CHAPTER 1 INTRODUCTION

Financial services are an important component of financial system. The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after the implementation of Liberalization, privatization and globalization. Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role as specialized agencies. The resource raising function remains to be the primary business of a merchant banker.1 Merchant bankers assist corporates in raising capital. They assist in issue of Shares, syndicating loans, public issue of debentures. They do not provide funds, they only assist. They also actively arrange working capital, appraisal, and Project scrutinization & persuade merger proposals. In BRITAIN merchant bankers & investment bankers are synonymous. In the U.S., Merchant bank means as investment bank which is well equipped to handle multinational corporations.

In INDIA merchant banker is a body corporate who carries on any activity of the issue management, which consist of preparing prospectus & other information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities market. There is no official category in investment banking.2

DEFINITION: In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money. The term can also be used to describe the private equity activities of banking.

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Financial Services Eric Banks Merchant Banking in India- B.C Lakshmanna & C.N Krishna Naik

According to Cox, D., merchant banks are the financial institutions providing specialised services which generally include the acceptance of bills of exchange, corporate finance, portfolio management and other banking services.

A merchant Banker has been defined by Securities Exchange Board Of India (Merchant Banker) rules, 1992, as3 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 such issue management.

ORIGIN OF MERCHANT BANKING:

The origin of merchant banking is to be traced to Italy in late medieval times and France during the seventeenth and eighteenth centuries. The Italian merchant bankers introduced into England not only the bill of exchange but also all the institutions and techniques connected with an organized money market. Merchant banking consisted initially of merchants who assisted in financing the transactions of other merchants in addition to their own trade. In France, during seventeenth and eighteenth centuries a merchant banker (le merchand banquer) was not merely a trader but an entrepreneur par excellence. He invested his accumulated profits in all kinds of promising activities. He added banking business to his merchant activities and became a merchant banker.4

HISTORY:
In late 17th and early 18th century Europe, the largest companies of the world was merchant adventurers, Supported by wealthy groups of people and a network of overseas trading posts, they collected large amounts of money to finance trade across parts of the world. For example, The East India Trading Company secured a Royal Warrant from England, providing the firm with official rights to lucrative trading activities in India. This company was the forerunner in developing the crown jewel of the English Empire. The English colony was

3 4

Regulation 2 (cd) of SEBI ACT 1992 Merchant Banking H.R. Machiraju

started by what we would today call merchant bankers, because of the firm's involvement in financing, negotiating, and implementing trade transactions5.

MERCHANT BANKING IN INDIA:

In India Merchant Banking activities started from the year 1967, following the footsteps of similar activities in UK & USA. Currently Merchant Banking activity has mushroomed in the Indian capital market with both public & private sector settings up their respective merchant Banking divisions. Currently, the total no. of merchant bankers in India is approx. 1450 with more than 930 registered with SEBI. The SEBI authorized Merchant Bankers Include merchant Banking divisions of All India Financial Institutions, nationalized & foreign banks, subsidies of the commercial banks, private merchant banks engaged in stock broking, underwriting activities & financial consultancy & investment advisory service firms.

Grindlays Banks 1967 Citi banks 1970 SBI 1973 ICICI - 1974
Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities. Merchant banking is the financial intermediation that matches the entities that need capital and those that have capital. It is a function that facilitates the flow of capital in the market.

http://finance.reachoutblogs.com/2008/05/merchant-banking-history-nature.html

Merchant banker registered with SEBI:

Public Sector: - Commercial banks, Financial Institutions, State Institutions Private sector: - International bankers, Banks, finance & investment

CHAPTER 2 MERCHANT BANKING NEED OF THE HOUR

GROWTH OF MERCHANT BANKING IN INDIA: Merchant banking activities in India originated in 1967 with the merchant banking division set up by the grind lay bank, the largest foreign bank in the country, at that time. The main service offered to the corporate enterprises by the merchant bank included management of public issue and financial consultancy. Other banks like city bank, chartered bank also assumed the merchant banking activity in India. State bank of India started merchant banking in 1973 followed by the ICICI in1974; both emerged as leader in merchant banking with significance business during the period of 1974-1985 in comparison to other banks. Mid seventies witnessed a growth of merchant banking organization in the country with various commercial banks, financial institutions, broker firms entering in to the field of merchant banking. The growth in merchant banking business during the early seventies was because of coming up of Foreign Exchange Regulation Act 1973 [FERA] where in large number of companies operating in India were required to dilute their foreign holdings, In order to continue business in the country this result in expansion in the capital markets providing enough opportunities to merchant bankers to established themselves. The change in Indian economy opened new doors for merchant banking business to enter in diversified area of activities, but at the same time this brought competition in merchant banking sector. This sector has traditionally been dominated by financial institution, banks and their subsidiaries. Now, various private sectors merchant bankers have emerged and some of them having international reputation. Till the end of 1990, the merchant banking sector was almost monopoly public sector institution and commercial banks, however since 1991 considerable number of private merchant banker have emerged on same.

IMPORTANCE AND NEED OF MERCHANT BANKING:

Important reasons for the growth of merchant banks has been developmental activities throughout the country, exerting excess demand on the sources of fund, for ever expanding industries and trade, thus leaving a widening gap between the supply and demand of invisible
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funds. All India financial institution had experienced constrain of resources to meet ever increasing demands for funds frame corporate sector enterprises. In such circumstances corporate sector had the only alternative to avail the capital market service for meeting their long term financial requirement through capital issue of equity shares and debentures. Growing demand for funds put pressure on capital market that enthused commercial banks, share brokers and financial consultancy firms to enter into the field of merchant banking and share the growing capital market. As a result all the commercial banks in nationalized and public sector as well as in private sector including foreign banks in India have opened their merchant banking windows and competing in this field. Need for merchant banking is felt in the wake of huge public saving lying untapped. Merchant banker can play highly significant role in mobilizing funds of savers to invisible channels assuring promising returns on investment and thus can assist in meeting the widening demand for invisible funds for economic activity. With growth of merchant banking profession corporate enterprises in both private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirement for funds for establishing new enterprises, undertaking expansion, modernization and diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by merchant banking. In view of multitude of enactment, rules and regulation, guidelines and offshoot press release instructions brought out the government from time to time imposing statutory obligations upon the corporate sector to comply with those entire requirement prescribed there in for the need of a skilled agency which could provide counselling in these matters in a packaged form. A merchant banker with their skills updated information and knowledge provide this service to the corporate units and advise them on such requirement to be complied with for raising funds from the capital market under different enactment viz. Companies Act, Income Tax Act, Foreign Exchange Regulation Act, Securities Contracts Corporate laws and Regulations. Merchant bank advice the investors of the incentives available in the form of tax relief, other statutory relaxation, good return on investment and capital appreciation in such investment to motivate them to invest their savings securities of the corporate sector. Thus merchant banks help industries and trade to rise and the investors to invest their saved money in sound and healthy concern with confidence, safety and expectation for higher yields. Finance is the backbone of business

activities. Merchant banker makes available finance for business enterprises acting as intermediaries between them, raising demand for funds and the supplies of funds. The following are some of the reasons why specialist merchant bank have a crucial role to play in India. 1. Growing complexity in rules and procedures of the government. 2. Growing industrialization and increase of technologically advanced industries. 3. Need for encouragement of rendering various other services. Small and medium industrialists, who require specialist services. 4. Need to develop backward areas and states which require different criteria. 5. Exploring the possibility of joint ventures abroad and foreign market. 6. Promoting the role of new issue market in mobilizing savings.

CHAPTER 3 LEGAK FRAMEWORK: UNDER SEBI ORGANIZATIONAL SETUP OF MERCHANT BANKERS IN INDIA:
In India a common organizational setup of merchant bankers operates in the form of divisions of Indian banks, foreign banks, financial institutions, subsidiary companies established by bankers like SBI, Canara Bank, Punjab National Bank, Bank of India, etc. Some firms are also organized by financial and technical consultants and professionals. Securities and Exchange Board of India has divided the merchant bankers into four categories based on their capital adequacy. Each category is authorized to perform certain functions. From the point of organizational setup Indias merchant banking organizations can be categorized into four groups on the basis of their linkage with parent activity. They are: (A) Institutional Base Where merchant banks function as an independent wing or as subsidiary of various private/Central Governments/State Governments financial institutions. Most of the financial institutions in India are in public sector and therefore such setup plays a role on the lines of government priorities and policies. (B) Banker Base These merchant bankers function as division/subsidiary of banking organization. The parent banks are either nationalized commercial bank or the foreign banks operating in India. These organizations have brought professionalism in merchant banking sector and they help their parent organization to make a presence in capital market. (C) Broker Base In the recent past there has been an inflow of qualified and professionally skilled brokers in various stock exchanges of India. These brokers undertake merchant banking related operations also like providing investment and portfolio management services.

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

REQUIREMENTS FOR SETTING UP A MERCHANT BANK OUTFIT:

1. Formation of the Business Organization SEBI Act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the types of organizations are listed below: a. b. c. d. e. Sole proprietorship Partnership firm Hindu Undivided Family (HUF) Corporate Enterprises Co-operative Society

Generally it is preferred that the Merchant Banking outfit be a registered company. Merchant Banks are generally setup as subsidiary companies of banks (Public or Private). For example, SBI caps, ICICI Securities etc. 2. Adoption of a viable business plan The basic test is required to find out whether the business to be undertaken is viable or not for a Merchant Banking setup. Capital adequacy, profitability, growth opportunities and current market size are some of the factors which need to be looked into.

3. Registration of Merchant Bankers a. Application for grant of certificate6

An application for grant of a certificate needs to be made to SEBI( board) in form A. The application can be made for any one of the following categories of the merchant banker namely:

Category I, that is

(i) To carry on any activity of the issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and (ii) To act as adviser, consultant, manager, underwriter, portfolio manager.

Category II, that is, to act as adviser, consultant, co- manager, underwriter, portfolio

manager;

Category III, that is to act as underwriter, adviser, consultant to an issue; Category IV, that is to act only as adviser or consultant to an issue.

To carry on the activity as underwriter or portfolio manager a separate certificate of registration needs to be obtained from SEBI.7 b. Application to conform to the requirements The application should conform to all the requirements under the SEBI guidelines, otherwise it may be rejected8. c. Furnishing of information, clarification and personal representation The Board may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker for the purpose of disposal of the

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Regulation 3(1) of SEBI (Merchant bankers)regulation ,1992 st Only 1 category needs registration from 1997 amendment 8 Regulation 4 of SEBI (Merchant bankers)regulation , 1992

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application. The applicant or its principal officer may appear before the Board for personal representation9. d. Consideration of application The Board shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely:10

the applicant shall be a body corporate other than a non- banking financial company; the merchant banker who has been granted registration by the Reserve Bank of India to

act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit;

the applicant has the necessary infrastructure like adequate office space, equipments,

and manpower to effectively discharge his activities;

the applicant has in his employment minimum of two persons who have the experience

to conduct the business of the merchant banker;

a person directly or indirectly connected with the applicant has not been granted

registration by the Board;

the applicant fulfils the capital adequacy requirement is as follows:

The capital adequacy requirement should not be less than the net worth of the person making the application for grant of registration. The net worth shall be as follows:Category Category I Category II Category III Category IV Minimum Amount Rs. 5, 00, 00, 000 Rs. 50, 00, 000 Rs. 20, 00, 000 Nil

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Regulation 5 of SEBI( Merchant bankers)regulation, 1992 Regulation 6 of SEBI (Merchant bankers) regulation,1992

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The applicant, his partner, director or principal officer is not involved in any litigation

connected with the securities market which has an adverse bearing on the business of the applicant and have not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence;

The applicant has the professional qualification from an institution recognized by the

Government in finance, law or business management;

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

e. Procedure for Registration The Board on being satisfied that the applicant is eligible shall grant a certificate. On the grant of a certificate the applicant shall be liable to pay the fees as prescribed11. f. Payment of fees and the consequences of failure to pay fees Every applicant eligible for grant of a certificate shall pay such fees in such manner and within the period specified. Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may suspend the registration certificate, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists. The Merchant Bank can commence business on acquisition of a Certificate of Registration from the SEBI after completion of the above mentioned formalities12.

MAIN OBJECTIVES OF MERCHANT BANKERS:

Merchant bankers render their specialized assistance in achieving the main objectives which are presented below: I. To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India.

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Regulation 8 of SEBI (Merchant bankers) regulation,1992 Regulation 12 of SEBI(Merchant bankers) regulation, 1992

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II.

The main object of merchant banker is to create secondary market for bills and discount or re-discount bills and acts as an acceptance house.

III.

Merchant bankers another objective is to set up and provide services for the venture capital technology funds.

IV.

They also provide services to the finance housing schemes for the construction of houses and buying of land.

V.

They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India.

VI.

They will invest in buying and selling of transfers, hypothecate and deal with disposal of shares, stocks, debentures, securities and properties of any other company.

SERVICES PROVIDED BY MERCHANT BANKS

Corporate Counseling: It includes a whole range of financial services provided by a merchant banker to a corporate unit with a view to ensure better performance, maintain steady growth and create a better image among investors. It covers the entire field of merchant banking activities i.e., project counseling, capital restructuring, portfolio management and the full range of financial engineering including venture capital, public issue management, loan syndication, working capital, fixed deposits, lease financing, acceptance credit, etc. However, the scope of corporate counseling is limited to suggestions and opinions leaving to the client to take corrective actions for solving its corporate problems. A merchant banker finds out the problems of enterprise, which shall include organizational goals for the enterprise, size of the organization and operational scales, choice of a product, pricing, etc., and suggests ways and means to solve those problems. Project Counselling: Project counselling is an important merchant banking service which includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project, appraising the project report with the financial institutions/banks.

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Project reports are prepared to obtain government approval of the project, for procuring financial assistance from financial institutions and banks, for ensuring market for the proposed product, for planning public issues, etc. Financing the project cost is an important aspect of project counseling. The two sources of funds available to finance the project cost are internal sources of funds (or owners' funds) which includes promoter's contribution and retained earnings; and external sources of funds which refers to the borrowed funds in the form of loans from banks, private investors and financial institutions and in the form of debentures from the public. Merchant banker has to decide the financing mix of the internal and external sources of funds keeping in view the rules, regulations and norms prescribed by the government or followed by the term lending financial institutions. While rendering project counseling services, the merchant banker has to ensure that the application forms for obtaining the funds from financial institutions are filled in with relevant and appropriate information and before submitting the application, the merchant banker has to appraise the project considering the various aspects as to the type of the project, location, technical, commercial and financial viability of the project. Credit Syndication: Once the client company has decided about the project proposed to be undertaken, the next step is looking for the sources wherefrom the funds could be procured to implement the project. Merchant banker has to locate the sources of funds and comply with the formalities required to procure the funds. This service rendered by the merchant banker in arranging and procuring credit from financial institutions, banks and other lending and investment organizations for financing the clients' project cost or meeting working capital requirement is referred to as loan syndication or credit syndication. Credit syndication in case of domestic borrowings is with the institutional lenders and banks. Long and medium term funds are obtained from the All India Financial Institutions like IFCI, IDBI etc., state level financial bodies like SFC, SIDC etc., commercial banks, mutual funds etc. Short-term funds are also required by the firm for purchase of raw materials, payment of wages, salaries etc. Sources of financing these short term requirements or working capital

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needs can be from internal sources like internal accruals from working or operations and short term loans from friends and relatives; or from external sources like short term borrowings from banks etc. Issue Management and Underwriting: management of capital issues is a professional service rendered by the skilled and experienced merchant bankers. Previously, the managing agents for a particular corporate used to manage public issues. The abolition of the managing agency system, the growth in the public limited companies in number and size, the imposition of new rules and regulations regarding the public issue of securities made it necessary for merchant bankers to play a definite role in the management of public issues. Public issue management involves marketing of corporate securities by offering the securities to the public, procuring private subscription to the securities and offering securities to existing shareholders of the company. As a manager to the public issue, the merchant banker, before the public issue he has to obtain the consent of the stock exchanges to the memorandum and articles of association, appoint other managers, bankers, underwriters, brokers etc. ,advice the company to appoint auditors, solicitors and board of directors, draft the prospectus and obtain consent from the companies legal advisors, board of directors and other concerned parties, file the prospectus with registrar, make an application for enlistment with stock exchanges and finally advertise for the issue. A merchant bankers post issue activities include final allotment and/or refund of subscription amount, calculation of underwriters liability in case of under subscription and complying the necessary statutory requirements for listing of securities on the stock exchange. Under writing of public issue: A fully underwritten public issue spells confidence to the investing public, which ensures a good response to the issue. Keeping this in view companies, which float a public issue usually, desire a full underwriting of the issue. Underwriting is only the guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed in proportion by the underwriter. An underwriter of the issue gets the following benefits:

It earns a commission of the commitment given.

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

Bankers to the Issue: The merchant banker can automatically become the banker to the issue in the following cases:

The bank is a broker to the company It has given underwriting commitments. It acts as a manger to the issue

The function of a banker to the issue is- to accept application forms from the public together with subscription money and transfer them to the account of the controlling branch. Portfolio Management: Portfolio refers to investment in different types of marketable securities or investment papers like shares, debentures and debenture stocks, bonds etc. from different companies or institutions held by individuals firm or corporate units. Portfolio management refers to managing efficiently the investment in the securities held by professionals to others. Merchant bankers take up management of a portfolio of securities on behalf of their clients, providing special services with a view to ensure maximum return by such investments with a minimum risk of loss of return on the money invested in securities. A merchant banker while performing the services of portfolio management has to enquire of the investment needs of the client, the tax bracket, ability to bare risk, liquidity requirements, etc. they should study the economic environment affecting the capital market, study the securities market and identify blue chip companies in which money can be invested. They should keep record of latest amendment in government guidelines, stock exchange regulations, RBI regulations, etc. Advisory Services Relating to Mergers and Takeovers: A merger is defined as a combination of two or more companies into a single company where one services and other loses their corporate existence. A merger is also defined as an amalgamation wherein the shareholders of the combining companies become substantially the shareholders of the company formed.
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A takeover is referred to as an acquisition, which is the purchase, by one company of a controlling interest in the share capital of another existing company. Merchant bankers are the middlemen settling negotiations between the offered and the offered. Their role is specific and specialized in handling the mergers and take over assignments. Being a professional expert, the merchant banker is apt to safeguard the interest of the shareholders in both the companies and as such his assistance is useful for both the companies, i.e. the acquirer as well as the acquired company. Once the merger partner is proposed the merchant banker has to appraise the merger/takeover proposal with respect to financial viability and technical feasibility. He has to negotiate with the parties and decide the purchase consideration and mode of payment. He has to comply with the legal formalities like getting approval from the Government/ RBI; drafting the scheme of amalgamation; getting approval of company Board, financial institution, high court if required; arranging for the meeting etc. Venture Capital Financing: Financing an emerging high-risk project is called venture capital financing. Many merchant bankers are entering into this area by also financing viable upcoming projects. The financing is by subscription to the equity capital, while repayment is by selling the equity through stock market when the shares are listed. Leasing: Is there another lucrative area of financing where merchant bankers are turning. Leasing is a viable source of financing while acquiring capital assets. The services include arrangement for lease finance facilities for leasing companies, legal; documents and tax consultancy. Non Resident Investment: To attract NRI investments in the primary and secondary markets, the merchant bankers provide investment advisory services to the NRIs in terms of identification of investment opportunities, selection of securities, portfolio management, etc. they also take care of operational details like purchase and sale of securities securing the necessary clearance from RBI under FERA for repatriation of dividends and interest, etc. Acceptance Credit and Bill Discounting: Though merchant bankers world over specialize in acceptance credit and bill discounting, these services are not currently provided by

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merchant bankers in India the principal reasoning being the lack of an active market for commercial bills. Arranging Offshore Finance: The merchant bankers also help their clients in the following areas involving foreign currency financing: 1. 2. 3. 4. Financing Of Exports And Imports Long Term Foreign Currency Loans Joint Ventures Abroad Foreign Collaboration Arrangements

The assistance rendered as in the case of financial services covers appraisals, negotiations, compliance with procedural and legal aspects etc. Management of Fixed Deposits of Companies: Recently, merchants bankers have begun to structure and mobilize fixed deposits for their corporate clients. They take care of the procedural and legal aspects, and also manage the collection and subsequent servicing of the deposits. Advice with regard to the amount to be raised, interest charges, terms of deposits and other related issues are also offered to the client. Relief to Sick Industries: The services offered by merchant bankers to sick industries can be summarized as follows: 1. Assessment of capital requirements and counselling on capital restructuring; 2. Appraisal of technological, environmental, financial and other factors causing sickness; 3. Preparations of programs and packages for rehabilitation of sick units; 4. Providing necessary assistance where the rehabilitation package involves mergers or amalgamation; 5. Obtaining necessary approval for implementation of the rehabilitation package from the statutory authorities; 6. Monitoring the implementation of the scheme of rehabilitation

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SERVICES OF MERCHANT BANKERS:

Business planning stage: 1) Project feasibility study 2) Advice on capital structuring Equity raising: 3) Preparation of prospectus and liaison with SEBI 4) Pricing decisions 5) Marketing in the capacity of lead managers 6) Underwriters to the issue 7) Post issue management 8) Assistance in ADR/GDR Debt raising: 9) Management of debenture issue 10) Preparation of bankable proposal and syndication of loan Working capital raising: 11) Assistance in arranging optimal capital finance Strategic advice: 12) Advice on mergers and acquisitions 13) Corporate structuring advice

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OBLIGATIONS AND RESPONSIBILITIES: Code of conduct

Every merchant banker has to abide by the code of conduct as specified below. A merchant banker in the conduct of his business has to observe standards of integrity and fairness of all his dealings with the clients and other merchant bankers. He ought to render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He has to, wherever necessary, disclose to his clients, the possible sources of conflict of duties and interest, while providing services. He cannot made any statement or become privy to any act, practice unfair competition, which is likely to be harmful to interest of other merchant bankers or is likely to place such other merchant banker in a disadvantageous position in relation to him, while competing for, or executing, any assignment. He should not make any exaggerated statement, whether oral or written, to the client either about his qualification or his capability to other clients. A merchant banker always endeavours to: 1. Render the best possible advice to the clients regarding clients the needs and requirements, and his own professional skill; and 2. Ensure that all professional dealing are affected in prompt, efficient and cost effective manner.

He should not:1) Divulge to other clients, press or any other party any other party confidential information about his client, which has come to his knowledge; and 2) Deal in the securities of any client company without making disclosure to the SEBI as per the regulations and also the Board of Directors of the client company.

He should endeavour to ensure that:1) The investors are provided with true and adequate information without making any

misguided or exaggerated claims, and are made aware of attendant risks before any investment decision is taken by them; 2) The copies of prospectus, memorandum and related literature are made available to the

investors

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3)

Adequate steps are taken for the fair allotment of securities and refund of application

money without delay; and 4) A merchant banker should not generally and particularly in respect of the issue of any securities be part to a) b) c) Creation of false market; Price rigging or manipulations; and Passing of price sensitive information to brokers, members of stock exchanges and other players in the capital market or take any other action which is unethical or unfair to the investors. Finally, he has to abide by the provisions of the SEBI Act, its rules and regulations which may be applicable and relevant to the activities carried on by the merchant banker.13

Maintenance of books of accounts, records etc.

Every merchant banker has to maintain certain documents like balance sheets, profit and loss account, auditors report etc. And he has to intimate the place where such documents will be maintained, at the end of every year merchant banker has furnish such documents to the board for inspection14.

Restriction on Business
No merchant banker, other than a bank/public financial institution (PFI) is permitted to carry on business other than that just in the securities market with effect from December 9, 1997.However, a merchant banker who is registered with RBI as a Primary Dealer/Satellite Dealer may carry on such business as may be permitted by RBI with effect from November 1999.

Responsibilities of Merchant Banker

Every lead manager has to enter into an agreement with the issuing companies setting out their mutual rights, liabilities, and obligation relating to issue and in particular to disclosures, allotment and refund. A statement specifying these is to be furnished to SEBI at least one month before the opening of the issue for subscription. In case of more than onelead manager/Merchant banker, the statement has to provide details about their respective
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Regulation 13 of SEBI (Merchant bankers) regulation,1992 Regulation 14 of SEBI (Merchant bankers) regulation,1992

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responsibilities. A lead merchant banker cannot manage an issue if the issuing company is its associate. He can also not associate with a merchant banker who does not hold a certificate of registration with the SEBI. It is necessary for a lead manager to accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs.25 lakh whichever is less. If he is unable to do so, he has to make arrangements for an underwriting of an, equal amount by a merchant banker associated with that issue under intimation to SEBI.15

Issue size including premium and intended retention oversubscription Up to Rs.5 crore Rs 10,000

Fee per document

Rs 5 crore- Rs 10 crore

Rs 15,000

Rs 50 crore- Rs 50 corer

Rs 25,000

Rs 10 crore- Rs 100 corer

Rs 50,000

Rs 100 crore- Rs 500 corer

Rs 2,50,000

More than Rs 500 corer

Rs 5,00,000

They have to continue to be associated with the issue till the subscribers have received the share debentures certificate or the refund of excess application money.

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Regulation 20,21,21A,22 of SEBI (Merchant bankers)regulation,1992

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Acquisition of shares a merchant banker is prohibited from acquiring securities of any company on the basis of unpublished price sensitive information obtained during the course of any professional assignment either from the client or otherwise. He has to submit to the SEBI the complete particulars of any acquisition of securities of a company whose issue is being managed by him within 15 days from the date of the transaction.

Disclosures to SEBI
1. 2.

A merchant banker has to disclose to the SEBI:16 His responsibilities with regard to the management of the issue, Any changes in the information/particulars previously furnished which have a bearing and the certificate of registrations granted to it.

3.

The names of the companies whose issues he has managed or has been associated with,

4. 5.

The particulars relating to breach of capital adequacy requirements and Information relating to his activities as manager, under writer, consultant or adviser to an issue.

Procedure for Inspection

The SEBI can undertake the inspection of the books of accounts, records, and documents of a merchant banker to ensure that the books are maintained in the manner required, the provision of the SEBI Act, rules and regulations are being camp lied with, and to investigate complaints from investors/other merchant bankers/any other person or any matter having a bearing on his activities, as a merchant banker and suo moto in the interest of securities business/investors interest into the affairs of the merchant banker.17 The merchant banker has an obligation to furnish all the information called for, allow a reasonable access to the premises, extend reasonable facility for the examination of books/records/documents/computer data and provide copies of the some assistance to the inspecting authority in connection with the inspection. On the basis of the inspection report and after giving him an opportunity to make an explanation, the SEBI can all upon the merchant banker to take such measures as it deems fit
16 17

and give all

Regulation 28 of SEBI (Merchant bankers)regulation,1992 Regulation 29 of SEBI( Merchant bankers)regulation,1992

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in the interest of the securities market and for due compliance with the provisions of the SEBI can appoint a qualified auditor with the above powers of the inspection committee to investigate into the books of accounts or the affairs and obligations of the merchant banker.18

Action in Case of Default

A merchant banker who fails to comply with any conditions subject to which the certificate of registration has been granted, by the SEBI and/or contravenes any of the provisions of the SEBI Act, rules or regulations, is liable to any of the two penalties19: a) Suspension of registration or b) Cancellation of registration

QUALITIES OF A MERCHANT BANKER:

1. Knowledge: Thorough understanding of technical issues related to business, understanding of legal and statutory requirements, appreciation of business acumen; financial expertise is a key thing a merchant banker must know. Delivery of his services depends on his basic understanding of these issues. 2. Capital market familiarity: Merchant banker should be well versed with Stock Markets, their movements. He should track happenings in the market on on-going basis. 3. Liasioning ability: Merchant bankers are required to liaison with SEBI, RBI, the stock exchanges, depositories and other government authorities for public issue related duties. It is imperative that a merchant bank maintains excellent rapport with all of them and also close relations even at informal levels. This only can see speedy and favourable clearances by the authorities. 4. Innovation: Corporate may approach with unique requirements. Standard solutions and products may not solve problems sometimes. Merchant bankers should do out of box thinking and be able to do financial engineering. They can device new financial

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CHAPTER 4 Containing regulations 29-34 of SEBI (Merchant bankers)regulation,1992 Regulation 35 ,chapter 5 of SEBI (Merchant bankers)regulation,1992

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instruments and get approved from the authorities. Innovation is required even to address stringent legal requirements. 5. Integrity: Merchant banker has valuable and confidential information of its customers. Merchants bankers should take utmost care that the information is not leaked and also not consumed for the purpose other than for which it was disclosed to the merchant banker.

There are some other qualities like leadership, friendliness, attitude towards problem solving,contacts,inquisitiveness to acquire new skills which if adopted by a merchant banker will make him successful .

PROBLEMS AND HURDLES:

1. Industry compartmentalization: company which is in merchant banking business would have expertise in underwriting, hire purchase, leasing, and portfolio management, money-lending. But RBI does not permit merchant banking firms to get into these activities. So the same promoters have to setup different companies for different purposes. Management cost increases and expertise pooling i.e. multiple use of same talent is not possible. 2. Malafide practices: Indian corporate culture is bettering, but still many corporate have excessively friendly approach. Favoured allotment of shares, tampering with project appraisal report to bankers is common. Corporate like to use merchant bankers for malafide intentions. This gives growth to more boutique fly-by-day firms. Giant professional or multinational merchant bankers are cautions in their approach to Indian market. 3. Regulations: though regulations are much better now, there is still scope for further improvement. Merchant bankers can be made more accountable and responsible. Professional qualification focused on merchant banking is not available. Industry is not well organized and all the players do not play the same tune. This is specifically evident in comparison with insurance industry and mutual funds industry. 4. Restriction of merchant banking activities: SEBI guidelines have authorized merchant bankers to undertake issue related activities and made them restrict their activities or

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think of separating these activities from present one and float new subsidiary and enlarge the scope of its activities. 5. Minimum net worth of Rs.5 crore: SEBI guidelines stipulate that a minimum net worth of Rs.5 crore for authorization of merchant bankers. 6. Non co-operation of issuing companies: Non co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem faced by merchant bankers.

In spite of problems popping up, merchant banking in India has vast scope to develop because of lot of domestic as well as foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.

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