Banking Law Project

On

“Merchant Banking in India”

Submitted to:

Dr. Kiran Kori

Faculty, Law of Banking

By:

Pankaj Sharma

Roll no. 100

Section A

Semester IX, B.A. LLB(Hons.)

Submitted on:

October 25, 2018

Hidayatullah National Law University

Uparwara Post, Abhanpur, New Raipur – 493661 (C.G.)

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 Acknowledgements
I feel elated to work on the project “Merchant Banking in India”. The practical
realization of the project has obligated the assistance of many Persons. Firstly I
express my deepest gratitude towards, Dr. Kiran Kori Faculty, Law of Banking,
to provide me with the opportunity to work on this project. Her able guidance and
supervision were of extreme help in understanding and carrying out the nuances of
this project.

I would also like to thank The University and the Vice Chancellor for providing
extensive database resources in the library and for the internet facilities provided by
the University.

Some printing errors might have crept in which are deeply regretted. I would be
grateful to receive comments and suggestions to further improve this project.

Pankaj Sharma

Roll No. 100

Section A, Semester IX

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 Table of Contents

Acknowledgments ………………….…………………………….…2

1. Introduction …………………………………….….…………4

• Research methodology………….…..5

• Objectives of study …………………5

• Questions ……………………….…..5

• Hypothesis……………………….….5

• Scope of study ……………………...5

• Mode of citation………………….….5

2. Definition…………………………………….………………….…6

3. Growth in India…………………………………..……………..… 8

4. Organizational setup……….…………………….……….………..10

5. Functions and Importance………………………………………….15

6. Examples ………………………………………………………….…17

Conclusion…………………………………………….…………………18

Bibliography………………………………………………………….…19

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Introduction

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
resources raising functions remains to be the primary business of a merchant banker. The
primary market holds the key to rapid capital formation, growth in industrial productions and
exports. There has to be accountability to the end use of funds raised from the market. The
increase in the number of issues and amount raised the number of merchant bankers.
Therefore, the field became highly competitive market where it requires a specialized skill in
handling the situation. The merchant bankers have a social responsibility to in building an
industrial structure in India.
Merchant bankers assist corporate 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 Projects scrutinize & 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 bankers 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.
Financial services in India have witnessed remarkable changes in the recent past after the
implementation of “Liberalization, privatization and globalization”.

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Research Methodology

The method of research adopted is doctrinal & descriptive in nature. Secondary sources of
information have been used to give the research work a concrete structure. Websites & e-
articles have been extensively referred for relying on the data. Other relevant sources as
suggested by the faculty coordinator have been referred to. Footnotes have been provided
wherever required.

Objectives of study

 To study about the merchant Bankers.

 To examine the growth of merchant banking in India.
 To study compliance with rules and registration governing the securities market.

Questions

 What is Merchant Banking and its growth in India?

Hypothesis

Company raises capital by issuing securities in market. Merchant bankers at as intermediaries

between the issuer of capital and the ultimate investor who purchase these securities.

It is the financial intermediation that matches the entities that need capital and those that
have capital. It is function that facilitates the flow of capital in the market. Merchant baking
activities in India originated in 1969 with the merchant banking division set up by the grind
lay bank, the largest foreign bank in the country, at the time.

Scope of study

In this project, the author only discusses the Merchant Banking In India and further this is
limited to merchant bankers mechanism according to SEBI.

Mode of citation

The mode of citation of this project is bluebook 19th edition

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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.

A merchant banker has been defined under the securities and exchange board of India
[merchant banker] rules,1992 as “any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing
securities as manager, consultant, advisor or rendering corporate advisory service in relation
to such issue management.

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

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 arrangements regarding
selling, buying or subscribing to securities as manager, consultant, advisor or rendering
corporate advisory service in relation to such issue management”.

In short, merchant bankers assist in raising capital and advice on related issues.

Merchant banking is the financial intermediation that matches the entities that need capital
and those that have capital? It is function that facilitates the flow of capital in the market.
Merchant Banks, thus, in essence, are financial institution providing specialist services which
generally include the acceptance of bill of exchanges, corporate finance, portfolio
management and other banking services. It is not necessary that a merchant banker should do
all such activities to be called a merchant bankers, one merchant bank may specialized in one
activity only, and take up other activities also, which may be complimentary or supportive to
specialized activity.

“ A merchant bank is a defined as a financial institution or an organization that underwrites

corporate securities and advice such clients on issue like corporate mergers etc involved in
the ownership of commercial venture, etc. this organization may be bank corporate body, a
firm or a priority concern”

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Scope of merchant banking activities:-

Merchant banking activities helps:

• In channel sing the financial surplus of the general public into productive investment
avenues.

• To coordinate the activities of various intermediaries to the share issue such the
registrar, banker, advertising agency, printers, underwriters, brokers etc.

• To ensure the compliance with rules and registration governing the securities market.

Growth of merchant banking in India

Merchant baking activities in India originated in 1969 with the merchant banking division set
up by the grind lay bank, the largest foreign bank in the country, at the time. The main
service offer to the corporate enterprises by the merchant bank includes management public
issue and financial consultancy. Other forcing bank 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 forcing 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 to forcing
exchange regulation act 1973 [ FERA] where in large number of forcing companies operating
in India were required to dilute their foreign holdings In order to continue business in the
country his 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 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. Various existing corporate entities and non-banking finance companies
have also focused their activities in merchant banking business. Before 1990 there were less

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than 40 merchant banking concerns while in 199 this number has exceeded to more than 400
firms.

Importance and need of Merchant Banking in India

Importance reasons for the growth of merchant banks has been development activities
throughout the country, exerting excess demand on the sources of fund for ever expanding
industries and trade, thus leaving a widening gap unabridged between the supply and demand
of invisible funds. All India financial institution had experienced constrain of resources to
meet ever increasing demands for demands for funds frame corporate sector enterprises. In
such circumstances corporate sector had the only alternative to avail of 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, gridlines 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 the need of a skilled agency existed which could provide counseling in these matters
in a package form. A merchant banker with their skills updated information and knowledge
provide this service to the corporate units and advice them on such requirement to be
complied with for raising funds from the capital market under different enactment viz.

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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
make available finance for business enterprises acting as intermediaries between them raising
demand for funds and the supplies of funds besides rendering various other services.

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 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 saving from.

Where merchant banks function as an independent wing or as subsidiary of various

private/central governments/ state government financial institution. Most of the financial
institution in India is in public sector and therefore such setup plays a role on the lines of
governmental priorities and policies.

Organizational setup of merchant bankers in India

In India a common organizational setup of merchant bankers to operate is in the form of
divisions of Indian and foreign banks and 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.

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From the point of organizational setup India’s 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.

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Requirements for setting up a merchant banking 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. Sole proprietorship
b. Partnership firm
c. Hindu Undivided Family (HUF)
d. Corporate Enterprises
e. 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

All the basic tests required to find out whether the business to be undertaken is viable or not
are also applicable to 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 certificate

An application for grant of a certificate needs to be made to SEBI .

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

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(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.

b. Application to conform to the requirements

The application should conform to all the requirements under the SEBI guidelines, otherwise
it may be rejected.

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
application. The applicant or its principal officer may appear before the Board for personal
representation.

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: -

 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

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  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 networth shall be as follows,

Category Minimum Amount

Category I Rs. 5, 00, 00, 000
Category II Rs. 50, 00, 000
Category III Rs. 20, 00, 000
Category IV Nil

 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 recognised 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 prescribed.

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.

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The Merchant Bank can commence business on acquisition of a Certificate of Registration
from the SEBI after completion of the above mentioned formalities.

Functions of a merchant banker

The following comprise the main functions of a merchant banker:

1. Management of debt and equity offerings:-

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

2. Placement and distribution:-

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

3. Corporate advisory services:-

Merchant bankers offer customized solutions to their client’s financial
problems. The following are the main areas in which their advice is sought.

4. Financial structuring:-
Includes determining the debt-equity ratio and gearing ratio for the client: the
appropriate capital structure theory is also framed. Merchant banker also explores the
refinancing alternatives of the client and evaluate cheaper source of fund. Another
area of advice is habilitation and turnaround management. In case of sick units,
merchant banker may design a revival package in coordination with banks and
financial institution. Risk management is another area where advice from a merchant

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 banker is sought. He advice the client on different hedging strategies and suggest the
appropriate strategy.

5. Project advisory service:-

Merchant banker help their clients in various stage of project undertaken by
the clients. They assist them in conceptualizing the project idea in the initial stage.
Once the idea is formed, they conduct feasibility studies to examine the viability of
the proposed project. They also assist the client in preparing different document like
the detail project report.

6. Loan syndication:-
Merchant banker arranges to tie up loans for their clients. This take place in a
series of step. Firstly they analyze the pattern of the clients cash flows, based on
which the terms of borrowing can be defined. Then the merchant banker prepares a
detailed loan memorandum, which is circulate to various banks and financial
institution and they are invited to participate in the syndicate. The banks then
negotiate the terms of lending on the basis of witch the final allocation is done.

Qualities of a Good Merchant Banker

Merchant Bankers are individual’s experts who organize and manage
the merchant banks. The operation of a merchant bank is influenced by the
personality, traits of its merchant bankers. Their qualities are:

1) Leadership:-
In order to interact with their clients and communicate effectively
merchant bankers should possess all relevant skills and update knowledge.

2) Aggressive action:-
Merchant bankers always looking for new business opportunities. On
locating a business opportunity and after obtaining the assignment from the clients, a
merchant banker has to be prompt in grasping the client’s problems and to provide a
better choice amongst alternative solutions. A good merchant banker is one who does

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 not allow his clients to think anything outside except what has been advised and thus
holding the clients interest for the present as well as for the future.

3) Co-operation and Friendliness:-

Co-operation and friendliness coupled with persuasiveness must flow as
natural traits in the merchant banker in order to win over the trust of their clients just
like a doctor or a lawyer who retains their clients permanently. A good merchant
banker has to share the thoughts of his clients with sympathetic gestures and offer
suggestions without any greed or favors.

4) Contacts:-
A merchant banking business mainly depends upon the sociable nature
and wider contacts. The scope of contact of a merchant banker covers:
(a) His own organization
(b) Central and State Government Offices (c) Banks,
(c) Financial Institutions,
(d) Promoters/Directors/Owners/Chief Executives of the public and private
enterprises,
(e) Printers,
(f) Advertising Agencies,
(g) Brokers and Stock Exchange Dealers,
(h) Advocates and Solicitors
(i) Members of the press, etc.
Merchant bankers have to widen the contacts and continue to maintain them
by meeting people in personal, in special gatherings and through writing to them.

5) Attitude towards problem solving:-

A good quality of a merchant banker is to be skilled in human relations
particularly in the inter-personal behavior. A merchant banker should have a positive
approach to understand the difficulties, adverse circumstances and the viewpoints of
others. Effective communication and proper feedback are the pre-requisites for
creating a positive attitude towards problem solving which could be gained partly
through the learning process and partly as an inborn personality trait.

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 6) Inquisitiveness for acquiring new skills, information and knowledge:-
Merchant bankers survive by providing the information required by their
needy clients. Therefore they must keep themselves updated with the latest
information in the area of the service product which they market.

EXAMPLE OF MERCHANT BANKING SERVICES

Canara Bank is also one of the leading Merchant Bankers in India, offering specialized
services to Banks, PSUs, State owned Corporations, Local Statutory bodies and corporate
sector.

Its SEBI registered Category I Merchant Banker / Underwriter to carry on Issue Management
(Public / Rights / Private Placement Issues), Underwriting, Consultancy and Corporate
Advisory Services etc.

They also hold SEBI registration Certificate to act as "Bankers to an Issue" with network of
exclusive Capital Market Service Branches to handle “Capital Market" related assignments.

They undertake "project appraisals" with resource raising plans from Capital Market/ Debt
Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Investors.

SBI’s Merchant Banking Group is strongly positioned to offer perfect financial solutions to
your business. They specialize in the arrangement of various forms of Foreign Currency
Credits for Corporate.

They provide the resources, convenience and services to meet your needs by arranging
Foreign Currency credits through:

• Commercial loans

• Syndicated loans

• Lines of Credit from Foreign Banks and Financial Institutions

• FCNR loans

• Loans from Export Credit Agencies

• Financing of Imports.

They are internationally the most Preferred Bank by Export Credit Agencies for Guarantees
in case of the Indian Clients or Projects
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 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,
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.

It can be said that in future how it’s going to get emerged in the Indian economy.
Hence, Merchant Banking can be considered as essential financial body in Indian financial
system. Merchant banking is an activity initially undertaken by a few large commercial banks
in India, and it is now being adopted or undertaken by a few large commercial banks in India,
and it is now being adopted or undertaken by practically every commercial bank through its
Merchant Banking Department. The range of activities covered under merchant banking very
wide indeed. The merchant banks offer a package of financial services

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 BIBLIOGRAPHY
BOOKS

 Bharagava, Amit,(1995), “Manual of SEBI - Guidelines on Capital Issues, Merchant

Banking & Mutual Fund”, NABHI Publication.

 Bhole, L.M.(1991), “Financial Institutions & Markets”, 3rd ed., Tata McGraw Hill

Publishing Company Limited, New Delhi.

 Dhankar, J.N. (1986), “A Treatise on Merchant Banking - Project Approval and

Financing”, Sky Lark Publication.

 Lakshmanna, B.C., & Krishna, Naik C.N.(2002), “Merchant Banking in India”, Deep

& Deep Publication (P) Ltd. New Delhi.

 Verma, J.C. (1990), “Merchant Banking - Organization and Management, Tata

McGraw Hill Publishing Co. Ltd.

 Singh, Joginder. (2004), “Growth and performance of merchant banking in India'',

Maharshi Dayanand University, Rohtak.

Websites

 www.primedatabase.com
 www.sebi.gov.in
 www.ambiindia.org
 www.bse.com

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