6c c

Y





 


The term merchant banking is used differently in different countries and so there
is no precise definition for it.

In London, merchant banker refers to those who are members of British

merchant banking & securities house association who carry on consultation, leasing,
portfolio services, assets management, euro credit, loan syndication etc.

In America, merchant banking is concerned with mobilizing savings of people

and directing the funds to business enterprise.





c
c
There is no universal definition for merchant banking. It assumes diverse function
in different countries. So merchant banking may be defined as, µan institution which
covers a wide range of activities such as management of customer services, portfolio
management, credit syndication, acceptance credit, counseling, insurance etc.

The Notification of the Ministry of Finance defines a merchant banker as, ³any
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 short, merchant bankers assist in raising capital and advice on related issues.


  
  
 
 -c c
c





Merchant banking originated through the entering of London merchants in
financing foreign trade through acceptance of bill. Later, the merchants assisted the
Government of under developed counties in raising long term funds through flotation of
bonds in London money market. Over a period, they extended their activities to
domestic business of syndication of long term & short term, underwriting of new issues,
acting as registrars and share transfer agents, debenture trustees, portfolio managers,
negotiating agents for mergers, take over etc. the post war period witnessed the rapid
growth of merchant banking through the innovative instrument like Euro dollar and the
growth of various financial centers like Singapore, Hong Kong, Bahrain, Kuwait, Dubai
etc.

Y






The need for specialized merchant banking service was felt in India with the rapid
growth in the number and size of the issue made in the primary market. The merchant
banking services were started by foreign banks, namely the national Grind lays bank in
1967 and the city bank in 1970. The banking commissions in its report in
1972recommended the setting up of merchant banking institutions by commercial banks
and financial institutions. This marked the beginning of specialized merchant banking in
India.

To begin with, merchant banking services were offered along with other
traditional banking services. In the mid-eighties, the banking regulation Act was
amended permitting commercial banks to offer a wide range of financial services
through the subsidiary rule. The state bank of India was the first Indian bank to set up
merchant banking division followed by Bank of India, Bank of Baroda, Canara bank,
Punjab national bank and UCO bank. The merchant banking gained prominence during
1983-84 due to new issue boom.


  
  
 
 c c
c
 

   Y
  YY

 

Y
  YY

 
 
c c

Assist in raising capital in the form of
Provide funds in the form of term
equity, preference shares, and syndicated loan and working capital.
loan working capital instruments.

c c

Advisor not financer. 
Financing is the main business.

c c

Do not accept chequable deposits. 
Demand deposits are the key
feature.

c c

Mainly fees based business. 
cMainly fund based business

c c

Being advisors, they are closer to the 
Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on risks proposal and cannot afford to be
shields i.e. mitigation measures grossly relationship based and close to
the customer.


  
  
 
 *c c
c



 

Y
 

The need of merchant banker is also felt in the wake of huge untapped public
savings as merchant bankers can play a highly significant role in mobilizing funds from
savers to invest in channels assuring promising return on investments and thus narrow
down the gap between demand for and supply of investible funds.

Merchant bankers not only provide advisory services to corporate enterprises but
also advise the investors of the incentives available in the form of tax relief and other
statutory obligations. Thus, the merchant bankers help industry and trade to raise funds,
and the investors to invest their saved money in sound and healthy concerns with
confidence, safety and expectation of higher yields.

Broadly a merchant banker can provide the following services:

c Corporate Counseling
c Project Counseling.
c Credit (Loan) Syndication
c Issue Management
c Underwriting of public issue
c Managers, consultants or advisers to the issue
c Portfolio Management
c Advisory service relating to mergers & Takeovers

c Off shore finance
c Non - Resident investment

Let¶s take a brief look at each of these functions:


  
  
 
 c c
c

cc  c c

It covers the entire field of merchant banking activities i.e., project counseling,
capital restructuring, portfolio management and the full range of financial engineering
including venture capital, public issue management, loan syndication, working capital,
fixed deposits, lease financing, acceptance credit, etc. However, the scope of corporate
counseling is limited to suggestions and opinions leaving to the client to take corrective
actions for solving its corporate problems.


c  c c

Project counseling is an important merchant banking service which includes

preparation of project reports, deciding upon the financing pattern to finance the cost of
the project, appraising the project report with the financial institutions/banks. Project
reports are prepared to obtain government approval of the project, for procuring
financial assistance from financial institutions and banks, for ensuring market for the
proposed product, for planning public issues, etc. Financing the project cost is an
important aspect of project counseling.


cc 
c!" c

Loan syndication refers to assistance rendered by merchant banks to get mainly

term loans for projects. Such loans may be obtained from a single development finance
institution or a syndicate. Merchant banks help corporate clients to raise syndicated
loans from commercial banks.


c#c$$cc

Management of issue involves marketing of corporative securities viz., equity

shares, preference shares and debentures or bonds by offering them to public.
Merchant banks act as intermediary whose main job is to transfer capital from those
who own it to those who need it.


  
  
 
 rc c
c

c%&c 'c(cc

Underwriting is only the guarantee given by the underwriter that in the event of
under subscription, the amount underwritten would be subscribed in proportion by the
underwriter. An underwriter of the issue gets the following benefits:

U It earns a commission of the commitment given.

U It earns the right to be appointed as bankers of that issue.
U It expands its clientele by underwriting more and more issues.


c)*c c c+ c c,cc

c
The managers to the issue assist in the drafting of prospectus, application
forms and completion of formalities under the companies Act, appointment of
register for dealing with share applications and transfer and listing of shares of the
company on stock exchange. Companies are free to appoint one or more agencies
as managers to the issue.


c '  c)$c

Portfolio refers to investment in different types of marketable securities or

investment papers like share, debentures and debenture stocks, bonds etc. from
different companies or institutions held by individuals firm or corporate units.

Portfolio management refers to managing efficiently the investment in the

securities held by professionals to others.

Merchant bankers take up management of a portfolio of securities on behalf of

their clients, providing special services with a view to ensure maximum return by such
investments with a minimum risk of loss of return on the money invested in securities.

c
c


  
  
 
 ‰c c
c

c-+ "c+cc c$c.c/ +c

A merger is defined as a combination of two or more companies into a single

company where one services and other looses their corporate existence. A takeover is
referred to as an acquisition, which is the purchase, by one company of a controlling
interest in the share capital of another existing company.

Merchant bankers are the middlemen settling negotiations between the offered
and the offeror. Their role is specific and specialized in handling the mergers and take
over assignments. Being a professional expert, the merchant banker is apt to safeguard
the interest of the shareholders in both the companies and as such his assistance is
useful for both the companies, i.e. the acquirer as well as the acquired company.


c0''c, c'c

The merchant bankers also help their clients in the following areas involving foreign
currency financing:

U Financing Of Exports And Imports

U Long Term Foreign Currency Loans
U Joint Ventures Abroad
U Foreign Collaboration Arrangements

The assistance rendered as in the case of financial services covers appraisals,

negotiations, compliance with procedural and legal aspects etc.


c1 cc2c+$c

To attract NRI investments in the primary and secondary markets, the merchant
bankers provide investment advisory services to the NRIs in terms of identification of
investment opportunities, selection of securities, portfolio management, etc. they also
take care of operational details like purchase and sale of securities securing the
necessary clearance from RBI under FERA for repatriation of dividends and interest,
etc.


  
  
 
 üc c
c
ƒ

Y



To be a successful merchant banker, following qualities are necessary:

c 3 & Thorough understanding of technical issues related to business,

understanding of legal and statutory requirements, appreciation of business acumen;
financial expertise is a key thing a merchant banker must know. Delivery of his services
depends on his basic understanding of these issues.

c c $/c '$" Merchant banker should be well versed with stock
markets, their movements. He should track imp happenings in the market on ongoing
basis.

c  c (" Merchant bankers are required to liaison with SEBI, RBI, the
stock exchanges, depositories and other government authorities for public issue related
duties. It is imperative that a merchant bank maintains excellent rapport with all of them
and also close relations even at informal levels. This only can see speedy and favorable
clearances by the authorities.

c # +  Corporate may approach with unique requirements. Standard solutions
and products may not solve problems sometimes. Merchant bankers should do out of
box thinking and be able to do financial engineering. They can device new financial
instruments and get approved from the authorities. Innovation is required even to
address stringent legal requirements.

c #" Merchant banker has valuable and confidential information of its
customers. Merchants bankers should take utmost care that the information is not
leaked and also not consumed for the purpose other than for which it was disclosed to
the merchant banker.


  
  
 
 [c c
c


 
Y



Merchant banking has been statutorily brought within the framework of the
securities and exchange board of India under SEBI (Merchant Bankers) Regulations,
1992.

The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented below:

c If any Company¶s other income exceeds 10 per cent of the total income, the
details should be disclosed.
c The Company should disclose any adverse situation which affects the operations
of the Company and occurs within one year prior to the date filing of the offer
document with the Registrar of Companies or Stock Exchange.
c The Company should also disclose the information regarding the capacity
utilization of the plant for the last 3 years.
c The Promoters of the Company must maintain their holding at least at 20 per
cent of the expanded capital.
c The company should disclose the time normally taken for the disposal of various
types of investor¶s grievances.
c The Company can make firm allotments in public issues as follows:
± Indian mutual funds (20%),
± FIIS (24%),
± Regular employees of the company (10%),
± Financial institution (20%).
c According to the guidelines, in case of the public issues, at least 30 mandatory
collection centers should be established.
c According to the SEBI guidelines regarding rights issue, the Company should
give advertisements in not less than two news-papers about the dispatch of
letters of offer. No preferential allotment may be made along with any rights
issue.


  
  
 
 6 c c
c
Y

YY



As determined by the finance ministry, government of India, merchant bankers

are eligible to charge commission/fee from their clients as detailed below:

c A merchant banker can charge 0.5% as the maximum as commission for whole
of the issue.

cThey can charge project appraisal fees.

c A lead manager can claim a commission of0.5% up to Rs.25 crore and 0.2% in
excess of Rs.25 crore.

c Underwriting commission.

c Brokerage commission 1.5%.

c Other expenses like advertising, printing, registrar¶s expenses, stamp duty etc.,
in connection with the issue can reimburse from its clients.










  
  
 
 66c c
c

 YY



Not many but some problems are faced by Indian merchant bankers

c #"c  $$4  company which is in merchant banking business

would have expertise in underwriting, hire purchase, leasing, and portfolio
management, money-lending. But RBI does not permit merchant banking firms to get
into these activities. So the same promoters have to setup different companies for
different purposes. Management cost increases and expertise pooling i.e. multiple use
of same talent is not possible.

c )'c  India corporate culture is bettering. But still many corporate
have excessively friendly approach. Favored allotment of shares, tampering with
project appraisal report to bankers is common. Corporate like to use merchant
bankers for malafide intentions. This gives growth to more boutique fly-by-day firms.
Giant professional or multinational merchant bankers are cautions in their approach
to Indian market.

c 2  though regulations are much better now, there is still scope for further
improvement. Merchant bankers can be made more accountable and responsible.
Professional qualification focused on merchant banking is not available. Industry is
not well organized and all the players do not play the same tune. This is specifically
evident in comparison with insurance industry and mutual funds industry.
c
c





  
  
 
 6-c c
c
 
Y






c !4cc"$c 'c,c$/: Indian market is growing. In fact India is one of

the largest emerging markets. Obviously, public issues, FDI, debt raising are on rise.
Lots of new and green fried projects are happening. Merchant bankers have lots
space to contribute.

c 2 (4 : more liberal the market is, more the things left to be
decided by the corporate. Merchant bankers assist in decision making and hence
their scope increases. With significant market freedom, merchant bankers work has
increased many folds.

c 5/c  : RBI prefers that commercial banks do not indulge in merchant
banking business directly. They should setup a subsidiary for the purpose. This
limits scope of commercial banks and gives space to merchant bankers. This policy
also results in fair business practices. Some countries allow commercial bankers to
get involved in IPO¶s, placement of debentures, etc. Indian scenario is favorable to
merchant bankers.

c   c  corporate can do project appraisal, strategic restructuring in

house as well. If the corporate prefer third-party independent assessment, then only
they will engage merchant bankers. Otherwise merchant banker¶s role is only
statutory as in issue management. India inc. apparently prefers and is happy with
merchant bankers work.

c   c "$: more happening in business gives more opportunities to

merchant bankers. Mergers, takeover acquisition, new Greenfield projects, fund
raising for government institutions, active money market are all providing better
business prospectus to merchant bankers.