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G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)

Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etcThey render all these services for a fee

The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association G.Venkatachalam.M.Com, MBA,

Merchant Banking-An Overview

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 flow of capital in the market. Ministry of Finance: Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)

Merchant Banking-An Overview

Banking commission Report-1972
a) b) c) d) e) Necessity Distinct from commercial Banks Investment Management and Advisory services Medium and small savers Manage

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)

Merchant Banking in India

Grind lays Banks-1967
Management of capital issue Production planning, system design to market research Management consultancy

Citibank-1970 SBI-1972

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)

Emerging Areas.
Private placements with NRIs and FIIs. Brought out deals. Market Making OTC NSE Forex Financial engineering- M&As, capital restructuring.
G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D) 6

Qualities of a good MB
Leadership Aggressive action Co-operative and friendliness Contacts Attitude towards problem solving Inquisitiveness for new skills, information and knowledge
G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D) 7

Prime Objectives of MB
Providing long term funds to the projects or companies. Project counseling- loan syndication, project appraisal and arrangement of Working capital. Deciding the capital structure. Portfolio Management Underwriting Corporate advisory & issue mgmt.
G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D) 8

General Obligations and Responsibilities

Maintenance of books of accounts, records and documents Copy of the balance sheet, auditors report and statement of financial position Responsibilities of lead Manager Underwriting obligation Submission of due diligence certificate Insider Trading Acquisition of shares

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)



It includes preparation of project reports,deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions.
LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.
G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D) 10

ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities ieequity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue,closing issue,launching publicity campaign etc.. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms,screening of applications,deciding allotment procedure,mailing of allotment G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D) letters,,share certficates and refund orders



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

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)


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

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)


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

Joint venture abroad

Financing exports and imports Foreign collaboration arrangement

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)


Managers to the issue or Merchant Bankers

Advise on the capital structure, instrument of issue. Pricing Assessing and appraisal of project report. Appointment of bankers, underwriters, brokers, registrars, printers and advertisement agents. Holding brokers-Underwriters,
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Services rendered
Organising finance for investment in projects Assistance in financial management Acceptance of house business Raising Eurodollar loans and issue of foreign currency bonds Financing export of capital goods, hydropower Financing of hire-purchase transaction, leasing Mergers, takeovers, valuation of assets

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)


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

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)


Registration with SEBI

Around 250 Merchant Bankers Abolished all categories and maintained Category-I Separate registration for underwriters and portfolio manager Segregation between fee based and Fund based activities
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Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:
The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space, equipment, manpower etc. The applicant must have at least two employees with prior experience in merchant banking Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker The applicant should not have been involved in any securities scam or proved guilt for any offence G.Venkatachalam.M.Com, MBA, 20 The applicant should have a minimum net worth of Rs.5 crores

Registration with SEBI

Authorized Activities
Issue Management
Preparation of prospectus Information relating to the issue

Determining financing structure Tie-up of finances and final allotment and/or refund of subscription Corporate advisors to the issue Consultants or advisors to issue and underwriting
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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

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

Professional qualification in finace,law or business management

Infrastructure like office space,equipment and man power

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

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

Half-yearly unaudited result should be submitted to SEBI

Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients G.Venkatachalam.M.Com, MBA, 23

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

SEBI has the right to send inspecting authority to inspect books of accounts,records etc of merchant bankers
Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied An initial authorisation fee,an annual fee and renewal fee may be collected by SEBI A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less G.Venkatachalam.M.Com, MBA, 24


Should make all efforts to protect the interest of investors Should maintain high standards of integrity,dignity and fairness in conduct of business Should fulfill all obligations in a professional and ethical manner Should not discriminate among the clients Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue Should render best possible advice to its clients Any penal action taken by SEBI should be informed to its clients
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Should inform the board about any legal proceedings initiated against it Should abide by the rules of Securities and Exchange Board of India Regulations,2003 Shall develop its own internal code of conduct for governing its internal operations Should ensure that any person it employs should have the capacity to be a merchant banker It is responsible for the act of its employees and agents Should not create false market

G.Venkatachalam.M.Com, MBA, M.Phil.,(Ph.D)



SEBI stipulates high capital adequacy norms for authorisation which prevents young, specialised professionals into merchant banking business Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problem Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services
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