Professional Documents
Culture Documents
PROJECT REPORT
ON
Merchant Banking In India And QIP
FOR
ARYAMAN FINANCIAL SERVICES LIMITED (AFSL)
BY
HIREN .H. JASOLIA
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Merchant Banking in India and QIP
DECLARATION
I hereby declare that the Project titled “ Merchant Banking in India And
QIP ” submitted as a part of the study of Master of Management Studies
(MMS) is my original work. The Project has not formed the basis for the
award of any other degree, diploma, associate ship, fellowship or any other
similar titles.
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Merchant Banking in India and QIP
CERTIFICATE
This is to certify that Hiren Jasolia has completed the Project “Merchant
Banking in India and QIP” under the guidance of Prof. Sujata Pandey in
partial fulfillment of the requirements for the award of Master of
Management Studies Degree for the academic period 2009-11.
Place: Mumbai
Date:
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Merchant Banking in India and QIP
ACKNOWLEDGEMENTS
I take this opportunity to express my gratitude and extend my thanks to all
those help and guidance made this endeavor successful.
I cannot end this page without thanking my family for their encouragement
and support while undertaking this Project.
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Merchant Banking in India and QIP
INDEX
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Merchant Banking in India and QIP
Executive Summary
The Indian economy is currently in a transition period and the second fastest
growing economy of the world after China. In this era of globalization,
service sector’s growth and contribution to the nations GDP has been
phenomenal since the last couple of years. Amongst all these, the Merchant
Banking services has grown from a sapling into a mighty tree and has
secured for itself its rightful place in the financial sector. It is a flourishing
services today as more entrepreneurs wanting to list their companies.
It can be said that this project helped me to understand every details about
Merchant Banking and 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.
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Merchant Banking in India and QIP
Objective
The Objective of the report is to understand every detail about
Merchant Banking And QIP. My objective in internship was to
prepare database of QIP Issue. On basis of database, I had to draw
some findings which would be useful for the management team of
Aryaman Financial Services Limited for future purposes.
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Merchant Banking in India and QIP
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Merchant Banking in India and QIP
Introduction
Financial services are an important component of financial system. The
smooth functioning of financial system depends upon the range of financial
services extended by the providers. Financial services in India have
witnessed remarkable changes in the recent past after the implementation of
“Liberalization, privatization and globalization”.
Funds are tapped from the capital market to finance various mega industrial
projects. In attracting public savings, Merchant Bankers play a vital role as
specialized agencies. The resource raising 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 has
increased 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.
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Merchant Banking in India and QIP
Definition
Merchant Banker has been defined under the Securities & Exchange
Board of India (Merchant Bankers) Rules, 1992 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".
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Merchant Banking in India and QIP
Formal merchant activity in India was originated in 1969 with the Merchant
Banking division setup by the Grindlays Bank, the largest foreign bank in
the country. The main service offered at that time to the corporate
enterprises by the Merchant Banks included the management of public
issues and some aspects of financial consultancy. Following Grindlays
Bank, Citibank 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 new projects 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 as part of the multiple services they could provide their clients,
State Bank of India started the Merchant Banking Division in 1972. In
the initial years the SBI’s objective was to render corporate advice and
assistance to small and medium entrepreneurs.
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 Chartered 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
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Merchant Banking in India and QIP
Upto 1970, there were only two foreign banks which performed
Merchant Banking operations in the country. SBI was the first Indian
commercial bank and ICICI the first financial institution to take up the
activities in 1972 and 1973 respectively. As a result of buoyancy in the
capital market in 1980’s some commercial banks set – up their subsidiaries
to operate exclusively in Merchant Banking industry. In addition, a number
of large stock broking firms and financial consultants also entered into
business. Thus, by the end of the end of 1980’s there were 33 Merchant
Bankers belonging to three major segments viz., commercial banks, all
India financial institutions, and private firms.
Merchant Banking industry which remained almost stagnant and
stereotyped for over two decades, witnessed an astonishing growth after the
process of economic reforms and deregulation of Indian economy in 1991.
The number of Merchant Banks increased to 115 by the end of 1992-93 300
by the end of 1993-94 and 501 by the end of August, 1994. all Merchant
Bankers registered with SEBI under four different categories include 50
commercial banks, 6 all Indian financial institutions – ICICI, IFCI, IDBI,
IRBI, Tourism Finance corporation of India, infrastructure Leasing and
Financial Services Ltd. and Private Merchant Bankers.
In addition to Indian Merchant Bankers, a large number of reputed
international Merchant Bankers like Merrill Lynch, Morgan Stanley,
Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in
India under authorization of SEBI.
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Merchant Banking in India and QIP
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.
d. Corporate Enterprises.
e. Co-operative Society.
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.
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Merchant Banking in India and QIP
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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Merchant Banking in India and QIP
The application should conform to all the requirements under the SEBI
guidelines, otherwise it may be rejected.
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: -
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Merchant Banking in India and QIP
The capital adequacy requirement should not be less than the net worth of
the person making the application for grant of registration. The net worth
shall be as follows,
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Merchant Banking in India and QIP
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.
Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
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Merchant Banking in India and QIP
Guidelines of SEBI
(1) The issuer shall appoint one or more merchant bankers, at least one of
whom shall be a lead merchant banker and shall also appoint other
intermediaries, in consultation with the lead merchant banker, to carry out
the obligations relating to the issue.
(2) The issuer shall, in consultation with the lead merchant banker, appoint
only those intermediaries which are registered with the Board.
(3) Where the issue is managed by more than one merchant banker, the
rights, obligations and responsibilities, relating inter alia to disclosures,
allotment, refund and underwriting obligations, if any, of each merchant
banker shall be predetermined and disclosed in the offer document as
specified in Schedule I.
(4) The lead merchant banker shall, only after independently assessing the
capability of other intermediaries to carry out their obligations, advise the
issuer on their appointment.
(5) The issuer shall enter into an agreement with the lead merchant banker in
the format specified in Schedule II and with other intermediaries as required
under the respective regulations applicable to the intermediary concerned:
Provided that such agreements may include such other clauses as the issuer
and the intermediary may deem fit without diminishing or limiting in any
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Merchant Banking in India and QIP
(6) An issuer shall, in case of an issue made through the book building
process, appoint syndicate members and in the case of any other issue,
appoint bankers to issue, at all mandatory collection centres as specified in
Schedule III and such other collection centres as it may deem fit.
(7) The issuer shall appoint a registrar which has connectivity with all the
depositories:
Provided that if issuer itself is a registrar to an issue registered with the
Board, then another registrar to an issue shall be appointed as registrar to the
issue:
Explanation: For the purpose of this regulation, in case of a book built
issue,
the lead merchant banker appointed by the issuer shall act as the lead book
runner
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Merchant Banking in India and QIP
5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on proposal and cannot afford to be
risks shields i.e. mitigation measures grossly relationship based and
close to the customer.
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Merchant Banking in India and QIP
The development activity through the country had exerted excess demand on
the sources of funds by the ever expanding industry and trade which could
not be met by the All India Financial Institutions. In these circumstances, the
corporate sector enterprises had the only alternative to avail themselves of
the capital market services for meeting the long-term fund requirements
through capital issues of equity and debentures. The growing demand for
funds from capital market has enthused many organizations to enter into the
field of Merchant Banking for managing the public issues.
The need of Merchant Banker is also felt in the wake of huge untapped
public savings as Merchant Bankers can play a highly significant role in
mobilizing funds from savers to invest in channels assuring promising return
on investments and thus narrow down the gap between demand for and
supply of investible funds.
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Merchant Banking in India and QIP
1. Corporate Counseling
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Merchant Banking in India and QIP
Corporate Counseling
A Merchant Banker finds out the problems of enterprise, which shall include
organizational goals for the enterprise, size of the organization and
operational scales, choice of a product, pricing, etc, and suggests ways and
means to solve those problems.
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Merchant Banking in India and QIP
Project Counseling
Merchant Banker has to decide the financing mix of the internal and external
sources of funds keeping in view the rules, regulations and norms prescribed
by the government or followed by the term lending financial institutions.
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Merchant Banking in India and QIP
considering the various aspects as to the type of the project, location,
technical, commercial and financial viability of the project.
Credit Syndication
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom the funds
could be procured to implement the project.
Merchant Banker has to locate the sources of funds and comply the
formalities required to procure the funds. This service rendered by the
merchant Banker in arranging and procuring credit from financial
institutions, banks and other lending and investment organizations for
financing the clients' project cost or meeting working capital requirement is
referred to as Loan Syndication or Credit Syndication.
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Merchant Banking in India and QIP
As a manager to the public issue, the Merchant Banker, before the public
issue has to obtain the consent of the stock exchanges to the memorandum
and articles of association, appoint other managers, bankers, underwriters,
brokers etc. , advice the company to appoint auditors, solicitors and board of
directors, draft the prospectus and obtain consent from the companies legal
advisors, board of directors and other concerned parties, file the prospectus
with registrar, make an application for enlistment with stock exchanges and
finally advertise for the issue.
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Merchant Banking in India and QIP
Underwriting is only the guarantee given by the underwriter that in the event
of under subscription, the amount underwritten would be subscribed in
proportion by the underwriter. An underwriter of the issue gets the following
benefits:
The Merchant Banker can automatically become the banker to the issue in
the following cases:
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Merchant Banking in India and QIP
Portfolio Management
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Merchant Banking in India and QIP
keep record of latest amendment in government guidelines, stock exchange
regulations, RBI regulations, etc.
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Merchant Banking in India and QIP
Once the merger partner is proposed the Merchant Banker has to appraise
the Merger/Takeover proposal with respect to financial viability and
technical feasibility. He has to negotiate with the parties and decide the
purchase consideration and mode of payment. He has to comply with the
legal formalities like getting approval from the Government/ RBI; drafting
the scheme of amalgamation; getting approval of company Board, financial
institution, high court if required; arranging for the meeting etc.
Leasing
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Merchant Banking in India and QIP
The Merchant Bankers also help their clients in the following areas
involving foreign currency financing:
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Merchant Banking in India and QIP
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Merchant Banking in India and QIP
6. Monitoring the implementation of the scheme of rehabilitation.
II. Malafide practices: India corporate culture is improving but still many
III. Regulations: though regulations are much better now, there is still scope
for further improvement. Merchant Bankers can be made more
accountable and responsible. Professional qualification focused on
Merchant Banking is not available. Industry is not well organized and all
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Merchant Banking in India and QIP
the players do not play the same tune. This is specifically evident in
comparison with insurance industry and mutual funds industry.
CONCLUSION
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Merchant Banking in India and QIP
There are broadly two ways by which companies can raise capital from the
markets viz. debt and equity. Whereas issuing debt instruments only adds to
the financial burden of the company, the equity option brings investment in
company by making investors partners in the business. Companies intending
to raise capital via the equity route have various ways of doing so which
include Initial Public Offering (IPO), Follow-on Public Offering
(FPO),Rights Issue, Preferential Issue of Shares or through listing in foreign
bourses through American Depository Receipts (ADRs) and Global
Depository Receipts (GDRs).
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Merchant Banking in India and QIP
placement for companies to raise money and a good way for funds /
institutions to pick up stakes in a company.
CHAPTER VIII
Applicability.
Definitions.
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Merchant Banking in India and QIP
(i) in case of allotment of equity shares, the date of the meeting in which the
board of directors of the issuer or the committee of directors duly authorized
by the board of directors of the issuer decides to open the proposed issue;
(b) the equity shares of the same class, which are proposed to be allotted
through qualified institutions placement or pursuant to conversion or
exchange of eligible securities offered through qualified institutions
placement, have been listed on a recognized stock exchange having nation
wide trading terminal for a period of at least one year prior to the date of
issuance of notice to its shareholders for convening the meeting to pass the
special resolution:
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Merchant Banking in India and QIP
Provided that where an issuer, being a transferee company in a scheme of
merger, de-merger, amalgamation or arrangement sanctioned by a High
Court under sections 391 to 394 of the Companies Act, 1956, makes
qualified institutions placement, the period for which the equity shares of the
same class of the transferor company were listed on a stock exchange having
nation wide trading terminals shall also be considered for the purpose of
computation of the period of one year.
(d) In the special resolution, it shall be, among other relevant matters,
specified that the allotment is proposed to be made through qualified
institutions placement and the relevant date referred to in sub-clause (ii) of
clause (c) of regulation 81 shall also be specified.
Explanation: For the purpose of clause (b), “equity shares of the same class”
shall have the same meaning as assigned to them in Explanation to sub-rule
(4) of rule 19 of the Securities Contracts(Regulation) Rules, 1957.
83.
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Merchant Banking in India and QIP
(2) The merchant banker shall, while seeking in-principle approval for
listing of the eligible securities issued under qualified institutions placement,
furnish to each stock exchange on which the same class of equity shares of
the issuer are listed, a due diligence certificate stating that the eligible
securities are being issued under qualified institutions placement and that the
issuer complies with requirements of this Chapter.
Placement Document:
84.
(2) The placement document shall be serially numbered and copies shall be
circulated only to select investors.
(3) The issuer shall, while seeking in-principle approval from the recognized
stock exchange, furnish a copy of the placement document, a certificate
confirming compliance with the provisions of this Chapter along with any
other documents required by the stock exchange.
(4) The placement document shall also be placed on the website of the
concerned stock exchange and of the issuer with a disclaimer to the effect
that it is in connection with a qualified institutions placement and that no
offer is being made to the public or to any other category of investors.
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Merchant Banking in India and QIP
(5) A copy of the placement document shall be filed with the Board for its
record within thirty days of the allotment of eligible securities.
Pricing.
85.
(1) The qualified institutions placement shall be made at a price not less than
the average of the weekly high and low of the closing prices of the equity
shares of the same class quoted on the stock exchange during the two weeks
preceding the relevant date.
(3) The issuer shall not allot partly paid up eligible securities:
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Merchant Banking in India and QIP
Provided further that on allotment of equity shares on exercise of options
attached to warrants, such equity shares shall be fully paid up.
(d) divides its outstanding equity shares including by way of stock split;
(e) re-classifies any of its equity shares into other securities of the issuer;
Restrictions on allotment.
86.
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Merchant Banking in India and QIP
(1) Allotment under the qualified institutions placement shall be made
subject to the following conditions:
Provided that a qualified institutional buyer who does not hold any shares in
the issuer and who has acquired the said rights in the capacity of a lender
shall not be deemed to be a person related to promoters.
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(a) rights under a shareholders’ agreement or voting agreement entered into
with promoters or persons related to the promoters;
(c) right to appoint any nominee director on the board of the issuer.
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87.
(a) two, where the issue size is less than or equal to two hundred and fifty
crore rupees;
(b) five, where the issue size is greater than two hundred and fifty crore
rupees:
Provided that no single allottee shall be allotted more than fifty per cent. of
the issue size.
(2) The qualified institutional buyers belonging to the same group or who
are under same control shall be deemed to be a single allottee.
88.
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Merchant Banking in India and QIP
date of passing of the resolution.
(2) The issuer shall not make subsequent qualified institutions placement
until expiry of six months from the date of the prior qualified institutions
placement made pursuant to one or more special resolutions.
89. The aggregate of the proposed qualified institutions placement and all
previous qualified institutions placements made by the issuer in the same
financial year shall not exceed five times the net worth of the issuer as per
the audited balance sheet of the previous financial year.
Tenure.
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Merchant Banking in India and QIP
The Securities and Exchange Board of India (SEBI) introduced the QIP
process in 2006, to prevent listed companies in India from developing an
excessive dependence on foreign capital.
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Merchant Banking in India and QIP
Only QIBs, who are not promoters of issuer or related to the promoters of
issuer, are eligible for allotment of the securities via this route. QIBs are
generally large institutional investors like banks, insurance firms, mutual
funds and foreign institutional investors who have the expertise and
financial muscle to evaluate market offerings and invest large amounts in
capital market. SEBI has given an extensive list on who are eligible to
qualify as QIB.
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Merchant Banking in India and QIP
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Benefits of QIPs
valuation of the issue is decided between the issuer and the buyers
and there is no third party interference. This also is another reason for
its popularity.
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Merchant Banking in India and QIP
shares since they have an exit option on the stock exchange and do
not have to wait for a minimum period of 1year.
issue to mutual funds QIP also gives the retail investors a practical
and efficient means to further diversify their portfolios.
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Merchant Banking in India and QIP
ANALYSIS
While preparing the database, there were some interesting facts which were
observed. These observations are put forth in the form of following
diagrams:
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Merchant Banking in India and QIP
Amarchand & Mangaldas & Suresh A. Shroff & Co. enjoyed dominance
and was able to bagged 37%
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Merchant Banking in India and QIP
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Merchant Banking in India and QIP
(In Crores)
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Merchant Banking in India and QIP
Conclusion
One of the key concerns in QIP is that unlike the rights issues, it dilutes the
stake of existing shareholders. Hence QIP are made by companies with
significant promoter holding and promoters with low stakes are reluctant to
adopt this route as a further dilution could mean risking its management
control of the company. However in difficult times like the current
environment where FCCBs and ECBs are not feasible, this option as and
interim measure can still prove to be beneficial as it gives the company’s
business the much needed capital to bail out and sustain itself.
Now, when the global capital market is struggling for revival, QIP is
ensuring a turnaround by giving the much need financial impetus to the
Indian real estate and infrastructure business while also giving investment
opportunities to the cash rich QIBs who have been waiting on the sidelines
over the last six months to enter the potential-rich Indian real estate market.
But the QIBs are selective as they look at growth prospects of the companies
and so companies with strong fundamentals, sound corporate governance
and good underlying assets have better ability to tap the QIP market.
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Merchant Banking in India and QIP
Recommendations for
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Merchant Banking in India and QIP
Bibliography
A. Government Sources
1. Money Outlook.
2. Business Week.
C. Commercial Publication
1. Bloomberg.
2. NSE Fact book
1. www.bseindia.com.
2. www.nseindia.com.
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