An Assignment on MERCHANT BANKING, ITS FUNCTIONING AND SCOPE IN INDIA Submitted by SHISHIR KUMAR SANKEESA (MM-09-11432)

Definition of a Merchant Banker The merchant bankers are those financial intermediaries involved with the activi ty of transferring capital funds to those borrowers who are interested in borrow ing. They guarantee the success of issues by underwriting them. Merchant Banks a re popularly known as issuing and accepting houses. Unlike in the past, their acti vities are now primarily non-fund based (Fee based). They offer a package of fin ancial 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 manage ment, credit syndication, acceptance credit, counseling, insurance, etc. Merchant Banking in India Merchant banking activity was formally initiated into the Indian capital Markets when Grindlays bank received the license from reserve bank in 1967. Grindlays s tarted with management of capital issues, recognized the needs of emerging class of Entrepreneurs for diverse financial services ranging from production plannin g and system design to market research. Even it provides management consulting s ervices to meet the Requirements of small and medium sector rather than large se ctor. Citibank Setup its merchant banking division in 1970. The various tasks pe rformed by this divisions namely assisting new entrepreneur, evaluating new proj ects, raising funds through borrowing and issuing equity. Indian banks Started b anking Services as a part of multiple services they offer to their clients from 1972. State bank of India started the merchant banking division in 1972. In the Initial years the SBI's objective was to render corporate advice And Assistance to small and medium entrepreneurs. Merchant banking activities is of course orga nized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationaliz ed banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited Companies. Some merchant banking outfits have entered into coll aboration with merchant bankers abroad with several branches Registration of Merchant bankers with SEBI It is mandatory for a merchant banker to register with the SEBI. Without holding a certificate of registration granted by the Securities and Exchange Board of I ndia, no person can act as a merchant banker in India. 1) Only a body corporate other than a non-banking financial company shall be eligible to get registration as merchant banker. 2) The applicant should not carry on any business other tha n those connected with the Securities market.

3) All applicants for Merchant Bankers should have qualification in Finance, law or Business Management. 4) The applicant should have infrastructure like office space, equipment, manpower etc. 5) The applicant must have at least two employe es with prior experience in merchant banking. 6) Any associate company, group co mpany, subsidiary or interconnected company of the applicant should not have bee n a registered merchant banker 7) The applicant should not have been involved in any securities scam or proved guilt for any offence 8) The applicant should hav e a minimum net worth of Rs.5 Crores. The various categories for which registrat ion can be obtained are: 1) Category I to carry on the activity of issue managem ent and to act as adviser, consultant, manager, underwriter, portfolio manager. 2) Category II - to act as adviser, consultant, co-manager, underwriter, portfol io 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 capit al requirement for carrying on activity as merchant banker: The capital requirem ent depends upon the category. The minimum net worth requirement for acting as m erchant 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) R egulations, 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 certific ate. Validity period of certificate of registration is three years from the date of issue. Three months before the expiry period, an application along with rene wal 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 sa tisfied renew certificate of registration for a further period of 3 years.

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, pri vate 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 TA CAPITAL MARKETS LTD ICICI BANK LTD RELIANCE SECURITIES LIMITED KOTAK MAHINDRA CAPITAL COMPANY LTD YES BANK LTD. Foreign Players in Merchant Banking: GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD. MORGAN STANLEY INDIA COMPANY PVT LTD BARCLAYS SECURITIES (INDIA) PVT. LTD BANK OF AMERICA, N.A DEUTSCHE BANK DEUTSCHE EQUITIES INDIA PRIVATE LIMITED

 BARCLAYS BANK PLC CITIGROUP GLOBAL MARKETS INDIA PVT. LTD. DSP MERRILL LYNCH LTD FEDEX SECURITIES LTD Note: Please find the List of all registered Merchant Bankers with SEBI at the e nd in Appendix-1 Major difference between Merchant banking and Investment Banking Sources of revenue could be [a] Fund based source & [b] Fee based source The fun d based income is that revenue gained from interest, lease rental, and as well a s income from capital market investments. The fee-based income is that source ga ined from banking, advisory services, custodial services etc. The major differen ce between the Merchant bankers and Investment Bankers is: Merchant Banking is p urely fee based. Investment banking is both fee based and fund based. A merchant banker can undertake only those activities, which are relating to securities ma rket and which do not require registration / have been granted exemption from re gistration 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 is sue Management Services acting like as Book Running Lead Manager/Lead Manager fo r the IPOs/FPOs/Right issues/Debt issues Managing advising on international offe rings of dept / equity i.e. GDR, ADR, bonds and other instruments Private placem ents of securities Primary or satellite dealership of GOVT securities Corporate advisory services relate to securities market eg: takeovers acquisitions and dis investments Stocking broking Advisory services for projects and Project appraisa ls. Syndication of rupee term loans International financial advisory services. P roject counseling and pre investment activities Undertaking Feasibility studies Issuing Project reports Design of capital structure Mobilization of funds from N RIs Foreign currency finance Mergers and takeovers Venture capital services Buy back and public deposits

Refund Banker Monitoring Agency Debenture Trustee Services of Merchant Banks in detail Project Counseling: Project counseling includes preparation of project reports, deciding upon the fi nancing pattern to finance the cost of the project and appraising the project re port with the financial institutions or banks. It also includes filling up of ap plication forms with relevant information for obtaining funds from financial ins titutions and obtaining government approval. 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: i nstrument designing, pricing the issue, registration of the offer document, unde rwriting support, and marketing of the issue, allotment and refund, listing on s tock exchanges. Issue Management: Management of issue involves marketing of corporate securities viz. equity share s, preference shares and debentures or bonds by offering them to public. Merchan t banks act as an intermediary whose main job is to transfer capital from those who own it to those who need it. After taking action as per SEBI guidelines, the merchant banker arranges a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issu e, registration of prospectus, launching publicity campaign and fixing date of b oard meeting to approve and sign prospectus and pass the necessary resolutions. Pricing of issues is done by the companies in consultant with the merchant banke rs. Managers, Consultants or Advisers to the Issue: The managers to the issue assist in the drafting of prospectus, application form s and completion of formalities under the Companies Act, appointment of Registra r for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies can appoint one or more agencies as man agers to the issue. Underwriting of Public Issue: Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue. Portfolio Management: Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and government securities. Por tfolio management refers to maintaining proper combinations of securities in a m anner that they give maximum return with minimum risk.

 Restructuring strategies A merger is a combination of two companies into a single company where one survi ves and other loses its corporate existence. A takeover is the purchase by one c ompany acquiring controlling interest in the share capital of another existing c ompany. Merchant bankers are the middlemen in setting negotiation between the tw o companies. Merchant bankers assist the management of the client company to suc cessfully restructure various activities, which include mergers and acquisitions , divestitures, management buyouts, joint venture among others. To help companie s achieve the objectives of these restructuring strategies, the merchant banker participates in different activities at various stages which include understandi ng the objectives behind the strategy (objectives could be either to obtain fina ncial, marketing, or production benefits), and help in searching for the right p artner in the strategic decision and financial valuation of the proposal. Off Shore Finance: The merchant bankers help their clients in the following areas involving foreign currency. (a) Long term foreign currency loans (b) Joint Ventures abroad (c) Fi nancing exports and imports (d) Foreign collaboration arrangements Non-resident Investment: The services of merchant banker includes investment advisory services to NRI in terms of identification of investment opportunities, selection of securities, in vestment management, and operational services like purchase and sale of securiti es. Loan Syndication: Loan syndication refers to assistance rendered by merchant bankers to get mainly term loans for projects. Such loans may be obtained from a single development f inance institution or a syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans from banks or financial institutions. Corporate Counseling and advisory services: Corporate counseling covers the entire field of merchant banking activities viz. project counseling, capital restructuring, public issue management, loan syndic ation, working capital, fixed deposit, lease financing acceptance credit, etc. M erchant bankers also offer customized solutions to their clients financial proble ms. Like determining the right debt-equity ratio and gearing ratio for the clien t; the appropriate capital structure theory is also framed. Merchant bankers als o explore the refinancing alternatives of the client, and evaluate cheaper sourc es of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordin ation with banks and financial institutions. Risk management is another area whe re advice from a merchant banker is sought. He advises the client on different h edging strategies and suggests the appropriate strategy.

 Placement and distribution The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, com mercial 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 represent s the wholesale reach of the merchant banker. The retail network depends on netw orking with investors. Role of merchant banker in a primary market issue management Merchant banker is the intermediary appointed by companies in the primary market issue. It has to look at the entire issue management and work as the Manager to the Public Issue. Principal steps that Merchant bankers have to perform in a br inging up a Public issue are as follows : Vetting of Prospects: The prospectus i s a document to communicate information about the company and the proposed secur ity issue to the investing public. The draft prospectus containing the disclosur es has to be vetted by SEBI before a public issue is made. Appointment of Underw riters: An underwriter agrees to subscribe to a given number of shares in the ev ent the public do not subscribe to them. The underwriter, in essence, stands gua rantee for public subscription in consideration for the underwriting commission. Appointment of bankers: The bankers to the issue collect money on behalf of the company from the applicants. Appointment of Registrars: The registrars to issue perform a series of tasks from the time the subscription is closed to the time the allotment is made. Appointment of Brokers and Principal Brokers: The brokers to the issue facilitate its subscription. Filing of the Prospectus with the Reg istrar of Companies Printing and dispatch of prospectus and application form: Af ter the prospectus is filed with the Registrar of Companies, the company should print the prospectus and the application form. Filing of Initial Listing Applica tion: Within ten days of filing the prospectus, the initial listing application must be made to the concerned stock exchanges, along with the initial listing fe es. Promotion of the Issue: The promotional campaign typically commences with th e filing of the prospectus with the Registrar of Companies and ends with the rel ease of the statutory announcement of the issue. Statutory Announcement: The sta tutory announcement of the issue must be made after seeking the approval of the lead stock exchange. This must be published at least ten days before the opening of the subscription list.

Collection of Applications: The statutory announcement (as well as the prospectu s) specifies when the subscription would open when it would close, and the banks where the applications can be made. Processing of Applications: The application forms received by the bankers are transmitted to the registrars to the issue fo r processing. Establishing the Liability Underwriters: If the issue is undersubs cribed, the liability of the underwriters has to be established. Allotment of Sh ares: If the issue is under-subscribed or just fully subscribed, the company may allot shares applied for by the applicants after securing the formal approval o f the concerned stock exchanges(s) Listing of the Issue: The detailed listing ap plication should be submitted to the concerned stock exchanges along with the li sting agreement and the listing fee. Costs of Public Issue: The cost of public i ssue is normally between 8 and 12 per cent depending on the size of the issue an d the level of marketing effort. The important expenses incurred for a public is sue are Underwriting Expenses, Brokerage, Fees to the Managers of the Issue, Fee s for Registrars to the Issue, Printing Expenses, Postage Expenses, Advertising and Publicity Expenses, Listing fees, Stamp duty. In addition to the above proce dural matter, the most important issue relates to the pricing of the issue. The merchant banker has to see that the issue is priced properly. Penalties Levied by SEBI on Merchant Bankers The Securities and Exchange Board of India (SEBI) notifies regulations pertainin g to the procedure of holding enquiries and imposing penalties on Merchant Banke rs. SEBI can appoint enquiry officers, can the officer will also be able to impo se the penalty on which the SEBI chairman will give the final verdict. The regul ations to be called Securities and Exchange Board of India (Procedures for Holdi ng Enquiry by Enquiry Officer and Imposing Penalty) Regulations (2002 )will cove r not just merchant bankers but all market intermediaries like portfolio manager s, registrars and share transfer agents, underwriters, debenture trustees, banke rs to an issue, foreign institutional Investors, custodians, depository particip ants, venture capital funds, mutual funds, collective investment schemes (CIS) a nd foreign venture capital investors and bring them under the ambit of SEBI. Acc ording to the notification, the penalty an enquiry officer can impose will be bo th minor and major. Among the minor penalties, the enquiry officer can issue war nings or censure, prohibit the intermediary from taking up new assignments or la unch a new scheme for a period of six months. It can also debar a partner or a w hole time director of the intermediary from carrying out activities as an interm ediary in the firm or company, and other capital market-related institutions for a period of six months. It can also suspend the certificate of registration for a period up to three months. Among the major penalties an enquiry officer can i mpose the cancellation of certificate of registration and suspension of certific ate of registration. However, the regulations says that no order under these reg ulations shall be passed excepting after holding an enquiry by an officer. To im plement these regulations, SEBI has amended regulations

pertaining to various intermediaries and some of its regulations like Insider Tr ading Regulations, SEBI (Prohibition of Fraudulent and Unfair Trade Practices re lating to Securities Market) Regulations and Takeover Code Regulations. Procedure for Inspection: SEBI may inspect books of accounts, records and documents of merchant bankers to ensure that the books of accounts are maintained in the required manner, that t he provisions act rules, regulations are compiled with, to investigate complaint s against the merchant banker and to investigate suomoto in the interest of secu rities business or investors interest in to the affairs of Merchant banker. SEBI may either give a reasonable notice or undertake inspection without notice in t he interest of investors. The findings of the inspection report are communicated to merchant banker. SEBI may appoint a qualified auditor to investigate in to t he books of accounts or the affairs of merchant banker. Penalties of Non complia nce of conditions for registration and contravention of the provisions of the MB regulations include suspension or cancellation of registration. A penalty of su spension of registration of a merchant banker may be imposed when: The merchant banker violates the provisions of act, rules or regulations The merchant banker: o Fails to furnish any information relating to his activities as merchant banke r as required by the board. o Furnished wrong or false information o Does not su bmit periodical returns, as required by the board. o Does not cooperate in any e nquiry conducted by the board. The merchant banker fails to resolve the complain ts of the investors or fails to give satisfactory reply to the Board in this beh alf. The merchant banker indulges in manipulating or price rigging or concerning activities. The merchant banker is guilty of misconduct or improper or un busin ess like or unprofessional conduct which is not in co ordinance with the code of conduct specified in schedule 3 The merchant banker fails to maintain the capit al adequacy requirement in accordance with the provisions of regulation 7. The m erchant banker fails to pay the fees The merchant banker violates the conditions of registration. The merchant banker does not carry out his obligations as spec ified in the regulation.

Defaults of The merchant banker and penalty points SEBI categorized defaults and the penalty points that they attract. ____________ _______________________________________________ Defaults penalty points _________________________________________________________ 1. General Defaults 2. Minor Defaults 3. Major Defaults 4. Serious Defaults 1 2 3 4 __________________________________________________________ General Defaults: For the purpose of penalty point, the following activities fall under general de fault and attract one penalty point. Non receipt of draft prospectus/letter of o ffer from the lead manager by SEBI, before filing with registrar of companies/st ock exchanges. Non receipt of inter se allocation of responsibilities of lead ma nagers in an issue by SEBI prior to the opening of the issue. Failure to ensure submission of certificate of minimum 90 % subscription to the issue as required under Govt of India Failure to ensure publicizing of dispatch of refund orders, shares/Debentures certificates, filing of listing application by the issuer as r equired under Govt of India press notification. Minor Defaults: The following activities fall under minor default and attract two penalty points . Advertisement, circular, broacher, press release and other issue related mater ials not being in conformity with contents of the prospects. Exaggerated informa tion or Information extraneous to the prospectus is given by the associated merc hant bankers in any press conference, Investor conference, brokers conference or other such conference /meet prior to the issue for marketing of the issue arrang ed/participated by the merchant banker. Failure to substantiate matters containe d in highlights to the issue in the prospectus. Violation of the Govt of India l etter regarding advertisements on new capital issues. Failure to exercise due di ligence in verifying contents of prospectus/ letter of offer.

Failure to provide adequate and fair disclosure to investors and objective infor mation about risk factors in the prospectus and other issue literature Delay in refund/allotment of securities. Non-handling of investor grievances promptly. Major defaults: The following activities fall under major default and attract three penalty poin ts. Mandatory underwriting not taken up by lead manager Excess number of lead ma nagers than permissible under SEBI Association of unauthorized merchant banker i n an Issue. Serious Defaults: The following activities fall under serious default and attract four penalty poi nts. Unethical practice by merchant banker and/or violation of code of conduct. Non cooperation with SEBI in furnishing desired information documents, evidence as may be called for. A merchant banker on reaching the penalty points of eight (8) attracts action from SEBI in terms of suspension/ cancellation of authorizat ion. To enable a merchant banker to take corrective action maximum penalty point s awarded in a single issue managed by a merchant banker are restricted to four (4) In the event of joint responsibility same penalty point is awarded for all l ead managers jointly responsible for the activity. In the absence of receipt of inter se allocation of responsibilities, all lead managers to the issue are awar ded the penalty point. Defaults in prospectus: If highlights are provided, the following deficiencies will attract negative poi nts 1) Absence of risk factors in highlights. 2) Absence of listing in highlight s. 3) Extraneous contents to prospectus, if stated in highlights. The maximum gr ading points of prospectus will be 10 and prospectus scoring greater than or equ al to 8 points are categorized as A+, those with 6 or less than 8 as A, with 4-6 points as B, and score of less than 4 points, the prospectus falls in category C.

General Negative Marks: If at all "Highlights" are provided in an issue: Risk factors should form part o f "Highlights", otherwise it will attract negative point of -1 Listing details, should form of part of " Highlights", otherwise it will attract negative point o f -0.5 Any matter extraneous to the contents of prospectus, if stated in highlig hts, will attract negative point of -0.5 CODE OF CONDUCT FOR MERCHANT BANKERS 1. A Merchant Banker shall make all efforts to protect the interests of investor s. 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 indep endent professional judgment. 5. A Merchant Banker shall endeavor to ensure that a. Inquiries from investors are adequately dealt with; b. Grievances of investor s 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 ava ilable to the investor under the regulatory system. 6. A Merchant Banker shall e nsure 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 t o make a balanced and informed decision. 7. A Merchant Banker shall endeavor to ensure that the investors are provided with true and adequate information withou t making any misleading or exaggerated claims or any misrepresentation and are m ade aware of the attendant risks before taking any investment decision. 8. A Mer chant Banker shall endeavor to ensure that copies of the prospectus, offer docum ent, letter of offer or any other related literature is made available to the in vestors at the time of issue or the offer. 9. A Merchant Banker shall not discri minate amongst its clients, save and except on ethical and commercial considerat ions. 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 p erforming for any client or has rendered to any client. 11. A Merchant Banker sh all 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 int erest situation that may arise in the conduct of its business or where any confl ict of interest arises, shall take reasonable steps to resolve the same in an eq uitable manner. 13. A Merchant Banker shall make appropriate disclosure to the c lient of its possible source or potential areas of conflict of duties and intere st while acting as Merchant Banker which would impair its ability to render fair , objective and unbiased services. 14. A Merchant Banker shall always endeavor t o render the best possible advice to the clients having regard to their needs. 1 5. A Merchant Banker shall not divulge to anybody either orally or in writing, d irectly or indirectly, any confidential information about its clients which has come to its knowledge, without taking prior permission of its clients, except wh ere 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 fi nancial status, which may adversely affect the interests of clients / investors is promptly informed to the clients and any business remaining outstanding is tr ansferred 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 Merch ant 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 ban king activity and any other activity. 19. A Merchant Banker shall have internal control procedures and financial and operational capabilities which can be reaso nably expected to protect its operations, its clients, investors and other regis tered entities from financial loss arising from theft, fraud, and other dishones t acts, professional misconduct or omissions. 20. A Merchant Banker shall not ma ke untrue statement or suppress any material fact in any documents, reports or i nformation furnished to the Board. 21. A Merchant Banker shall maintain an appro priate 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 Boa rd of India (Ombudsman) Regulations, 2003. 22. A Merchant Banker shall ensure th at the Board is promptly informed about any action, legal proceedings etc., init iated against it in respect of material breach or non compliance by it, of any l aw, 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 re ndering such advice. (b) In the event of an employee of the Merchant Banker rend ering such advice, the merchant banker shall ensure that such employee shall als o disclose the interests, if any, of himself, his dependent family members and t he 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 eff ective discharge of the compliance officers duties. 26. A Merchant Banker shall d evelop its own internal code of conduct for governing its internal operations an d laying down its standards of appropriate conduct for its employees and officer s in carrying out their duties. Such a code may extend to the maintenance of pro fessional excellence and standards, integrity, confidentiality, objectivity, avo idance or resolution of conflict of interests, disclosure of shareholdings and i nterests etc. 27. A Merchant Banker shall ensure that good corporate policies an d 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 otherwi se qualified to act in the capacity so employed or appointed (including having r elevant professional training or experience) 29. A Merchant Banker shall ensure that it has adequate resources to supervise diligently and does supervise dilige ntly persons employed or appointed by it in the conduct of its business, in resp ect of dealings in securities market.

30. A Merchant Banker shall be responsible for the acts or omissions of its empl oyees and agents in respect of the conduct of its business. 31. A Merchant Banke r shall ensure that the senior management, particularly decision makers have acc ess to all relevant information about the business on a timely basis. 32. A Merc hant Banker shall not be a party to or instrumental for a. Creation of false mar ket; b. Price rigging or manipulation or; c. Passing of unpublished price sensit ive information in respect of securities which are listed and proposed to be lis ted in any stock exchange to any person or intermediary in the securities market . 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 be en amended on December 19, 1997 to provide that: a. The applicant should be a fi t and proper person; b. A merchant banker has to seek separate registration for its underwriting or portfolio management activities; c. The categorization of me rchant 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 ca rrying any activities not pertaining to the securities market; and e. The applic ant should be a body corporate other than non-banking finance company. The Merch ant Bankers Regulations were amended on January 21, 1998 to provide time up to J une 30, 1998 to sever its activities or hive off its activities not pertaining t o 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 co mpulsory registration (section 451A), maintenance of liquid assets (section 451B ), creation of reserve fund (section 451C ) and all the provisions of the recent Directions relating to deposit acceptance and prudential norms. Merchant bankin g companies, to be eligible for the above exemption, are required to satisfy the following conditions: i. such companies are registered with the SEBI under sect ion 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; they acquire sec urities only as part of their merchant banking business; they do not carry on an y other financial activities as mentioned in section 451 (c ) of the RBI Act, 19 34; they do not accept / hold public deposits. ii. iii. iv. Maintenance of books of accounts, records etc. (1)Every merchant banker shall ke ep 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 posi tion. (2) Every merchant banker shall intimate to the Board the place where the books of accounts, records and documents are maintained. (3) Without prejudice t o sub- regulation (1), every merchant banker shall, after the end of each accoun ting period furnish to the Board copies of the balance sheet, profit and loss ac count and such other documents for any other preceding five accounting years whe n 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 d ocuments 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' rep ort 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 e xisting members with or without the right of renunciation the amount of the issu e 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 sha ll before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual rights, liabilities and oblig ations relating to such issue and in particular to disclosures, allotment and re fund. 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) Rupe es fifty crores but less than rupees one hundred crores-Three (c) Rupees one hun dred 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, allotm ent and refund are clearly defined, allocated and determined and a statement spe cifying such responsibilities is furnished to the Board at least one month befor e 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 suc h lead merchant banker shall clearly be demarcated and a statement specifying su ch responsibilities shall be furnished to the Board at least one month before th e opening of the issue for subscription. (2) No lead merchant banker shall, agre e to manage the issue made by any body corporate, if such body corporate is an a ssociate of the lead merchant banker. Lead merchant banker not to associate with a merchant banker without registratio n A lead merchant banker shall not be associated with any issue if a merchant bank er 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 f ive percent of the total underwriting commitment or rupees twenty-five lakhs, wh ichever is less: Provided that, if the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrang ement for having the issue underwritten to that extent by a merchant banker asso ciated 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 reasonablene ss 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 f ollowing documents, namely: (i) particulars of the issue; (ii) draft prospectus or where there is an offer to the existing shareholders, the draft letter of off er; (iii) any other literature intended to be circulated to the investors, inclu ding 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 a t 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 Region al Stock Exchanges, or with both. (3) The lead manager shall ensure that the mod ifications 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 Sch edule IV] Continuance of association of lead manager with an issue The lead manager undertaking the responsibility for refunds or allotment of secu rities in respect of any issue shall continue to be associated with the issue ti ll the subscribers have received the share or debenture certificates or refund o f excess application money; Provided that where a person other than the lead man ager is entrusted with the refund or allotment of securities in respect of any i ssue, the lead manager shall continue to be responsible for ensuring that such o ther person discharges the requisite responsibilities in accordance with the pro visions 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 offi cer shall either on their respective accounts or through their associates or rel atives enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course o f 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 tran saction for acquisition of securities of anybody corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering in to such transaction. Disclosures to the Board A merchant banker shall disclose to the Board as and when required, the followin g information, namely: (i) his responsibilities with regard to the management of the issue; (ii) any change in the information or particulars previously furnish ed, 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 as sociated with; (iv) the particulars relating to breach of the capital adequacy r equirement as specified in regulation 7; (v) relating to his activities as a man ager, 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 respon sible for monitoring the compliance of the Act, rules and regulations, notificat ions, guidelines, instructions etc., issued by the Board or the Central Governme nt and for redressed of investors grievances. (2) The compliance officer shall im mediately and independently report to the Board any non-compliance observed by h im and ensure that the observations made or deficiencies pointed out by the Boar d on \ in the draft prospectus or the Letter of offer as the case may be, do not recur. Scope for growth of Merchant Banking in India As planning and industrial policy of the country envisaged the setting of up of new industries and technology, greater financial sophistication and financial se rvices are required. There is a well proven link between economic growth and fin ancial technology. Economic development requires specialist financial skills: sa vings banks to marshal individual savings; finance companies for consumer lendin g and mortgage finance; insurance companies for life and property cover; agricul tural banks for rural development; and a range of specialized government or gove rnment sponsored institutions. As new units have been set up and business is exp anding, they require additional financial services. A public equity or debt issu e is the logical source of fund in this situation and merchant banks can tap thi s opportunity of growth. The areas of great scope could be, Growth of Primary market: If the primary market grows and number of issues increases, the scope of merchan t banking will be enhanced. Entry of Foreign Investors: Now India capital market directly taps foreign capital through euro issues.FDI i s increased in capital market. So Merchant bankers are required to advice them f or their investment in India. The increasing number of joint ventures also requi res expert services of Merchant Bankers. If more and more NRIs participate in ca pital market, there will be great demand for merchant banker services. Changing policy of Financial Institutions: Now the lending policies of financial institutions are based on project orientat ion, So the merchant banker services will be needed by corporate enterprise to p rovide expert guidance. Development of debt markets: If the debt market is enhanced, there will be tremendous scope for Merchant bank ers. Now NSE and OTCEI are planned to raise their fund through debt instruments. Corporate restructuring:

Due to liberalization and globalization Companies are facing lot of competition. In order to compete, they have to go for restructuring, merger, acquisitions or disinvestments. They may offer good opportunities to merchant bankers The scope could be extended to Advising the company on designing of its Capital Structure . Advising the company on the instrument to be offered to the public. Pricing of the instrument. Advising the company on Legal/ regulatory matters and interacti on with SEBI/ ROC/ Stock Exchanges and other regulatory authorities. Assisting t he company in marketing the issue. In channelizing the financial surplus of the general public into productive investment avenues. To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, adv ertising agency, printers, underwriters, brokers etc. 9. To ensure the complianc e with rules and regulations governing the securities market 1. 2. 3. 4. 5. 6. 7. 8. THE FACTORS ON WHICH GROWTH OF MERCHANT BANKING DEPENDS: 1. 2. 3. 4. Planning an d industrial policy of the country i.e. India in this case Prevailing Economic c ondition of the country Regulatory system of the market and economy prevailing i n India Confidence of the people, traders, buyers, marketers, business houses, f inancial institutions etc 5. The economic environment of the outside world. 6. C ompetition among the existing players and the upcoming entrants.

APPENDIX-1 List of All Merchant Bankers Registered with SEBI A.K. CAPITAL SERVICES LTD ALLAHABAD BANK ALLBANK FINANCE LTD. ALMONDZ GLOBAL SEC URITIES LTD (FORMERLY ALLIANZ SECURITIES LTD) AMBIT CORPORATE FINANCE PRIVATE LT D ANAND RATHI FINANCIAL SERVICES LIMITED (FORMERLY ANAND RATHI SECURITIES PVT LT D) ANDHRA BANK ANTIQUE CAPITAL MARKETS PVT. LTD. ARIHANT CAPITAL MARKETS LTD ARY AMAN FINANCIAL SERVICES LIMITED ASHIKA CAPITAL LTD ASIT C. MEHTA INVESTMENT INTE RRMEDIATES LTD ATHERSTONE CAPITAL MARKETS LTD AVENDUS CAPITAL PVT. LTD. BNP PARI BAS BOB CAPITAL MARKETS LTD BRICS SECURITIES LTD CALYON BANK (FORMERLY CREDIT AG RICOLE INDOSUEZ) CENTRUM CAPITAL LIMITED (FORMERLY CENTRUM FINANCE LTD) COMFORT SECURITIES PVT LTD CORPORATE PROFESSIONALS CAPITAL PVT. LTD. CORPORATE STRATEGIC ALLIANZ PVT LTD D & A FINANCIAL SERVICES PVT. LTD. DAIWA SECURITIES SMBC INDIA PVT LTD CREDIT SUISSE SECURITIES (INDIA) PVT LTD DALMIA SECURITIES PVT. LTD. DAR ASHAW & COMPANY PRIVATE LTD (FORMERLY BADAR FINANC DBS BANK LTD EDELWEISS CAPITA L LTD ELARA CAPITAL (INDIA) PRIVATE LIMITED EMKAY SHARE AND STOCK BROKERS LTD EQ UIRUS CAPITAL (P) LTD ESCORTS SECURITIES LTD FIRSTCALL INDIA EQUITY ADVISORS PVT . LTD. FORTRESS CAPITAL MANAGEMENT SERVICES PVT LTD FORTUNE FINANCIAL SERVICES ( INDIA) LTD GSFS CAPITAL & SECURITIES LTD HDFC BANK LTD IDBI BANK LTD.(FORMERLY I NDUSTRIAL DEVELOPMENT BANK OF INDIA) IDBI CAPITAL MARKET SERVICES LTD IDFC-SSKI LTD.

IMPERIAL CORPORATE FINANCE & SERVICES PVT LTD IND GLOBAL CORPORATE FINANCE PVT L TD INDIA CAPITAL MARKETS PRIVATE LIMITED INDIA INFOLINE LTD.(FORMERLY INDIA INFO LINE SECURITIES PVT LTD) INDIABULLS SECURITIES LIMITED (FORMERLY ORBIS SEC LTD) INDUSIND BANK LTD INFRASTRUCTURE DEVELOPMENT FINANCE COMPA ING VYSYA BANK LTD. ( ERSTWHILE THE VYSYA BANK LTD.) INTEGRATED ENTERPRISES (INDIA) LTD (INTEGRATED AD VISORY SERV INTENSIVE FISCAL SERVICES PVT LTD INTER CORPORATE FINANCIERS & CONSU LTANTS LTD. JEFFERIES INDIA PRIVATE LIMITED KARN MERCHANT BANKERS LTD. KARVY INV ESTOR SERVICES LTD KEYNOTE CORPORATE SERVICES LTD KHANDWALA INTEGRATED FINANCIAL SERVICES PVT LTD KHANDWALA SECURITIES LTD LAZARD INDIA PRIVATE LTD ( LAZARD CRE DIT CAPITAL LTD.) LKP SECURITIES LTD (FORMERLY LKP SHARES AND SECURITIES LTD) LO DHA CAPITAL MARKETS LTD LSI FINANCIAL SERVICES PVT. LTD. MACQUARIE INDIA ADVISOR Y SERVICES PVT LTD MAPE ADVISORY GROUP PVT LTD MASTER CAPITAL SERVICES LTD MEGHR AJ SP CORPORATE FINANCE (PVT) LTD MONEY MATTERS INVESTMENT ADVISORS PRIVATE LIMI TED MOTILAL OSWAL INVESTMENT ADVISORS PVT. LTD. MPA FINANCIAL SERVICES LIMITED M UNOTH FINANCIAL SERVICES LTD N M ROTHSCHILD AND SONS (INDIA) PVT LTD NETWORTH ST OCK BROKING LTD. NIRBHAY CAPITAL SERVICES PVT LTD NOMURA FINANCIAL ADVISORY AND SECURITIES (INDIA) PVT. LTD. NORTHBRIDGE CAPITAL LIMITED ORIENTAL BANK OF COMMER CE PADMAKSHI FINANCIAL SERVICES LIMITED PIONEER INVESTCO PL CAPITAL MARKETS PVT LTD PNB GILTS LIMITED PNR SECURITIES LTD PRIME SECURITIES LTD PUNEET ADVISORY SE RVICES PVT LTD R R FINANCIAL CONSULTANTS LTD RABO INDIA SECURITIES PRIVATE LIMIT ED REAL GROWTH SECURITIES PVT. LTD. RELIGARE CAPITAL MARKETS LIMITED

SAFFRON CAPITAL ADVISORS PVT LTD SAL SECURITIES PVT. LTD. SICOM LTD SMC CAPITALS LIMITED SOBHAGYA CAPITAL OPTIONS LTD. SOCIETE GENERALE SPA MERCHANT BANKERS LIM ITED SPARK CAPITAL ADVISORS (INDIA) PVT LTD SREI CAPITAL MARKETS LTD STANDARD CH ARTERED-STCI CAPITAL MARKETS LIMITED STCI PRIMARY DEALER LIMITED SUMEDHA FISCAL SERVICES LTD TAIB CAPITAL CORPORATION LIMITED TAMILNAD MERCANTILE BANK LTD THE C ATHOLIC SYRIAN BANK LTD TRUST INVESTMENT ADVISORS PVT LTD ULJK SECURITIES PVT. L TD. UNION BANK OF INDIA UNITED BANK OF INDIA VALUE LINE ADVISORS PVT LTD.(FORMER LY S B & T FINANCE PRIVATE LTD) VC CORPORATE ADVISORS PVT. LTD. (FORMERLY ECCENT RIC CAPITAL PVT LTD.) VCK CAPITAL MARKET SERVICES LTD. AXIS BANK LTD.(FORMERLY U TI BANK LTD.) BAJAJ CAPITAL LTD TATA CAPITAL MARKETS LTD ICICI BANK LTD (private ) ICICI SECURITIES LTD RELIANCE SECURITIES LIMITED KOTAK MAHINDRA CAPITAL COMPAN Y LTD YES BANK LTD. BANK OF AMERICA, N.A MORGAN STANLEY INDIA COMPANY PVT LTD DE UTSCHE BANK & DEUTSCHE EQUITIES INDIA PRIVATE LIMITED BARCLAYS BANK PLC BARCLAYS SECURITIES (INDIA) PVT. LTD. CITIGROUP GLOBAL MARKETS INDIA PVT. LTD. DSP MERRI LL LYNCH LTD FEDEX SECURITIES LTD GOLDMAN SACHS(INDIA) SECURITIES PVT. LTD. J P MORGAN INDIA PVT. LIMITED SBI CAPITAL MARKETS LTD BANK OF MAHARASHTRA IFCI FINAN CIAL SERVICES LTD KARUR VYSYA BANK LTD, PUNJAB NATIONAL BANK STATE BANK OF BIKAN ER AND JAIPUR

BIBILIOGRAPHY 1. Merchant Banking Principles and Practices by H.R. Machiraju 2. Financial Serv ices by Eric Banks 3. www.sebi.gov.in 4. http://www.indianmba.com/Faculty_Column /FC378/fc378.html 5. http://www.asialaw.com/Article/1988860/Merchant-Banking.htm l 6. http://books.google.co.in/books?id=hp4BauyTxUC&pg=PA109&lpg=PA109&dq=scope+of +Merchant+banking+in+India&sourc e=bl&ots=BTTHpGEALi&sig=HWuUScyl7m69LzePBvQ2ihV dfHk&hl=en&ei=RgekSs mRCoSIkAXA1pjXDw&sa=X&oi=book_result&ct=result&resnum=10#v= onepage&q= scope%20of%20Merchant%20banking%20in%20India&f=false 7. www.wikipedia .com

What didnt we understand? What are Highlights? in Merchant Banking Jargon. Why did Merchant Banking kick sta rt so late in India compared to rest of the world? Why Merchant Banking is limit ed to only Fee based, when there is so much of scope? What are the reasons for res tricting Merchant Bankers to only NBFCs. What are the growth dependency factors of Merchant banking as a growing sector?