An Assignment on

“MERCHANT BANKING, ITS FUNCTIONING AND SCOPE IN INDIA”

Submitted by

SHISHIR KUMAR SANKEESA (MM-09-11432)


Definition of a Merchant Banker

 The merchant bankers are those financial intermediaries involved with the activity
of transferring capital funds to those borrowers who are interested in borrowing.
 They guarantee the success of issues by underwriting them.
 Merchant Banks are popularly known as “issuing and accepting houses”.
 Unlike in the past, their activities are now primarily non-fund based (Fee based).
 They offer a package of financial services. The basic function of merchant banks
is marketing corporate and other securities that are guaranteeing sales and
distribution of securities and also other activities such as management of customer
services, portfolio management, credit syndication, acceptance credit, counseling,
insurance, etc.

Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital Markets when
Grindlays bank received the license from reserve bank in 1967. Grindlays 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. Even it provides management consulting services to meet the
Requirements of small and medium sector rather than large sector. Citibank Setup its
merchant banking division in 1970. The various tasks performed by this divisions namely
assisting new entrepreneur, evaluating new projects, raising funds through borrowing and
issuing equity. Indian banks Started banking Services as a part of multiple services they
offer to their clients from 1972. State bank of India started the merchant banking division
in 1972. In the Initial years the SBI's objective was to render corporate advice And
Assistance to small and medium entrepreneurs. Merchant banking activities is of course
organized and undertaken in several forms. Commercial banks and foreign development
finance institutions have organized them through formation divisions, nationalized banks
have formed subsidiaries companies and share brokers and consultancies constituted
themselves into public limited companies or registered themselves as private limited
Companies. Some merchant banking outfits have entered into collaboration with
merchant bankers abroad with several branches

Registration of Merchant bankers with SEBI

It is mandatory for a merchant banker to register with the SEBI. Without holding a
certificate of registration granted by the Securities and Exchange Board of India, no
person can act as a merchant banker in India.

1) Only a body corporate other than a non-banking financial company shall be eligible to get
registration as merchant banker.
2) The applicant should not carry on any business other than those connected with the
Securities market.
3) All applicants for Merchant Bankers should have qualification in Finance, law or
Business Management.
4) The applicant should have infrastructure like office space, equipment, manpower etc.

5) The applicant must have at least two employees with prior experience in merchant
banking.

6) Any associate company, group company, subsidiary or interconnected company of the

applicant should not have been a registered merchant banker

7) The applicant should not have been involved in any securities scam or proved guilt for
any offence

8) The applicant should have a minimum net worth of Rs.5 Crores.

The various categories for which registration can be obtained are:

1) Category I – to carry on the activity of issue management and to act as adviser,

consultant, manager, underwriter, portfolio manager.
2) Category II - to act as adviser, consultant, co-manager, underwriter, portfolio
manager.
3) Category III - to act as underwriter, adviser or consultant to an issue
4) Category IV – to act only as adviser or consultant to an issue

The capital requirement for carrying on activity as merchant banker:

The capital requirement depends upon the category. The minimum net worth requirement
for acting as merchant banker is given below:
Category I – Rs. 5 crores
Category II – Rs, 50 lakhs
Category III – Rs. 20 lakhs
Category IV – Nil

Procedure for getting registration:

An application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers)
Regulations, 1992. SEBI shall consider the application and on being satisfied, issues a
certificate of registration in Form B of the SEBI (Merchant Bankers) Regulations, 1992.

Registration fee payable to SEBI:

Rs. 5 lakhs which should be paid within 15 days of date of receipt of intimation regarding
grant of certificate. Validity period of certificate of registration is three years from the
date of issue. Three months before the expiry period, an application along with renewal
fee of 2.5 lakhs should be submitted to SEBI in Form A of the SEBI (Merchant Bankers)
Regulations, 1992. SEBI shall consider the application and on being satisfied renew
certificate of registration for a further period of 3 years.
Merchant Bankers in India:

There are 135 Merchant bankers who are registered with SEBI now in India. There are public
sector, Private sector and foreign players registered with SEBI. The below are the examples of
few of the Merchant bankers in each of the Public, private and foreign players.

Public sector Merchant Bankers:

• SBI CAPITAL MARKETS LTD

• PUNJAB NATIONAL BANK

• BANK OF MAHARASHTRA

• IFCI FINANCIAL SERVICES LTD

• KARUR VYSYA BANK LTD,

• STATE BANK OF BIKANER AND JAIPUR

Private Sector Merchant Bankers:

• ICICI SECURITIES LTD

• AXIS BANK LTD.(FORMERLY UTI BANK LTD.)

• BAJAJ CAPITAL LTD

• TATA CAPITAL MARKETS LTD

• ICICI BANK LTD

• RELIANCE SECURITIES LIMITED

• KOTAK MAHINDRA CAPITAL COMPANY LTD

• YES BANK LTD.

Foreign Players in Merchant Banking:

• GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD.

• MORGAN STANLEY INDIA COMPANY PVT LTD

• BARCLAYS SECURITIES (INDIA) PVT. LTD

• BANK OF AMERICA, N.A

• DEUTSCHE BANK

• DEUTSCHE EQUITIES INDIA PRIVATE LIMITED

 • BARCLAYS BANK PLC

• CITIGROUP GLOBAL MARKETS INDIA PVT. LTD.

• DSP MERRILL LYNCH LTD

• FEDEX SECURITIES LTD

Note: Please find the List of all registered Merchant Bankers with SEBI at the end in Appendix-1

Major difference between Merchant banking and Investment Banking

Sources of revenue could be [a] Fund based source & [b] Fee based source The fund based income is that
revenue gained from interest, lease rental, and as well as income from capital market investments. The
fee-based income is that source gained from banking, advisory services, custodial services etc. The major
difference between the Merchant bankers and Investment Bankers is:

Merchant Banking is purely fee based.

Investment banking is both fee based and fund based.

A merchant banker can undertake only those activities, which are relating to securities market and which
do not require registration / have been granted exemption from registration as an NBFC from RBI.

In particular a merchant Banker can undertake the following activities

Managing of public issue of securities

Underwriting connected with the public issue Management Services acting like as Book Running
Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues

Managing advising on international offerings of dept / equity i.e. GDR, ADR, bonds and other
instruments

Private placements of securities

Primary or satellite dealership of GOVT securities

Corporate advisory services relate to securities market eg: takeovers acquisitions and
disinvestments

Stocking broking

Advisory services for projects and Project appraisals.

Syndication of rupee term loans

International financial advisory services.

Project counseling and pre investment activities

Undertaking Feasibility studies

Issuing Project reports

Design of capital structure

Mobilization of funds from NRIs

Foreign currency finance

Mergers and takeovers

Venture capital services

Buy back and public deposits

Refund Banker

Monitoring Agency

Debenture Trustee

Services of Merchant Banks in detail

• Project Counseling:

Project counseling includes preparation of project reports, deciding upon the financing pattern to finance
the cost of the project and appraising the project report with the financial institutions or banks. It also
includes filling up of application forms with relevant information for obtaining funds from financial
institutions and obtaining government approval.

• Management of debt and equity offerings

This forms the main function of the merchant banker. He assists the companies in raising funds from the
market. The main areas of work in this regard include: instrument designing, pricing the issue, registration
of the offer document, underwriting support, and marketing of the issue, allotment and refund, listing on
stock exchanges.

• Issue Management:

Management of issue involves marketing of corporate securities viz. equity shares, preference shares and
debentures or bonds by offering them to public. Merchant banks act as an intermediary whose main job is
to transfer capital from those who own it to those who need it. After taking action as per SEBI guidelines,
the merchant banker arranges a meeting with company representatives and advertising agents to finalize
arrangements relating to date of opening and closing of issue, registration of prospectus, launching
publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the
necessary resolutions. Pricing of issues is done by the companies in consultant with the merchant bankers.

• Managers, Consultants or Advisers to the Issue:

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

• Underwriting of Public Issue:

Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount
underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot underwrite more
than 15% of any issue.

• Portfolio Management:

Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by
different companies and government securities. Portfolio management refers to maintaining proper
combinations of securities in a manner that they give maximum return with minimum risk.
• Restructuring strategies

A merger is a combination of two companies into a single company where one survives and other loses its
corporate existence. A takeover is the purchase by one company acquiring controlling interest in the share
capital of another existing company. Merchant bankers are the middlemen in setting negotiation between
the two companies. 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.

• Off Shore Finance:

The merchant bankers help their clients in the following areas involving foreign currency.

(a) Long term foreign currency loans

(b) Joint Ventures abroad

(c) Financing exports and imports

(d) Foreign collaboration arrangements

• Non-resident Investment:

The services of merchant banker includes investment advisory services to NRI in terms of identification
of investment opportunities, selection of securities, investment management, and operational services like
purchase and sale of securities.

• Loan Syndication:

Loan syndication refers to assistance rendered by merchant bankers to get mainly term loans for projects.
Such loans may be obtained from a single development finance institution or a syndicate or consortium.
Merchant bankers help corporate clients to raise syndicated loans from banks or financial institutions.

• Corporate Counseling and advisory services:

Corporate counseling covers the entire field of merchant banking activities viz. project counseling, capital
restructuring, public issue management, loan syndication, working capital, fixed deposit, lease financing
acceptance credit, etc. Merchant bankers also offer customized solutions to their client’s financial
problems. Like determining the right debt-equity ratio and gearing ratio for the client; the appropriate
capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the
client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround
management. In case of sick units, merchant bankers may design a revival package in coordination with
banks and financial institutions. Risk management is another area where advice from a merchant banker is
sought. He advises the client on different hedging strategies and suggests the appropriate strategy.
• Placement and distribution

The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual
fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution
network of the merchant banker can be classified as institutional and retail in nature. The institutional
network consists of mutual funds, foreign institutional investors, private equity funds, pension funds,
financial institutions etc. The size of such a network represents the wholesale reach of the merchant
banker. The retail network depends on networking with investors.

Role of merchant banker in a primary market issue management

Merchant banker is the intermediary appointed by companies in the primary market issue. It has to look at
the entire issue management and work as the Manager to the Public Issue.

Principal steps that Merchant bankers have to perform in a bringing up a Public issue are as follows :

Vetting of Prospects: The prospectus is a document to communicate information about the company and
the proposed security issue to the investing public. The draft prospectus containing the disclosures has to
be vetted by SEBI before a public issue is made.

Appointment of Underwriters: An underwriter agrees to subscribe to a given number of shares in the

event the public do not subscribe to them. The underwriter, in essence, stands guarantee for public
subscription in consideration for the underwriting commission.

Appointment of bankers: The bankers to the issue collect money on behalf of the company from the
applicants.

Appointment of Registrars: The registrars to issue perform a series of tasks from the time the
subscription is closed to the time the allotment is made.

Appointment of Brokers and Principal Brokers: The brokers to the issue facilitate its subscription. Filing
of the Prospectus with the Registrar of Companies

Printing and dispatch of prospectus and application form: After the prospectus is filed with the
Registrar of Companies, the company should print the prospectus and the application form.

Filing of Initial Listing Application: Within ten days of filing the prospectus, the initial listing
application must be made to the concerned stock exchanges, along with the initial listing fees.

Promotion of the Issue: The promotional campaign typically commences with the filing of the
prospectus with the Registrar of Companies and ends with the release of the statutory announcement of
the issue.

Statutory Announcement: The statutory announcement of the issue must be made after seeking the
approval of the lead stock exchange. This must be published at least ten days before the opening of the
subscription list.
Collection of Applications: The statutory announcement (as well as the prospectus) specifies when the
subscription would open when it would close, and the banks where the applications can be made.

Processing of Applications: The application forms received by the bankers are transmitted to the
registrars to the issue for processing.

Establishing the Liability Underwriters: If the issue is undersubscribed, the liability of the underwriters
has to be established.

Allotment of Shares: If the issue is under-subscribed or just fully subscribed, the company may allot
shares applied for by the applicants after securing the formal approval of the concerned stock
exchanges(s)

Listing of the Issue: The detailed listing application should be submitted to the concerned stock
exchanges along with the listing agreement and the listing fee.

Costs of Public Issue: The cost of public issue is normally between 8 and 12 per cent depending on the
size of the issue and the level of marketing effort. The important expenses incurred for a public issue are
Underwriting Expenses, Brokerage, Fees to the Managers of the Issue, Fees for Registrars to the Issue,
Printing Expenses, Postage Expenses, Advertising and Publicity Expenses, Listing fees, Stamp duty. In
addition to the above procedural matter, the most important issue relates to the pricing of the issue. The
merchant banker has to see that the issue is priced properly.

Penalties Levied by SEBI on Merchant Bankers

The Securities and Exchange Board of India (SEBI) notifies regulations pertaining to the procedure of
holding enquiries and imposing penalties on Merchant Bankers. SEBI can appoint enquiry officers, can
the officer will also be able to impose the penalty on which the SEBI chairman will give the final verdict.
The regulations to be called Securities and Exchange Board of India (Procedures for Holding Enquiry by
Enquiry Officer and Imposing Penalty) Regulations (2002 )will cover not just merchant bankers but all
market intermediaries like portfolio managers, registrars and share transfer agents, underwriters,
debenture trustees, bankers to an issue, foreign institutional Investors, custodians, depository participants,
venture capital funds, mutual funds, collective investment schemes (CIS) and foreign venture capital
investors and bring them under the ambit of SEBI.

According to the notification, the penalty an enquiry officer can impose will be both minor and major.

Among the minor penalties, the enquiry officer can issue warnings or censure, prohibit the
intermediary from taking up new assignments or launch a new scheme for a period of six months.
It can also debar a partner or a whole time director of the intermediary from carrying out
activities as an intermediary in the firm or company, and other capital market-related institutions
for a period of six months. It can also suspend the certificate of registration for a period up to
three months.

Among the major penalties an enquiry officer can impose the cancellation of certificate of
registration and suspension of certificate of registration.

However, the regulations says that no order under these regulations shall be passed excepting after
holding an enquiry by an officer. To implement these regulations, SEBI has amended regulations
pertaining to various intermediaries and some of its regulations like Insider Trading Regulations, SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations and
Takeover Code Regulations.

Procedure for Inspection:

SEBI may inspect books of accounts, records and documents of merchant bankers to ensure that the
books of accounts are maintained in the required manner, that the provisions act rules, regulations are
compiled with, to investigate complaints against the merchant banker and to investigate suomoto in the
interest of securities business or investors interest in to the affairs of Merchant banker. SEBI may either
give a reasonable notice or undertake inspection without notice in the interest of investors.

The findings of the inspection report are communicated to merchant banker. SEBI may appoint a
qualified auditor to investigate in to the books of accounts or the affairs of merchant banker.

Penalties of Non compliance of conditions for registration and contravention of the provisions of the MB
regulations include suspension or cancellation of registration.

A penalty of suspension of registration of a merchant banker may be imposed when:

The merchant banker violates the provisions of act, rules or regulations

The merchant banker:
o Fails to furnish any information relating to his activities as merchant banker as required
by the board.
o Furnished wrong or false information
o Does not submit periodical returns, as required by the board.
o Does not cooperate in any enquiry conducted by the board.

The merchant banker fails to resolve the complaints of the investors or fails to give satisfactory
reply to the Board in this behalf.

The merchant banker indulges in manipulating or price rigging or concerning activities.

The merchant banker is guilty of misconduct or improper or un business like or unprofessional
conduct which is not in co ordinance with the code of conduct specified in schedule 3

The merchant banker fails to maintain the capital adequacy requirement in accordance with the
provisions of regulation 7.

The merchant banker fails to pay the fees

The merchant banker violates the conditions of registration.

The merchant banker does not carry out his obligations as specified in the regulation.
Defaults of The merchant banker and penalty points
SEBI categorized defaults and the penalty points that they attract.

___________________________________________________________

Defaults penalty points

_________________________________________________________

1. General Defaults 1

2. Minor Defaults 2

3. Major Defaults 3

4. Serious Defaults 4

__________________________________________________________

General Defaults:

For the purpose of penalty point, the following activities fall under general default and attract one
penalty point.

Non receipt of draft prospectus/letter of offer from the lead manager by SEBI, before filing with
registrar of companies/stock exchanges.

Non receipt of inter se allocation of responsibilities of lead managers in an issue by SEBI prior to
the opening of the issue.

Failure to ensure submission of certificate of minimum 90 % subscription to the issue as required
under Govt of India

Failure to ensure publicizing of dispatch of refund orders, shares/Debentures certificates, filing of
listing application by the issuer as required under Govt of India press notification.

Minor Defaults:

The following activities fall under minor default and attract two penalty points.

Advertisement, circular, broacher, press release and other issue related materials not being in
conformity with contents of the prospects.

Exaggerated information or Information extraneous to the prospectus is given by the associated
merchant bankers in any press conference, Investor conference, broker’s conference or other such
conference /meet prior to the issue for marketing of the issue arranged/participated by the
merchant banker.

Failure to substantiate matters contained in highlights to the issue in the prospectus.

Violation of the Govt of India letter regarding advertisements on new capital issues.

Failure to exercise due diligence in verifying contents of prospectus/ letter of offer.

Failure to provide adequate and fair disclosure to investors and objective information about risk
factors in the prospectus and other issue literature

Delay in refund/allotment of securities.

Non-handling of investor grievances promptly.

Major defaults:

The following activities fall under major default and attract three penalty points.

Mandatory underwriting not taken up by lead manager

Excess number of lead managers than permissible under SEBI

Association of unauthorized merchant banker in an Issue.

Serious Defaults:

The following activities fall under serious default and attract four penalty points.

Unethical practice by merchant banker and/or violation of code of conduct.

Non cooperation with SEBI in furnishing desired information documents, evidence as may be
called for.

A merchant banker on reaching the penalty points of eight (8) attracts action from SEBI in terms of
suspension/ cancellation of authorization.

To enable a merchant banker to take corrective action maximum penalty points awarded in a single issue
managed by a merchant banker are restricted to four (4)

In the event of joint responsibility same penalty point is awarded for all lead managers jointly responsible
for the activity. In the absence of receipt of inter se allocation of responsibilities, all lead managers to the
issue are awarded the penalty point.

Defaults in prospectus:

If highlights are provided, the following deficiencies will attract negative points

1) Absence of risk factors in highlights.

2) Absence of listing in highlights.

3) Extraneous contents to prospectus, if stated in highlights.

The maximum grading points of prospectus will be 10 and prospectus scoring greater than or equal to 8
points are categorized as A+, those with 6 or less than 8 as A, with 4-6 points as B, and score of less than
4 points, the prospectus falls in category C.
General Negative Marks:

If at all "Highlights" are provided in an issue:

Risk factors should form part of "Highlights", otherwise it will attract negative point of -1

Listing details, should form of part of " Highlights", otherwise it will attract negative point of -0.5

Any matter extraneous to the contents of prospectus, if stated in highlights, will attract negative
point of -0.5

CODE OF CONDUCT FOR MERCHANT BANKERS

1. A Merchant Banker shall make all efforts to protect the interests of investors.
2. A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct
of its business.
3. A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner.
4. A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise
independent professional judgment.
5. A Merchant Banker shall endeavor to ensure that-
a. Inquiries from investors are adequately dealt with;
b. Grievances of investors are redressed in a timely and appropriate manner;
c. Where a complaint is not remedied promptly, the investor is advised of any further steps
which may be available to the investor under the regulatory system.
6. A Merchant Banker shall ensure that adequate disclosures are made to the investors in a timely
manner in accordance with the applicable regulations and guidelines so as to enable them to make
a balanced and informed decision.
7. 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.
8. 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.
9. A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and
commercial considerations.
10. A Merchant Banker shall not make any statement, either oral or written, which would
misrepresent the services that the Merchant Banker is capable of performing for any client or has
rendered to any client.
11. A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its interest.
12. A Merchant Banker shall put in place a mechanism to resolve any conflict of interest situation
that may arise in the conduct of its business or where any conflict of interest arises, shall take
reasonable steps to resolve the same in an equitable manner.
13. A Merchant Banker shall make appropriate disclosure to the client of its possible source or
potential areas of conflict of duties and interest while acting as Merchant Banker which would
impair its ability to render fair, objective and unbiased services.
14. A Merchant Banker shall always endeavor to render the best possible advice to the clients having
regard to their needs.
15. 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.
16. A Merchant Banker shall ensure that any change in registration status / any penal action taken by
the Board or any material change in the Merchant Banker’s financial status, which may adversely
affect the interests of clients / investors is promptly informed to the clients and any business
remaining outstanding is transferred to another registered intermediary in accordance with any
instructions of the affected clients.
17. A Merchant Banker shall not indulge in any unfair competition, such as weaning away the clients
on assurance of higher premium or advantageous offer price or which is likely to harm the
interests of other Merchant Bankers or investors or is likely to place such other Merchant Bankers
in a disadvantageous position while competing for or executing any assignment.
18. A Merchant Banker shall maintain arms length relationship between its merchant banking activity
and any other activity.
19. A Merchant Banker shall have internal control procedures and financial and operational
capabilities which can be reasonably expected to protect its operations, its clients, investors and
other registered entities from financial loss arising from theft, fraud, and other dishonest acts,
professional misconduct or omissions.
20. A Merchant Banker shall not make untrue statement or suppress any material fact in any
documents, reports or information furnished to the Board.
21. A Merchant Banker shall maintain an appropriate level of knowledge and competence and abide
by the provisions of the Act, regulations made there under, circulars and guidelines, which may
be applicable and relevant to the activities carried on by it. The merchant banker shall also
comply with the award of the Ombudsman passed under Securities and Exchange Board of India
(Ombudsman) Regulations, 2003.
22. A Merchant Banker shall ensure that the Board is promptly informed about any action, legal
proceedings etc., initiated against it in respect of material breach or non compliance by it, of any
law, rules, regulations, directions of the Board or of any other regulatory body.
23. (a) A Merchant Banker or any of its employees shall not render, directly or indirectly, any
investment advice about any security in any publicly accessible media, whether real-time or non
real-time, unless a disclosure of his interest including a long or short position, in the said security
has been made, while rendering such advice.
(b) In the event of an employee of the Merchant Banker rendering such advice, the merchant
banker shall ensure that such employee shall also disclose the interests, if any, of himself, his
dependent family members and the employer merchant banker, including their long or short
position in the said security, while rendering such advice.
24. A Merchant Banker shall demarcate the responsibilities of the various intermediaries appointed
by it clearly so as to avoid any conflict or confusion in their job description.
25. A Merchant Banker shall provide adequate freedom and powers to its compliance officer for the
effective discharge of the compliance officer’s duties.
26. A Merchant Banker shall develop its own internal code of conduct for governing its internal
operations and laying down its standards of appropriate conduct for its employees and officers in
carrying out their duties. Such a code may extend to the maintenance of professional excellence
and standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict of
interests, disclosure of shareholdings and interests etc.
27. A Merchant Banker shall ensure that good corporate policies and corporate governance are in
place.
28. A Merchant Banker shall ensure that any person it employs or appoints to conduct business is fit
and proper and otherwise qualified to act in the capacity so employed or appointed (including
having relevant professional training or experience)
29. A Merchant Banker shall ensure that it has adequate resources to supervise diligently and does
supervise diligently persons employed or appointed by it in the conduct of its business, in respect
of dealings in securities market.
 30. A Merchant Banker shall be responsible for the acts or omissions of its employees and agents in
respect of the conduct of its business.
31. A Merchant Banker shall ensure that the senior management, particularly decision makers have
access to all relevant information about the business on a timely basis.
32. A Merchant Banker shall not be a party to or instrumental for -
a. Creation of false market;
b. Price rigging or manipulation or;
c. Passing of unpublished price sensitive information in respect of securities which are
listed and proposed to be listed in any stock exchange to any person or intermediary in
the securities market.

SEBI Regulations for Merchant Bankers

Merchant Bankers have been barred from undertaking activities other than related to the securities
market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19, 1997 to
provide that:

a. The applicant should be a fit and proper person;

b. A merchant banker has to seek separate registration for its underwriting or portfolio management
activities;
c. The categorization of merchant bankers I, II, III and IV has been dispensed with;
d. A merchant banker, other than a bank or a public financial institution, has been prohibited from
carrying any activities not pertaining to the securities market; and
e. The applicant should be a body corporate other than non-banking finance company.

The Merchant Bankers Regulations were amended on January 21, 1998 to provide time up to June 30,
1998 to sever its activities or hive off its activities not pertaining to the securities market. The Reserve
Bank of India has exempted merchant banking companies from the provisions of Reserve Bank of India
Act, 1934 relating to compulsory registration (section 451A), maintenance of liquid assets (section 451B),
creation of reserve fund (section 451C ) and all the provisions of the recent Directions relating to deposit
acceptance and prudential norms.

Merchant banking companies, to be eligible for the above exemption, are required to satisfy the following
conditions:

i. such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are
carrying on the business of merchant banker in accordance with the Rules / Regulations framed
by the SEBI;
ii. they acquire securities only as part of their merchant banking business;
iii. they do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act,
1934;
iv. they do not accept / hold public deposits.

Maintenance of books of accounts, records etc.

(1)Every merchant banker shall keep and maintain the following books of accounts, records and
documents namely:-

(a) a copy of balance sheet as at the end of each accounting period;

 (b) a copy of profit and loss account for that period;

(c) a copy of the auditor's report on the accounts for that period; and

(d) a statement of financial position.

(2) Every merchant banker shall intimate to the Board the place where the books of accounts, records and
documents are maintained.

(3) Without prejudice to sub- regulation (1), every merchant banker shall, after the end of each accounting
period furnish to the Board copies of the balance sheet, profit and loss account and such other documents
for any other preceding five accounting years when required by the Board.

Submission of Half-yearly results

Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by
the Board with a view to monitor the capital adequacy of the merchant banker.

Maintenance of books of account, records and other documents

The merchant banker shall preserve the books of accounts and other records and documents maintained
under regulation 14 for a minimum period of five years.

Report on steps taken on Auditor's report

Every merchant banker shall within two months from the date of the auditors' report take steps to rectify
the deficiencies, made out in the auditor's report.

Appointment of lead merchant bankers

(1) All issues should be managed by at least one merchant banker functioning as the lead merchant
banker: Provided that, in an issue of offer of rights to the existing members with or without the right of
renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the
appointment of a lead merchant banker shall not be essential.

(2) Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an
agreement with such body corporate setting out their mutual rights, liabilities and obligations relating to
such issue and in particular to disclosures, allotment and refund.

Restriction on appointment of lead managers

The number of lead merchant bankers may not, exceed in case of any issue of Size of issue No. of
Merchant Bankers

(a) Less than rupees fifty crores-Two

(b) Rupees fifty crores but less than rupees one hundred crores-Three
(c) Rupees one hundred crores but less than rupees two hundred crores-Four
 (d) Rupees two hundred crores but less than rupees four hundred crores-Five
(e) Above Rupees four hundred crores five or more as may be agreed by the board

Responsibilities of lead managers

(1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities
relating to the issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and
determined and a statement specifying such responsibilities is furnished to the Board at least one month
before the opening of the issue for subscription: Provided that, where there are more than one lead
merchant bankers to the issue the responsibilities of each of such lead merchant banker shall clearly be
demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one
month before the opening of the issue for subscription.

(2) No lead merchant banker shall, agree to manage the issue made by any body corporate, if such body
corporate is an associate of the lead merchant banker.

Lead merchant banker not to associate with a merchant banker without registration

A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a
certificate is associated with the issue.

Underwriting obligations

(1) In respect of every issue to be managed, the lead merchant banker holding a certificate under
Category I shall accept a minimum Underwriting obligation of five percent of the total underwriting
commitment or rupees twenty-five lakhs, whichever is less: Provided that, if the lead merchant banker is
unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement
for having the issue underwritten to that extent by a merchant banker associated with the issue and shall
keep the Board informed of such arrangement.

Submission of due diligence certificate

The lead merchant banker, who is responsible for verification of the contents of a prospectus or the Letter
of Offer in respect of an issue and the 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

(1) 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.

(2) The documents referred to in sub-regulation (1) shall be furnished at least two weeks prior to date of
filing of the draft prospectus or the letter of offer, as the case may be, with the Registrar of Companies or
with the Regional Stock Exchanges, or with both.

(3) 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.

Payment of fees to the Board

The draft prospectus or draft letter of offer referred to in regulation 24 shall be submitted along with such
fees and in such manner as may be specified in Schedule IV]

Continuance of association of lead manager with an issue

The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any
issue shall continue to be associated with the issue till the subscribers have received the share or
debenture certificates or refund of excess application money;

Provided that where a person other than the lead manager is entrusted with the refund or allotment of
securities in respect of any issue, the lead manager shall continue to be responsible for ensuring that such
other person discharges the requisite responsibilities in accordance with the provisions of the Companies
Act and the listing agreement entered into by the body corporate with the stock- exchange.

Acquisition of shares prohibited

No merchant banker or any of its directors, partner or manager or principal 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 during the
course of any professional assignment either from the clients or otherwise.

Information to the Board

Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition
of securities of anybody corporate whose issue is being managed by that merchant banker within fifteen
days from the date of entering into such transaction.

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 is.

Appointment of compliance officer

(1) 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 redressed of investors’ grievances.

(2) The compliance officer shall immediately and independently report to the Board any non-compliance
observed by him 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, do not recur.

Scope for growth of Merchant Banking in India

As planning and industrial policy of the country envisaged the setting of up of new industries and
technology, greater financial sophistication and financial services are required. There is a well proven link
between economic growth and financial technology.

Economic development requires specialist financial skills: savings banks to marshal individual savings;
finance companies for consumer lending and mortgage finance; insurance companies for life and property
cover; agricultural banks for rural development; and a range of specialized government or government
sponsored institutions. As new units have been set up and business is expanding, they require additional
financial services. A public equity or debt issue is the logical source of fund in this situation and merchant
banks can tap this opportunity of growth. The areas of great scope could be,

Growth of Primary market:

If the primary market grows and number of issues increases, the scope of merchant banking will be
enhanced.

Entry of Foreign Investors:

Now India capital market directly taps foreign capital through euro issues.FDI is increased in capital
market. So Merchant bankers are required to advice them for their investment in India. The increasing
number of joint ventures also requires expert services of Merchant Bankers. If more and more NRIs
participate in capital market, there will be great demand for merchant banker services.

Changing policy of Financial Institutions:

Now the lending policies of financial institutions are based on project orientation, So the merchant banker
services will be needed by corporate enterprise to provide expert guidance.

Development of debt markets:

If the debt market is enhanced, there will be tremendous scope for Merchant bankers. Now NSE and
OTCEI are planned to raise their fund through debt instruments.

Corporate restructuring:
Due to liberalization and globalization Companies are facing lot of competition. In order to compete, they
have to go for restructuring, merger, acquisitions or disinvestments. They may offer good opportunities to
merchant bankers

The scope could be extended to

1. Advising the company on designing of its Capital Structure.
2. Advising the company on the instrument to be offered to the public.
3. Pricing of the instrument.
4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ ROC/ Stock
5. Exchanges and other regulatory authorities.
6. Assisting the company in marketing the issue.
7. In channelizing the financial surplus of the general public into productive investment avenues.
8. To coordinate the activities of various intermediaries to the share issue such as the registrar,
bankers, advertising agency, printers, underwriters, brokers etc.
9. To ensure the compliance with rules and regulations governing the securities market

THE FACTORS ON WHICH GROWTH OF MERCHANT BANKING DEPENDS:

1. Planning and industrial policy of the country i.e. India in this case
2. Prevailing Economic condition of the country
3. Regulatory system of the market and economy prevailing in India
4. Confidence of the people, traders, buyers, marketers, business houses, financial
institutions etc
5. The economic environment of the outside world.
6. Competition among the existing players and the upcoming entrants.
 APPENDIX-1

List of All Merchant Bankers Registered with SEBI

A.K. CAPITAL SERVICES LTD

ALLAHABAD BANK
ALLBANK FINANCE LTD.
ALMONDZ GLOBAL SECURITIES LTD (FORMERLY ALLIANZ SECURITIES LTD)
AMBIT CORPORATE FINANCE PRIVATE LTD
ANAND RATHI FINANCIAL SERVICES LIMITED (FORMERLY ANAND RATHI
SECURITIES PVT LTD)
ANDHRA BANK
ANTIQUE CAPITAL MARKETS PVT. LTD.
ARIHANT CAPITAL MARKETS LTD
ARYAMAN FINANCIAL SERVICES LIMITED
ASHIKA CAPITAL LTD
ASIT C. MEHTA INVESTMENT INTERRMEDIATES LTD
ATHERSTONE CAPITAL MARKETS LTD
AVENDUS CAPITAL PVT. LTD.
BNP PARIBAS
BOB CAPITAL MARKETS LTD
BRICS SECURITIES LTD
CALYON BANK (FORMERLY CREDIT AGRICOLE INDOSUEZ)
CENTRUM CAPITAL LIMITED (FORMERLY CENTRUM FINANCE LTD)
COMFORT SECURITIES PVT LTD
CORPORATE PROFESSIONALS CAPITAL PVT. LTD.
CORPORATE STRATEGIC ALLIANZ PVT LTD
D & A FINANCIAL SERVICES PVT. LTD.
DAIWA SECURITIES SMBC INDIA PVT LTD
CREDIT SUISSE SECURITIES (INDIA) PVT LTD
DALMIA SECURITIES PVT. LTD.
DARASHAW & COMPANY PRIVATE LTD (FORMERLY BADAR FINANC
DBS BANK LTD
EDELWEISS CAPITAL LTD
ELARA CAPITAL (INDIA) PRIVATE LIMITED
EMKAY SHARE AND STOCK BROKERS LTD
EQUIRUS CAPITAL (P) LTD
ESCORTS SECURITIES LTD
FIRSTCALL INDIA EQUITY ADVISORS PVT. LTD.
FORTRESS CAPITAL MANAGEMENT SERVICES PVT LTD
FORTUNE FINANCIAL SERVICES (INDIA) LTD
GSFS CAPITAL & SECURITIES LTD
HDFC BANK LTD
IDBI BANK LTD.(FORMERLY INDUSTRIAL DEVELOPMENT BANK OF INDIA)
IDBI CAPITAL MARKET SERVICES LTD
IDFC-SSKI LTD.
IMPERIAL CORPORATE FINANCE & SERVICES PVT LTD
IND GLOBAL CORPORATE FINANCE PVT LTD
INDIA CAPITAL MARKETS PRIVATE LIMITED
INDIA INFOLINE LTD.(FORMERLY INDIA INFOLINE SECURITIES PVT LTD)
INDIABULLS SECURITIES LIMITED (FORMERLY ORBIS SEC LTD)
INDUSIND BANK LTD
INFRASTRUCTURE DEVELOPMENT FINANCE COMPA
ING VYSYA BANK LTD. (ERSTWHILE THE VYSYA BANK LTD.)
INTEGRATED ENTERPRISES (INDIA) LTD (INTEGRATED ADVISORY SERV
INTENSIVE FISCAL SERVICES PVT LTD
INTER CORPORATE FINANCIERS & CONSULTANTS LTD.
JEFFERIES INDIA PRIVATE LIMITED
KARN MERCHANT BANKERS LTD.
KARVY INVESTOR SERVICES LTD
KEYNOTE CORPORATE SERVICES LTD
KHANDWALA INTEGRATED FINANCIAL SERVICES PVT LTD
KHANDWALA SECURITIES LTD
LAZARD INDIA PRIVATE LTD ( LAZARD CREDIT CAPITAL LTD.)
LKP SECURITIES LTD (FORMERLY LKP SHARES AND SECURITIES LTD)
LODHA CAPITAL MARKETS LTD
LSI FINANCIAL SERVICES PVT. LTD.
MACQUARIE INDIA ADVISORY SERVICES PVT LTD
MAPE ADVISORY GROUP PVT LTD
MASTER CAPITAL SERVICES LTD
MEGHRAJ SP CORPORATE FINANCE (PVT) LTD
MONEY MATTERS INVESTMENT ADVISORS PRIVATE LIMITED
MOTILAL OSWAL INVESTMENT ADVISORS PVT. LTD.
MPA FINANCIAL SERVICES LIMITED
MUNOTH FINANCIAL SERVICES LTD
N M ROTHSCHILD AND SONS (INDIA) PVT LTD
NETWORTH STOCK BROKING LTD.
NIRBHAY CAPITAL SERVICES PVT LTD
NOMURA FINANCIAL ADVISORY AND SECURITIES (INDIA) PVT. LTD.
NORTHBRIDGE CAPITAL LIMITED
ORIENTAL BANK OF COMMERCE
PADMAKSHI FINANCIAL SERVICES LIMITED
PIONEER INVESTCO
PL CAPITAL MARKETS PVT LTD
PNB GILTS LIMITED
PNR SECURITIES LTD
PRIME SECURITIES LTD
PUNEET ADVISORY SERVICES PVT LTD
R R FINANCIAL CONSULTANTS LTD
RABO INDIA SECURITIES PRIVATE LIMITED
REAL GROWTH SECURITIES PVT. LTD.
RELIGARE CAPITAL MARKETS LIMITED
SAFFRON CAPITAL ADVISORS PVT LTD
SAL SECURITIES PVT. LTD.
SICOM LTD
SMC CAPITALS LIMITED
SOBHAGYA CAPITAL OPTIONS LTD.
SOCIETE GENERALE
SPA MERCHANT BANKERS LIMITED
SPARK CAPITAL ADVISORS (INDIA) PVT LTD
SREI CAPITAL MARKETS LTD
STANDARD CHARTERED-STCI CAPITAL MARKETS LIMITED
STCI PRIMARY DEALER LIMITED
SUMEDHA FISCAL SERVICES LTD
TAIB CAPITAL CORPORATION LIMITED
TAMILNAD MERCANTILE BANK LTD
THE CATHOLIC SYRIAN BANK LTD
TRUST INVESTMENT ADVISORS PVT LTD
ULJK SECURITIES PVT. LTD.
UNION BANK OF INDIA
UNITED BANK OF INDIA
VALUE LINE ADVISORS PVT LTD.(FORMERLY S B & T FINANCE PRIVATE LTD)
VC CORPORATE ADVISORS PVT. LTD. (FORMERLY ECCENTRIC CAPITAL PVT LTD.)
VCK CAPITAL MARKET SERVICES LTD.
AXIS BANK LTD.(FORMERLY UTI BANK LTD.)
BAJAJ CAPITAL LTD
TATA CAPITAL MARKETS LTD
ICICI BANK LTD (private)
ICICI SECURITIES LTD
RELIANCE SECURITIES LIMITED
KOTAK MAHINDRA CAPITAL COMPANY LTD
YES BANK LTD.
BANK OF AMERICA, N.A
MORGAN STANLEY INDIA COMPANY PVT LTD
DEUTSCHE BANK & DEUTSCHE EQUITIES INDIA PRIVATE LIMITED
BARCLAYS BANK PLC
BARCLAYS SECURITIES (INDIA) PVT. LTD.
CITIGROUP GLOBAL MARKETS INDIA PVT. LTD.
DSP MERRILL LYNCH LTD
FEDEX SECURITIES LTD
GOLDMAN SACHS(INDIA) SECURITIES PVT. LTD.
J P MORGAN INDIA PVT. LIMITED
SBI CAPITAL MARKETS LTD
BANK OF MAHARASHTRA
IFCI FINANCIAL SERVICES LTD
KARUR VYSYA BANK LTD,
PUNJAB NATIONAL BANK
STATE BANK OF BIKANER AND JAIPUR
 BIBILIOGRAPHY

1. Merchant Banking Principles and Practices by H.R. Machiraju

2. Financial Services by Eric Banks

3. www.sebi.gov.in

4. http://www.indianmba.com/Faculty_Column/FC378/fc378.html

5. http://www.asialaw.com/Article/1988860/Merchant-Banking.html

6. http://books.google.co.in/books?id=hp4B-
auyTxUC&pg=PA109&lpg=PA109&dq=scope+of+Merchant+banking+in+India&sourc
e=bl&ots=BTTHpGEALi&sig=HWuUScyl7m69LzePBvQ2ihVdfHk&hl=en&ei=RgekSs
mRCoSIkAXA1pjXDw&sa=X&oi=book_result&ct=result&resnum=10#v=onepage&q=
scope%20of%20Merchant%20banking%20in%20India&f=false

7. www.wikipedia.com
What didn’t we understand?

What are “Highlights”? in Merchant Banking Jargon.

Why did Merchant Banking kick start so late in India compared to rest of the world?
Why Merchant Banking is limited to only “Fee based”, when there is so much of scope?
What are the reasons for restricting Merchant Bankers to only NBFCs.
What are the growth dependency factors of Merchant banking as a growing sector?