Merchant banking

OBJECTIVES :

To

study

the

significance

of

Merchant

Banking

towards the development of securities industry.

To analyze issue management regulations. To analyze the functions of Merchant Banking in relation to To gain practical knowledge relating to merchant banking To draw a conclusion and suggestions based on the analysis

rules and regulations of SEBI.

activities.

and experiences.

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Merchant banking

EXECUTIVE SUMMARY Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital & the ultimate investors who purchase these securities. Merchant banking is the financial intermediation that matches the entities that need capital & that have capital. It is a function that facilities the flow of capital in the market. Merchant bankers provide assistance to the corporate houses for setting up industries. Merchant banking provides a broad & complementary range of services to address the needs of our clients at various stages in their growth. These include the ability to identify & acquire strategic assets & capabilities; identify & partner with companies who will share the risk & rewards of developing an asset. The project discusses the significant role of Merchant Banks in the financial sevice sector. It examines merchant banking in relation to issue management; corporate advisory services, loan syndication and so on. It also includes the scope, advantages and growth of Merchant Banking in Indian economy.

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Merchant banking

ACKNOWLEDGEMENT

I owe a number of debts of gratitude to all those sources from which I have drawn information and persons from whom I have received help and advice in completing this project. I would like to thank my project guide, PROF.KAJAL.BHOJWANI for her valuable suggestions, assistance & guidance for completing my projects successfully. I have also been benefited greatly from the advice & counsel of Mr.P.V.DANDEKAR. (AGM of UNION BANK) & I am happy to express my grateful thanks to him.

Many thanks are due to my friends, colleagues & my cousins for rendering all assistance unhesitatingly.

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Merchant banking

MERCHANT BANKING Introduction

The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses. At that time the merchants were merely financing their own activities. As international trade grew and other lesser-known names wanted to import goods from abroad, the established merchants lent their names to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses would charge a commission for this service and thus there grew up the business of accepting bills of finance trade not merely of themselves, but of others. Acceptance business thus became and to a degree always has been hallmark of true Merchant Banks. The second historical of Merchant Banks was the raising of capital for foreign Government. In many cases, the Merchant Banks have been trading in the countries concerned and gained the confidence of Governments and other authorities in those countries. Thus the second principal ingredient of Merchant Banking became and still is raising of capital through the issue of stocks and bonds.
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Therefore, Merchant Banks can be accepting houses or issuing houses or both. Merchant Banking started in the beginning of 20th century in UK and USA. More recently, the services offered by Merchant Banks have entered into the other areas of operations. Their role is wide ranging and they can now provide most of the financial services required by a company, touching almost all aspects of establishing and running of industrial units on sound financial footing. In indan context 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.

In Indian context this definition suits well. Merchant baking in India started with management of public issues and loan syndication and has been slowly and gradually covering activities like project counseling, portfolio management, investment counseling 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 Securities & Exchange Board of I India (Merchant Bankers)

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Rules, 1992 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.

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EVOLUTION & GROWTH OF MERCHANT BANKING

Introduction
The progress of the Securities Industry of any country depends mainly on the flow of funds. In fact, capital generation is the lifeblood of the capital market without which the health and soundness of the financial system cannot be geared and for which well-developed capital market as well as money market is essential. In India prior to the enactment of Indian Companies Act,1956,managing agents acted as issue houses for securities, evaluated projects reports, planned capital structure & to some extent provided venture capital for new firms. Few share broking firms also functioned as merchant bankers.

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Merchant banking
The need for specialized banking service was felt in India with the rapid growth in the number & size of the issues made in the primary market. The merchant banking services were started by foreign banks, namely the national Grindlays bank in 1967 & the city bank in 1970. the banking commission in its report in 1972 recommended the setting up of merchant banking institutions by commercial banks & 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 mideighties, the Banking Regulations 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 its merchant banking division in 1972.Later, ICICI set up its Merchant banking division followed by Bank of India, Bank of Baroda, Canara Bank, Punjab National Bank &UCO Bank. The Merchant Banking gained prominence during 1983-84 due to new issue boom.

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Merchant banking

NEED

&

IMPORTANCE

OF

MERCHANT

BANKING IN INDIA
Important reason for the growth of merchant banking has been the developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap unabridged between the supply and demand of investible funds. All India financial institutions had experienced resource constraint to meet the everincreasing demand 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 consultancy firms to enter into the field of merchant banking and share the growing capital market. With the result, all the commercial banks in nationalized and public sector as well as 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 merchant bankers as well as managing public issues in syndication with other merchant bankers.

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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 the funds for establishing new enterprises, undertaking expansion/modernization/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 from the capital market by the corporate enterprises year after year. In view of multitude of enactments, rules and regulations, guidelines and offshoot press release instructions brought out by the Government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the need of skilled agency existed which could provide counseling in these matters in a package form. Merchant bankers, with their skills updated information and knowledge,
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Merchant banking
provide this 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, 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 industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence, safety and organizations for higher yields.

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Merchant banking

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. ways and means for the funds. As an intermediary-Merchant Banker plays a crucial role in exploring the Besides, issue management, Merchant Banker also performs several other important functions like underwriting of securities, Private placement of securities,
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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 promotion and administration of issues. industry cannot prosper. It is well known fact that without adequate professional support of Merchant Bankers the securities

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Merchant banking

MERCHANT ADVANTAGES

BANKING

FOR

INDIA:

The bane of Indian capital markets today is lack of investor confidence. This is reflected in the poor performance in the The cause for the existing primary and secondary markets.

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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Merchant banking

MERCHANT BANKING ORGANISATIONS

Securities and Exchange Board of India (SEBI) has divided merchant bankers into four categories, which are as follows: CATEGORIES Category I ACTIVITIES To carry on the activity of issue management and to act as adviser, consultant, manager, Category II To act underwriter, as adviser, portfolio underwriter, Rs. lakhs Nil 20 Rs.50 lakhs portfolio manager. consultant, underwriter, Category III manager. To act as co-manager, NETWO RTH Rs.1crore

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

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, investors and issuers of securities. The minimum net worth and initial authorization fee
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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.

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Merchant banking

QUALITIES BANKERS

OF

GOOD

MERCHANT

Merchant bankers are individual experts who organize and manage the merchant banks. The operations of merchant banks are, therefore, influenced by the personality trait of these individuals. For the success of merchant banks operations, the qualities which merchant bankers should have are discussed below:-

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. Once a business opportunity has been located, the merchant banker has got to obtain the mandate for the merchant banking assignment from the clients at once which will depend upon his own communication skills, persuasiveness and the background of the organization to which he belongs. anything outside except what has been advised. A good Therefore, merchant banker is one who does not allow his client to think 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 entirely for the present as well as for the future.

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Merchant banking

COOPERATION 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. Business of an honest business merchant banker spreads with geometrical propagation when he shares the thoughts of his clients with sympathetic gestures and offers pragmatic suggestions without greed or favour. Very often, rude, intemperate and indifferent disposition or blunt out burst withdraw fortunate business opportunities forever. Friendliness and cooperation must flow as natural traits in the merchant banker to win over the trust of the clients like a doctor or lawyer who retain their clients permanently. CONTACTS Success of merchant banker depends upon

his sociable nature and the richness of wider contacts. A merchant banker is supposed to be acquainted deeply with all the constituents of merchant banking. Merchant bankers should widen contacts and references and continue to maintain them with goodness, honour and humour by meeting people in person, through writing and in special gatherings. ATTITUDE TOWARDS PROBLEM SOLVING The

most important personality trait of a merchant banker is his attitude towards problem solving. Even client coming to him has got to return fully satisfied having consulted a merchant banker. Positive
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Merchant banking
approach to understand the view points of others, their difficulties and their adverse circumstances is possible only when a person is skilled in human relations particularly the inter-personal and intrapersonal behavior. Effective communication and proper feedback are the pre-requisite for creating a positive attitude towards problem solving which could be gained partly through learning process and partly as an in born quality.

INQUISITINESS FOR ACQUIRING NEW SKILLS,

INFORMATION AND KNOLEDGE Merchant bankers lice on their wits they earn by giving information to needy clients. Therefore, they should keep a track with latest information in the area of the service product, they market. This is possible if merchant bankers possess the quality of inquisitiveness. The above qualities of a merchant banker are only illustrative. All good qualities in merchant bankers are difficult to be defined so elaborately. Nevertheless, merchant banker should possess super business acumen, managerial abilities, administrative capacities and salesmanship so as to understand the problems and sell the service product to the needy clients.

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Merchant banking

RESPONSIBILITIES BANKER
To the Investors

OF

MERCHANT

Investor protection is fundamental to a healthy growth of the Capital Market. Protection is not to be conceived as that of compensating for the losses suffered. The responsibility of the Merchant Banker in ensuring the completeness of the disclosures is of paramount importance in view of the fact that entire reliance is based on offer Document either Prospectus or Letter of Offer because an independent agency like a Merchant Banker has done the scrutiny. Capital structuring The Merchant Bankers while designing the capital structure take into account the various factors such as Leverage effect on earnings per share, the project cost and the gestation period, cash flow ability of the company, the cost of capital, the considerations of management control, size of the company, and general economic factors. These exercise are done mainly in order to meet the fund requirement of the company taking due cognizance of the investors preference. Project Evaluation and due Diligence

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Merchant banking
Due diligence and project evaluation is another major responsibility of the Merchant Banker. Where the project has already been appraised by a bank/financial institution, the Merchant Banker relies on the said appraisal before accepting an assignment. However, where the project has not been appraised by as bank/financial institution, the Merchant Bank undertakes a detailed evaluation of the project before taking up an assignment for issue management. Legal aspect The factors that are looked into in case of the legal aspects are:
Compliance with the SEBI guidelines and the various guidelines

issued by the Ministry of Finance and Department of Company affairs. Pending litigations towards tax liabilities or any criminal/civil prosecution any of the directors for any offenses. Fair and adequate disclosures in the prospectus.

Pricing of the Issue The Merchant Banker looks into the various factors while pricing the issue. Some of the factors are past financial performance of the company, Book value per share, stock market performance of the

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Merchant banking
shares. The Merchant Banker has a vital role to play in pricing of the instrument. Marketing of the Issue Marketing of the issue is a vital responsibility of the Merchant Banker. The first stage is Pre-issue marketing for placement of the issue with the financial institutions, banks, mutual funds, FIIs and NRIs. The second stage is the marketing of the issue to the general public through various vehicles such as press, brokers, etc.

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Merchant banking

REGISTRATION OF MERCHANT BANKER

Although Merchant Banking activity ushered in two decades ago, it was only in 1992, in India, after the formation of SEBI that is defined and a set of rules and regulations governing it are in place. A Merchant Banker is defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying, or subscribing to securities, or acting as manager, consultant, advisor or rendering corporate advisory services in relation to issue management. No person is allowed to carry out any activity as a Merchant Banker unless he or she holds a certificate granted by SEBI. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:

The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space, equipment, manpower etc.

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Merchant banking

The applicant must have at least two employees with prior experience in merchant banking Any associate company, group company, subsidiary or

interconnected company of the applicant should not have been a registered merchant banker

The applicant should not have been involved in any securities scam or proved guilt for any offence The applicant should have a minimum net worth of Rs.5 crores

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Merchant banking

BUSINESS STRATEGY

DEVELOPMENT

APPROACH

AND

Merchant banking services are highly competitive business activities and to get business, merchant bankers have to stand on their heels and run to grab the business opportunity. The basic approach for a merchant banker is to maintain close contact with other agencies involved in managing public issues like managing brokers, advertising agencies, firm of registrar to the issue, banks operating as bankers to the issue and advocates/solicitors who have expertise in the area of corporate law and consultancy. These agencies could give clue to the new business opportunity to be explored by the merchant banker. The basic strategy should be to get information, follow-up the same and materialize the business opportunity. To this end, the merchant bankers should frequently join clubs where the business magnates meet and freely mix with them, talk about their future business plans and converse with them on the issues of interest to them, join association or club of merchant bankers and be inquisitive to trace new opportunities for the merchant banking business, explore the possibilities of working with existing merchant bankers to the forthcoming public issues or other merchant banking activities. In addition to above, merchant banker should take steps to promote new business in the following manner:

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Merchant banking

Contact frequently the small business owners convince them

of business growth through expansion of their activities by forming limited companies, polling resources together through merger and amalgamation, etc.

Helping private limited companies to convert into limited and take up new

companies

activities/expansion/modernization/diversification programme etc. and assure them of the requisite help.

SEBI BANKS:

GUIDELINES

FOR

MERCHANT

(1) Maintenance of books of accounts, records: (a) Every merchant banker shall keep and maintain the following books of accounts, records and documents namely:(i) a copy of balance sheet as at the end of each accounting period; (ii)a copy of profit and loss account for that period; (iii) a copy of the auditor's report on the accounts for that period; (iv) a statement of financial position. (b) Every merchant banker shall intimate to the Board the place where the books of accounts, records and documents are maintained. (2) Submission of Half-yearly results :

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Merchant banking
Every merchant banker shall furnish to the Board half-yearly un-audited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker. . (3) 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 reasonableness 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 : (a) The lead manager responsible for the issue shall furnish to the Board, the following documents, namely: (i) particulars of the issue; (ii) draft prospectus or where there is an offer to the existing shareholders, the draft letter of offer; (iii) any other literature intended to be circulated to the investors, including the shareholders; and (iv) such other documents relating to prospectus or letter of offer as the case may be. (b) The lead manager shall ensure that the modifications 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. (4) Acquisition of shares prohibited: No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them.
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Merchant banking
Information to the Board Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of any body corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction. (5) Disclosures to the Board: A merchant banker shall disclose to the Board as and when required, the following information, namely: (i) his responsibilities with regard to the management of the issue; (ii) any change in the information or particulars previously furnished, 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 associated with; (iv) the particulars relating to breach of the capital adequacy requirement as specified in regulation 7; (v) relating to his activities as a manager, underwriter, consultant or adviser to an issue as the case may be. (6) Appointment of compliance officer : (i) Every merchant banker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc., issued by the Board or the Central Government and for redressal of investors grievances. (ii) The compliance officer shall immediately and independently report to the Board any non-compliance observed by him

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Merchant banking
and ensure that the observations made or deficiencies pointed out by the Board on \ in the draft prospectus or the Letter of offer as the case may be.

(7) PROCEDURE FOR INSPECTION Obligations of merchant banker on inspection by the Board: (i) It is the duty the merchant banker, who is being inspected, to produce to the inspecting authority books, accounts and other documents in his custody or control and furnish him with the statements and information relating to his activities as a merchant banker. (ii) The merchant banker shall allow the inspecting authority to have reasonable access to the premises occupied by such merchant banker. (iii) The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any principal officer, director, partner, proprietor and employee of the merchant banker. (iv) It shall be the duty of the merchant banker to give to the inspecting authority all assistance in connection with the inspection which the merchant banker may reasonably be expected to give.

(8) CODE OF CONDUCT FOR MERCHANT BANKERS 1. A Merchant Banker shall make all efforts to protect the interests of investors. 2. A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business.

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Merchant banking
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 independent professional judgment. 5. A Merchant Banker shall endeavor to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. 6. A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer. 7. A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. 8. A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its interest. 9. A Merchant Banker shall not divulge to anybody either orally or in writing, directly or indirectly, any confidential information about its clients which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force. 10.A Merchant Banker shall maintain arms length relationship between its merchant banking activity and any other activity. 11.A Merchant Banker shall be responsible for the acts or omissions of its employees and agents in respect of the conduct of its business.

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Merchant banking SERVICES OF MERCHANT BANKERS

Introduction Among the important financial intermediaries are the merchant bankers. The services of Merchant bankers have been identified in India with just issue management. It is quite common to come across reference to merchant banking and financial services as though they are distinct categories. The services provided by merchant banks depend on their inclination and resources - technical and financial. Merchant bankers (Category 1) are mandated by SEBI to manage public issues (as lead managers) and open offers in take-over. These two activities have major implications for the integrity of the market. They affect investors' interest and, therefore, transparency has to be ensured. These are also areas where compliance can be monitored and enforced.

Merchant banks are rendering diverse services and functions, which are as follows:

Issue Management Underwriting Mergers & Acquisitions Project Counselling Loan Syndication Restructuring service Corporate Advisory Services

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Merchant banking

Factoring Services Asset Securitization Forex Services Hire Purchase Lease finance Venture capital

SCOPE

OF

MERCHANT

BANKING

SERVICES:
In the present dynamic environment where public money is playing a vital role in financing a large number of projects, both in the public and private sectors, Merchant Banking has a significant role in managing the show and meeting the growing demands for funds by the corporate sector. Merchant Banking includes a whole gamut of activities which meet the needs of both corporate and individual investors and which range from identification, evaluation, promoting and financing of projects (both domestic and overseas) by raising resources in the equity and long-term loans, to organize and participate in international consortia, to raise foreign currency loans and to offer advisory services on various matters related to finance, investment, capital management, structure, mergers, amalgamation, takeovers and acquisitions. They also play a useful role in the portfolio management, money market operations, venture capital, leasing, etc. Merchant bankers act as a guide for the

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Merchant banking
entrepreneurs who are unaware, or have little knowledge or experience, of the complexities involved in the above spheres. In addition to the above, the scope of Merchant Banking services has extended to providing advisory services to companies to increase or divest their stakes, public sector undertaking disinvestments, international issues, etc. With the OTCEI being operation now, Merchant Bankers will have a key role to play in terms of appraising the projects and offering two-way quotes for market making in case of entrepreneur going for listing in the above exchange. Merchant Bankers act as a critical link between the corporate who are intend to raise funds and the investors who are interested to invest in securities Industry. Merchant Bankers are also Besides issue management, the undertake the activities like

underwriting connected with the public issue management business, Managing/advising on International offerings of Debt/Equity i.e., GDR, ADR, Bonds and other instruments, Private placement securities, Primary or Satellite dealership of government securities, Corporate Advisory services related to securities market (e.g., Takeovers, acquisitions, disengagement), Stock-Broking, Advisory Services for projects, Syndication of rupee term loans and International Financial Advisory Services. The services can be represented as follows: -

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Merchant banking

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SERVICES BANKERS

RENDERED

BY

MERCHANT

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. When companies seek to raise resources for implementation of a new project or finance expansion or modernization or diversification of an existing unit or fund long term working capital requirement, they retain the services of a merchant banker. To a large extent the type of issue would vary with the purpose for which funds are raised. Merchant bankers when retained as managers to issue will have to assist the company in all the stages connected with public issue. 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 Obtaining consent/acknowledgement from SEBI.
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exchanges.

Merchant banking

Appointing bankers, underwriters, brokers, advertisers, Obtaining the consent of all the agencies involved in the Holding road shows, to sell the issue. These shows are held

printers etc.

public issue.

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 Deciding the dates of opening and closing of the issue. Obtaining the daily report of application money collected at Obtaining subscription to the issue. After the close of the issue, obtaining consent of stock

collected.

various branches.

exchange for deciding basis of allotment etc.

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Merchant banking

Corporate advisory services relating to the issue

In India, the pricing of issues is now freely decided by the company, with valuable inputs from the merchant bankers, who have to sell the issue at the decided price. The pricing of the issue especially in a public issue is very important. The pricing has to be such, that the investors will be attracted to invest in the issue at that price, at the same time the company should get the premium that it is looking for. After all, the premium can play a very role in deciding the companys capital structure, as larger the premium lesser will be the requirement for borrowed funds. The promoter also needs to decide whether to go in for a fresh issue or to go for a rights issue. However this will depend mainly on the quantum of funds that the company needs to raise. The success of the issue is dependent on the selection of the right type of security. In this matter, the expert advice of merchant bankers is of immense importance. In the issue management the merchant bankers have to coordinate the various agencies to the issue. The success of the issue depends on the cooperation of all the agencies involved.

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Merchant banking
The merchant bankers offer following services during the public issues: Preparing an action plan and budget for the total expenses for the issue. Preparation of application to SEBI and assistance in obtaining the consent from SEBI Drafting of the prospectus. Selection of underwriters. Brokers etc. Selection of bankers to the issue. Selection of advertising agency for publicity. Obtaining approval of the institutional underwriters and stock exchanges for publication of the prospectus. Companies are free to appoint one or more agencies as Managers to an issue. SEBI guidelines insist that all issues should be managed by at least one authorized merchant banker, functioning either as the sole or lead manager to the issue. Ordinarily, not more than two merchant bankers should be associated as lead managers, advisors and consultants to a public issue. In issues of over Rs. 100 crores, the number could be up to a maximum of four. The responsibilities of merchant bankers in management of public issues are many. Some of these are: We have seen that many unscrupulous promoters have raised money from the market. This has hurt the investors a lot and has also made investors nervous about stock market investments. This

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in turn affects the functioning of stock markets both the primary and the secondary markets. It is therefore necessary that merchant bankers are satisfied with the viability of the project, which they can then sell to the investors with confidence. themselves with good issues. The merchant banker should act as the custodians of the investors money and this puts a lot of responsibility on them. To discharge this function the merchant bankers have to exercise due diligence independent by verifying the contents of the prospectus and the reasonableness of the views expressed therein. It is the responsibility of the merchant bankers to get the securities listed on all the stock exchanges mentioned in the prospectus. With the introduction of Demat accounts the complaints about allotment have surely gone down. It is the responsibility of the merchant bankers to ensure timely refunds and allotment of securities to the investors. The merchant bankers have to certify that they verified everything and that they believe it to be true. This assures the investing public about the safety of their investment. The precautions by the merchant bankers would ensure that all the fake companies, whose intention is to defraud the investors, dont have access to the market. It is therefore important for the reputation of merchant bankers, to only associate

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UNDERWRITING Underwriting is like insurance against the failure of an issue. It is a guarantee to the issuing the company, that the money that it requires for its project will definitely be raised. It means that even if the issue is not fully subscribed to by the public, the underwriters will make up the short fall. Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription for the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter takes, he is paid commission. Underwriting is a device that ensures the success of new issues. New companies entering the markets for the first time, always face number of problems in raising funds from the market. One of the biggest problems of course that the company is not well known to the investors and many of them will be unwilling to invest their money in such ventures. Many a times even existing companies may find it difficult to raise money, due to some reasons. Issuing companies therefore approach different underwriters with a request to underwrite the issue. Underwriters on their part need to satisfy themselves about the viability of the project and also about the integrity of the promoters of the company. It must be noted that when an issue is under subscribed, the underwriters will pick the shares and only if the

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project is good enough, then in future they can sell the shares in the market and get not only their money back, but can also make a decent profit as well. It is obligatory for the merchant bankers to accept a minimum 5% underwriting in the issue subject to a ceiling. By taking underwriting in an issue managed by them, they show their full commitment to the issue that they are managing. The SEBI has made it mandatory for issuing companies to underwrite all issues.

MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin-offs, carveouts or tracking stocks.

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Role of Merchant Banker Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in negotiating on one with corporate interested in hiving of divisions/companies which are not with in the purview of the long-term business strategy of the group/company, and on the other hand for Corporate interested in non organic growth by acquiring companies/units for reason strategic or non strategic in nature. Takeovers may be hostile or friendly in nature, hostile takeovers are without the consent of the company and company being takeover may work out an anti takeover strategy to counter the threat. Merchant Bankers provide following services in M&A: Identification of potential takeover targets.

Financial & Technical appraisal of the merger/takeover proposal. Negotiation with the parties for arriving at the suitable price or exchange ratio. Assistance in obtaining necessary approval & addressing procedural & legal issues.

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PROJECT COUNSELLING

Introduction Project counseling is very important and lucrative merchant banking services which only very few merchant bankers having advantages of knowledge, skills and experience over others are able to render satisfactorily. The corporate seek advice in respect of identification of profitable investment opportunities in the related business areas (like forward/backward integration) or as part of diversification process. The merchant bankers carry out detailed studies on product demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study. It may involve arrangement of a foreign collaboration, advice on technical parameters and also legal issues.

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Scope of services Project counseling services are needed by industrial entrepreneurs in India in the following areas: Preparation of project report.

Deciding upon the financing pattern to finance the cost of the project. Aspects of project appraisal with financial institutions/banks.

LOAN SYNDICATION 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 or consortium as in the case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans from commercial banks. Scope of service Once the client company has decided about the project proposed to be undertaken, the next step is looking for the sources wherefrom 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

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complying with all the formalities involved in the sanction and disbursal of loan rests with the merchant bankers who provide the service of 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 working for and on behalf of their clients. RESTRUCTURING SERVICES Merchant bankers assist the management of the client company to successfully restructure various activities, which include mergers and acquisitions, divestitures, management buyouts, joint venture among others. To help companies achieve the objectives of these restructuring strategies, the merchant banker participates in different activities at various stages which include understanding the objectives behind the strategy (objectives could be either to obtain financial, marketing, or production benefits), and help in searching for the right partner in the strategic decision and financial valuation of the proposal.

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CAPITAL ASSISTANCE

In providing financial assistance, merchant banks offer a full understanding of all facets of the capital markets. This includes all types of debt and equity financing available from both the domestic and international markets. A merchant banker, cognizant of capital costs, looks for the best sources of capital, including its restrictions and dollar limitations. It should be understood that interest rates are not the only definition of capital costs. Restrictions on availability, prepayment terms, and operating effectiveness can often outweigh what might appear to be inexpensive capital with low interest rates. Too often, capital includes costs, which force an entrepreneur or a business to undertake undesirable actions. In the short-run, some actions might be necessary, but often in the long run are detrimental. The traditional merchant banker understands these capital limitations and can structure a transaction, which is beneficial to all sides of the table -- not just the capital source. He also knows how to substitute one type of capital for another, sometimes utilizing internal sources from asset repositioning or

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cash creation from improvements in working capital. He understands fully the risk versus return elements necessary to complete the capital procurement process.

CORPORATE ADVISORY SERVICES

Merchant bankers offer customised solutions to solve the financial problems of their clients. Advice is sought in areas of financial structuring (as shown in the Modern Manufacturing case above). Merchant bankers study the working capital practices that exist within the company and suggest alternative policies. They also advise the company on rehabilitation and turnaround strategies, which would help companies to recover from their current position. They also provide advice on appropriate risk management strategies like hedging strategies.

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FACTORING SERVICE

Role Of Merchant Banker In Factoring The merchant banker may act as factor organization with a view to earning a great amount of commission. The factor provides the following services: (a) Financing (b) Advisory services if necessary (c) Collection of bills/Account Receivable against sales proceeds. (d) Maintenance of sales ledger (e) Provide further if necessary f) Covering losses if there are any

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ASSET SECURITIZATION

It is a process through which some inactive assets (mortgage assets) are converted into cash/active assets. It is long-term debt financing. Here assets are converted into long-term bonds. The whole process is done by the Special Purpose Vehicle (SPV). In this approach, the merchant banker for issuance of security bonds against the assets with a matching of time and terms between mortgage property and security bonds. Here the selection of asset is generally considered on the basis of the following: (I) Quality of assets (ii) Certainty of repayment (iii) Good ranking from the credit rating agency. The process of asset securitization takes place in the following firms:

Originating Institutions/Firm Special Purpose Vehicle (SPV) Merchant Banker (MB)

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FOREX SERVICES

Role of merchant banker in Forex function The currency values, interest rates, share index and commodities affect the financial derivatives like futures, swaps and other tools of risk management. Corporates therefore employ well-trained professionals to manage treasury and forex functions so that they can ensure competent management. Thus, this service is provided to Corporates through merchant bankers. Merchant bankers assess various markets to advice Corporates or other banks that needs currency. Merchant bankers constantly update about the policies of the regulatory bodies, monitors the current prices, makes predictions based on the analysis of trends etc

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HIRE PURCHASE SERVICE

Hire-purchase involves a system under which term loans for purchases of goods and services are advanced to be liquidated in stages through a contractual obligation. The goods whose purchases are thus financed may be consumer goods or producer goods or they may be simply services such as air travel. Hire-purchase credit may be provided by the seller himself or by any financial institution. However, unlike in other countries, the emphasis in India is on the provision of instalment credit for productive goods and services rather than for purely consumer goods. Suppliers of hire-purchase finance include retail and wholesale traders, commercial banks. Role of Merchant Banker Merchant Banker undertakes the activity of financing for hirepurchase activities. The merchant banker looks more to the creditworthiness and business morality of the buyer than the value of security.

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LEASE FINANCE COMPANIES

Lease finance companies provide finance to acquire the use of assets for a stipulated period of time without owning them. The user of the asset is known as the lessee, and the owner of the asset is known as the Lesser. Leasing is medium-term arrangement for finance. Role of Merchant Banker Merchant Bankers helps in assessing the credit risk of industrial borrowers. The merchant bankers provide help in evaluating lease proposals. He analyse the merits and demerits of lease finance with reference to a given proposal and leave it to their clients to decide on the appropriate source and type of finance, thus enlarging their range of choices and the variety of services available to them.

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VENTURE CAPITAL Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves. Role of Merchant Banker Merchant Bankers assist ventures proposals of technocrats, with high technology, which are new, and high risk. To seek assistance from venture capital funds or companies. They also provide technical, financial & managerial services & help the company to set up a track record. The assistance should mainly be for equity support, through loan support to supplement this may be extended.

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MERCHANT BANKING: INDIAN SCENARIO Merchant Banking activity was formally initiated into the Indian capital markets when Grindlays Bank received the license from Reserve Bank in 1967. Grindlays which started with management of capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research. Apart from meeting specially, the needs of small-scale units it provided management constancy services to large and medium sized companies. Following Grindlays Bank, Citi Bank set-up its Merchant Banking division in 1970. The division took up the task of assisting new entrepreneur and existing units in the evaluation of new projects and raising funds through borrowing and issue of equity. Management consultant services were also offered. Consequent to the recommendations of Banking Commission in1972, that Indian bank should start Merchant Banking Division in 1972. In the initial years the SBIs objective was to render corporate advice and assistance to small and medium entrepreneurs. The economic reforms initiated by the Government since July 1991 in the files of industry, trade and financial sector have paved the way for rapid development of the economy. Several projects have been conceived since then and almost all the major groups in the country that have announced their intentions to set-up mega projects in infrastructure sector envisaging investment of thousands
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of crores. With several large projects been set-up and many more on the drawing board, the demand for a complete range of Merchant Banking services encompassing project advisory services, issue management and financial advisory services for corporate sector has increased considerably. This has led to a sharp growth in the Merchant Banking business in the last 2 years.

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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 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. classified as under: Merchant bankers will have to conduct management of capital issues in a different fashion than what is being done at present 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 espouse entrepreneurship in industrial undertakings in higher degree so as to reduce their dependence on land farming to other means of rural avocations. Alternatively, this poses a big challenge for the merchant bankers to manage the surplus money available with the villagers by holding Some of the areas of challenges, which have been explored on the basis of research, are

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portfolio on their behalf or by channelising it directly to industry in the shape of fixed deposits, etc. 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. They should so closely associate with the units so as to smell developing weakness in the management of the enterprise and suggest timely action to check any mis-management leading to sickness of the industrial unit.

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

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investment activity in India. Merchant bankers, therefore, have to take latest information about the economic, social and political environment of our country to foreign countries and apprise the foreigners with the facilities and relaxations in various rules and regulations of the Government and the policy framework available for their benefit incase they choose to invest in India or lend their technological expertise to Indian entrepreneur and/or to collaborate in any other useful manner.

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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CURRENT ISSUE: Negligence by Merchant Bankers

Merchant bankers are required to vet material, financials and statements of companies which propose to raise capital from the market through IPOs (initial public offers) or rights offerings. They are also required to attend to certain important postissue activities, like share allotment and refunds. Technically called due diligence, this exercise is to be conducted diligently because prospective investors decide to invest or not to invest based upon what the due diligence conducted by investment bankers reveals.

However, an inspection conducted by the market regulator SEBI has revealed that a few Merchant bankers have not gone about their job seriously if anything, they were far from diligent.

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Their vetting of the proposal of companies which raised money from the market was characterised by sheer neglect and not due diligence. Most of these investment bankers are well known names in Merchant banking circles. Kotak, Enam Financial, DSP Merrill Lynch, SBI Caps and HSBC are amongst them. Peeved with the scant respect shown by these merchant bankers to its instructions, SEBI is to launch adjudication proceedings against them to impose monetary penalty. In the case of Yes Bank, the information furnished in the IPO documents with regard to the promoters did not tally with what was furnished to the Reserve Bank of India (RBI). SEBI has pulled up DSP Merrill Lynch, the investment banker, in this case. SEBI has also pulled up another investment banker, viz., Enam, associated with the IPO of Yes Bank a scam featuring manipulation of retail investors had surfaced then. HSBC and SBI Caps failed to furnish key information in respect of the open offers managed by them. To top it all, in some cases, there have been as many as ten to fifteen lapses in the offer documents. The investment bankers did not follow the prescribed procedure while conducting due diligence. They did not verify the plant and machinery of the companies whose issue they had managed. Litigations pending against company directors had not been disclosed in the documents. Even the financials furnished in the documents were incorrect. In the case of one IPO, the post-issue capital of the company was higher than its authorised capital something which even a PUC
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commerce student would have detected. Surely, due diligence could not get worse than this! The company in question was Weal Infotech and the due diligence was conducted by Aryaman Financial. Even in respect of open offers, such lacunae have been detected by SEBIs inspection team. In the case of Garware Offshore open offer, for example, the documents failed to provide important information concerning the target company. The investment banker associated with the offer was HSBC. Incidentally, HSBC had been taken to task by the regulator on an earlier occasion too. These unfortunate incidents show that however vigilant the regulator is, violations do occur and violation could be committed even by entities we normally tend to hold in high esteem. This is truer in India where even established theories meet their Waterloo.

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CONCLUSION Merchant banks are private financial institution.Their primary sources of income are PIPE (Private Investment In Public Entities ) financings and international trade.Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation. Because they do not invest against collateral, they take far greater risks than traditional banks. Because they are private, do not take money from the public and are international in scope, they are not regulated. Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help.The reason that businesses should develop a working relationship with a merchant bank is that they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists. The Growth of capital Market in India in the 90s is mainly due to the key role played by the merchant banking divisions of leading developments banks as well as commercial banks. They dominate the market in providing professional service to the corporate sector The importance of merchant bankers as sponsors of capital issues is reflected in their major services. In view of the over-whelming importance of merchant bankers in the process of capital issues, it is now mandatory that all public issues should be managed by merchant bankers.

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Thus The Scope of merchant banking activities Merchant banking activity helps:

In channelising 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, advertising agency, printers, underwriters, brokers etc. To ensure the compliance with rules and regulations governing the securities market

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BIBLIOGRAPHY
I have collected all the information from the following sources:

PRIMARY DATA: a) INDMERCHANT BANK, FORT. b) UNION BANK OF INDIA, FORT. SECONDARY DATA: FROM BOOKS a) MERCHANT BANKING

-H.R.SUNEJA
b) Capital Markets & financial services

-ANIL AGASHE
c) Management accounting & financial analysis

_M .Y .KHAN

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-P.K.JAIN
FROM WEBSITES a) www.unionbankofindia.com
b) www.indbank.org

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