two weeks before the date of filing with the registrar of companies/regional stock exchange or both particulars of the issue, draft prospectus/letter of offer, other literature to be circulated to the investors/shareholders, and so an to the SEBI. They have to ensure that the modifications/suggestion made by it with respect to the information to be given to the investors is duly incorporated. The draft prospectus/draft letter of offer should be submitted to the SEBI along with the prescribed fee specified below:-

They have to continue to be associated with the issue till the subscribers have received the share debentures certificate or the refund of excess application money.

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Merchant Banking
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 companies established by bankers like SBI, Canada Bank, Punjab National Bank, Bank of India, etc. some firms are also organized by financial and technical consultants and professionals. Securities and exchanges Board of India has divided the merchant bankers into four 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 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 governmental priorities and policies.

b) Banker Base:These merchant bankers function as division/ subsidiary of banking organization. The parent banks are either nationalized commercial banks 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 operating also like providing investment and portfolio management services.

d) Private Base:These merchant banking firms are originated in private sectors. These organizations are the outcome of opportunities and scope in merchant banking 11

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 Sectors merchant banking firms have come up either as sole proprietorship, partnership, private limited or public limited companies. Many of these firms were in existence for quite some time before they added a new activity in the form of merchant banking services by opening new division on the lines of commercial banks and All India Financial Institution (AIFI).

SCOPE OF MERCHANT BANKING SERVICES IN INDIA

Merchant banking is a service oriented industry. The services rendered by merchant banks to the corporate client in India are more or less the same which are, being rendered traditionally in U.K and other European countries by the merchant banks in U.S.A by the investment bankers to carter to the needs of the business enterprises. Indias economy is in the state of transition facing an entirely different environment than that faced by the developed nations of the world. In view of these circumstances, a mark of distinction is apt to be noted in the nature and the type of services being offered by the merchant banks in India.

Following services provide by the merchant bankers in India:-

1. Corporate Counseling 2. Project Counseling 3. Loan Syndication 4. Management Of Capital Issues 5. Dealing In Secondary Market 6. Mutual Funds 7. Portfolio Management 8. Underwriters 9. Mergers / Amalgamations

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Merchant Banking
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; (A) (B) Pre-issue management Post-issue management

(A)

Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:(1) (2) (3) Obtaining stock exchange approvals to memorandum and articles of associations. Taking action as per SEBI guide lines Finalizing the appointments of the following agencies: 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

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Merchant Banking
(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) (9) (10) Approval of prospectus from Securities and Exchange Board of India. Filing of the prospectus with Registrar of Companies. Making an application for enlistment with Stock Exchange along, with copy of the prospectus. (11) (12) Publicity of the issue with advertisement and conferences. Open subscription list.

(B)

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) (6)

To ensure he listing of securities at Stock Exchanges. To attend the investors grievances regarding the public issue

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.

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Merchant Banking
PROCEDURE FOR REGISTRATION

While considering the application for registration made in the prescribed form, the SEBI takes into accounts all matters relevant to the activities relating to portfolio manager and in particular.

a) Necessary infrastructure like adequate office staff, equipment and manpower to discharge his activities. b) Has in employment a minimum of two persons with experience to conduct portfolio management business. c) A person directly/ indirectly connected with the applicant, that is,

associated/subsidiary/inter-connected pr Group Company has not been granted registration; d) Capital adequacy of not less than net worth of Rs. 50 lakh in term of capital plus free reserves. e) The applicant/ partner/ director/principal officer has not been convicted for nay offence involving moral turpitude/ guilty of any economic offence; f) The applicant/partner/director/partner/ principal officer is not involved in any litigation connected with the securities market; g) The applicant has professional qualification in finance/law/accounting/business management; and h) Grant of certificate is in the interest of the investors.

GENERAL OBLIGATIONS AND RESPONSIBILITIES

Code of Conduct:A portfolio manager has to, in the conduct of business; observe high standards of integrity and fairness in all his dealing with his clients and other portfolio managers. The money received by him from a client for an investment purpose should be deployed as soon as possible and money due and payable to a client should be paid forthwith.

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Merchant Banking

A portfolio manager has to render at all times high standards of services, exercise due diligence, ensure proper-care and exercise independent professional judgment. He should either avoid any conflict of interest in his investment or disinvestment decision, or where any conflict of interest arises; ensure fair treatment of all his customers. He must disclose to the client, possible sources of conflict of duties and interest, while providing unbiased services. A portfolio manger should not place his interest above those of his clients. He should not make any statement or become privy to any act, practice or unfair competition, which i! Likely to be harmful to the interest of other portfolio managers or is likely to place them in a advantageous position in relation to the portfolio manager himself, while competing for or executing any assignment. Any exaggerated statement, whether oral or written, should not be made by him to client other about the qualification or the capability to- render certain services or his achievements in regards to services n rendered to the other clients.

At the time of entering into contract, he should been in writing from the clients his interest in various corporate bodies which enable him to obtain unpublished price-sensitive information of the, body corporate. A portfolio manger should not disclose to any clients or press any confidential information about his clients, which has come in his knowledge. Where necessary and in the interest of the clients, he should take adequate steps for the registration of the transfer of the clients securities and for claiming and receiving dividends, interest payment and other right accruing to the client. He must also make necessary action for the conversion of securities and subscription/ renunciation of/or rights in accordance with the clients instruction.

Contract with Clients:-

Every portfolio manager is required, before taking up an assignment of management of portfolio on behalf of a client, is enter into an agreement with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligation relating to the management of the portfolio of the client. The contract should, inter alias, contain.

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Merchant Banking
i. ii. The investment objectives and the services to be provided Areas of investment and restrictions, if any, imposed by the client with regards to investment in a particular company or industry; iii. iv. v. vi. Attendant risks involved in the management of the portfolio; Period of the contract and provision of early termination, if any; Amount to be invested; Procedure of setting the clients accounts including the form of repayment on maturity or early termination of contract; vii. viii. Fee payable to the portfolio manager; Custody of securities.

The funds of all clients must be placed by the portfolio manager in separates accounts to be maintained by him in a scheduled commercial bank. He can charges an agreed fee from the client for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly, any return and such fee should be independent of the returns to the clients and should not be on return sharing basis.

General Responsibilities;The discretionary portfolio manager should individually and independently manage the funds of each client in accordance with the need of the client in a manner, which does not partake the character of a mutual fund, whereas the non-discretionary portfolio manager should manage the funds in accordance with the direction of client. He should act in a fiduciary capacity with regard to the client funds and transact in securities in within the limitation placed by the client himself with regard to dealing to securities under the provisions of the reserve bank of India act, 1934. He should not derive any direct or indirect benefit out of the client funds or securities. he cannot pledge or give on loan securities held on behalf of client to a third person, without obtaining a written permission from his client. He should ensure proper timely handling of complaints from his client and take appropriate action immediately.

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Investment of clients money:-

The portfolio manager should not accept money of securities from his client from his client for a period of less than one year. Any renewal of portfolio funds the maturity of the indicial period is deemed as a fresh placement for a minimum period of one year. The portfolio funds can be withdrawn or taken back by the portfolio client at his risk before the maturity date of the contract under the following circumstances..

Voluntary or compulsory termination of portfolio management service by the portfolio manager. Suspension or termination of registration of portfolio manager by the SEBI. Bankruptcy or liquidation in case the portfolio manager is a body corporate. Permanent disability, lunacy or insolvency in case the portfolio manager is an individual.

The portfolio manager can invest funds of his clients in money market instrument or as specified in the contract, but not in bill discounting, bedlam financing or for the purpose of lending or placement with corporate or non-corporate bodies. While dealing with clients funds, he should not indulge in speculative transaction, that is, not enter into any transaction for the purchase or sale of any securities in which transaction is periodically or ultimately settled otherwise than by actual delivery or transfer of security. He may enter into transaction on behalf of the client for the specific purpose of meeting margin requirements only if the contract so provides and the client is made aware of, the attendant risk of such transaction. Maintenance of book of accounts / records:

Every portfolio manager must keep am maintain the following book of accounts, records and documents. A copy of balance sheet at the end of each accounting period. A copy of the profit and loss account for each accounting period. A copy of the auditor report on the account for each accounting period. A statement of financial position and Record in support of every investment transaction or recommendation which indicate the data, fact and opinion leading to that investment decision. 18

Merchant Banking
After the end of each accounting period, copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting year when required must be submitted to the SEBI. Half yearly unedited financial result, when required with a view to monitor the capital adequacy have to be submitted to the SEBI the books of account and other record and document must be preserved for a minimum period off five years.

QUALITIES OF A GOOD MERCHANT BANKER

Merchant Bankers are individuals experts who organize and manage the merchant banks. The operation of a merchant bank is influenced by the personality, traits of its merchant bankers. Their qualities are:

1) Leadership:In order to interact with their clients and communicate effectively merchant bankers should possess all relevant skills and update knowledge.

2) Aggressive action:Merchant bankers always looking for new business opportunities. On locating a business opportunity and after obtaining the assignment from the clients, a merchant banker has to be prompt in grasping the clients problems and to provide a better choice amongst alternative solutions. A good merchant banker is one who does not allow his clients to think anything outside except what has been advised and thus holding the clients interest for the present as well as for the future.

3) Co-operation and Friendliness:Co-operation and friendliness coupled with persuasiveness must flow as natural traits in the merchant banker in order to win over the trust of their clients just like a doctor or a lawyer who retains their clients permanently. A good merchant banker has to share the thoughts of his clients with sympathetic gestures and offer suggestions without any greed or favors.

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4) Contacts:A merchant banking business mainly depends upon the sociable nature and wider contacts. The scope of contact of a merchant banker covers: (a) His own organization (b) Central and State Government Offices (c) Banks, (c) Financial Institutions, (d) Promoters/Directors/Owners/Chief Executives of the public and private Enterprises, (e) Printers, (f) Advertising Agencies, (g) Brokers and Stock Exchange Dealers, (h) Advocates and Solicitors (i) Members of the press, etc. Merchant bankers have to widen the contacts and continue to maintain them by meeting people in personal, in special gatherings and through writing to them.

5) Attitude towards problem solving:A good quality of a merchant banker is to be skilled in human relations particularly in the inter-personal behavior. A merchant banker should have a positive approach to understand the difficulties, adverse circumstances and the viewpoints of others. Effective communication and proper feedback are the pre-requisites for creating a positive attitude towards problem solving which could be gained partly through the learning process and partly as an inborn personality trait.

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DEVELOPMENT STAGES OF MERCHANT BANKING FIRMS
In the merchant banking organization in the following chart, the firm of merchant banker and individual stock broker have been included as they have been contributing jointly to the growth of the profession of merchant banking. But most of these firms are not well developed to show stage of maturity. Most of them are still in the start-up and early growth stages. This is easily dissemble from the following projection of the development stages

Unit

Stages in development of merchant banking

Principal financing Organizational setup source

Very loose organization, 1 Start-up founders and associates involved in the management Emerging formal 2 Early growth organization, founders, or professional manager in management Formal organization with 3 Accelerating growth professional, manager or founder Complex organization with professional manager Firms investment with banks backing in terms of loan Corporate finance from bank plus equity funds from public Matching finance available from all possible sources Individual investment Own investment

Sustaining growth

maturity

Multilayer complex management organization

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MARKET POTENTIAL OF MERCHANT BANKING SERVICES
Merchant banking in the country has come to be primarily associated with the capital markets. With deregulation of Indian markets there are several new sectors open to private investment which have consequently created an opportunity for private financing. The need for this banking is not currently met, by their commercial banks or the financial institutions and hence there is a huge gap which needs to be filled. This gap can be met through capital markets or a range of finance products and hence a good scope exists for the various services offered by a merchant banker. The establishment of SEBI and the abolition of the office of Controller of Capital Issues (CCI) in 1992 heralded in area of free market pricing of equity shares. Merchant bankers in particular have been assigned a greater responsibility in the fixation of issue price & premium, if any. In the CCI regime merchant bankers had restricted role to play in that regard. The role was confined mainly to getting clearance from the CCI & to ensuring the success of capital issue through marketing efforts. There were also no disclosure norms. Merchant bankers were seldom held accountable for the correctness of the information disclosed in the prospectus & letter of offer but with issuance of comprehensive guidelines for free market pricing, code of conduct for merchant bankers, etc. by SEBI role of merchant bankers has considerably increased. An outstanding development in history of Indian capital market was opening up in 1992 by allowing financial institutions to invest in the primary & secondary markets & also permitting Indian companies to directly tape foreign capital markets through Euro Issues. The result was so encouraging that within less than 2 years to march 1994 the total inflow of foreign capital through these routes reached to about $5 billion. It was estimated that this figure may go up to $35-$40 billion by the turn of the century.

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Merchant Banking
THE USERS OF 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 economic 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 development. Besides, the technological development also helps the 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 creation of law and regulation of law is the network within which the government and merchant bankers have to abide by the legal norms which have the characteristics of change depending upon the moods of the public system. (I.e. the government) and public interest. Demand for merchant banking services is one of the environmental 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.

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MERCHANT BANKING-FUTURE DEVELOPMENT

Time and again the Merchant banking Industry in India witnessed experienced and underwent significant changes. The very purpose for which these firms are commences their services should be taken care of and they should mould their policy decision and activities to move in tune with the main objectives of Investors protection and to create healthy environment in capital markets. No doubt, Merchant Banking firms are subject to a host of control measures, regulations and rules framed and guided by SEBI. To some extent, frequent changes and /or amendments to policies and control measures, though needed for smooth working of the securities Industry, proves to be detrimental to the very existence of the Merchant Banking system in the country. The SEBIs Act 1992 confers power upon SEBI to supervise and control the affairs of the Merchant Banking firms in India. The various studies which had been undertaken in India for evaluating the performance of Merchant Banking firms and the implications of these on securities industry. No single study has been emerged so far pertaining to the evaluation of Merchant Banking firms and in-depth study on their activities as well as operational and financial performance in the light of changing regulatory environment. In recent past, the small investor has turned his back on the primary capital market. Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and reinforce his faith. He has lost all hopes of appreciation of his investment. And this when all these years millions have though capital market, ate capital market and dreamt capital market. It needed an extraordinary effort and skill the drive the small investor away! High premiums, false premiums and gray market operations. The professed protector of his interests first laid down the dictum of proportionate allotment, then of minimum subscription, all working against his interests. This would make an observant student of the stock market infer that there is some game plan afoot to dethrone the small investor from his prominent; he was believed to be the king. With the coming to SEBI, an organization that was ostensibly brought into existence to guard the interest of the small investor, hopes ran high that the small investor would now have a safe playing field. But these hopes were soon belied. Far from guarding the interests of the investing public, SEBI embarked on a course of action, which has positively hurt them. The 24

Merchant Banking
latest fiat of EBI bans corporate advertising after the receipt of acknowledgement card by a company wanting to go public. SEBIs this action has caused the closure of an information window. Now 50 million potential investors are deprived of official and authentic

information given by the Issuer. It is hard to understand reasons for this drastic and totally uncalled for action. While there has been no official explanation for this fiat, there is reason to believe that it may be based on a wrong perception of the role for corporate advertising. All this has been done perhaps because the corporate and intermediaries is to follow the practices of Western capital markets here, oblivious of the fact that our capital markets are altogether different in structure, in systems and in the number of participants Freedom of commercial expression could be exploited by some to serve their own ends, just a s freedom of speech and expression could be abused but this has not led our Government to put arbitrary restrictions on our freedom. Merchant Bankers have reason to believe they will be handicapped without the marketing support. But the worst sufferer would be the investor, especially the small investor it is this class, which forms the backbone of the capital market. As a result of the ban, the small investor would be deprived of the opportunity to study the corporate profile of the Issuer. In the absence of adequate information, they will have to depend on manipulated facts and information fed by unreliable sources. Besides, there are larger issues arising out of SEBIs action. From the point of view of liberalization of the economy, SEBI has taken a retrograde step. A market economy To achieve this

flourished through bigger markets, higher sales and lesser profits.

performance, a company needs an aggressive marketing plan and advertising effort is the main thrust to such a plan. No marketing plan can be worthwhile unless it is backed by an effective advertising plan. The ban imposed by SEBI nips the marketing plan in the bud. The Indian primary capital market is basically a retail market. It consists of innumerable investors who take own individual investment decisions. Whatever, the system, it is this market that will bring in the funds. If these markets destabilized, the investors will look for alternative avenues to invest their funds. SEBI in its one of the first documents on SEBI and Investor Protection, Development and Regulation of Securities Market clearly specifies significance of regulating capital market and its future plans for fulfilling the twin objectives viz., Development of capital market and investor protection are explained in introductory 25

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paragraphs. It speak out that, The decade of the 1980 witnessed a phenomenal growth and development of the securities market, demonstrated its potential not only to mobilize the savings of the horses hold sector but also to allocate it with some degree of efficiency for industrial development. The dilution of the holdings of the multinational companies at affordable prices in the latter part of the 1970s had generated considerable interest, which was, carries well into the next decade. Several companies came in the early part of the 1980s and successfully raised large resources from the market especially through debt instruments, which further sustained investor interest. By the end of the decade, the securities market in India came to be firmly integrated with the financial system of the country. With the corporate sector increasingly relying on the securities market for meeting their long-term requirement of funds, the securities market their long-term requirement of funds; the securities market competed on equal terms with the Development Financial Institutions, which were the traditional purveyors of long-term capital. The emergence of the securities markets into the main stream of the financial system of the country was thus one of the major economic processes of the 1980s an inevitable outcome of the maturing process of the financial system. They brought about notable

changes in the capital structure of the companies across industries, gave birth to new intermediaries and institutions in the securities market and created a new awareness and interest in investment opportunities in the securities market among investor. In spite market, its quality lagged far behind and there was absence of adequate professionalism and fair competition among the various players in the market. Besides, the regulatory framework then prevailing was fragmented difficult, if not effective.

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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.

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BIBLIOGRAPHY
en.wikipedia.org/wiki/Merchant_bank www.investopedia.com/terms/m/merchantbank.

www.academia.edu/4582419/merchant_banking_in_india

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