Merchant Banking

Basics of Merchant
Banking
Basics of Merchant Banking Merchant banking
is relatively new concept in the area of financial
services in India. It caters to the need of trade
and industry by acting as intermediary,
consultant , financial and liaison agency. The
expectation that the business will generate
money at some time in the future to repay the
amount lent or invested, plus a return to the
owner of the fund, is the basis of banking.

 If the bank lends money, it is commercial

banking. If the bank is agent then it brings
those with money together with those who
need it. It is known as investment
banking, some time called as merchant
banking because merchant s were the first
who need this type of funding.

Meaning
The merchant bank is An
organisation that underwrites
corporate securities and advises
clients on issues like corporate
mergers, etc. involves in the
ownership of commercial ventures.

Definition
Merchant banking means any person who is
engaged in the business of issue
management either by making
arrangements regarding selling, buying
underwriting or subscribing to the securities
as underwriter, manager, consultant, advisor
or rendering corporate advisory services in
relation to such issue management.

Services Rendered by Merchant

Banker

1. Corporate counselling,
2.Project counselling and pre-investment studies
3.Capital restructuring
4.Credit syndication and project finance
5.Issue management and underwriting
6.Portfolio management
7.Non-resident investment
8.Working capital finance

9.Acceptance credit and bill discounting

10. Mergers Amalgamations and takeovers
11.Ventuer capital financing
12. Lease financing
13. Foreign Currency Finance
14. Fixed deposit broking
15. Mutual funds flotation and management
16. Arrange for Rehabilitation of sick projects.

Origin of merchant banking

The concept originated from Italy
during 3rd century. The first known
firms which have been involved were
Riccadi of luca, Medici, Fuggier and
so on. In olden time merchant
banking was also known as
accepting and issuing houses in
the U.K. and investment banks in
the USA.

Origin of merchant banking

In fact, there was no distinction between the
function of merchant banking and commercial
banks until 1932. later, the Glass Steagall
Act,1933, distinguished the function of merchant
banking or investment banking from commercial
banking. However, in 2000 Clinton Administration
allowed investment banks to run the function of
commercial banks in addition to their usual
functions of investment banking. This was
effected through an amendment in the Glass
Steagall Act.

Origin of merchant banking

in India
National Grindlays bank in India initiated merchant
banking services in1969. The Citibank followed it in 1970.
The state bank of India was the first Indian commercial
bank to set up a separate merchant banking division in
1973. ICICI followed it in 1974. both these Indian
merchant bankers emerged as leader in merchant
banking having done significant business during the
period 1974-85 in comparison to foreign banks. A number
of commercial bank financial institution and other
organistion are now engaged in providing merchant
banking services. The merchant banks in Indian operate
as issue houses rather then full-fledged merchant banks.

 Difference between Merchant banks

and Commercial banks:- Deals with
Debt & Debt related finance. Asset
oriented. Generally avoid risks. Deals
with Equity & Equity related finance.
Management oriented. Willing to
accepts risks.

Registration of merchant
bankers
The applicant should be a body corporate 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 inter connected company of the applicant
should not have been registered merchant banker. The
applicant should not have been involved in any securities
scam or proved guilty for any offence. The applicant
should have a minimum net worth of Rs. 5 crores.

Scope of merchant banking

activities
In channelizing the financial surplus of
the general public into productive
investment avenues. To co-ordinate
the activities of various intermediaries
to the share issue such as the
registrar, bankers, advertising agency,
underwriters, broker etc. To ensure the
compliance with rules and regulations
governing the securities market

Function of a merchant
banker
Management of debt equity offerings
Promotional activities Placement and
distribution Corporate advisory services
Project advisory services Loan syndication
Providing ventures capital and mezzanine
financing Leasing finance
Function of a merchant banker Bought out
deals Non resident investment Advisory
services relating to mergers and
acquisition Portfolio management

CODE OF CONDUCT
Should make all efforts to protect the interest
of investors Should maintain high standards of
integrity, dignity and fairness in conduct of
business Should fulfil all obligations in a
professional and ethical manner Should not
discriminate among the clients Should ensure
that prospectus, letter of offer etc.. is
available to investors at the time of issue
Should render best possible advice to its
clients Any penal action taken by SEBI should
be informed to its clients

 Should inform the board about any legal

proceedings initiated against it Should abide
by the rules of Securities and Exchange Board
of India Regulations,2003 Shall develop its
own internal code of conduct for governing its
internal operations Should ensure that any
person it employs should have the capacity to
be a merchant banker It is responsible for the
act of its employees and agents Should not
create false market

Issue management
It refers to a management of securities
offering of clients to the general public
and existing shareholders on right
basis. Issue managers are also known
as merchant banker or lead managers.
Type of issues Public issues Right
issue, and Private placement

Public issues (eligibility

norms)
1. for unlisted companies- Should have a pre-issue
net worth of a minimum amount of Rs. 1 crore in 3
out of the preceding 5 years. Compulsorily meet
the minimum nethworth level during the two
immediately preceding years. Should have a track
record of distributable profits as given in section
205 of the companies act 1956 for at least 3 years
In the preceding 5 year period The issue size
should not exceed an amount equal to five times
its pre-issue net worth.

 for listed companies- Must have a track

record of distributable profits in
compliance with section 205 of the
companies act 1956 for at least 3 years
In the preceding 5 year period It must
have a pre-issue net worth of not less
than Rs. 1 crore in 3 out of the 5
preceding years, with the minimum net
worth to be met during the immediately
preceding 2 years.

Registration charges
According to SEBI the charges payable by the
merchant banker are as under: Category 1- a
sum of Rs. 2.5 lakh to be paid annually for the
first two year commencing from the date of
initial registration and thereafter a sum of Rs.
1 lakh to keep the registration in force.
Category 2- A sum of Rs. 1.5 lakh to be paid
annually for the first two year commencing
from the initial registration and thereafter a
sum of Rs. 50000 to keep the registration in
force.

Registration charges
Category -3- A sum of Rs. 1 lakh to be
paid annually for the first two year
commencing from the date of initial
registration and there after a sum of
25000 to keep the registration in force.
Category 4- A sum of Rs. 5000 to be paid
annually for the first two year
commencing from the date of initial
registration and there after a sum of Rs.
1000 to keep the registration in force

Summery of the SEBI guidelines

on merchant banking
objectives of merchant banking regulation It
regulates the rising of fund in primary market
It assures the issuer a market for rising
resource at low cost, effectively and easily It
ensures a high degree of protection to the
interest of the investors It provides for the
merchant banker a dynamic and competitive
market with high standard of professional
competence , integrity and solvency It ensures
fair efficient and flexible primary market to all
involved I the process of primary issue

Authorized activity
Issue management- It consist of preparation of prospectus and
other information relating to the ; issue of shares and securities
Determining financing structure Tie-up of finances Final allotment
Refund of subscriptions Corporate advices Managing, consultation
and advising The other authorized activities will be portfolio
management services

Method of authorization- Professional qualification finance, low or

business management Adequate office space, equipment and
manpower At least two person to be employed with experience to
carry on the business of merchant banking Capital adequacy
Previous track record, experience, general reputation and fairness
in all their transactions

CATEGORY OF MERCHANT BANKER

CATEGORY OF MERCHANT BANKER

CATEGORY 1st :- 2nd :- 3rd :- 4th :MINIMUM NETWORTH 1 crore 50 lacs
20 lacs NIL

 MERCHANT BANKERS COMMISSION :

MERCHANT BANKERS COMMISSION Maximum 0.5%
Project appraisal fees Lead Manager :- - 0.5% upto
Rs.25 crores - 0.2% more in excess of Rs.25 crores

Slide 30:
Underwriting fees Brokerage commission 1.5%
Other expenses :- - Advertising - Printing Registrars expenses - Stamp duty

Merchant banking Scope in India :

Merchant banking Scope in India

Growth of new issues market :

1) Growth of new issues market
Indian market largest emerging
market Domestic and foreign
investors setting up their biz here.
Many public and private issues
coming up Growth in new issues
market Scope for M.Bs. have risen

 Entry of FII :
2) Entry of FII Indian capital market is
globalised Indian Cos. are permitted to
invest in euro issues. Similarly, FII are
permitted to invest in India. Hence they
need M.Bs to advise them for their invt in
India. Increasing no. of JVs also require
expert services of M.Bs.

 Changing policy of FI :
3) Changing policy of FI Liberalisation of policies FI would require
expert services of M.Bs for project appraisal, financial management,
financial restructuring etc.

4) Development of debt market :

4) Development of debt market Good portion of capital can be
raised through debt instruments. Tremendous opportunities to M.Bs.

5) Innovations in Financial Instruments :

5) Innovations in Financial Instruments New financial instruments
have come up. M.Bs are market makers for these instruments.

 Corporate Restructuring :
6) Corporate Restructuring Liberalisation and
globalisation Competition in corporate sector becoming
intense. Cos. reviewing their strategies, structure and
functioning etc. leading to corporate restructuring. Good
opportunity to M.Bs to extend their area of operation.

7) Disinvestment :
7) Disinvestment It means reduction of some kind of
asset of a firm for achieving either financial or ethical
objectives. Motive of disinvestment is to obtain funds.

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