MERCHANT BANKING

INTRODUCTION
Investment Banking is an American Synonym of Merchant Banking;
Merchants used to attend to extending of loans and arranging finance for trade purposes; As the time passed the banking assumed more importance and the merchants switched over to banking activities, hence the term merchant Banking took placed.

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Meaning

Merchant banking is a non-banking financial activity similar to banking; Merchant banking is a fee based business, where the bank assumes market risk but no long-term credit risk. These are financial institutions providing valuable solutions such as:Acceptance of bills of exchange; Corporate finance; Portfolio management; Other non-banking services.
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definition
An
organization that underwrites securities for corporations, advices such clients on mergers, and is involved in the ownership of commercial ventures. According to Mr. Rosenburg

Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager; consultant adviser; or one rendering corporate advisory services in relation to such activities in the management. According to MOF, India
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Origin
In Britain started in the 13th century when a few private firms engaged themselves in foreign trade and finance.
Based on the British model Dutch and Scottish traders started merchant banking. In USA merchant banking was developed by the European bankers.

West Germany developed close link with the commercial banks thus offering variety of services to customers.
In 1972 merchant banking practice was started in South Africa
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Indian scenario
In 1857, the chartered mercantile bank of india started its operations.
During the 19th century, the foreign bankers operated in India through the popular agency house called East India House. National Grindlays Bank opened its branch in 1967.

SBI floated its merchant banking division in 1972.

Some of the banks which started Merchant banking are Central bank of India, BOI, syndicate bank, BOB, Standard chartered bank, ICICI, IFCI and IDBI etc. 1/20/2013 6

Importance of Merchant Banking

1)Need for Merchant Banking is felt in the wake of huge public savings lying untapped. 2)Merchant bankers can play highly significant role in mobilizing funds of savers to investible channels. 3)assuring promising returns on investments and thus can assist in meeting the widening demand for investible funds for economic activity.

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Functions
Issue Management Services to act as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues Project appraisal; Corporate Advisory Services; Underwriting of equity issues; Banker to the Issue/Paying Banker; Refund Banker; Monitoring Agency; Debenture Trustee;
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Categories
To act as a merchant banker, a person or firm should hold a certificate granted by the regulator- the securities and exchange board of India. SEBI regulations provide for 4 categories of Merchant Bankers; Category I: It Will take up activities associated with issue management. Category II: Allowed to carry the roles of advisor, consultant, co-manager, underwriter and portfolio manager; Category III: Allowed to act as underwriter, advisor, and consultant; and 1/20/2013 9 Category IV: Only allowed to act as advisor or consultant.

CAPITAL ADEQUACY NORMS :

Category I

: Rs. 5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil

Services of Merchant Bankers

Corporate counseling; Project Counseling; Loan syndication; Management of capital issues; Advisory services to mergers and takeovers; Consultancy to sick industrial units; Corporate Advisory services; Portfolio management; Leasing; and Issue Management.

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Principal steps in the issue of Prospectus

Design and vetting of prospectus; Nature of instrument; Pricing of the issue; Appointment of underwriters; Appointment of bankers; Appointment of registrars; Appointment of brokers and principal brokers.

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Qualities of Merchant Banker

Should have knowledge and information about the capital markets, trends in the stock exchange, psychology of the investing public, and technological and economical changes in the country; Ability to analyze and evaluate various technical, financial, and economical aspects concerning the formation of an industrial project; Safeguard the interest of the investing public. Integrity and maintenance of high professional standards are necessary for the success;
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Conti
Should realize the changing environment of capital market and keep cordial relationship with the investors;
They should develop innovative capital market instruments for satisfying the changing needs of investors; Must restrict, concentrate and develop their strength to keep costs under control.

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Filing of the prospectus

Printing and dispatch of prospectus and application form; Filing of initial listing application; Promotion of the issue; Statutory announcement; Collection of applications; Processing of applications; Allotment of shares; Listing of the issue; Cost of public issue.

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Problems of Merchant Bankers

As per SEBI guidelines, Merchant Bankers are authorized to undertake only issue related activities, which restrict their scope of activities. Issuing companies do not adhere to the schedule in allotment and refund of application money thereby creating trouble for the image of these bankers at the investors.
Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services

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SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for authorisation which prevents young,specialised professionals into merchant banking business Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problem Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services

Guidelines for the Merchant Bankers

Should have qualification in finance, law or business management; Should have adequate office space, equipment and manpower;

At least 2 merchant bank operations qualified persons to be appointed;

Should be fair in all transactions; SEBI will supervise the activities of merchant bankers.
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Continue
SEBI has laid responsibility on merchant banks for the true disclosures and factual statements made on the prospectus and the authenticity of such statements; SEBI has the power to suspend or cancel the authorization of merchant bankers in case of any violation of the guidelines; Merchant bankers should send quarterly reports on the public issue and rights issue on hand, the names of the companies, size of the issue, and other details; Should abide by the code of conduct prescribed by SEBI; For the issue over Rs. 100 crs, the number of BRLMs should be 4 to 5; Merchant bankers should make an agreement with corporate bodies about their mutual rights, liabilities and obligations etc.

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Future prospects in India

Growth of primary market;

Entry of foreign investors; Changing policy of financial institutions; Development of debt market; Corporate restructuring.
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Examples of Merchant Banking

The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization Prospectus and RoC filing.