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Merchant banking : As per SEBI (MB 1992, Regulations), a merchant banker means a person who is engaged in the business of securities issue management either by making arrangements regarding selling, buying of securities; rendering consultancy/ advisory services related to capital market securities.

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

Scope of Merchant Banking in India

Issue management Underwriting Consultancy services for the issue Marketing services for the issue PS: MBs are precluded to take up any fund based activity other than associated with securities market.


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

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

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

Category II

: Rs.50 lakhs

Category III : Rs.20 lakhs Category IV : Nil


SEBIs License 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, Every merchant banker should maintain copies of balance sheet,Profit and loss account, and other required documents. Half-yearly unaudited result should be submitted to SEBI

SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines 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


Should maintain high standards of integrity,dignity and fairness in conduct of business. Should fulfill all obligations in a professional and ethical manner. Should provide true & adequate information to investors Shall not be aparty to any Price rigging& false presentation Shall ensure all statutory compliances.

General obligation & responsibility

Not to engage in any other business other than securities. Maintain Books of A/c, records and furnish financial statements to SEBI. Submission of half yearly results. Appointment of lead manager Documents to be submitted Underwritting guidelines

Role of Merchant banker in Security Issues

Pre Issue: Issue planning & advisory Underwritting Preparing offer document Conducting Due diligence Issue pricing Issue structuring Selection of other intermediaries Documentation Marketing Statutory compliances

Post Issue
Deciding allotment
Mailing of allotment letters,share certificates
Refund In case of book built route, decide the cut off price. Addressing investor grievances Statutory filling with SEBI, post offer closure Liasioning with Stock exchange for listing

Topics: Pre Issue decision making Key concepts Issue pricing, structuring, timing Procedural aspect Regulatory Provisions & SEBI guidelines Requirements under Companies Act Process for making Issue ( Fixed price, Book building) Post issue management

Pre Issue decision making The benefits of going public are:

Firms can access financial markets and tap a larger source of capital Existing shareholders get an opportunity to exit ( Liquidity event). Capital structure: it brings down the debt equity ratio and thereby increases the future borrowing power of the firm. Equity does not involve fixed debt servicing cost. In case of premium pricing, it increases the networth, without diluting the capital base proportionally.

The cons:
The Loss of control Information disclosure requirements Exchange listing requirements

Hostile take over

Pre Issue decision making

Significance of an IPO.
It brings in large capital. It creates new ownership It creates Market capitalisation for the firm and attatch a value to it. It provide opportunity for performance evaluation of firm It brings additional cost of compliance & regulation It checks management decisions.

Pre Issue decision making

Generally any IPO decision making involves 3 aspects.

1) Strategic perspective 2) Financial perspective 3) Merchant banking perspective

Strategic perspective
Long term benefits of listing Does it help you to achieve strategic & financial goals?? Does your business model need listing??

Financial perspective
Fund requirement Are there other cheaper alternatives?? Capital structuring Impact on key financial ratios.

Merchant banking perspective

Timing Issue pricing Issue structuring

Bull phase High business confidence Investor sentiments Market conditions

Generally MB use following method. Price to earning ratio(P/E Ratio) Price to book value ratio(M/B ratio)

P/E ratio. The firms preceding 3 years average EPS is taken. The average P/E multiple for the industry is taken. 2 approaches are adopted a) Conservative pricing b) Aggressive pricing

Pricing- Example
FY 05-06 06-07 07-08


AVG EPS = 5 Generally we take wt. average. Assuming wt. as(0.2, 0.3,0.5), the EPS =4.4

P/E Highest multiple for the Industry Lowest Average

For Yr 3




A) Conservative pricing- 11 * 4.4 = 48.4 B) Aggressive pricing - 15*4.4 = 66.0

Issue structuring
Issue size Promoters quota Firm allotments Net public offer Face value, premium value Final offer price Minimum & maximum subscription