Research Report

On

COMPREHENSIVE STUDY OF
MERCHANT BANKING SERVICES IN
INDIA
.
Submitted in partial fulfillment of the requirement for the
degree of
Master of Business Administration

Session (2008-10)

Under the guidance of: Submitted by:

Dr. Ramesh Chand Dalal Ritesh Pasrija
Professor (University School of Management) MBA (Gen.) Final
kurukshetra University, Roll No. 66
Kurukshetra Uni. Roll no.155475

Submitted To:

University School of Mangement

Kurukshetra University, Kurukshetra
(HARYANA)
 Acknowledgement

A project report is never the sole product of a person whose name appears on the cover.
There is always the help, guidance and suggestions of many in preparation of such a
report. So, I have indebted to several people who have helped me in completing my
projectComprehensive Study Of Merchant Banking Services In India

I wish to express my sincere thanks to Dr. Ramesh Chand Dalal, University School of
Management Kurukshetra University, Kurukshetra for his valuable guidance and
pain taking supervision during course of my present work. His keen interest, timely
and constant encouragement and generous cooperation gave me confidence and
strength to progress this report. His valuable advice, constructive criticism and
suggestion during course of my study really helped me a lot. I also thank him for
providing full facilities required in submitting our report within a limited time span.
I am also thankful to all the employees working in the department for their
continuous help and advice at different times.

I would be failing my duty if I dont mention my friends and classmates who helped me
at various moments, during my project.

Specially, I am thankful to my parents and God for their blessings and showing me the
right way at all moments.

Ritesh Pasrija

2
 Declaration

I, Ritesh Pasrija, Roll No. 66, class MBA(GEN) 2 year, IV semester of the University
School of management, hereby declare that the project entitled Comprehensive Study
Of Merchant Banking Services In India is an original work and the same has not been
submitted to any other institute for the award of any other degree. The project report was
submitted to the supervisor on 26-04-2010. The feasible suggestions have been duly
incorporated in consultation with the supervisor.

Signature of Candidate

3
 Table of Contents

Chapter Page No.

1. Executive Summary 5

2. Introduction 6-8
3. Justification of the study 9-10
4. Review of the existing literature 11-13
5. Objectives of the study 22-26
6. Research Methodology 27-29
7. An insight on Merchant Banking 30-47
8. Issue Management 48-58
9. Merchant Bankers Commission 59-60
10. Analysis of the study 61-65
11. Recommendations 66-67
12. Conclusion 68-69

13. Limitations of the Study 70-71

14. Bibliography 72-73

EXECUTIVE SUMMARY

4
The research studies are of great help in enhancing the knowledge of a person.

Practical knowledge is a suffix to theoretical knowledge. Classroom lectures

clarify the fundamental concept of management. But classroom lecture must be

correlated with practical research situation. It is in this sense that the research

project is made compulsory for curriculum and has a significant role to play in

the field of business management. Through this type of project, one can

understand the application of theory into practical. But it is only difficulties,

which make the success dears. In this project I have put lot of make success

dears. In this I have put lot of effort to make it success.

This project Comprehensive study of merchant banking services in India and

obligatory part of M.B.A curriculum. My purpose for this project is the analysis

of various services provide by the banking sector.

In research methodology I have chosen Descriptive research, due to limited time

Period, Descriptive research is those researchers, which are concerned with

describing the characteristics of a particular or a group. Descriptive research is

used by me to find out of the knowledge of Merchant Banking in India. I have

collected data from secondary sources.

5
INTRODUCTION

6
 INTRODUCTION

The term merchant banking is used differently in different countries and so there is

no precise definition for it. In London, Merchant banker refers to those who are

members of British Merchant Banking and Securities House Association who carry

on consultation, leasing, portfolio services, assets management, euro credit; loan

syndication etc. in America, merchant banking is concerned with mobilization

savings of people and directing the funds to business enterprise .

There is no universal definition for merchant banking. It assumes diverse functions

in different countries. So merchant banking may be defined as, an institution which

covers a wide range of activities such as management of customer services, portfolio

manage meant, credit syndication, acceptance credit, counseling, insurance etc.

The notification of Ministry of Finance defines a merchant banker as, any person

who is engaged in the business of issue management either by making arrangements

regarding selling, buying or subscribing to the securities as manager, consultant,

adviser or rendering corporate advisory service in relation to such issue

management.

Merchant banking originated through the entering of London merchants in financing

foreign trade through acceptance of bill. Later, the merchants assisted the

Government of under developed countries in raising long-term funds through

7
flotation of bonds in London money market. Over a period, they extended their

activities to domestic business of syndication of long-term and short-term finance,

underwriting of new issues, acting as registrars and share transfer agents, debenture

trustees, portfolio managers, negotiating agents for mergers, take over etc. The post

war period witnessed the rapid growth of merchant banking through the innovative

instrument like dollar and the growth of various financial centers like Singapore,

Hong Kong, Baharain, Kuwait, and Dubai etc.

8
JUSTIFICATION

OF

9
 THE STUDY

Justification of the study

The significance of the study is the comprehensive study of merchant banking

services in India. Merchant banking services in India cover a wide range of activities

which are fund-based and non-fund based financial and investment services

encompassing both capital as well as money activities in domestic as well as in

international markets. Non-fund activities include capital issue management and

private placement of securities, loan/ credit/ fund syndication, corporate counseling,

project counseling, NRI counseling and portfolio counseling. Fund-based activities

include underwriting of equity/preference shares, bonds and debentures in new

10
capital issues etc. In the study I will research on to know about the growth of

merchant banking in India, the range of merchant banking services, the qualities of

good merchant bankers, the role of the merchant bankers, the guidelines for

merchant bankers, the scope of merchant banks. In the study I will research on the activities

performed by merchant bankers and the guidelines provided by the SEBI to the merchant

bankers in India. In the study the main emphasis is on the various strategies of banking sector

with special reference to merchant banking.

REVIEW
OF
11
 EXISTING
LITERATURE

Review of the existing literature

According to the Ministry of Finance merchant Banker is : -

Any person who is engaged in the business of

issue management either by making arrangements regarding selling, buying or

subscribing to securities as manager, consultant, advisor or rendering corporate

advisory service in relation to such issue management.

According to the concept of Merchant banking is: -

12
 An institution which covers a wide range of

activities such as management of customer services, portfolio management, credit

syndication, acceptance credit, counseling, insurance etc.

In London, merchant banker refers to those who carry on consultation, leasing,

portfolio services, asset management, euro credit, loan syndication etc.

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

and directing the funds to business enterprise.

Merchant banking activity was formally initiated into the Indian capital market when

Grind lays Bank received the license from Reserve Bank in 1967.

Grind lays which started with management of capital issue, recognized the needs of an

emerging class of entrepreneurs for diverse financial services ranging from production

planning and system design to market research Apart from meeting specially, the

needs of small scale units, it provided management consultancy services to large and

medium sized companies. Following Grind lays Bank, Citi Bank set up its merchant

banking division in 1970. The division took up the task of assisting new entrepreneurs

and existing units in the evaluation of the new project and raising funds through

borrowing and equity issues. Management consultancy services were also offered.

Merchant bankers are permitted to carry on activities of primary dealers in

government securities. Consequent to the recommendations of banking commission in

1972, that Indian banks should offer merchant banking services they could provide

their clients, State Bank of India started the Merchant Banking division in 1972. In the

13
initial years the S.B.I.s objectives was to render corporate advice and assistance to

small and medium entrepreneurs.

The commercial banks that followed State Bank of India were Central Bank of India. Bank of

India and Syndicate Bank in 1977; Bank of Baroda, Standard Charted Bank and Mercantile Bank

in 1978; and United Bank of India, United Commercial Bank, Punjab National Bank, Canara

Bank and Indian Overseas Bank in late 70s and early 80s. Among the development banks,

ICICI started merchant banking activities in 1973, followed by IFCI (1986) and IDBI (199

Conceptualization

Any person who is engaged in the business of issue management either by making

arrangements regarding selling, buying or subscribing to securities as manager,

consultant, advisor or rendering corporate advisory service in relation to such issue

management .

14
 Focus of the problem

The present performance of Merchant Banking Division set up by some of the

Commercial bank is very satisfactory. The scope of Merchant Banking activities is very

bright in India for commercial banks and financial consulting firms/companies due to

following new activities:-

15
 a) Fund Management :-

Investment banks provide fund management services. Fund

under management of Schroeders have swollen five fold to 74 billion pounds in the ten

years to the end of 1995. Fund management contributes to nearly half of Schroeders

annual profits. Flemings management 60 billion pounds, Rothschild 17 billion pound and

Hambros, 8 billion pounds.

b) Portfolio Management :-

Portfolio Management services is out of the merchant

banking activities recognized by Securities Exchange board of India (SEBI). The Portfolio

Management Service can be rendered either by the SEBI authorized categories I & II

merchant bankers or the Portfolio Manager or the discretionary Portfolio Manager as

defined in clauses (E) and (F) of rule 2 of securities and Exchange Board of India

(Portfolio Managers) rules 1993.

According to the definitions as contained in the above clauses, a Portfolio Manager means

any person who pursuant to a contract or arrangement with a client, Advisers or directs or

undertakes on behalf of the clients (whether as a discretionary Portfolio Manager or

otherwise) the management or administration of a Portfolio of securities or the funds of the

clients, as the case may be. A merchant banker acting as a Portfolio Manager should also be

bound by the rules and regulations applicable to a Portfolio Manager.

c) Project Counseling :-

16
 Project Counseling is very important and lucrative

merchant banking service which only very few merchant bankers having advantages of

knowledge, skills and experience over others are able to render satisfactorily. Efforts

have been made to pass on the requisite knowledge, skills and useful information

gathered on the basis of experience of experts engaged in project appraisals and project

financing to merchant bankers, professionals and the interested readers so as to enable

them to gather in expertise in broader areas of the project counseling techniques and

procedures.

d) Venture Capital :-

Venture capital funds (VCFs) are part of the primary

market. There are 35 venture capital fund registered with SEBI apart from one foreign

venture capital firm registered with SEBI. Data available for 14 firms indicate that total

funds available with them at the end of 1996 were Rs. 1402 crores, which Rs. 672.85

crores had been invested in 6212 projects in 1996. Venture Capital, which was

originally restricted to risk capital, has become now private equity. Venture capital

represents funds invested in new enterprises, which are risky but promise high returns.

VCFs finance equity of units, which propose to use new technology and are promoted

by technical and professional entrepreneurs. They also provide technical, financial and

managerial services and help the company to set up a track record. Once the company

meets the listing requirements of the OTCEI or stock exchanger, VCF can disinvest its

shares .

17
e) Stock Exchange Operations :-

Stock Basics: How stocks Trade

Most stocks are traded on Exchanges, which are places where buyers and sellers

meet and decide on price. Some exchanges are physical locations where transactions

arte carried out on a trading floor. Youve probably seen pictures of a trading floor,

in which traders are widely throwing their arms up, waving, yelling and signaling to

each other. The other type of exchange is a virtual kind, composed of a network of

computers where traders are electronically. The purpose of a stock market is to

facilitate the exchange of securities between buyers and sellers, thus reducing the

risks of investing. Just imagine how difficult it would be to a sell shares if you had

to call around the neighborhood trying to find a buyer. Really, a stock market is

nothing more than a super-sophisticated farmers market linking buyers and sellers.

Before we go on, we should distinguish between the primary market and the

secondary market. The primary market is where securities are created (by means

of an IPO) while, in secondary market, investors trade previously issued securities

without the involvement of the issuing-companies. The secondary market is what

people are referring tom when they talk about the stock market. It is important to

understand that the trading of a companys stock does not directly involve that

company.

The term market can have many different meanings. One usage of the term

denotes the primary market and the secondary market. These two markets

distinguish between the market where securities are created and the market where

18
they are traded among investors. Their function is key in understanding how stocks

trade.

Primary Market :

The primary market is where securities are created. Its in this market that firms sell

(float) new stocks and bonds to the public for the first time. For our purposes, you

can think of the primary market as being synonymous with an initial public offering

(IPO). Simply put, an IPO occurs when a private company sells stocks to the public

for the first time.

IPOs can be very complicated because many different rules and regulations dictate

the processes of institutions; however; they all follow a general pattern:-

1. A company contacts an underwriting firm in order to decide upon the legal

and financial details regarding the offering of securities.

2. A preliminary registration statement, which details the companys interests

and prospects and the particularities of the issue, is field to the appropriate

authorities. Known as a preliminary prospectus or red herring, this document

is not finalized and not a solicitation by the company issuing the new shares.

It is rather an information pamphlet and a letter describing the intent of the

company.

3. Governing bodies must approve the finalized statement and then a final

prospectus, detailing the issues price, restrictions and benefits, is issued by

the company. This final prospectus is legally binding for the company.

The important thing to understand about the primary market is that you arte

buying securities directly from an issuing company.

19
Secondary Market:

The secondary market is what people refer to when they talk about the stock market.

This includes the NYSE, NASDAQ, and all major exchanges around the world. The

defining characteristic of the secondary market, investors trade previously issued

securities without the involvement of the issuing companies. For example, if you go to

buy Microsoft stock, you are dealing only with another investor who owns shares in

Microsoft. Microsoft (the company) is in no way involved with the transaction.

The secondary market can be further broken down into two specialized categories:

auction market and dealer market.

In the auction market, all individuals and institutions wishing to trade securities will

congregate into one area and announce the prices at which they are willing to buy sell

(bid and ask offers). The idea is that an efficient market should prevail by bringing

together all parties and having them publicly declares their prices. Thus, theoretically,

the best price of a good need not be searched for because the convergence of buyers and

sellers will cause mutually-agreeable prices to emerge. The best example of an auction

market is the largest stock exchange in the world, the NYSE.

In contrast, a dealer market does not require parties to coverage. Individuals or

institutions will specialize in specific securities or commodities and then buy and sell

according to the demand of the market. These declare then earn profits through

differences in the posted bidding and asking prices for their specific securities. The

rationale behind a dealer market is convenience: investors arent required to wait for

other participants before a transaction can occur. Thus, many over-the-counter markets

are classified as dealer markets since the demand and supply for particular stocks is not

20
always enough to meet the requirements of different investors, allowing the specialist to

intervene by buying and selling out of personal inventories. Most bonds are in dealer

markets, and the NASDAQ stock exchange can also be classified as this type.

Third and Fourth Markets :

Third and fourth markets, as they involve significant volumes of shares to be transacted

per trade, arent for regular investors. The third market began as a rogue over-the-

counter market for large institutional investors not wishing to pay the set commissions

determined by the NYSE. This third market has slowly been phased out of use since

many of the commission schedules set by the NYSE have been removed. The Fourth

market is very similar to the third market except for the fact that no brokers are

involved in the transaction. An example is a direct trade between two large institutions.

Why Is This Important?

This off, its good to have a general understanding of the structure of the market. If you

understand how securities are brought to market and then traded on various exchanges,

you will know what is central to the markets functioning properly. Just imagine if

organized secondary markets did not exist-youd have to personally track down other

investors to engage in buying/selling stock. Not an easy task.

In fact, many investment scams revolve around securities that have no secondary

market. The ability to sell a security (liquidity) is often taken for granted. If a security

doesnt have a market, you can get stuck with a big loss and no options. As this is so

often the case, a little education might save you some money in the long run.

21
22
 OBJECTIVES

OF

THE STUDY

Objectives of the study

The objectives of my study are:-

The comprehensive study merchant banking services.

To know what are the activities performed by merchant banks.

23
 To know what are their general obligations and responsibilities.

To know the growth of merchant banking in India .

Comprehensive study of services of merchant banking:-

The main objective of study is to study the

various services provided by banking sector with special reference to merchant banking.

Activities performed by M.B.I.: -

24
 Merchant banking services in India cover a wide range of

activities which are fund-based, on-fund based financial and investment services encompassing

both capital as well as money activities in domestic as well as international markets

Merchant Banking Activities

Non-fund based activities Fund-based activities

Non-fund based activities include:-

Capital issues management and private

placement of securities, loan / credit / fund syndication, corporate counseling,

project counseling. NRI counseling, trusteeship management, portfolio management,

management of mergers and amalgamation, management of Buying and Buy-outs,

financial engineering or capital restructuring, reorganization, inter-corporate

investment of funds, lease-broking, and equipment procurement finance liaison etc .

Fund-based activities include :-

Underwriting of equity/preference shares, bonds

and debentures in new capital issues, dealing in money market instruments, like

25
placement of commercial papers, certificates of deposits, treasury bills, transactions etc.

Undertaking equipment leasing, venture capital/fund activities, dealing in secondary

market operations with or without stock exchange membership, inter-corporate

placement of funds etc .

General Obligations and Responsibilities : -

Malignance of books of accounts, records and

documents: merchant bankers have to keep and maintain a copy of the balance sheet, a

copy of auditors report and a statement of financial position, merchant bankers should

inform SEBI where the accounts, records and documents are maintained.

Merchant bankers have to furnish annually to SEBI copies of balance sheet, profit and

loss account and such other documents for any other preceding five accounting years as

required.

Merchant bankers are required to submit SEBI half yearly working results with a view

to monitor their capital adequacy. Books, records and documents should be preserved

for five years. Auditors report should be acted upon within two months. Merchant

bankers should execute an agreement with the issuing company setting out their mutual

rights, liabilities and obligations to such issue and particular to disclosures, allotment

and refund.

Number of Lead Managers: The number of lead manger depends on the size of the

public issue. The guidelines stipulate that for an issue unto Rs. 50 crores, the number of

lead manager should not exceed two, for issue between Rs. 50-100 crores maximum of

26
three, for issues between Rs. 100-200 crores of four, for issues above Rs.200 crores but

less than Rs.400 crores, five, and for issues of above Rs.400 crores, five or more as may

be agreed by SEBI.

27
 RESEARCH

METHODOLOGY

Research Methodology

28
While conducting any study, the method adopted for it is to be given due consideration.

Wide ranges of alternative approaches are available to choose from therefore ultimate

choice of the optimal methodology becomes complicated. Once the researcher is

satisfied that the method adopted is the best as compare to those rejected, only them

proceed further.

Research Methodology in a way is systematic representation of research or any other

problem. It is a written game plan for conducting research. It tends to describe the step

taken by researches in studying the research problem along with logical background.

It tends to describe methodology for solution of the problem that has been taken for the

purpose of study. This project focuses on the methodology for technique used for the

collection, classification & tabulation of the data. This plan throws light on the research

problem, the objective of the study & limitation of study.

Therefore, In order to solve a problem, it is necessary to design a Research

Methodology for problem as the same way differs from problem to problem.

The main motive behind the research is to know the various services provided by

banking sector with special reference to merchant banking.

The research design conducted by me for my study is described as follows: -

Research Design: -

29
 A research design is the specification of the methods and procedures for acquiring

the information needed to structure or to solve the problem. It is overall framework of the project

that stipulates what information is to be collected from which sources and which procedure.

Sources of Data Collection: -

Secondary Data.

Research Type:-

Descriptive Collection: -

Descriptive research is that research, which are

concerned with describing the characteristics of a particular or a group. Descriptive

research is used by me to find out of the knowledge of Merchant Banking in India.

Sample Size:-

Sample size is 6 banks.

30
 AN INSIGHT

ON

MERCHANT BANKING

MERCHANT BANKING HISTORY

31
In late 17 th and early 18 th century Europe, the largest companies of the world was

merchant adventures. Supported by wealthy groups of people and a network of overseas

trading posts, the 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 started by what we would today call merchant bankers, because

of the firms involvement in financing, negotiating, and implementing trade

transactions.

The colonies of other European countries were started in the same manner. For example,

the Dutch merchant adventures were active in what is now Indonesia, the French and

Portuguese acted similarly in their respective colonies. The American colonies also

represent the product of merchant banking, as evidenced by the activities of the famous

Hudson Buy Company. One does not typically look at these countries economic

development as having been fueled by merchant bank adventurers. However, their

colonies and their progress stem from the business of merchant banks, according to

todays accepted sense of the world.

THE HISTORICAL MERCHANT BANK

Merchant Banking, as the term has evolved in Europe from the 18 th century to today,

pertained to an individual or a banking house whose primary function was to facilitate

32
the busyness process between a product and the financial requirements for its

development. Merchant banking services span from the earliest negotiations from a

transaction to its actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity was

directed towards a commodity trader/cargo owner who was involved in the buying,

selling, and shipping of goods. The role of the merchant banker, who had the expertise

to understand a particular transaction, was to arrange the necessary capital and ensure

that the transaction would ultimately produce collectable profits. Often, the merchant

banker also became involved in the actual negotiations between a buyer and seller in a

transaction.

THE MODERN MERCHANT BANK

During the 20 th century, however, European merchant banks expanded their services.

They became increasingly involved in the actual running of the business for which the

transaction was conducted. Today, merchant banks actually own and run business for

their own account, and that of others.

Since the 18 th century, the term merchant banker has, therefore, been considerably

broadened to include a composite of modern day skills. These skills include those

inherent in an entrepreneur, a management advisor, a commercial and/or investment

banker plus that of a transaction broker. Today a merchant banker is who has the ability

to merchandisethat is, create or expand a needand fulfill capital requirements. The

modern European bank, in many ways, reflects the early activities and breadth of the

services of the colonial trading companies.

33
Most companies that come to a U.S. merchant bank are looking to increase their

financial stability or satisfy a particular, immediate capital need.

Professional merchant bankers must have: 1) an understanding of the product, its

industry and operational management; 2) an ability to raise capital which might or

might not be ones own (originally merchant bankers supplied their own capital and

thereby took an equity interest in the transaction); 3) and most importantly, Effective

skills in concluding a transaction-the actual sale of the product and the collection of

profit. Some people might question whether or not there are many individuals or

organizations that have the abilities to fulfill all three areas of expertise.

THE NORTH AMERICAN VARIANT

Merchant banking services in the U.S. however, have been undertaken by highly

specialized boutiques, where each offers its own specialized service. The typically

charge fee income for each service, and transactions are oriented toward short-term

deals rather than long-term relationships.

Very few offer the complete range of services that are available through traditional

European merchant banks. In fact, most companies that come to a U.S. merchant bank

are looking primarily to increase their financial stability or satisfy a particular,

immediate capital need. They are not looking for the actual on-line operating advice

and assistance required to complete the traditional merchant banking process.

CAPITAL ASSISTANCE

34
In providing financial assistance, merchant banks offer full understanding of all facets

of the capital markets. This includes all types of debt and equity financing available

from both domestic and international markets. A merchant banker, cognizant of capital

costs, looks for best sources of capital, including its restrictions and dollar limitations.

It should be understood that interest rates are not only definition of capital costs.

Restrictions on availability, prepayment terms, and operating effectiveness can often

outweigh what might appear to be inexpensive capital with low interest rates. Too often,

capital includes costs, which force an entrepreneur or a business to undertake

undesirable actions. In the short-run, some actions might be necessary, but often in the

long-run are detrimental. The traditional merchant banker understands these capital

limitations and can structure a transaction, which is beneficial to all sides of the table

not just the capital source. He also knows how to substitute one type of capital for

another, sometimes utilizing internal sources from asset repositioning or cash creation

from improvements in working capital. He understands fully the risk versus return

elements necessary to complete the capital procurement process.

FINDING A MERCHANT BANK

35
There are many merchant bankers operating in North America today, both large and

small, though only a subset offer a full range of services, before selecting a merchant

banker, one should decide what services are required. Is it capital, general management

consulting, supervision of an existing investment, a joint venture, or merger/acquisition

assistance to spot and consummate a distribution, product or manufacturing opportunity

that one requires?

It is paramount to know who in such an organization is best qualified to fill these needs.

Also, selection of the merchant banker depends on whether one needs to satisfy short or

a long-term objective, or both.

In the final analysis, it is personal relationship between the parties that will determine

the chances of success. One may find the smaller merchant banking companies are both

comprehensive in their services and reliable. They may effectively handle all

transaction elements, while remaining within ones cost parameters. Moreover, these

smaller firms can offer more personalized services, better performance and quicker

responses to a clients needs.

Locating a merchant bank that fits a particular need can be as difficult as the transaction

itself. Even though there are such directories as that published by the American

Bankers Association of Security Dealers and the Directory of Corporate Finance, there

are no sources that evaluate the abilities of North American merchant bankers. For each

transactions needs, one must assess the skills of a merchant banker while examining

the firms performance record.

Merchant Banking in India

36
As planning and industrial policy envisaged the setting up of new industries and

technology greater financial, sophistication and financial services are required.

According to Goldsmith, there is a well- proven link between economic growth and

financial technology.

Economic development requires specialist financial skills: saving banks to marshal

individual saving; finance companies for consumer lending and mortgage finance;

companies for life and property cover; agricultural banks for rural development; and a

range of specialized government or government sponsored institutions. As new units

were set up and business expanded, they required additional financial services, which

were then not provided by the banking system. Like the local banking system and the

trade before, the local system of family enterprises was unsuited for raising large

amounts of capital. A public equity or debt issue was the logical source of funds.

Merchant banks serve a dual role within the financial sector. Through deposits or sales

of securities they obtain funds for lending to their clients (SEBI forbids lending by

them): a function similar to most institutions. Their other role is to act as agents in

return for fee. SEBI envisages a mandatory role for merchant banks in exercising due

diligence apart for issue management, in buy-backs and public offer in take over bids.

Their underwriting and corporate financial services are all fee rather than fund based

and their significance is not reflected in their total assets of the industry. SEBI has

pressing for merchant banks to be primarily fee-based institutions.

Services Rendered by Merchant Banks

37
The working of merchant banking agencies and units formed subsequently to offer

merchant banking services has shown that merchant banks are rendering diverse

services and functions, such as organizing and extending finance for investment in

projects, assistance in financial management, acceptance house business, raising Euro-

dollar loans and issue of foreign currency bonds, financing of local authorities,

financing expert of capital goods, ships, hydro-power installation, railways, financing

of hire-purchase transactions, equipment and promotion of investment trusts. Not all

merchant banks offer all these services. Different merchant bankers specialize in

different services. Merchant banking may cover a wide range of financial activities and

in the process include a number of different financial institutions. In the last 25 years

new services and functions apart from issue management have been added. Merchant

Bankers render their specialized assistance in handling the following major activities:

Project management

Issue management

Portfolio Management services

Counseling

Loan Syndication

Bought out deals

38
 Organization of Merchant Banking Units

The structure of organization of merchant banks reveals certain similar

characteristics:

A high proportion of professionals to total staff;

A substantial delegation of decision making;

A short chain of command;

Rapid decision making;

Flexible organization structure;

Innovative approaches to problem solving; and

High level of financial sophistication.

In the words of Skully, a merchant bank could be best defined as a financial institution

conducting money market activities and lending, underwriting and financial advice, and

investment services whose organization is characterized by a high proportion of

professional staff able to approach in an innovative manner and to make implement

decisions rapidly.

Merchant banking activities are regulated by:-

Guidelines of SEBI and Ministry of Finance

Companies Act, 1956 and

Listing Guidelines of Stock Exchange and

Securities Contracts (Regulation) Act, 1956.

39
 Definition of Merchant Banker

The Notification of the Ministry of finance defines a merchant banker as, any person

who is engaged in the business of issue management either by making arrangement

regarding selling, buying or subscribing to securities as manager, consultant, advisor or

rendering corporate advisory service in relation to such issue management. The

amendment regulations specify that issue management consists of prospectus and other

information relating to the issue, determining financial structure, tie-up of financiers

and final allotment and refund of the subscriptions, underwriting and portfolio

management services.

Categories of Merchant Bankers

Initially merchant bankers were classified into four categories having regard to their

nature and range of activities and their responsibilities to SEBI, investors and issuers of

securities. The minimum net worth and initial authorization fee depend on the category.

Since September 5, 1997 only Category I exists. The first category consists of merchant

bankers who carry on any activity of issue management. Which will inter alia consists

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 to act in the capacity of managers, advisor or consultant into an issue.

Net worth : Minimum net worth for first category is Rs. 1 crore.

40
Registration Fee : Registration fee for first category is Rs. 5 lakhs annually in the

first three years, Rs. 25 lakhs in fourth year. Renewal is every three years.

In addition merchant banker has to pay fees per offer document; Rs. 10000 up to Rs.5

crores; Rs. 15000 for Rs. 5-10 crores; Rs. 25000 for Rs. 25-50 crores; Rs. 5000 for Rs.

50-100 crores; Rs. 250000, Rs. 100-500 crores; and Rs. 500000, above Rs. 500 crores.

Code of Conduct

The code of conduct stipulates that in the performance of duties, merchant banker

should act in an ethical manner, inform the client that he is obliged to comply with the

code of conduct, render high standard of service and exercise due diligence, not to

indulge in unfair practices, not to make misrepresentations, give best advice, not to

divulge confidential information about the clients, endeavor to ensure that true and

adequate information is provided to investors.

Finally merchant bankers should not be a party in respect of issue of securities, creation

of false market, price rigging or manipulation or pass price sensitive information, to

abide by all rules, regulations, and guidelines, resolutions issued by the government of

India and SEBI from time to time.

41
 Responsibilities of Lead Manager

Lead managers should not agree to manage any issue unless his responsibilities relating

to the issue mainly disclosures, allotment and refund are clearly defined. A statement

specifying such responsibilities should be furnished to SEBI at least one month before

opening of the issue .

Underwriting Obligations: Lead merchant banker in Category I, should accept a

minimum underwriting obligation of five percent of the total underwriting commitment

or Rs. 25 lakhs whichever is less .

Submission of Due Diligence Certificate: A due diligence certificate about

verification of contents of prospectus or the latter of an offer in respect of an issue and

the reasonableness of the views expressed therein should be issue by the lead merchant

banker.

Documents to be submitted to SEBI by Lead Manager

The lead manager should submit to SEBI:-

a) Particulars of the issue, draft prospectus or letter of offer.

b) Any other literature intended to be circulated to the investors including

the shareholders and

c) Such other documents relating to prospectus or letter of offer as the case

may be.

42
These documents should be furnished at least two weeks before filing the draft

prospectus or letter of offer with ROC or with Regional Stock Exchange. The lead

manager has to ensure that modifications suggested by SEBI are incorporated. The lead

manager undertaking the responsibility of refunds or allotment of securities in respect

of any issue should continue to be associated with the issue till the subscribers have

received share certificate or refund of excess application money.

Different Kind of securities, which are used in trading:-

Debentures

Floating Rate bonds

Warrants

Income Bonds

Asset Backed Securities

Junk Bonds

Index Bonds

Easy Exit Bonds

Regular Income Bonds

Retirement Bonds

Equity Shares

43
 Changing role of a Merchant Banker

In the past.

The role of the merchant banker was to arrange the necessary capital and ensure that the

transaction would be implemented i.e. a financial intermediary facilitating the flow of

capital among the concerned parties.

Today.

A merchant banker plays multiple roles which include those of an entrepreneur, a

management advisor, an investment banker, and a transaction broker.

This shows that the breath and depth of a merchant bankers activity has changed over

the years.

Service offered : The wide gamut of services offered by a merchant banker includes:

Issue management: This forms the Bread and Butter operations for most merchant

bankers. The main area of service involves:

Instrument designing

Pricing of the issue

Registration process for the issue of shares

Underwriting of the issue

Marketing efforts

Final allotment to investors

Listing details on stock exchanges

44
Corporate advisory services:

Merchant bankers offer customized solutions to solve the financial problems of their

clients. Advice is sought in areas of financial structuring (as shown in the Modern

Manufacturing case above). Merchant bankers study the working capital practices that

exist within the company on rehabilitation and turnaround strategies, which would help

companies to recover from their current position. They also provide advice on

appropriate risk management strategies.

Project advisory services :

Merchant bankers help clients to conceptualize the project idea, to carry out feasibility

studies to find out the viability of the project, and also to appraise their project.

Loan syndication:

These financial intermediaries arrange loans, for their clients, by analyzing their cash

flow pattern, so that the terms of borrowing meet the clients cash requirements. They

also offer assistance in loan documentation procedures.

Restructuring strategies:

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.

45
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.

46
Merchant bankers and service provider of merchant banking

The leading Merchant Banks in India are:

Public Sector:

ICICI Securities Ltd. (promoted by ICICI)

SBI Capital Markets Ltd. (promoted by State Bank of India)

Merchant Banking Divisions of IDBI and IFCI

PNB Capital services Ltd. (promoted by Punjab National Bank)

Private Sector:

Kotak Mahindra Capital Co.

Financial and Investment Consultancy Pvt. Ltd.

DSP Financial Consultants

Enam Financial Services

Jardine Fleming India Ltd.

Escorts Financial Services Ltd.

DCM Financial Services Ltd.

Other service provider of merchant banking:

Oriental Bank Of Commerce

Provides banking services.

47
 Indian Overseas Bank

Providing banking services.

HDFC Bank Limited

Providing banking services of account, cash management etc.

Allianz Capital Management Services Ltd.

Merchant banking, money market operations and retail banking.

Unit Trust of India

Providing services related to mutual fund.

Union Bank of India

Providing banking services.

State Bank of India

Providing banking services.

Bank of Punjab, Limited

Provides banking services.

Syndicate Bank

Providing all type of banking services.

Deutsche Bank AG

Provides banking services.

North Eastern Development Finance corporation Limited

Providing banking services.

Care Connections Private Limited

Providing services of finance like insurance, loans, chit funds.

48
 ISSUE

MANAGEMENT

49
 ISSUE MANAGEMENT

Issue management refers to management of securities offerings of the corporate sector

to public and existing share holders on rights basis. Issue management parlances are

known as Merchant Banker or Lead mangers. Although the term Merchant Banking, in

generic term, covers a wide range of services such as project counseling, portfolio

management, investment counseling, mergers and acquisitions, etc.

Issue management constitutes perhaps the most important and sizeable function within

it. So much so, that very often, the term merchant banking and Issue Management are

almost used synonymously.

The significance of Issue management for a Merchant Banker is succinctly displayed in

the definition of Merchant Banker as contained in the Securities and Exchange Board

of India (Merchant Banker) rules and regulations. 1992, viz, Any person who is

engaged in the business of issue management either by making arrangements

regarding selling, buying or subscribing to securities as manager, consultant, advisor

or rendering corporate advisory service in relation to such issue management.

50
 Types of Issues

Existing as well as new companies raise funds through various sources for

implementing projects. One of the sources of raising funds is mobilizing capital by

issuing securities. This can be done in the following three ways:

1. Public Issue

2. Right Issue

3. Private Placement

Public Issue

The most method of raising funds through issues is through prospectus. Public issue is

made by a company through prospectus for a fixed number of shares at a stated price.

Which may be at par or premium, and any person can apply for the shares of the

company. The prospectus has to disclose all material and essential factors about the

company to the intending purchase of shares. The Schedule-II of the Companies Act,

1956 specifies the matters to be stated and reports to be set out in the prospectus.

Securities and Exchange Board of India has laid down guidelines for raising funds from

the public. The guidelines relate to adequate disclosures in the prospectus so that the

Investor can take informed decision while making an investment in a company.

51
Right Issue

Right Issue are issues of new shares in which existing shareholders are given

preemptive rights to subscribe to new issue of shares. Such further shares are offered in

proportion to the capital paid-up on the shares held by them at the date of such

obligation to accept the offer. On the other hand, they have right to renounce the offer a

favor of any person. Right shares are usually offered on terms advantageous to the

shareholders. For example, shares of the face value of Rs. 10 may be offered at par

value, while the market price of the share at the time of offer may be Rs.15 or more.

Private Issue

The direct sale of securities by a company to investors is called private placement. In

private placement no prospectus is issued. Private placement covers, preference shares

and debentures. It is assumed that the investors have risks of the investment. The

financial intermediary, however, plays a vital role in preparing can offer memorandum,

and negotiating with investors. The private placement has obvious advantage of sped

and confidentiality. Private placement offers access to capital more quickly than public

issue, which may take six months of one year. On the other hand, it is possible to raise

funds through private placement within 2 to 3 months.

Access to primary market is quite costly on account of various mandatory and non-

mandatory expenses. Some public companies are too small to afford a public issue.

Such companies choose to use private placement.

52
Further the requirement of companies may be smaller than the minimum stipulated for

the public issue for listing at different stock exchanges. Finally private placement is not

influenced like the primary market by the prevailing bull or bear phases in the stock

market. The attitude of institutional investors towards the regular issue of securities in

private placement market is more stable and continuous.

53
 Who can be an Issue Manager?

Since setting up of SEBI, Issue Managers are required to be registered with SEBI so as

to carry on their Issue Management activities. SEBI has formulated Rules and

Regulation for merchant bankers, which bring out the requirements for Registration of

issue managers apart from prescribing the conduct rules for them. In terms of these

regulations for registration:

Issue Manager should have necessary infrastructure like adequate office space,

equipments and manpower to effectively discharge his activities.

Issue Managers should have minimum tow persons who have experience to

conduct the business of the Merchant Banker along with professional

qualifications in Law, Finance or Business Management.

Issue Manager should fulfill capital adequacy requirements i.e. he should have a

minimum net worth of Rs. 5 crores.

54
In term of SEBI Regulations, there are restrictions on the number of Issue Managers

who can associate with an Issue, which are presented below:

Size of the Issue Permissible No. of

Lead Managers

Less than Rs. 50 crores 2

Rs. 50 crores but less than Rs. 100 crores 3

Rs. 100 crores but less than Rs. 200 crores 4

Rs. 200 crores but less than Rs. 400 crores 5

Rs. 400 crores and above 5 or more

55
 Roles of Issue Manager

An Indispensable Pilot:

Under SEBI guidelines, a public/ rights issue cannot be floated without the association of

a Merchant Banker. Merchant banker, like pilots of air-crafts are repositories of special

skills required to executing the management of issue.

A Financial Architect:

One of the important areas of Issue Management relates to capital structuring, Capital

gearing and financial planning for the company. While performing these activities

Merchant Bankers act as Financial Architects.

An Investors/Underwriter:

Merchant Bankers also underwrite and invest in the Issue lead managed by them.

A Co-traveler:

Merchant bankers also sometimes act as market makers in Issues lead managed by them.

They invest, continue to hold and offer and sell quotes for the Scrips of the company after

Listing. Thus, as market makers, their association is not merely restricted management of

Issue but continues like co-traveler with the company.

A Performer of Due Diligence:

Under the SEBI guidelines, every Merchant Banker while managing a capital Issue is

expected to perform Due Diligence and furnish a Due Diligence Certificate to SEBI.

Association of Merchant Bankers of India (AMBI) has prescribed detailed Due Diligence

56
guide to its members to facilitate their performance of due diligence. SEBI has also

prescribed a code of conduct for Merchant Bankers.

A Zubin Mehta:

While managing an issue, a Merchant Banker is required to co-ordinate with a large

number of institutions and agencies. Merchant banker like an able conductor of orchestra

has to ensure that all the players complete their jobs timely and with proper co-

ordination, so as produce the end result effectively.

A Satellite of SEBI

Each Merchant banker is required to be registered with SEBI. While managing issues

they are required to interact and file offer documents with SEBI. They are also required

to file number of reports related to Issue management by them with SEBI. In a nut shell,

they have to necessarily remove around SEBI while managing an Issue.

A Dream Merchant:

Marketing of an issue is an essential and perhaps the most important component of Issue

Management. Merchant banker makes number of promises and commitments to the

prospective investors, which puts him in the shoes of a dream merchant.

57
 PUBLIC ISSUE MANAGEMENT

Raising money from the capital market needs planning the activities and chalking out a

marketing strategy. It is, therefore essential to make an analytical study of various

sources, the quantum, the appropriate time the cost of raising capital and the possible

impact of such resources on the overall capital structure besides the law governing the

issue. There are various activities required for raising funds from the capital markets.

These can be broadly divided into pre-issue and post-issue activities.

Pre-Issue Activities

Signing of Memorandum of Understanding

Obtaining Appraisal Note

Determination of Optimum

Convening An EGM

Appointment of Underwriters, Registrars etc.

Preparation of Documents

Due Diligence

Submission of Offer Document to SEBI

Finalization of Collection centers

Filling with Registrars of Companied

Launching of a Public Issue

58
 Promoters Contribution

Closing of the Issue

Post-Issue Activities:

After the closures of the Issue, the Lead Manager has to manage the Post-Issue activities

pertaining to the issue. Certificate of 90% subscription from Registrar as well as final

collection certificate from Bankers is obtained.

Finalization of Basis of Allotment

Dispatch of Share Certificate, etc.

Issue of Advertisement in Newspapers.

59
MERCHANT

BANKERS

COMMISSION

60
 Merchant Bankers Commission

As determined by the Finance Ministry, Government of India, Merchant Bankers

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

1. A merchant Banker can charge 0.5% as the maximum as commission for

whole of the issue.

2. They can charge project appraisal fees.

3. A lead manager can claim a commission of 0.5% upto Rs. 25 crore and

0.2% in excess of Rs. 25 Crore.

4. Underwriting commission

On amount devolving on amount subscribed

Types of Security Underwriters by Public

1. Equity shares 2.50 2.50

2. Preference shares/ debentures

upto Rs. 5 lakh 2.50 1.50

excess of Rs. 5 lakh 2.00 1.00

5. Brokerage commission 1.5%.

61
6. Other expenses like advertising printing, Registrars expenses, stamp duty

etc., in connection with the issue can be reimbursed from its clients.

ANALYSIS

OF

THE STUDY

62
 Analysis of the study
Merchant Bankers services cover wide range of activities which are fund-based and non-

fund based activities. These activities are financial and investment services

encompassing both capital as well as money activities in domestic as well as in

international markets. I analysis that merchant banking means any institution

which covers a wide range of activities such as management of customer

services, portfolio management, credit syndication, acceptance credit,

counseling, insurance etc.

The present performance of Merchant Banking Division set up by some of the

Commercial bank is very satisfactory. The scope of Merchant Banking activities is very

bright in India for commercial banks and financial consulting firms/companies due to the

new activities like fund management, portfolio management, stock exchange operations,

venture capital & project counseling.

The commercial banks that followed the services of the merchant banking activities are

State Bank of India were Central Bank of India. Bank of India and Syndicate Bank in

1977; Bank of Baroda, Standard Charted Bank and Mercantile Bank in 1978; and United

Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank and Indian

Overseas Bank in late 70s and early 80s. Among the development banks, ICICI started

merchant banking activities in 1973, followed by IFCI (1986) and IDBI (199

63
The merchant banking activities include the services of the primary market, secondary

market and third and fourth market services. Merchant Banker provides all the services of

the stock exchange operations activities.

Non-Fund based activities include capital issues management and private

placement of securities, loan / credit / fund syndication, corporate counseling,

project counseling. NRI counseling, trusteeship management, portfolio

management, management of mergers and amalgamation, management of Buying

and Buy-outs, financial engineering or capital restructuring, reorganization,

inter-corporate investment of funds, lease-broking, and equipment procurement

finance liaison etc.

Fund-Based activities include underwriting of equity/preference shares, bonds

and debentures in new capital issues, dealing in money market instruments, like

placement of commercial papers, certificates of deposits, treasury bills,

transactions etc. Undertaking equipment leasing, venture capital/fund activities,

dealing in secondary market operations with or without stock exchange

membership, inter-corporate placement of funds etc .

Merchant bankers have to furnish annually to SEBI copies of balance sheet,

profit and loss account and such other documents for any other preceding five

accounting years as required. Merchant bankers are required to submit SEBI half

yearly working results with a view to monitor their capital adequacy. Books,

records and documents should be preserved for five years. Auditors report

should be acted upon within two months. Merchant bankers should execute an

64
agreement with the issuing company setting out their mutual rights, liabilities

and obligations to such issue and particular to disclosures, allotment and refund.

In the past the role of the merchant banker was to arrange the necessary capital

and ensure that the transaction would be implemented i.e. a financial

intermediary facilitating the flow of capital among the concerned parties.

Today a merchant banker plays multiple roles which include those of an

entrepreneur, a management advisor, an investment banker, and a transaction

broker.

This shows that the breath and depth of a merchant bankers activity has

changed over the years.

Merchant bankers offer customized solutions to solve the financial problems of

their clients. Advice is sought in areas of financial structuring (as shown in the

Modern Manufacturing case above). Merchant bankers study the working capital

practices that exist within the company on rehabilitation and turnaround

strategies, which would help companies to recover from their current position.

They also provide advice on appropriate risk management strategies.

Merchant bankers help clients to conceptualize the project idea, to carry out

feasibility studies to find out the viability of the project, and also to appraise

their project.

These financial intermediaries arrange loans, for their clients, by analyzing their

cash flow pattern, so that the terms of borrowing meet the clients cash

requirements. They also offer assistance in loan documentation procedures

65
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.

Since setting up of SEBI, Issue Managers are required to be registered with SEBI

so as to carry on their Issue Management activities. SEBI has formulated Rules

and the Regulation for merchant bankers, which bring out the requirements for

Registration of issue managers apart from prescribing the conduct rules for them.

Number of Lead Managers: The number of lead manger depends on the size of

the public issue. The guidelines stipulate that for an issue unto Rs. 50 crores, the

number of lead manager should not exceed two, for issue between Rs. 50-100

crores maximum of three, for issues between Rs. 100-200 crores of four, for

issues above Rs.200 crores but less than Rs.400 crores, five, and for issues of

above Rs.400 crores, five or more as may be agreed by SEBI.

So that Merchant Banking plays a vital role and performed a wide range of

activities & offered customized solution to the problem of the clients.

66
RECOMMENDATIONS

67
 Recommendations

The Merchant bankers should try to reduce their commission, which they

are charging from their clients as in the issue management they are

charging 5% commission which is very high charges.

They should try to provide some extra benefits to their clients. Merchant

Bankers should provide more services like in issue management

prospectus issue, and portfolio management advisory services etc.

They should try to reduce their complicated work. Merchant Bankers do

various complicated work like in loan syndication various information

related to the clients

All the Merchant bankers should try to improve the Domestic Market.

They should provide more and easily services to the clients.

The Merchant Bankers provide all the information related to services to the

client with that SEBI's objectives of improving disclosure of private

information and investor protection can be achieved.

68
CONCLUSION

69
 Conclusion

The merchant banker plays a vital role in channelising the financial surplus of

the society into productive investment avenues. Hence before selecting a

merchant banker, one must decide what the services for which he is being

approached. Selecting the right intermediary who has the necessary skills to meet

the requirements of the client will ensure success.

A new competition has started among Merchant Banking outfits in approving

higher and higher premium to attract the business. In many cases their pricing

emphasis is one qualitative actor like promoters experience, marketing network,

brand name and export potential and performance.

Finally, it has been concluded that, there is no uniform pricing methodology and

no Lead Manager is following the same methodology for all the issues handled.

70
LIMITATIONS

OF

71
 THE STUDY

Limitation of the Study

(a) Time factor for the study is not sufficient to do intensive study and to

touch all the relevant factors of the Merchant Banking Industry.

(b) Availability of limited information.

72
BIBLOGRAPHY
73
 Bibliography

Gorden, E and K. Natrajan Emerging Scenario of Financial Services.

Himalaya Publishing House.

Dr. Verma J.C. Merchant Banking 3rd Edition Inter India, New Delhi.

Machiraju H.R. Merchant Banking 2nd Edition Wheeler Pub. New Delhi.

Newspapers & Magazines

74
 Financial journals

Website

www.google.com

www.icicisecurities.com

www.sbifinancialmarket.com

www.indiainfoline.com

75