PROJECT REPORT ON MERCHANT BANKING

Under the Guidance of: Prof. Paul Chelladuai (MENTOR)

Submitted to: MR. PAUL CHELLADURAI (MENTOR)

Submitted by: VIKASH KUMAR SHARMA (PGPBM 2007-09) Roll No. : 3096

Submitted in Partial fulfillment of PGPBM Course to International School of Business & Media, Bangalore

ACKNOWLEDGEMENT

First of all I would like to thank GOD without whose blessings and help I would not have been able to complete this project. I wish to express my gratitude to Mr. Paul Chelladurai who helped me to understand the concept of this project. I am also thankful to our librarian who provided me important inputs related to my project.

I also thank my friends who provided me the help from their experience. Last, but not the least, I would like to thank from my heart deep to my college who gave me this opportunity to work on this project.

VIKASH KUMAR SHARMA

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DECLARATION I, VIKASH KUMAR SHARMA, hereby declare that this dissertation titled, MERCHANT BANKING is my original work under the guidance of Mr. Paul

Chelladurai towards partial fulfillment of the requirements for the PGPBM course of International School of Business & Media. This report has not been submitted earlier for the award of Degree/Diploma/Programme by any other University/B-school.

Date: 7th March 2009 Place: Bangalore

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EXECUTIVE SUMMARY Topic Student Name Project Guide : : : Merchant Banking Vikash Kumar Sharma Mr. Paul Chelladurai

Mission of Project: - This report deals with the findings and recommendations regarding the Changing Trends of Merchant banking in the last decade or so and to know how my suggestions, if implemented can be more fruitful to the industry.

Methodology: - The research methodology, which has been done for this project, consist of the following order. Data Collection: - The sources from which I have collected the data are as follows: Secondary Data: - Secondary Data was collected from the various sites of Internet, books, magazines, journals and so on.

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PREFACE The research started with understanding the concept of Merchant Banking and then knowing how the related companies make use of it to carry out their businesses in a more efficient manner and seek information through secondary data in order to make a knowledgeable report and getting to know the crux of the industry. In the process I faced a lot of queries regarding the subject. To overcome this problem my I did a deep study on the subject to big extent so that I can make a meaningful report.

This research was carried down during my mandatory curriculum part of PGPBM to make a dissertation report and the area of research was whole industry of Merchant Banking. During the course of research, an attempt was made to study the pattern for Merchant Banking and know how the industry can move to next level.

The conclusions drawn are based on the observations and facts collected from the various sources of secondary data. As a whole, my efforts were to give a consolidated picture for the study. I expect my work would at least act as a further scope to the industry. With this I whole-heartedly hand over my project hours to you.

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Index

Chapters

Particulars

Page No:

Introduction

Scope of work

16

Methodology of research

23

Empirical study

29

Findings & Interpretation

36

Recommendation

40

Limitations of the research

42

Bibliography

43

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Introduction
History Modern Practices Services Private equity market

Scope of work
Use of private equity Forms taken by investments Commercial bank involvement Evolution Recent track record Factors responsible for changes

Methodology of research
Management of debt/equity offering Placement & Distribution Corporate advisory services Project advisory services Loan syndication Venture capital financing

Empirical study
Banking & related finance Arrangement of finance Investment management Loan arrangement Conflict of interest Confidentiality of information Dealing

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Findings & Interpretation

Activities 1. Front office 2. Middle office 3. Back office

Recommendation
Future Developments Conclusion

Limitations of the research Bibliography

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1. INTRODUCTION

The most familiar role of the merchant bank is stock underwriting. A large company that wishes to raise money from investors through the stock market can hire a merchant bank to implement and underwrite the process. The merchant bank determines the number of stocks to be issued, the price at which the stock will be issued, and the timing of the release of this new stock. The merchant bank files all the paperwork required with the various market authorities, and is also frequently responsible for marketing the new stock, though this may be a joint effort with the company and managed by the merchant bank. For really large stock offerings, several merchant banks may work together, with one being the lead underwriter.

By limiting their scope to the needs of large companies, merchant banks can focus their knowledge and be of specific use to such clients. Some merchant banks specialize in a single area, such as underwriting or international finance. Many of the largest banks have both a retail division and a merchant bank division. The divisions are generally very separate entities, as there is very little similarity between retail banking and what goes on in a merchant bank. Although your life is probably affected every day in some way by decisions made in a merchant bank, most people reading this article are unlikely ever to visit or deal directly with a merchant bank. Merchant banks operate behind the scenes and away from the spotlight.

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1.1 History

Merchant banks, now so called, are in fact the original "banks". These were invented in the middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature based on the strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade. They brought with them ancient practices from the middle and Far East silk routes. Originally intended for the finance of long trading journeys, these methods were now utilized to finance the production of grain.

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church, but did not bind the Jews. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain.

It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a counter) in the great grain markets became centres for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange, later still, a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation. -9-

A sensible manner of discounting interest to the depositors against what could be earned

by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long distance transport of goods.

1.2 Modern practices

The definition of merchant banking has changed greatly since the days of the Rothschilds. The great merchant banking families dealt in everything from underwriting bonds to originating foreign loans. Bullion trading and bond issuing were some of the specialties of the Rothschild family. The modern merchant banks, however, tend to advise corporations and wealthy individuals on how to use their money. The advice varies from counsel on Mergers and acquisitions to recommendation on the type of credit needed. The job of generating loans and initiating other complex financial transactions has been taken over by investment banks and private equity firms.

Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in America. This type initiates loans and then sells them to investors. Even though these companies call themselves "Merchant banks," they have few if any of the characteristics of former Merchant banks.

(A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public.)

Merchant Banking is an activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks.

Merchant banks are private financial institution. Their primary sources of income are PIPE financings and international trade. Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation. Because they do not invest against collateral, they take far greater risks than traditional banks. Because they are - 10 -

private, do not take money from the public and are international in scope, they are not regulated. Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help.

The reason that businesses should develop a working relationship with a merchant bank is that they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists. It is rare for a merchant bank to fail. The last major failure was Barings Bank (1992). It failed because of unsupervised trading of copper futures contracts and buybacks. When the Dotcom Bubble burst in 2001, scores of venture capital firms failed. The greatest merchant bank failure in history was the Knights Templar. After the Crusades, the Order became immensely wealthy controlling and funding the trade between the Middle East and Western Europe. They foolishly loaned money to the French Government. To avoid repaying the money, King Louie had the Pope declare the Order heretics. Thousands of monks lost their lives, but France balanced its budget.

To understand Merchant Banks, you should know something of their history. Modern merchant banking started in Italy during the 7th Century. The banking practices evolved from the financing structure of the Silk Road Trading that predates the Roman Empire. The basic financing structure was the advance payment for goods by merchant bankers at a great discount to the delivery value of those goods. In the case of Italy and then Germany, wheat was the product. The merchant banks purchased the wheat soon after planting. They accepted the risk of crop failure. They profited when they sold the wheat. In most countries today, the national government accepts the risk through government crop insurance.

In the 1920s, American merchant banks began to become involved in investor relations and financing public companies. The Kennedy fortune comes in part from Joseph Kennedys involvement as a merchant banker to the pre-Crash Stock Market. By the 1960s, the cost of going public in the States began to increase. Many American brokerage house clients lacked the resources to pay these costs. Major brokerage firms responded by creating merchant banking departments. These departments became known as Investment Banks. Their role was to loan the parent brokerage firms client companies the money to go public. They recovered the loan from the proceeds of the Initial Public Offering (IPO). For their service, they received a large bloc of shares in the new public company. Their secondary job was to arrange acquisitions that made the client company a more attractive IPO candidate. Successful M&A work is very rewarding. - 11 -

Today, North American merchant banks have taken the form of "boutiques"- whereby, each offers its own specialized services. The hallmarks of these merchant bank boutiques are that they typically charge fees payable in cash and/or the client's stock for each service rendered. You can find a merchant bank that meets any reasonable set of needs.

1.3 American merchant banks offer many of the following services:

Consulting advice on going public and international business. Advice and help in taking your company public. If they are unwilling to supply Investment Banking bridge loans, they have a low cost strategy for taking your company public.

The do PIPE (Private Investment in Public Equities) financings. They can advise or help with a companys M&A strategy. They are essential advisors for companies seeking to become multinational corporations. They off pragmatic general business advice for real world situations. In providing advice and assistance, merchant bankers must possess a complete understanding of all facets of capital markets.

This includes every type of debt and equity financing both domestically and internationally. Merchant bankers cognizant of capital costs, seek optimum sources of capital. It is fundamental to acknowledge that interest rates are not the only standard relating to capital costs. Restrictions on funding availability, repayment terms, and operating effectiveness often outweigh what might appear to be inexpensive capital. Too frequently capital costs compel a growing business to take undesirable actions. Some action might be necessary or advantageous but in the long run - inordinate capital costs can be detrimental. The traditional merchant banker understands capital limitations and is able to structure transactions which are beneficial to all parties not just the capital source. A knowledgeable merchant banker knows how to substitute one kind of capital for another - sometimes utilizing internal sources by way of either asset or corporate repositioning or equity creation. Above all, a merchant banker fully comprehends the "risk" versus "return" element necessary to complete the capital procurement process.

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Merchant banking has been a very lucrative and risky endeavor for the small number of bank holding companies and banks that have engaged in it under existing law. Recent legislation has expanded the merchant-banking activity that is permissible to commercial banks and is therefore likely to spur interest in this lucrative specialty on the part of a greater number of such institutions. Although for much of the past half-century commercial banks have been permitted (subject to certain restrictions) to engage in merchant-banking activities, the term merchant banking itself is undefined in U.S. banking and securities laws and its exact meaning is not always clearly understood.

1.3.1 Ranking of Merchant Banking in India:

Merchant Banker ICICI Securities IDBI SBI Caps DPS IFCI Bank Baroda Jardine Fleming JM Finance ENAM PNB Caps of

OE

FSS

QPS

QM

INN

4.0

4.0

4.2

3.8

4.3

4.2 4.4. 6.1 6.1 6.7

3.2 3.9 5.7 5.7 6.5

4.5 4.6. 6.0 6.0 6.7

4.0 6.7 6.0 6.0 6.6

4.8 5.2 5.3 6.3 6.8

5.8

6.2

5.9

5.0

5.5

6.0

6.5

5.5

5.9

5.4

6.3 6.8

6.8 6.8

6.4 6.7

6.3 6.8

6.2 6.8

Note: OE: Overall Excellence; FSS: Financial Soundness; QPS: Quality Product/Service; QM: Quality Management; INN: Innovativeness.

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1.3.2 Objectives of Merchant Banking in Prevailing Economy:

To study the significance of Merchant Banking towards the development of securities industry. To analyze issue management regulations. To analyze the functions of Merchant Banking in relation to rules and regulations of SEBI. To evaluate the performance of Merchant Bankers, both activity performance and operational and financial performance. To draw a conclusion and suggestions based on the analysis and experiences.

Definition and Early History of Merchant Banking

Although not defined in U.S. federal banking and securities laws, the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies. Both investment banks and commercial banks engage in merchant banking, and the type of security in which they most commonly invest is common stock. They also invest in securities with an equity participation feature; these may be convertible preferred stock or subordinated debt with conversion privileges or warrants. Other investment bank services raising capital from outside sources, advising on mergers and acquisitions, and providing - 14 -

bridge loans while bond financing is being raised in a leveraged buyout (LBO)-are also typically offered by financial institutions engaged in merchant banking. Merchant banks first arose in the Italian states in the Middle Ages, when Italian merchant houses-generally small, family-owned import-export and commodity trading businessesbegan to use their excess capital to finance foreign trade in return for a share of the profits. This trade generally consisted of lengthy sea voyages. Thus, the investments were very high risk: war, bad weather, and piracy were constant threats, and by their nature the voyages were long-term and illiquid. Later, the center for merchant banking shifted from the Italian states to Amsterdam and then, in the eighteenth century, to London, where immigrants from Prussia, France, Ireland, Russia, and the Italian states formed the core of early British merchant banking. Like the Italian and Dutch houses before them, these British houses were generally small, family-owned partnerships, and most of them continued both to trade for their own businesses and to finance the trading by others. By the end of the eighteenth century, however, the British merchant houses had increased in size and sophistication and began specializing in trade, marketing, or finance. As the nineteenth century opened, virtually no mercantile houses remained focused on both trade and finance.

1.4 The Private Equity Market in the United States

The private equity market in the United States has evolved over the years, with financial institution involvement only becoming significant in the 1960s and 1970s. Where these funds are invested also has changed over time. Currently, most private equity funding is used to fund start-up or early-stage companies or to bring large public companies private. Private equity investments can be made through limited partnerships or they can be direct investments. Subsidiaries of banking organizations are probably the largest direct investors in this market.

1.4.1 Evolution of the Private Equity Market

Given its history, merchant banking is often thought of as a European, and especially British, financial specialty, and British institutions continue to maintain a major presence in this area. Since the 1800s and even earlier, however, U.S. firms (such as J.P. Morgan) also have been active in merchant banking. However, although both investment banks and commercial banks, as well as other types of businesses, have been authorized to engage

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in private equity investment in the United States, financial institutions have not been major providers of private equity. Until the 1950s, U.S. investors in private equity were primarily wealthy individuals and families. In the 1960s and 1970s, corporations and financial institutions joined them in this type of investment. (In the 1960s, commercial banks were the major providers of one kind of private equity investing, venture-capital financing.) Through the late 1970s, wealthy families, industrial corporations, and financial institutions, for the most part investing directly in the issuing firms, constituted the bulk of private equity investors.

2. SCOPE OF WORK
2.1 Typical Uses of Private Equity Private equity financing is an alternative to raising public equity, issuing public debt, or arranging a private placement of debt or bank loan. The reasons companies seek private equity financing are varied. For example, other forms of financing may be unavailable or too expensive because the company's track record is either nonexistent or poor (that is, the company is in financial distress). Or a private company may want to expand or change its ownership but not go public. Or a firm may not want to take on the fixed cost of debt financing. Public firms may seek private equity financing when their capital needs are very limited and do not warrant the expense, time, and regulatory paperwork required for a public issue. They also may seek private equity to keep a planned acquisition confidential or to avoid other public disclosures. They may use the private equity market because the public market for new issues in general is bad or because the public equity market is temporarily unimpressed with their industry's prospects. Finally, very often in recent years, managements of large public firms have felt their firms will benefit from a change in capital - 16 -

structure and ownership and will choose to go private by means of a leveraged buyout (LBO). Before the mid-1980s, two-thirds of private equity investments were used to finance venture-capital investments.

2.2 Forms Taken by Investments

Currently, more than 80 percent of private equity investments are made by limited partnerships, with professional private equity managers acting on behalf of institutional investors. In a limited partnership, the professional equity managers serve as general partners, and the institutional investors serve as limited partners. The general partners manage the investment and contribute an insignificant part of the investment, generally approximately 1 percent. These limited partnerships have a contractually fixed life, usually ten years. The investments are highly illiquid over the partnership's life, with a return not expected until the partnership's later years, when the business is sold through a public offering or a private sale, or the shares are repurchased by the company. Banks (through subsidiaries) often act as limited partners in private equity limited partnerships, and infrequently as general partners.

Direct investments in private equity are made also. Through subsidiaries, bank holding companies and banks are probably the largest direct investors in the private equity market.

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2.3 Commercial Bank Involvement in Merchant Banking

Commercial banks have historically utilized Small Business Investment Corporations (SBICs) or "5 percent subs" (defined below) for their domestic private equity investments, and Edge Act Corporations or foreign subsidiaries to make their foreign private equity investments. Several very large bank holding companies have come to dominate merchant banking, directing as much as 10 percent of their capital to these activities. For the most part, reported earnings from these merchant-banking activities have been very good.

Small Business Investment Corporations. SBICs were authorized by the Small Business Investment Act of 1958 to promote smallbusiness equity funding. This act authorized BHCs and banks to provide equity capital to small companies through SBICs, which can be subsidiaries of either BHCs or banks. A very significant percentage of the largest SBICs are subsidiaries of banks rather than of BHCs. Investments in SBICs are direct and subject to certain limits. Banks are allowed to invest only 5 percent of their capital and surplus in their SBICs; bank holding company investments are capped at 5 percent of the BHC's interest in the capital and surplus of its subsidiary banks. The investments of the SBICs also are limited. Investments can be made only in companies with pre-investment net worth of no more than $18 million, and each investment is capped at 50 percent of the recipient's outstanding shares of stock.

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5 Percent Subs. The Bank Holding Company Act of 1956 permitted bank holding companies to make passive equity investments in non financial companies. Specifically, the legislation allowed bank holding companies to own a maximum of 5 percent of the voting shares (hence the "5 percent sub" designation) and a maximum of 25 percent of the total equity of companies engaged in any activity. There is no limit on the total amount of equity that a BHC can invest through all of its 5 percent subs.

Foreign Subsidiaries or Edge Act Corporations.

As mentioned above, banks have made private equity investments in foreign firms through foreign subsidiaries of bank holding companies or through Edge Act Corporations, which are generally organized as bank subsidiaries. Edge Act Corporations are permitted to own up to 20 percent of the voting shares or 40 percent of the total equity of a foreign company.

2.4 Evolution

A few very large BHCs dominate merchant banking, directing as much as 10 percent of their capital to these activities. Citigroup, Chase, Bank of America, FleetBoston, and Wells Fargo have the largest presence in this area. In 1999, Chase, FleetBoston, Wells Fargo, J.P. Morgan, and First Union reported an aggregate investment of over $5 billion in venture-capital investments, and they expect to continue to expand this area of their business. Many banks entered merchant banking in the 1960s to take advantage of the economies of scope produced when private equity investing is added to other bank services, particularly commercial lending. As lenders to small and medium-sized companies, banks become knowledgeable about individual firms' products and prospects and consequently are natural providers of direct private equity investment to these firms. As mentioned above, commercial banks were the largest providers of venture capital in the 1960s. In the middle to late 1980s, the decision to enter merchant banking was thrust on other banks and bank holding companies by unforeseen events. In those years, as a result of the LDC (less-developed-country) debt crisis, many banks received private equity from developing nations in return for their defaulted loans. At that time, many of these banks set up merchant-banking subsidiaries to try to get some value from this private equity. - 19 -

Also at about that time, most commercial banks began refocusing their private equity investments to middle-market and public companies (often low-tech, already profitable

companies) and, rather than providing seed capital, financed expansion or changes in capital structure and ownership. Most particularly, they took equity positions in LBOs, takeovers, or recapitalizations or provided subordinated debt in the form of bridge loans to facilitate the transaction. Often they did both. Commercial banks financed much of the LBO activity of the 1980s. Then, in the mid-1990s, major commercial banks began once again focusing on venture capital, where they had substantial expertise from their previous exposure to this kind of investment. Some of these recent venture-capital investments have been spectacularly successful. For example, the Internet search engine Lycos was a 1998 investment of Chase Manhattan's venture-capital arm.

2.5 Recent Track Record

Commercial banks are permitted to report either realized or unrealized gains on their merchant-banking portfolios, as long as they are consistent in the reporting.This option makes it difficult for one to compare different entities' financial results and could lead to an overly liberal reporting of profits. However, the Federal Reserve Board (FRB) generally considers bank holding companies that are engaged in merchant banking to have reported their earnings conservatively on these equity investments.

The merchant banker are those financial intermediary involved with the activity of transferring capital funds to those borrowers who are interested in borrowing.

The activities of the merchant banking in India is very vast in nature of which includes the following

The management of the customers securities The management of the portfolio, The management of projects and counseling as well as appraisal The management of underwriting of shares and debentures The circumvention of the syndication of loans Management of the interest and dividend etc

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2.6 Factors responsible for the Changes:

Globalization of Indian Economy has made the whole economy open, which has more multinational player in the era of the financial services? This has resulted in to the emergence of the global investment in financial sector. Government has now open up the doors of investments especially in the area of banks and insurance, which leads to competitive environment for the present players. Now they have to bring something new which is efficient and best services to live in the competitive environment.

Competition arising out of Private Company Participation is due to the liberalization of the economy. Now along with the public/government players, private players are also offering financial services and instruments, which are more innovative and different than the earlier offering. Financial markets are being redefined, reinvented and reconfigured on a persistent basis.

Changing Customer Demographics:

If we look at the all-growing economies like China, Germany and Brazil, India has 35% of the population in the age group of 15years to 34 years. It is estimated that by 130mn plus people get added to working population by 2009 with 55 million families (320 million people) will be added in the middle-income group (0.1 to 0.3 Million Rs). The demographic change leads to the change in the need of the customer.

Changing Customer Needs customers have larger segment in corporate decision-making they are the final judges of the every single activity offered by the marketer. Banks in India have traditionally offered mass banking products. Financial market has turned into a buyer's market. Market focus is shifting from mass banking products to class banking with introduction of value added products. Today, financial institutions are co-designing the products/services with their customers and striving to provide them with global solutions

Government Reforms Government is major decision player in the financial market. It decides the proportion of the investment limits as well as the regulation and control. In last ten years government is designing its policy with more liberal and competitive content. Which it are welcome trends for the emerging financial services. - 21 -

Revolution in Banking Sector:

Banking in India originated in the first decade of 18th century with the General Bank coming into existence in 1786. Bank of Hindustan followed this. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as the Bank of Calcutta in Calcutta in June 1806.

In the early 1990s the then Narasimha Rao government embarked on the policy of liberalization and gave license to small number of private banks, which came to be known as new generation tech-savvy banks such as ICICI Bank and HDFC Bank. Currently in 2005, banking in India is considered fairly matured in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. With the growth of Indian economy expected to be strong for quite some time especially in its service sector, the demand for banking services specially retail banking, mortgage and investment services are expected to be strong.

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3. METHODOLOGY OF RESEARCH
Merchant banking implies investment management. Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the investors who purchase these securities. Merchant banking is the financial intermediation that matches the entities that need capital and those that have capital for investment. Services of merchant bankers The services provided by merchant bankers includes management of mutual funds, public issues, trusts, securities and international funds. It involves dealing with the corporate clients and advising them on various issues like- mergers, acquisitions, public issues, etc. Functions of merchant bankers include:

3.1 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 undergoing tasks include instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund and listing on stock exchanges.

3.2 Placement and Distribution. The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual funds, insurance products, and commercial paper, to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds pension funds, financial institutions, etc.

3.3 Corporate advisory services. Merchant bankers offer customized solutions to their clients' financial problems. Financial structuring includes determining the right debt-equity ratio and the framing of appropriate capital structure theory.

3.4 Project advisory services. Merchant bankers help their clients in various stages of the 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.

3.5 Loan Syndication. Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the client's cash flows, based - 23 -

on which the terms of the borrowings can be defined. The banks then negotiate the terms of lending on the basis of which the final allocation is done.

3.6 Providing venture capital financing. Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies. Regulatory framework. An applicant should comply with the following norms:

The applicant should be a corporate body. The applicant should not carry on any business other than those connected with the securities market. The applicant should have necessary infrastructure like office space, equipment, manpower, etc. The applicant must have at least two employees with prior experience in merchant banking. Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker. The applicant should not have been involved in any securities scam or proved guilt for any offence.

3.7 Leasing Services:

The Indian company investors must be acknowledged that lease is that agreement under which the company or Indian firm acquire the exact right and make use of certain capital asset on the consideration of payment of rental charges. The Indian corporate company must equally known that it cannot equally know that it cannot acquire any kind of ownership to such an asset apart from making use of it. The user comparatively pays all the expected operating costs and also the maintenance expenses.

The main corporate companies must equally take into the consideration that developed countries like America, United Kingdom the companies of such a countries are commonly depending on the leasing factor. In India since the era of liberalization, many of the Indian companies have equally been involved in the leasing transactions. On the other side, many financial institutions and even the commercial banks in the Indian financial sector have comparatively been accepted over the same transactions.

3.8 Mutual Funds Services - 24 -

The Indian corporate companies must equally be informed that the mutual funds comprises of the exact funds gained by pooling all the public savings. The mutual funds are comparatively invested in those portfolios, which are commonly diversified in nature with the main objectives of sharing the risk. The Indian small-scale investors cannot be able to get their funds from the comparative big corporate companies can equally gain there working funds from the mutual funds.

However, the modern concept of the mutual funds was developed in1968 in London by the foreign and colonial government trust of London. By which it gained its invention in India in early 1980, even if it was exactly started in 1964 by the unit trust of India.

In addition to the above, the mutual funds can be grouped into

[A] Close ended funds &

[B] Open ended funds.

The Indian corporate companies can only benefits from the mutual funds on gaining savings for investment, better yield low cost on investment, tax benefits, flexible on investment, promoting industrial development reducing the cost of new issue and many more other advantages.

On the other side, Indian corporate companies must be informed on the kind of risks involved with the mutual funds like market risks, scheme risks, business risk, investment risks and even the political nature of risks. While the investors are selecting the funds must take into account the objectives of the fund, consistency of performance of the funds. Historical background of the funds, cost of operation, capacity for innovation, the investors servicing, market trends, and even the transparence of the fund management. For the Indian mutual funds to have good future there must be full support of SEBI better control of capital issue, better interest rate, good PE ratio, investors must have good choice, tax concessions, and many more.

3.9 Hire Purchase Services - 25 -

In the hire purchase kind of transaction is that method of selling by which goods are left out on hiring by the Indian corporate company to the purchaser by which the hirer is comparatively required to the payment on an agreed sum of amount in the system of periodical installments. In the hire purchase the Indian corporate companies must know that the ownership of such kind of the property exactly remain under the control of the creditor who normally passes the right to hirer on the condition of payment of the last agreed sum of money in installment.

The Indian corporate company must know that legally, payment is made in installment over the agreed specified period, possession of the same right is delivered to the purchaser during the time of agreement, the property passes to the exact purchaser on the agreed last installment, and the hirer has a right to return the property without further installment. In addition to the above, the Indian corporate company must know that the agreement must comparatively contain the nature of the goods as described in manner so that to identify them easily, the nature of the hire purchase price, the date of commencement and finally the extend or number of installments.

3.10 Venture Capital Services

The venture capital is that investment in the new Indian enterprises without stability in growth. It's that environment of capital, shareholding and even the setting up of small firms, which are comparatively specializing, in same new technological ideas in the commercial sectors.

The venture capital is equity participation, it's of high risk in nature, it's also available only for commercialization of new technologies and it's the exact promoter of the projects, and it's continuous in nature and input of the firm. The Indian corporate companies must equally know that venture capital involves the development of project idea,

implementation, fledging or additional financing, and establishment stage.

The main importance of venture capital to Indian, corporate companies are the reduction of risk, easy to analyze the business prospects and to assume the investors on affairs of the business. The Indian methods of venture financing are equity participation, income notes, the conventional loans and even the conditional loans. In order to promote the venture capital growth in India, there must be tax concessions for capital gains, high level - 26 -

development of capital market, giving of fiscal incentives to Indian corporate companies, high level participation of the private sectors the improving and reviewing of the existing laws and limited partnership and many more.

3.11 Discounting, factoring and forfeiting services

Due to the exact trade transaction the trade bill comparatively arises, the Indian corporate companies must take into consideration that the supplier of the exact goods draws bill which is based on the purchase for the invoice price of goods sold on credit method of which is drawn on the short period of time. The buyer pays the amount on the exact date by which the supplier of goods has to await until the expiry of the exact bill. However, the banks provides the cash discounting based on the exact trade bills by which they deduct certain charges as discount based on the amount of the bill and credit balance of the customers account.

Factoring

Factoring is to get thing being done. The ward factor means to mark or to do according to R.W. Johnson factoring is a service involving the purchase by financial organization, called a factor of receivables owned by manufacturers and distributors by the customers with the factor assuming full credit and collection responsibilities.

The main conditions of factoring that the Indian corporate companies must know are these must be assignment of debt that has to be in favour of the factor. The selling limits for the client, the factor must have recourse to the client in the case of non-payment by the customer; the factor will equally have recourse in case of non-payment, details on payment for the services, interest and limit of any overdraft facility charged. The Indian corporate companies must be well informed about the types of factoring as full service, recourse factoring, maturity, bulk, invoice, agency and also international factoring. At the same time the exact cost of factoring like the pricing, fee, discount, accounting system must be taken into consideration.

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Forfeiting

Forfeiting is the French term means "to give something" or "give one's right". Generally the term forfeit is non-recourse purchase by the commercial bank or any other financial intermediaries or institutions receivables that equally arises from the export of the goods.

3.12 Securitization of Debt Services

The securitization is that process by which the liquidating of the liquid and the long term assets of the Indian corporate companies like the loans and receivables by the issuing marketable securities against the same. However, the Indian corporate companies must know that securitization is that technique by which the exact long term, non-negotiable instruments are equally converted into securities of such kind of small value in nature which can be easily transacted in the commercial capital market.

In India, apart from the above, there is low and unpopularity of securitization due to introduction of it as it's a new idea or concept to India, heavy stamp duty and comparative registration fees imposed by the Indian government, complicated and also legal transfer procedure the difficulty in the assignment of debts. Also there is poor standard of loan documentation, problem of inadequate credit rating system, poor accounting procedure and lack of comprehensive guidance.

3.13 Derivatives

The derivatives are those instruments, which are commonly used to derive therein-exact value of underlying asset of the financial institutional corporate companies. The derivatives comparatively may involve the payment or receipt of the value or income created by the underlying assets. The main factors that are responsible for the slow growth of derivatives in India and high level of misconception of the derivatives, the derivatives lends themselves to leveraging, the nature of the off balance sheet, items, poor accounting system, speculative mechanism and finally poor infrastructure system.

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3.14 Credit Rating Services

According to Moody's Rating are designed exclusively for the purpose of grading bonds according to their investments qualities". Also according to the Australian Ratings "A corporate credit rating provides lenders with a simple system of gradation by which the relative capacity of companies to make timely repayment of interest and principal on a particular type of debt can be noted".

The main credit ratings in India are credit rating information service ltd (CRISIL), investment information and credit rating agency of India (ICRA), Credit Analysis and Research (CARE), and Duff Phelps Credit Rating Pvt. Ltd (DCR India).

The applicant should have a minimum net worth Rs50 million. Scope of merchant banking in India Merchant banking activities help in channelizing the financial surplus of the general public into productive investment avenues. They help to coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, Underwriters, brokers, etc. and to ensure the compliance with rules and regulations governing the securities market. This being the era where mergers and acquisitions are hot, the scope of merchant banking has grown to a large extent.

4. EMPIRICAL STUDY
The origins of merchant banks go back to the early nineteenth century when a number of trading houses largely of non-British background and ownership were founded in the City of London to trade, and facilitate the trade, with the Empire in the East and with the North and South American continent. From trading it was only a short step to financing the trade at both ends of the line, the exporter from the United Kingdom and the importer in the developing country. The importer tended to be a government or semi government body which apart from a requirement for the more sophisticated goods of the Old World required financing of infrastructure projects such as railways, roads and dams, as well as what might today be called balance of payment financing. This was difficult and adventurous (or entrepreneurial) financing which suited particularly the merchant banks of the time. The risks were perceived by others to be great, but so were the rewards to the merchant banks. The merchant banks who engaged in this business were singularly well placed in - 29 -

the City of London to benefit from the outpourings of goods and energy and the prestige of Britain and would undoubtedly not have been able to develop as they did had they been located, as their founding families were, in say Hamburg, Bremen, Frankfurt, Copenhagen or Paris. They were at the centre of things and the financial centre at that time was and indeed even now is London. The merchant banks had one place of business and that was in the City of London. They were thus the forerunners of wholesale banking. Since they did not choose to branch out in the truest sense of that word in banking terms and relied for their deposits on a

relatively small but wealthy private clientele and a few corporate customers they were able, and indeed had, to give a superior kind of personal banking service which inevitably led to the provision of services additional to those of banking.

Additional services

These services developed over a period of time into financial advisory services to corporations, governments and semi-governmental bodies, the raising of finance through all varieties of instruments both equity, semi-equity and debt as well as the provision of investment services to those of their clients who had accumulated sufficient wealth to wish to safeguard what they had got rather than to multiply it manifold through their own efforts. In this way the merchant the Banking Ordinance, banks started their investment management activities which have continued to this day, the only major change being that there are very few individual or family fortunes remaining to be managed (other than perhaps in the Middle East, South East Asia and South America where there are transfer difficulties) and the emphasis now is on corporate funds with pension and retirement schemes forming the bulk of these funds.

4.1 Banking and related finance

As I have already indicated one of the main areas indeed the most important area of recurring earnings - of merchant banks is that of providing loans to customers. Linked with this activity is the provision of other banking services such as are carried out by retail banks for their customers. The banking services provided by merchant banks for their customers are no different to the services provided by the retail banks for their corporate customers. Merchant banking in the banking sense is banking for corporate customers or wholesale banking. The other areas of a merchant bank's activity provide little opportunity for growth in Hong Kong due to the rather restricted market for these kinds of services. - 30 -

This in turn has meant that the very large majority of, indeed almost all, merchant banks have primarily concentrated on the provision of banking services.

4.2 Corporate finance advisory services

While banking services provide the bread and butter income of any merchant bank, the corporate finance advisory services provide the prestige, excitement, the occasional large fee and the bulk of any publicity. The most prestigeous and most immediately profitable part of these advisory services is undoubtedly the merger and acquisition field. However this is work which takes a merchant bank a long time to develop. Yet once it is developed it looks to an outsider relatively easy. This adversary relationship does exist in contested takeovers of which in Hong Kong there are very few. Hong Kong is a pragmatic place which realizes that contested takeovers seldomly bring short or medium-term benefits and even long-term benefits are hard to come by. It is partly this lack of emotional involvement which causes boards to seek financial advice to help them recommend to their shareholders the appropriate but perhaps unwelcome course of action. Mergers and acquisitions are the most exciting part of the corporate finance side of a merchant bank's activities but since there are in Hong Kong less than twenty such transactions in any one year it is obvious that only three or four of the many merchant banks in Hong Kong can keep their hands in by acting in at least half-a-dozen of those transactions every year. However a more continuing involvement is that achieved through general corporate finance advice on the structuring of the finances of a company and helping it to raise medium and long-term finance as well as equity finance through underwriting issues of debt and equity, a major example of which is 'going public.' This can be highly profitable or unprofitable if the issue fails and is left with the underwriter.

4.3 The arrangement of finance

As I have mentioned before the most common activity of most merchant banks in Hong Kong and elsewhere is the arrangement of finance. This is particularly the area, on which the merchant banks of the multi-national banks have concentrated, none more so than the subsidiaries of the American merchant banks, the so-called 'Yankee' merchant banks. This activity fits in well with their parent banks' large balance sheets and ability to lend. What happens is that the merchant bank obtains the mandate to raise a large loan, governmental, semi-governmental, or project related, by putting forward to a borrower its ability of tapping the substantial resources of its parent bank. For such benefits a merchant - 31 -

bank is paid a fee which, although small in comparison to the management fee paid to the managing syndicate, can be large in absolute terms given the size of some of the transactions involved. Also merchant banks act as lead managers or co-managers in bond issues, both in local and foreign currencies and, given the enormous appetite of largescale projects in the area for funds, arrange for preferential export credits, both buyer and supplier credits.

4.4 Investment management

The managing of clients' funds has for a long time been a peculiarly suitable area for a merchant bank's skill, heritage and personal service. The credibility of the largest merchant banks in this field is considerable since their clients believe that having survived however many wars and inflationary periods, a merchant bank should be well-suited to protecting his funds against the vicissitudes of an economically uncertain world and perhaps in favorable stock market circumstances to increasing the funds. A number of British merchant banks are managers of very sizeable funds, a few managing on a world-wide basis more than US$5,000 million, and some over US $3,000 million each. A number of the British merchant banks as well as some other institutions are active in the investment management field from Hong Kong, managing international funds on behalf of their parent companies as well as funds in the South East Asian area and of course in Hong Kong. Although this activity is not nearly as profitable some would say that on its own it is not profitable since investment management fees do not cover the costs of an investment division of a merchant bank it provides a steady source of income Nevertheless British institutions and British merchant banks have long been convinced that the investment of funds on an international basis is a means of participating in economies which at any one time show better growth prospects and a useful weapon of combating the weakness of Sterling, and thereby achieving in Sterling terms, an above-average return. Recently a modest retirement funds industry has developed in Hong Kong.

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Such funds are steady in their contribution rates unlike most funds placed in the care of merchant banks by individuals or institutions. The unit trust industry too has expanded, mostly through the realization that Hong Kong is an ideal fund management centre served extremely well by brokers and situated in the centre of a very significant potential market for unit trusts and mutual funds. It has been helped, not unnaturally, in its growth by the excellent performance shown by a number of fund managers operating from Hong Kong over a number of years.

4.5 Loan agreements

While there are no legal or voluntary guidelines that must be followed with loan agreements, the law has extended its encompassing grasp considerably into this area of merchant banking. It is the practice of the market place and the relative bargaining strength of the two parties - the borrower and the group of syndicating banks which determines the form of the contract that is entered into between the two of them. Contrary to practice even as little as ten years ago, loan agreements now are lengthy, highly complicated and peppered with such a large amount of legal jargon that few borrowers, unless they are skilled and often in the market place, can understand them without legal assistance. The growth of the legal complexity of loan agreements can be traced quite clearly to the beginning of multiple syndications. The reason is easy to explain: when a loan was given by a single bank to a borrower, it was usually in circumstances where the lender had an intimate knowledge of the borrower, its strengths and its weaknesses and - 33 -

had usually done business with it for a considerable length of time. As loan requirements rose and as the financial assistance which could be offered by a single bank was either inadequate for the borrower or unduly large for the bank, other banks had to be brought in. Often these did not have a well-developed knowledge of the borrower and they considered that, in order to protect themselves, they should restrict the borrower's activities or define what it could and could not do. In any case the presence of a large number of banks (and in particular American banks) has meant that simple one or two-page loan agreements are now no longer sufficient for syndication purposes. The over-complex documentation adopted nowadays reflects the practice in the Euro-dollar market. Lawyers blame leading syndicating banks and they in turn blame lenders' lawyers. However if the problem is looked at objectively there is simply no justification for blaming the lawyers since they only give the protection they believe the client wants or ought to have. All the same everybody admits that the protection given in loan agreements to both sides is often highly esoteric. In the growth of Hong Kong as a syndication centre for international transactions to a position second only to that of London, the merchant banks have obviously been assisted by working in a fertile environment with considerable demand for funds South East Asia. The very fact that syndications have been done from Hong Kong and have grown at an extremely rapid rate has led to a number of law firms skilled in loan syndication work to move to Hong Kong. This has benefitted their clients who have on the whole been the lenders, but indirectly also the borrowers whose local legal advisers have picked up the most modern practices in the field and have used them to protect the borrower. While the bulk of syndication work in Hong Kong is done for non-Hong Kong borrowers the increasing size of projects undertaken in Hong Kong has meant that a number of Hong Kong borrowers themselves have undertaken or are planning jumbo-sized loans the equal of those raised for non-Hong Kong borrowers. These loans are a feature of capital investments of a size hitherto unknown in Hong Kong. More recently there has been much discussion of lending to China. In the context of talking about loan agreements it must be mentioned how difficult it is likely to be, initially at least, to persuade the Chinese to comply with some of the 'standard' terms of international loan agreements agreed to by other sovereign borrowers such as jurisdiction, governing law, cross-default and the more esoteric interest cost clauses. Only time will tell when the first standard syndicated loan document involving China is going to see the light of day.

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4.6 Conflicts of interest

It is an axiom that information about clients operating in the same industry should not be divulged to other clients. Obviously the specialized knowledge gained by a merchant bank in assisting clients operating in the same industry is in general available to all those clients and, I suspect, clients are happy to benefit from this specialized knowledge. It makes the merchant bank that has a number of clients in the same industry that much more of an 'insider' in the traditional rather than stock exchange meaning of that word, and thus it is likely to be able to provide a solution precisely tailored to that client and the industry in which it is active. By this means very substantial business can and has been lost, but this is part of the system by which merchant banks choose to operate.

4.7 Confidentiality of information

Apart from its professional knowledge and skills the most important aspect of a merchant bank's reputation is its professional ethics. Similarly to other professions the question of confidentiality is always uppermost in the minds of directors and executives and since information can be, and very often is, highly price-sensitive, enormous care has to be taken that it is not divulged. To me it is a matter of considerable concern and some surprise that there are so many leaks of takeovers or rights issues, both of which are usually highly price-sensitive. Concern because such price movements should not occur and surprise because they do. If a merchant banker or a director of a company really wished to use price-sensitive information to his best advantage he should divulge it to noone but deal on his own account. Thus while merchant banks and their clients use code names, lock their files and do not mention the names of transactions to others, even their colleagues, leaks still occur, That they occur largely involuntarily has been proved in the majority of cases where The Stock Exchange in London has made enquiries into price movements. The fact that the takeover code acknowledges that price movements occur which do not originate from insider dealing, also gives some evidence to my belief that most leaks occur involuntarily.

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4.8 Dealings

One of the more difficult and potentially troublesome aspects of a merchant bank's activities is the dealing in shares of companies in respect of which it has price-sensitive information. Such information should of course be kept entirely separate and within the confines of one or two people only in the corporate finance division. Nevertheless if the investment division of a merchant bank, entirely without this information or the knowledge that it exists within the corporate finance division, deals in the shares of a company and achieves, for itself or for its clients, large profits the suggestion is that this information has crossed what is called in America 'the Chinese Wall.' It might be considered unfair to stop the investment division purchasing or selling on information which it has acquired through the market or research purely because confidential information has also been received by another part of the house. The individual client or pension fund would certainly feel aggrieved if his investment adviser was unable to deal under such circumstances. But dealings on behalf of the house or executives of the house are a different matter. In summary I believe that good judgment and the almost obsessive desire by the larger firms to maintain their integrity built up over so many years is still the best determinant of whether to deal or not.

5. FINDINGS & INTERPRETATION

Organizational structure of an investment bank

5.1 Main activities and units

On behalf of the bank and its clients, the primary function of the bank is buying and selling products. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through "principal risk", risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. An investment bank is split into the so-called front office, middle office, and back office.

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5.1.1 Front office

Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and advise on mergers and acquisitions. These jobs pay well, so are often extremely competitive and difficult to land. On a similar note, they are extremely stressful and degrading. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the investment banking division include mergers and acquisitions (M&A) and corporate finance. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt.

Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds). Asset Management market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.

Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. The necessity for numerical ability has created jobs for physics and math Ph.D.s who act as quantitative analysts.

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Merchant banking is a private equity activity of investment banks. Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant bank" was the British English term for an investment bank.)

Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.

Strategy is the division which advises external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products.

5.1.2 Middle office

Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.

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Finance areas are responsible for an investment bank's capital management and risk monitoring. By tracking and analyzing the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer.

Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division.

5.1.3 Back office

Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank, many banks have outsourced operations. It is, however, a critical part of the bank. A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank.

Technology refers to the information technology department. Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes. - 39 -

5.1.4 Vertical integration

In the U.S., the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities which led to segregation of investment banks from commercial banks. Glass-Steagall was effectively repealed for many large financial institutions by the Gramm-Leach-Bliley Act in 1999. Another development in recent years has been the vertical integration of debt securitization. Previously, investment banks had assisted lenders in raising more lending funds and having the ability to offer longer term fixed interest rates by converting the lenders' outstanding loans into bonds. For example, a mortgage lender would make a house loan, and then use the investment bank to sell bonds to fund the debt, the money from the sale of the bonds can be used to make new loans, while the lender accepts loan payments and passes the payments on to the bondholders. This process is called securitization. However, lenders have begun to securitize loans themselves, especially in the areas of mortgage loans. Securitized house loans may have exacerbated the subprime mortgage crisis beginning in 2007, by making risky loans less apparent to investors.

6. RECOMMENDATION
6.1 Significant recommendations of the study:

Regulation requiring all issues to be managed and certified by a Merchant Banker could be relaxed in case of rights offerings.

The set of issues, which are placed through a public offering, will include all high and low quality issues, will be placed through a rights offering. For the set of issues, which are placed through a public offering, further screening can be achieved by making underwriting optional. For the screening mechanism in the preceding recommendation to be effective, the current 90% subscription rule should be strengthened. SEBI's objectives of improving disclosure of private information and investor protection can be achieved.

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6.2 FUTURE DEVELOPMENTS

The larger merchant banks, now in the fourth quarter o the second century of their existence, obviously feel that they will have a continuing role to play. They have come far and are unlikely to stop here. I suspect that in an age where personal service is less frequent and the concept of universal shopping more prevalent though not necessarily with the agreement or at the wish of the customer an institution developing its relationships with a relatively small number of clients on a highly professional and individual basis will continue to be sought after. The merchant banks' importance in raising funds for their clients may be diminishing but their advisory role relating to raising funds is increasing. Merchant banks, similar to Hong Kong entrepreneurs, are highly flexible and even the larger ones move often quickly into new areas which they believe will be profitable.

Lastly there is a certain mystique and prestige which attaches to their trade and these attributes are now also marketed by the retail banks, to the ultimate benefit of both types of institutions.

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

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Conclusion of the study:

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 actors 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.

Merchant banking has been a very lucrative-and risky-endeavor for the small number of bank holding companies and banks that have engaged in it under existing law. Recent legislation has expanded the merchant-banking activity that is permissible to commercial banks and is therefore likely to spur interest in this lucrative specialty on the part of a greater number of such institutions. Although for much of the past half-century commercial banks have been permitted (subject to certain restrictions) to engage in merchant-banking activities, the term merchant banking itself is undefined in U.S. banking and securities laws and its exact meaning is not always clearly understood.

7. LIMITATIONS OF THE RESEARCH

No industry can run without any flaws. Same is the case with Merchant banking. Following are some of the limitations of Merchant Banking:

Sometimes, they may face the problem of sufficient capital to deal in securities which stops them from getting proper returns. Lack of proper skilled labour. Problem in managing right kind of Merger & Acquisition. Choosing the right kind of Capital Mix. Giving proper knowledge to its clients about future strategies.

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8. BIBLIOGRAPHY

Swizz Bank Institute Report Investment Banking-I (ICFAI Journal) Investment Banking: Past and Present Merchant banking and financial services www.guardian.co.uk Banking City Business Series

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