MERCHANT BANKING

CHAPTER 1

CONCEPT OF MERCHANT BANKING

The dictionary meaning of merchant bank refers to an organization that underwrites

corporate securities and advises such clients on issues like corporate mergers, etc.
involved in the ownership of commercial ventures. This organization may be a bank,
corporate body, firm or proprietary concern.

The Securities and Exchange Board of India has defined merchant banks as any
person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory service in relation to such issue
management.

In Indian context this definition suits well. Merchant banking in India started with the
management of public issues and loan syndication and has been slowly and gradually
covering activities like project counselling, portfolio management, investment
counselling and mergers and amalgamation of the corporate firms. Although, merchant
banking organizations present a long list of services they contemplate to render to their
clients but the main services so far being rendered by them are those as authorized by
the SEBI.

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CHAPTER 2

HISTORY OF MERCHANT BANKING

Origin of merchant banking

The origin of merchant banking can be traced back to the 13 th century when the
development of international trade and finance took place. The early merchant bankers
were traders of commodities. These bankers also acted as bankers to the kings of
European States and financed continental wars and coastal trades. The earlier merchant
bankers used to lend their name to the lesser known traders by accepting bills through
which they guaranteed that the holder of the bill would receive full value on the date of
payment. Hence the name merchant was used because of its roots in merchant trade.

The growth of merchant banking in India

Formal merchant activity in India was originated in 1969 with the merchant
banking division setup by the Grindlays Bank, the largest foreign bank in the country.
The main service offered at that time to the corporate enterprises by the merchant banks
included the management of public issues and some aspects of financial consultancy.
Following Grindlays Bank, Citibank set up its merchant banking division in 1970.The
division took up the task of assisting new entrepreneurs and existing units in the
evaluation of new projects and raising funds through borrowing and equity issues.
Management consultancy services were also offered. Merchant bankers are permitted to
carry on activities of primary dealers in government securities. Consequent to the
recommendations of Banking Commission in 1972, that Indian banks should offer
merchant banking services as part of the multiple services they could provide their
clients, State Bank of India started the Merchant Banking Division in 1972. In the initial

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years the SBIs objective was to render corporate advice and assistance to small and
medium entrepreneurs.

The commercial banks that followed State Bank of India were Central Bank of
India, Bank of India and Syndicate Bank in 1977.Bank of Baroda, Standard Chartered
Bank and Mercantile Bank in 1978 and United Bank of India, United Commercial
Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank in late 70s and
early 80s. Among the development banks, ICICI started merchant banking activities in
1973 followed by IFCI (1986) and IDBI (1991).

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CHAPTER 3

IMPORTANCE, NEED AND ROLE OF MERCHANT BANKERS

Important reason for the growth of merchant banking has been developmental
activity throughout the country, exerting excess demand on the sources of funds for
ever expanding industry and trade thus, leaving a widening gap unbridged between the
supply and demand of inventible funds. All Indian financial institutions and
experienced resources constraint to meet the ever increasing demands for funds from
the corporate sector enterprises. In the circumstances corporate sector had the only
alternative to avail of the capital market services for meeting their long-term financial
requirements through capital issues of equity and debentures. With the growing demand
for funds there was pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field of merchant banking
and share the growing capital markets. With the result, all the commercial banks in
nationalized and public sector as well as in private sector including the foreign banks in
India have opened their merchant banking windows and are competing in this field.
There has been a mushroom growth of financial consultancy firms and broker firms
doing advisory functions as well as managing public issues in syndication with other
merchant bankers.

Notwithstanding the above facts, the need of merchant banking institutions is

felt in the wake of huge public savings lying still untapped. Merchant banks can play
highly significant role in mobilizing funds of savers to investible channels assuring
promising return on investments and thus can help in meeting the widening demand for
investible funds for economic activity. With the growth of merchant banking profession
corporate enterprises in both public and private sectors would be able to raise required
amount of funds annually from the capital market to meet the growing requirements for
funds for establishing new enterprises, undertaking expansion or modernization or

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diversification of the existing enterprises. This reinforces the need for a vigorous role to
be played by merchant banks.

Merchant banks have been procuring impressive support from capital market for
the corporate sector for financing their projects. This is evidenced from the increasing
amount raised form the capital market by the corporate enterprises year after year.

Merchant bankers, with their skills, updated information and knowledge,

provide service to the corporate units and advise them on such requirements to be
complied with for raising funds from the capital market under different enactments viz.
Companies Act, Income-tax Act, Foreign Exchange Regulation Act, Securities
Contracts (Regulation) Act and various other corporate laws and regulations.

Merchant bankers advise the investors of the incentives available in the form of
tax reliefs, other statutory relaxations, and good return on investment and capital
appreciation in such investment to motivate them to invest their savings in securities of
the corporate sector. Thus, the merchant bankers help the industry and trade to raise
funds and the investors to invest their saved money in sound and healthy concerns with
confidence, safety and expectation for higher yields.

Role of Merchant Banker

The role of merchant banker is dynamic in the wake of diverse nature of

merchant banking services. Merchant bankers dynamism lies in promptly attending to
the corporate problems and suggests ways and means to solve it. The nature of merchant
banking services is development oriented and promotional to help the industry and trade
to grow and survive.

He is always awake to renew his skills, develop expertise in new areas so as to

equip himself with the knowledge and techniques to deal with emerging new
problems of corporate business world.

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He has to keep pace with the changing environment where government rules,
regulations and politics affecting business conditions frequently change; where
science and technology create new innovations in production processes of
industries.

Merchant banker has to think and devise new instruments of financing industrial
projects.

He has to assume wider responsibilities of saving industrial units from going

sick and guiding industries to be setup in industrially backward areas to
eliminate regional imbalances in industrial development of the country.

He has to guide the wider section of the community possessing surplus money to
invest in corporate securities and other productive investment channels.

He has to help the industry in different forms to ensure that it runs risk free and
devoid of uncertainty by assisting the promoters with his knowledge and skills
to resolve the problems being faced by them.

He has to watch the interest and win over the confidence of the government, its
agencies, along with the entrepreneurs, the investors and the whole community.

He must bridge the communication gap between different sections and resolve
the problem being faced in different areas concerned with the business world.

In the days ahead, merchant bankers have very significant role to play tuning
their activities to the requirements of the growth pattern of the corporate sector, the
industry and the economy as a whole which is, in itself, a challenging task and to meet
these challenges merchant bankers will have to be more vigorous and strategic in
playing their role. They will have also to adopt new ways and means in discharging
their role.

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CHAPTER 4

Merchant Banking: Objectives

Merchant Banker plays a vital role in the economic and financial development
of the country. As a result of economic and financial liberalization new companies are
formed and number of issues floated to raise resources from the investor community.
Considering the significance of the issue the Government of India instituted SEBI in
1990 to regulate and control various market intermediaries. SEBI issued various rules
and regulations for each and every segment of the capital market. To regulate Merchant
bankers, with the twin objective viz., investor protection and development of the capital
market, SEBI issued rules and regulations for Merchant Bankers. Subsequent
amendments also have been made to these regulations to further strengthen this segment
of the securities industry. These regulations (Merchant Banking) specified that every
company desires to float an issue to the public should engage Merchant Banker
(Registered under these regulations with SEBI) as Lead Manager. In this context
Merchant Banker gained the importance in the Indian Securities Industry. In the wake
of economic reforms and financial liberalization the need for financial resources has
significantly increased. As an intermediary-Merchant Banker plays a crucial role in
exploring the ways and means for the funds. Besides, issue management, Merchant
Banker also performs several other important functions like underwriting of securities,
Private placement of securities, corporate advisory services e.g., Takeovers,
Acquisitions, Disinvestments Managing & International offerings of debt/equity, i.e.
GDR, ADR, Primary dealership of government securities, Syndication of rupee, term
loans, international financial advisory services, etc. which require special skills.

Having given a serious and careful thought to securities industry reforms, SEBI has
taken efforts seriously to boost the splendid endeavor of securities market
intermediaries. As a result, Merchant Bankers came into being to look after the

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promotion and administration of issues. It is well known fact that without adequate
professional support of Merchant Bankers the securities industry cannot prosper

Merchant Banking for India: Advantages

The bane of Indian capital markets today is lack of investor confidence. This is
reflected in the poor performance in the primary and secondary markets. The cause for
the existing situations are many but primarily arise on account of lack of liquidity,
unscrupulous issuers and Merchant Bankers and poor or unappeased issues. Merchant
banking can solve this problem because investors would be dealing with reputed
merchant bankers in the primary market rather than unknown issuers.

The Merchant Banks, whatever are their issue management techniques have
their own capital on hold. The issues are likely to be properly appraised and priced.
Merchant banks would hold the issue until the market conditions are appropriate for
issue, thus reducing risk exposure of investors to gestation for issue. Merchant Banks
make the primary market for IPOs thus assuring protection to the issuers also about
subscription. In sum, the quality of pricing appraisal and primary market functions will
improve resulting in substantial improvement in investor confidence. The necessity of
Merchant Banking is indicated in the view of the wide industrial base of the Indian
Economy.

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CHAPTER 5

ORGANIZATIONAL SETUP OF MERCHANT BANKERS IN INDIA

In India a common organizational setup 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, Canara Bank, Punjab National Bank, Bank
of India, etc. Some firms are also organized by financial and technical consultants and
professionals. Securities and Exchange Board of India 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 setup Indias merchant
banking organizations can be categorized into four 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 setup plays a
role on the lines of government priorities and policies.

(B) Banker Base

These merchant bankers function as division/subsidiary of banking organization.

The parent banks are either nationalized commercial bank or the foreign banks
operating in India. These organizations have brought professionalism in merchant
banking sector and they help their parent organization to make a presence in capital
market.

(C) Broker Base

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In the recent past there has been an inflow of qualified and professionally skilled
brokers in various stock exchanges of India. These brokers undertake merchant banking
related operations also like providing investment and portfolio management services.

(D) Private Base

These merchant banking firms are originated in private sector. These

organizations are the outcome of opportunities and scope in merchant banking business
and they are providing skill-oriented specialized services to their clients. Some foreign
merchant bankers are also entering either independently or through some collaboration
with their Indian counterparts. Private sector merchant banking firms have come up
either as the sole proprietorship or public limited companies. Many of these firms were
in existence for quite some times before they added a new activity in the form of
merchant banking services by opening new divisions on the lines of commercial banks
and All India Financial Institutions.

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CHAPTER 6

QUALITIES OF GOOD MERCHANT BANKERS

Merchant bankers are individual experts who organize and manage the merchant
banks. For the success of merchant banks operations, the qualities which merchant
bankers should have are discussed below:-

1. Leadership Merchant banker should posses all relevant skills, updated

knowledge to interact with the clients and effectively communicate. Leadership
is synonymous with followers who follow the one who leads.

2. Aggressive action Aggressiveness is a personality trait of a good leader but in

merchant banking it has a wider connotation. Aggressive merchant bankers are
always looking for new business. A good merchant banker is one who does not
allow his client to think anything outside except what has been advised.
Therefore, promptness in grasping the clients problems and providing better
choice amongst alternative solutions evidence aggressive approach in the
profession to hold the clients interest in entirety for the present as well as the
future.

3. Co-operation and friendliness No doubt, these two characteristics are the

symbols of good leadership but it hardly needs to be stressed that cooperation
and friendliness coupled with persuasiveness are the main instruments with
which a merchant banker mixes with the people, gathers information, obtains
business mandate and renders satisfactory services to the clients.

4. Contacts Success of a merchant banker depends upon his sociable nature and
the richness of wider contacts. The scope of contact encompasses intimate
contiguity and acquaintances within his own organization, Central and State

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Government Offices where compliances under various relevant enactments are

to be reported, Indian and foreign banks, financial institutions at Central and
State levels, promoters/directors/owners and chief executives of the private and
public enterprises which would be prospective beneficiaries of merchant
banking services.

5. Attitude towards problem solving The most important personality trait of a

merchant banker is his attitude towards problem solving. Every client coming to
him has got to return fully satisfied having consulted a merchant banker.
Positive approach to understand the view point of others, their difficulties and
their adverse circumstances is possible only when a person is skilled in human
relations particularly the inter-personal and intra-personal behaviour.

6. Inquisitiveness for acquiring new skills, information and knowledge

Merchant bankers live on the wits they earn by giving information to needy
clients. Therefore, they should keep abreast with latest information in the area of
the service product, they market. This is possible if merchant bankers posses the
quality of inquisitiveness.

Nevertheless, merchant banker should possess super business acumen, managerial

abilities, administrative capacities and salesmanship so as to understand the problems of
trade and industry, devise ways and means to sort out and resolve those problems and
sell the service product to the needy clients.

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CHAPTER 7

REQUIREMENTS FOR SETTING UP A MERCHANT BANKING

OUTFIT

1. Formation of the Business Organisation

SEBI act, 1992 does not prescribe any specific form of business organization to
carry on the activities as merchant banker. However, the types of organizations are
listed below:

a) Sole proprietorship

b) Partnership firm

c) Hindu Undivided Family (HUF)

d) Corporate Enterprises

e) Co-operative Society

Generally it is preferred that the Merchant Banking outfit be a registered company.

Merchant Banks are generally setup as subsidiary companies of banks (Public or
Private). For example, SBI caps, ICICI Securities etc.

2. Adoption of a viable business plan

All the basic tests required to find out whether the business to be undertaken is
viable or not are also applicable to a Merchant Banking setup. Capital adequacy,
profitability, growth opportunities and current market size are some of the factors
which need to be looked into.

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3. Registration of Merchant Bankers

1. Application for grant of certificate

2. An application for grant of a certificate needs to be made to SEBI .

In India, merchant banks operate in the form of Divisions of Indian and Foreign
banks and financial institutions, subsidiary companies established by banks like SBI
Capital Markets Ltd., can Bank Financial Services Ltd., PNB Capital Services Ltd., etc.
Securities and Exchange Board of India (SEBI) has divided merchant bankers into four
categories based on its capital requirements, which are as follows: -

CATEGORIES ACTIVITIES NETWORTH

Category I To carry on the activity of issue management and to Rs.1crore

act as adviser, consultant, manager, underwriter,
portfolio manager.

Category II To act as adviser, consultant, co-manager, Rs.50 lakhs

underwriter, portfolio manager.

Category III To act as underwriter, adviser or consultant to an Rs. 20 lakhs

issue.

Category IV To act only as adviser or consultant to an issue Nil

Merchant Bankers are classified into 4 categories as shown in the above table
having regard to their nature and range of activities and their responsibilities to SEBI,

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investors and issuers of securities. The minimum net worth and initial authorization fee
depends on the category. The first category consists of merchant bankers who carry on
any activity of issue management, determining financial structure, tie-up of financiers,
advisor or consultant to an issue, portfolio manager and underwriter. The second
category consists of those authorized to act in the capacity of co-manager/advisor,
consultant, and underwriter to an issue or portfolio manager. The third category consists
of those authorized to act as underwriter, advisor or consultant to an issue. The fourth
category consists of merchant bankers who act as advisor or consultant to an issue.

To carry on the activity as underwriter or portfolio manager a separate certificate of

registration needs to be obtained from SEBI.

3. Application to conform to the requirements

The application should conform to all the requirements under the SEBI guidelines,
otherwise it may be rejected.

4. Furnishing of information, clarification and personal representation

The Board may require the applicant to furnish further information or clarification
regarding matters relevant to the activity of a merchant banker for the purpose of
disposal of the application. The applicant or its principal officer may appear before the
Board for personal representation.

5. Consideration of application

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The Board shall take into account for considering the grant of a certificate, all
matters, which are relevant to the activities relating to merchant banker and in
particular the applicant complies with the following requirements, namely: -

the applicant shall be a body corporate other than a non- banking financial
company

the merchant banker who has been granted registration by the Reserve Bank of
India to act as a Primary or Satellite dealer may carry on such activity subject to
the condition that it shall not accept or hold public deposit

the applicant has the necessary infrastructure like adequate office space,
equipments, and manpower to effectively discharge his activities

the applicant has in his employment minimum of two persons who have the
experience to conduct the business of the merchant banker

a person directly or indirectly connected with the applicant has not been granted
registration by the Board;

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

the applicant has the professional qualification from an institution recognised by

the Government in finance, law or business management

Grant of certificate to the applicant is in the interest of investors.

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6. Procedure for Registration

The Board on being satisfied that the applicant is eligible shall grant a certificate. On
the grant of a certificate the applicant shall be liable to pay the fees as prescribed.

7. Payment of fees and the consequences of failure to pay fees

Every applicant eligible for grant of a certificate shall pay such fees in such manner and
within the period specified.

Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the
Board may suspend the registration certificate, whereupon the merchant banker shall
cease to carry on any activity as a merchant banker for the period during which the
suspension subsists.

The Merchant Bank can commence business on acquisition of a Certificate of

Registration from the SEBI after completion of the above mentioned formalities.

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CHAPTER 8

SERVICES PROVIDED BY MERCHANT BANKERS

ISSUE MANAGEMENT:

The public issue of securities is the core of merchant banking function. At one
time it was constructed as the sole function. Merchant bankers were identified as issue
houses. It was later perceived that they provide other financial services. The merchant
bankers help corporate to raise money from the markets through the issue of shares,
debentures, bonds etc. They are designated as managers to the issue. Their main
business is to attract public money to capital issues.

They usually render the following services:

Drafting of prospectus and getting it approves from the stock exchanges.

Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers etc.
Obtaining the consent of all the agencies involved in the public issue.
Holding road shows, to sell the issue. These shows are held for the
analysts, brokers & institutional investors. The purpose of these shows is
to answer queries from these people about the company and the project
for which the funds are being raised.
Deciding the pattern of advertising.
Deciding the branches where application money should be collected.
Deciding the dates of opening and closing of the issue.

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Underwriting

Meaning

The word underwriting was coined by British Merchants who used to write their
names at the end of marine insurance document wherein each agreed to assure joint
risk.

The dictionary meaning of underwriting is to agree to sell bonds, etc. to the public, or
to furnish the necessary money for such securities and to buy those which cannot be
sold.

Underwriting is an important primary market activity performed by stock brokers,

merchant bankers and underwriters approved by SEBI for this purpose. It is related to
marketing and merchant banking for an issue. The industry positions are measured by
the amount of underwriting one does.

Underwriters are distributors for the financial products- assuring a sale and if the sale
does not actually take place, they agree to pick up the residual. It is an assurance against
the possible failure of the issue and the underwriters have to step in if the issue remains
under subscribed to the extent of the amount underwritten. If the market does not take
the share, it is an indication of overpricing of scrip. As such, the underwriter exposes
himself to risk on account of fall in market price and blockening his funds.

Underwriting offer is similar to insurance business, where the insurer is exposed to risk
to the extent of amount insured, but the only game is the insurance commission. In
underwriting, the compensation is underwriting commission. The underwriting decision
is evaluation of risk and probable loss which can also be reduced by sub-underwriting.

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In India underwriting commission is regulated by statute at a maximum of 2.5%.

Similarly, the entry into this business is also regulated by SEBI thereby only SEBI
registered agencies can act as underwriters. These are:-

1. Category 1,2 & 3 Merchant bankers.

2. Underwriters.

3. Stockbrokers.

Underwriting and SEBI guidelines

According to SEBI guidelines on investor protection and disclosure dated 11/06/1992,

underwriting was mandatory for the full issue amount for each issue of capital to the
public. This has since been relaxed in view of high costs involved and now the
underwriting is optional.

The lead managers are required to satisfy themselves that the financial of the
underwriters are adequate for them to undertake their underwriting commitments; such
opinion has to be included in the prospectus also.

Underwriting agreement

To avoid disputes between the underwriters and Issuer Company, SEBI has formulated a
model underwriting agreement which seeks to standardize the legal relationship
between the two parties. It provides clear guidelines for resolving the issues of disputes.
It stipulates several norms for interest of both the parties including the time limit within
which the issue should open from the date of agreement i.e. three months.

The practice in our country is that lead managers obtain blank and undated consents
from the underwriters which the underwriters do in order to get the business and there
have been cases where the issues really came even after one year of sending consents.

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The underwriters shall be entitled to appoint sub-underwriters but the main underwriter
will be primarily responsible. The underwriters are also asked to produce a statement of
devolvement of issues and a statement of declaration of net worth alongwith Chartered
Accountants Certificate at the time of sending consents. All underwriters who are
members of recognized stock exchanges have also to obtain permission to act as
underwriter from their Stock Exchange.

Underwriting agreement is a legally enforceable contract between a company or an

issuer and the underwriter. There is no legal difference between underwriting and
contingent underwriting as all underwritings are dependent on a contingency.
Sometimes, a company enters into a standby arrangement whereby there is an
agreement between the company and an undertaker who agrees to apply for shares, if
not subscribed by public. This is also an underwriting agreement.

Evaluation by underwriter:

Since the underwriters contingent stake is involved in any issue, it is desirable for any
underwriter to evaluate the project or issue before consenting to act as an underwriter.
He should stress upon following points while deciding whether to underwrite and how
much to underwrite.

1. Companys standing and past track record

2. Management of the company, competence of promoters and professional

approach.

3. Objects of the proposed issue.

4. Project details, means of finance, pricing and marketing.

5. Foreign participation in technology, finance and management.

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6. Price of the issue and listed price of companys shares or of other companies
in industry.

7. Pending disputes and litigations.

8. Statutory clearances.

9. Financial institutions loans and participation in equity.

What the company looks for in underwriters:

The companies or their lead managers appoint underwriters on the basis of their
standing in the market and past experience as to procurement and honouring of
commitments.

The major points that are looked into are:-

1. Financial strength of the underwriters.

2. Experience in primary market.

3. Primary market network.

4. Past performance and procurements.

5. Outstanding underwriting commitments.

Sub-underwriting

The underwriter shall be entitled to arrange for sub-underwriting of his underwriting

obligation on his own account with any person, broker or underwriter on terms and
conditions to be agreed upon between them. Notwithstanding any such sub-
underwriting arrangement, the main underwriter only shall be primarily responsible for

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 MERCHANT BANKING

sub-underwriting and any failure or default on the part of sub-underwriters to discharge

their respective sub-underwriting obligation, shall not exempt or discharge the
underwriter of his underwriting obligation to the company.

Wherever such arrangements are done, it should be informed to the company, lead
managers and concerned stock exchanges.

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 MERCHANT BANKING

Loan Syndication

Loan syndication or credit syndication refers to the services rendered by the merchant
bankers in arranging and procuring credit from financial institutions, banks and other
lending and investment organizations for financing the clients project cost or meeting
working capital requirements. In other words, it is a project finance service. In sequence
of merchant banking services it ranks next to project counselling.

Once the client company has decided about the project proposed to be undertaken, the
next step is looking for the sources from where funds could be procured to implement
the project. The responsibility of locating the sources of finance, approaching these
sources by putting in requisite prescribed applications and complying with all
formalities involved in the sanction and disbursal of loan rests with the merchant
bankers who provide the service loan/credit syndication.

Loan syndication in the case of domestic borrowing is undertaken with the institutional
lenders and the banks. Amongst institutional lenders the following institutions are the
main suppliers of the long and medium term funds with which the merchant bankers
contact, liaison, and arrange loans for and on behalf of their clients.

1. All India Financial Institutions:

i. Industrial Finance Corporation of India (IFCI)

ii. Industrial Development Bank of India (IDBI)

iii. Industrial Credit and Investment Corporation of India Ltd. (ICICI)

iv. Industrial Reconstruction Bank of India (IRBI)

v. Shipping Credit and Investment Company of India Ltd. (SCICI Ltd.)

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 MERCHANT BANKING

2. State Level Financial Bodies:

i. State Financial Corporations (SFCs)

ii. State Industrial Development Corporations (SIDCs)

iii. State Industrial and Investment Corporations (SIICs)

3. All India Level Investment Institutions:

i. Life Insurance Corporation of India (LIC)

ii. Unit Trust of India (UTI)

iii. General Insurance Corporation of India (GIC) and its subsidiary companies.

4. Commercial Banks:-- Commercial banks join consortium financing with all India
financial institutions to provide medium term loan to industrial projects, otherwise they
cater to the needs for working capital requirements.

5. Mutual Funds

6. Venture Capital Funds

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Project Counselling

Project counseling is very important and lucrative merchant banking service which only
very few merchant bankers having advantages of knowledge, skills and experience over
others are able to render satisfactorily.

Project report its meaning and need

The dictionary meaning of the word project is plan, scheme, course of action etc.

The above meaning of the project is acceptable from merchant banking point of view.
But merchant bankers may contribute to the basic idea which a promoter initially picks
up for the proposed industrial activity.

Merchant bankers advise the clients on project preparation. Thus, two reports viz.
technical feasibility report and the market survey report must be prepared separately.
Various agencies, at different levels, evaluate these two reports to extract the desired
information for taking decisions.

Project report purposes Preparation of project report is necessary for the following
purposes

For obtaining government approvals Government has put restrictions on taking up

certain economic activities without its prior approval. Most of these restrictions have

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been placed to ensure that economic activity conforms to the basic norm of planned way
where scarce resources of the nation could be put to better utilization for producing
goods and services. Project report about the proposed activity is prepared to obtain
government approvals particularly in the following areas:

Grant of industrial licence to undertake specified industrial activity.

Foreign investment and technology tie-up.

Grant of import licence for importing raw material, plant, machinery and
equipments.

Grant of foreign exchange allocation for import of capital goods or raw

materials etc.

Grant of subsidies and other concessions from the government at centre or state
levels or from government sponsored agencies, etc.

For procuring financial assistance from different financial institutions, banks and
public sources Financial institutions and banks grant term loans and working capital
limits respectively to the business enterprises on the basis of the requirements projected
and justified in the project report. For procuring public subscription towards equity it is
necessary to convince the investing public about the technical feasibility and economic
viability of the project from practical as well as from legal angle to justify the financial
requirements and comply with various statutory formalities for which the project report
is needed.

For planned implementation of action plan or project Project report enables a

company for planned utilization of resources and implementation of the project within
scheduled time.

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 MERCHANT BANKING

For ensuring market for the proposed product Project report presents integrated
aspects about the product being proposed to be produced and to explore market for it.
Market survey reports are part of the project report. Product, in real sense, is known
only through market survey, which provides information about the existing as well as
the future demand for the product. Such market explorations provide information about
end users of the product, segments of the market for promotional efforts as well as for
pricing decisions.

For ensuring specified technical process and engineering requirement for

manufacture of the product Cost of the project is affected by the technical process
involved in production of the desired goods. Project report describes the technical
process. Technical process suggests for suitable location of project site, size of plant,
requirement of raw material, labour and skills, power, fuel, water, effluent treatment and
degree of pollution control, transportation, etc. Project report provides all these details
for taking quick decision on its implementations.

Scope of project counselling services Project counselling services are needed

by industrial entrepreneurs in India in the following areas:-

1. Preparation of project report.

2. Deciding upon the financing pattern to finance the cost of the project.

3. Aspects of project appraisal with financial institutions/banks.

Preparation of project report:

Preparation of project report involves pre-investment study of the proposed production

activity from different angles including the following:--

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(1) Planning of objectives Planning of objectives of the proposed activity is essential

from different angles.

(2) Evaluating the plan objective The above objectives and targets should be
evaluated individually on consideration of the following aspects by the promoters of the
project themselves or through the help of the merchant bankers or other professional
consultants:

(3) Evaluate activity having identified the objectives This is to be done with
reference to requirements of the following elements:

i. Technical know-how and other requirements.

ii. Plant and equipment.

iii. Manpower requirements for both skilled and non-skilled.

iv. Financial requirements.

v. Managerial competence and organizational set-up.

i. (4) Take a decision whether or not to undertake the project idea Merchant
bankers, wile giving suggestions or opinions on the above aspect are guided by
their own experience and professional skills attained over the years of their
practice and experience in the field work.

(5) Format of the project report No format of project report is prescribed. Project
report for different products involving different technical process will contain
information best suited to the manufacturing process of each of such products. But there
are certain aspects which are common in all project reports. These aspects are discussed
below:

i. Product

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ii. Capacity

iii. Technical process

iv. Schedule of implementation

v. Cost of the project

vi. Market study

(6) Deciding upon the financial pattern Financing the project cost Important
aspects of project counselling is the planning for raising funds required to finance the
project cost. Apparently there are two sources of funds available to finance the project
cost viz. internal sources and external sources.

Internal resources refer to owners funds whereas external sources are borrowed
funds. Internal source of funds could be the owners funds retained in the company in
the form of reserves and surpluses or provision for depreciation or retained earnings.

External finance is in the form of loans from banks, private investors and
financial institution. Loans may be short-term and long-term for periods. These loans
are raised as borrowings from the banks and term lending financial institutions.
Company may burrow from public by way of public issues through prospects or private
investment institution in the form of debentures at fixed rate with different conditions of
convertibility, non-convertibility and redemption.

Based on the above background the project cost of a company is financed as per the
following pattern:

Means of financing the project cost:

1) Share capital (owners funds); and/or

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Equity/Preferences shares

Indian promoters

Non-resident Indians

Public issue

2) Term loans (borrowed funds); and/or

Rupee loan or foreign currency loan from financial institutions/banks;

Convertible debentures or non-convertible debentures from public issue or private

placement with investment institutions;

Unsecured loans/deposits; Lease financing

(3) Subsidies; and/or

(4) Internal cash accruals.

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 MERCHANT BANKING

Portfolio Management

Portfolio management is a way of handling clients investments in order to gain returns.

The main objectives of portfolio management sought to be achieved by the merchant
bankers for their clients include the following:

Safety of investment or funds The investment should be preserved, not be lost and
remain in a returnable position in cash or kind.

Marketability The investment made in securities should be marketable i.e. the

securities must be listed and traded at the stock exchange so as to avoid difficulty in
their encashment.

Liquidity The portfolio must consist of such securities which could be encashed
without any difficulty or involvement of time to meet urgent need of funds.
Marketability ensures liquidity of the portfolio.

Reasonable return The investment should earn a reasonable return to upkeep the
declining value of money and be compatible with opportunity cost of the money in
terms of current income in the form of interest or dividend.

Appreciation in capital The money invested in portfolio should grow and result in
capital gains.

Tax planning Efficient portfolio management is concerned with composite tax

planning covering income-tax, capital gains tax and wealth-tax.

Risk avoidance Risk avoidance and minimization of risk are important objectives of
portfolio management. Portfolio managers achieve these objectives by effective
investment planning and periodical review of the market situation .

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 MERCHANT BANKING

Mergers and Acquisitions

Business combinations are known by different names viz. mergers, consolidations,

takeover, amalgamations, and acquisitions. Meanings of these terms should be
understood as some of these terms carry different meanings in different situations. For
example, the meaning of the word combination it refers to mergers and consolidation
as a common term used interchangeably but carrying legally distinct interpretation.

Meaning of terms:

Merger Mergers is defined as a combination of two or more companies into a single

company where one survives and the others lose their corporate existence. The survivor
acquires the assets as well as the liabilities of the merged company or companies.
Generally, the company which survives is the buyer which retains its identity and the
seller company is extinguished. Merger is also defined as amalgamation. Merger is the
fusion of two or more existing companies. All assets, liabilities and stock of one
company stand transferred to Transferee Company in consideration of payment in the
form of equity shares of Transferee Company or debentures or cash or mix of the two or
three modes.

Amalgamation Ordinarily amalgamation means merger. Both the terms are used
interchangeably.

Consolidation Consolidation is known as the fusion of two existing companies into a

new company in which both the existing companies extinguish. Thus, consolidation is
mixing up of the two companies to make them into a new one in which both the existing
companies lose their identity and cease to exist. The mix-up assets of the two companies
are known by a new name and the shareholders of two companies become shareholders
of the new company. None of the consolidating firms legally survive. There is no
designation of buyer and seller. All consolidating companies are dissolved. In other

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words, all the assets, liabilities and stocks of payment in terms of equity shares or bonds
or cash or combination of the two or all modes of payments in proper mix

Holding Company Mergers and consolidations are distinct business combinations

which differ from a holding company. The relationship of the two companies when
combine their resources are differently known as parent company which holds the
equity stock of the other company known as subsidiary and controls its affairs. The
main criteria of becoming holding company is the control in the composition in the
Board of Directors in another company and such control should emerge from holding of
equity shares and thereby more than 50% of the total voting power of such company.

Acquisition In the context of business combinations, an acquisition is the purchase by

one company of a controlling interest in the share capital of another existing company.
An acquisition may be affected by:

a) Agreement with the persons holding major interest in the company management
like members of the board or major shareholders commanding majority of
voting power.

b) Purchase of shares in open market.

c) Takeover offer to the general body of shareholders.

d) Purchase of new shares by private treaty.

e) Acquisition of share capital of one company either by all or any one of the
following forms of considerations viz. means of cash, issuance of loan capital,
or insurance of share capital.

Takeover A takeover is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of
takeover, transaction involved in takeover, determination of the share exchange or cash

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 MERCHANT BANKING

price and the fulfillment of goals of combination all are different in takeovers than in
mergers. For example, process of takeover is unilateral and the offeror company decides
about the maximum price. Time taken in completion of transaction is less in takeover
than in mergers.

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Mutual Funds

A mutual fund is a professionally-managed form of collective investments that pools

money from many investors and invests it in stocks, bonds, short-term money market
instruments, and/or other securities. In a mutual fund, the fund manager, who is also
known as the portfolio manager, trades the fund's underlying securities, realizing capital
gains or losses, and collects the dividend or interest income. The investment proceeds
are then passed along to the individual investors. The value of a share of the mutual
fund, known as the net asset value per share (NAV), is calculated daily based on the
total value of the fund divided by the number of shares currently issued and
outstanding.

Factoring

Factoring , a sort of suppliers credit , is understood by the services an agent renders

to its principal by managing the latters scales ledger , realizing the book debts or
bills receivables against a pre-determined commission known as commercial
charge. For example, the manufacturer or trader sells the goods directly or through
agent and advises the details of the sale to the factory to realize the credits.
Thus, the factors responsibility is contractual with the privity of contract with the
seller. Depending upon the terms of the contract, the factor may assume risk for
non-payment by the customer also. The need for factor services is felt in view of
expanding sales by the manufacturer suppliers so as to manage the sales realization
of books debts. Thus, it reduces dependence upon bank credit for working capital
requirements.

The above service of factoring is different what merchant bankers used to render in the
early part of nineteenth century. Then, the mercantile agent had full control of his

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principal goods i.e. he used to sell and invoice the goods in his own name either on term
cash or credit depending upon the nature of transaction.

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 MERCHANT BANKING

CHAPTER 9

PLAYERS IN MERCHANT BANKING

1. ENAM

ENAM was founded in1984 to provide knowledge-driven

financial services at the time when Indian economy investors faced a
bewildering array of options. ENAM is the one of the largest underwriters in
India. ENAM offers promising & exciting companies the opportunity of
assessing the public market equity finances. ENAMs long-term association with
capital markets & primary markets has provided it with deep insights of the
functioning of Indian financial institutions. The merchant banking services
provided by ENAM are: -
Equity debt/syndication: Raising capital through a private placement of a
companys securities is an effective & timely offering to a public offering.
ENAM represents the clients in the private placement of debt and equity
with institutional & high net worth investors.
Corporate Restructuring: - ENAM provides client with strategic and
practical solutions to financial challenges. Their restructuring services
includes Mergers & Acquisitions, Takeovers, Debt restructuring, Buyers
services etc.
ENAM also provide the seed stage services, value creation services and
IPOs advisory services which are represented below:

ICICI SECURITIES

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 MERCHANT BANKING

ICICI Securities Limited is a leader across the spectrum of Merchant

Banking. We are experienced in every aspect of the business from domestic and
international capital markets advisory, to M&A advisory, Private Equity syndication,
Restructuring and infrastructure advisory. Our investment banking team, based
across key cities in India and New York, London, and Singapore consists of
professionals with expertise across a range of industries.

ICICI SECURITIES provide following services:

Mergers and Acquisitions: - ICICI Securities Limited is amongst the first
Indian investment Banks to form a dedicated M&A practice and continues to
be a leader by providing innovative and unique solutions to achieve varied
objectives of the client. They offer a full range of advisory services, which
include joint ventures, mergers, acquisitions, and divestitures.
Equity Capital Markets: - ICICI Securities Limited is at the forefront of
capital markets advisory having been involved in most major book building
and fixed price offerings over the last decade. It is amongst the leading
underwriters of Indian equity and equity-linked offerings.
Infrastructure Advisory: - ICICI Securities Limited has a dedicated
infrastructure vertical focused on assisting clients in identifying and
capitalising on the opportunities thrown up by the all pervasive boom in the
Indian infrastructure sector.
Dealing with Bulls and Bears: - ICICI Securities Limited assists global
institutional investors to make the right decisions through insightful research
coverage and a client focused Sales and Dealing team. The equity group
leverages research and distribution reach to domestic and foreign
institutional investors in case of public offerings.
Thus the quality of analysis and client servicing standards, are a
testimony to the quality of ICICI securities team.

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 MERCHANT BANKING

.
CITIGROUP
Citigroup Corporate and Investment Banking
achieve the extraordinary for our clients around the world. No financial
institution is more committed to advancing the goals of its clientsour diverse
and talented staff in more than 100 countries advises companies, governments
and institutions on the best ways to realize their strategic objectives. We create
solutions for and provide the broadest possible capital and market access to
thousands of issuer and investor clients. And no institution better executes the
increasingly complex payment and cash management solutions required in
today's global economy. The features Citigroup are as follows: -

Over the years, Citigroup has established a track record of outstanding

business milestones such as Cash Management, pioneered by Citigroup in
1986 and utilized by over 900 Corporates with through-puts totaling around
$ 35 billion (8% of India's GDP).

It is India's largest foreign bank in the FX (foreign exchange) market with a

14 per cent market share.

As the leading custodian, Citibank has over $22 billion of custody assets
under management.

STATE BANK OF INDIA

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 MERCHANT BANKING

SBI Merchant Banking Group is strongly positioned to offer perfect

financial solutions to your business. We specialize in the arrangement of
various forms of Foreign Currency Credits for Corporate.

State Bank of India is the nation's largest bank. Tracing its roots back some
200 years to the British East India Company (and initially established as
the Bank of Calcutta in 1806), the bank operates more than 13,500
branches and over 5,000 ATMs within India, where it also owns majority
stakes in seven associate banks.

State Bank of India has more than 50 offices in nearly 35 other countries,
including multiple locations in the US (California), Canada, and Nigeria.
The bank has other units devoted to capital markets, fund management,
factoring and commercial services, and brokerage services. The Reserve
Bank of India owns about 60% of State Bank of India.

SBI being an Indian entity has no India exposure ceiling. Our Primary
focus is On Indian Clients. SBIs seasoned Team of professionals provides

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 MERCHANT BANKING

you with Insightful credit Information and helps you Maximize the Value
from the transaction.

OUR PRODUCTS AND SERVICES

Arranging External Commercial Borrowings (ECB)

Arranging and participating in international loan syndication

Loans backed by Export Credit Agencies

Foreign currency loans under the FCNR (B) scheme

Import Finance for Indian corporate

SBI CAPITAL MARKETS LIMITED (SBICAPS) is India's leading

investment bank and project advisor, assisting domestic companys fund-

mobilization efforts for last many years.

We began operations in August 1986 as a wholly owned subsidiary of the

State Bank of India, which is the largest commercial bank in India. In
January 1997, fresh equity shares were issued to Asian Development Bank
(ADB) and ADB now holds 13.84% stake in the equity of SBICAPS. The
distinguished parentage (with a 86.16% stake) together with the long
standing association of an internationally renowned financial institution
like the Asian Development Bank further enhances our image as a truly
'World Class Investment Bank'.

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 MERCHANT BANKING

Our Mission - To provide Credible, Professional and Customer Focused

world-class investment banking services.

Our Vision -To be the best India based Investment Bank.

SBI Group:

The largest commercial bank group in India

Position in the domestic banking sector as on 31 March 2008:

15.44% of the aggregate deposits.

15.28 % of total advances.

The only Indian Bank to find a place in the Fortune Global 500 List.

First Indian Bank to take up merchant banking in 1986.

SBI Capital Markets Limited:

No. 1 in Asia Pacific for Project Advisory. Rating by Thomson

Project Finance International.
No. 1 in IPOs, managed 700+ issues (since 1989 source Prime
Database).

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 MERCHANT BANKING

The only Indian Merchant Banker in the Global 10, Thomson

Project Finance International 2007.
Pioneer in Privatization.

Subsidiary:-

SBICAPS Ventures Ltd.

SBICAP Securities Ltd.

SBICAPS (UK) Ltd.

SBICAP Trustee Company Ltd

CHAPTER 10

ANALYSIS & INTERPRETATION

Q1.Do you take any financial services from bank?

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 MERCHANT BANKING

Q.2. Do you know about merchant banking?

Q.3.Are You Satisfied With The Services Provided By Bank?

Q.4.What is the position of Merchant Banking in Private Sector?

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 MERCHANT BANKING

SR.NO POSITION PERCENTAGE

1 GOOD 50

2 NORMAL 30

3 BAD 20

TOTAL 100

Q.5.What is the position of Merchant Banking in Public Sector?

SR.NO POSITION PERCENTAGE

1 GOOD 40

2 NORMAL 55

3 BAD 46 5

TOTAL 100
 MERCHANT BANKING

Q.6.Are you satisfied by Security margin of bank?

CHAPTER 11
CHALLENGES AHEAD

Merchant bankers have to tap the opportunities lying ahead with the developing pace of
the economy. These opportunities arise in the form of challenges before the merchant

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bankers to test their skills, expertise and efforts to attune their activities with the
programme of economic development of the country, adopt new instruments and
innovative means of financing to meet the growing financial requirements of the
corporate clients. Some of the areas of challenges, which have been explored on the
basis of research, are classified as under:

Merchant bankers will have to conduct management of capital issues in a different

fashion than what is being done at present to provide the full benefit of their
services of corporate counseling, project counseling and loan syndication to small
industries then besides distributions of their securities to the public and arranging
long-term institutional or banking finance for them

If the planned objective of economic decentralization and rapid development of

rural economy is to be achieved merchant bankers will have to make expert efforts
in the interest of the national economy by mobilizing the savings from the rural
sector and creating avenues for its investment in rural areas in industry, trade and
commerce in different shapes and different magnitudes encouraging the local people
to reduce their dependence on land farming and involve in other activities

Increasing number of sick industries is the ever-growing threat for the industrial
economy of the country. Merchant bankers have to find out ways and means for
rehabilitating the sick industries and also devise the manner by which the running
industry might be saved from going sick

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The millions of small savers are unable to manage their savings in India in both
rural and urban areas. There are mainly the people from the middle class and lower
middle class. Merchant bankers must devise ways and means to provide services
for portfolio management to these citizens.

Public and private sector institutions engaged in trade, commerce and industry have
many times surplus funds lying with them awaiting opportunity outside. These
funds should be tapped by the merchant bankers from time to time by mobilizing
them to deficit areas on profitable return basis playing the interest rate games as is
done in SWAP deals in international finance.

In the international field, where the public and private enterprises are entering to
raise foreign currency resources, Indian counterparts have to depend upon the
assistance of foreign merchant bankers. Indian merchant bankers, therefore, will
have to sharpen their skills and attain the requisite expertise in the field of
international merchant banking.

To tap the latest technology available internationally and procure the transfer of the
technology to India, merchant bankers should frequently make-exploring tours to
foreign countries, organize meetings and conferences with the Chamber of
Commerce and Industry and other commercial, industrial and financial
organizations so as to enthuse the foreigners to take interest in investment activity in
India.

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The challenges noted above are only indicative of the expected role of merchant bankers
and in no way be constructed as exhaustive and final. These challenges continue to
stand before the merchant bankers to meet the test of time and shall grow in
number with the growing requirements of financial services for the corporate sector
and the community as a whole.

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CHAPTER 11

Recommendations

(1) Indian public issues are characterized for their high cost on expenses like
advertisement, stationery, and commission to intermediaries. Dual payment to
underwriters on same issue one as underwriting commission and other as
brokerage should be curtailed as such type of overlapping payments enhances
cost of the issues. With increased competition the merchant banker should be
allowed to negotiate their issue management fees instead of having fixed fees.
Due to this the merchant bankers will have to offer comparable services at lower
cost. This also means that public sector banks may face difficulties if they do not
become cost effective. Cost reduction would also be possible by restoring to the
maximum use of non-traditional practices of raising the equity and debenture
capital in the market viz. offer for sale without prospectus, offer for sale by
tender, public issue by tender, private placement of shares etc.

(2) There have been a large number of investors who have come in capital markets
through primary markets. These investors are in majority not exposed to stock
market operations. They remain in a state of uncertainty about the marketability
of their stock. The merchant banker in future can play an active role in
establishing a link between primary market investors and stock exchanges. This
would remove uncertainty from the minds of investors about marketability of
their security holding and also create a balance in bullish and bearish forces by
attracting their attention to these transactions. Stock exchange introduction
would be made more prominent and be frequently permitted as a less costly way
for obtaining quotation and making the shares familiar with the investing public.
This may help those companies who have widespread of shareholders but could
not obtain a quotation from stock exchanges.

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(3) The traditional process of issue management takes between three to four months
on an average causing in uncertainty and delay in raising funds. The issue
becomes risky as for a new company its success also depends on success of
issue. It increases companys stake and thus the cost of issue. Merchant banks
can provide a permanent solution to the problem by buying the entire issue at a
discount from the company and encash it at a premium in the market when the
companys project goes into production after gestation period. SBI Capital
Market Ltd. has taken the first step in this direction. The company will pick up
entire equity issue of small companies and later on sell the shares in phases
through private placement and through stock exchanges.

(4) The real threat to the merchant bankers functioning in the country is from the
entry of international investment bankers. Managing rural surplus can be an area
in which Indian Merchant Bankers can have an edge over the foreign counter-
parts. Indian merchant bankers seem to have some glamorous attraction for
NRIs Funds and they are not giving due attention to the vast resource of
indigenous sources should not go untapped. In this area merchant banks have to
put their efforts in moping up the rural surplus and channelize it into corporate
securities. This is an open field and the Indian merchant bankers can explore it
instead of concentrating on NRI Funds.

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CHAPTER 12

CONCLUSION

The merchant banker plays a vital role in channelizing 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 predicated 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 a
essential to remove the trading malpractice and structural inadequacies prevailing in the
market, and provide the investors an organized, well regulated market place in future

CHAPTER 13

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BIBLOGRAPHY

1) FINANCIAL SERVICES- V. A. Avadhani.

Newspapers:
Business Today

Business World

Economic Times

WEBLIOGRAPHY:
www.google.com
www.wikipedia.com

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