Merchant Banking

Faculty
Harshad Thakker
 Origin of Merchant Banking
 The term “Merchant Banking” is originated
from the merchants doing business at
London who started financing foreign trade
through acceptance of bills who afterwards
extended their help to the Governments of
underdeveloped countries to raise long
term funds (finance). Later on these
merchants formed an Association which is
known as “Merchant Banking & Securities
House Association.”
 Development of Merchant Banking in
India
 In India the concept was introduced by National
& Grindlays Bank in 1967 by undertaking the
management of Capital Issue, Production
planning, System design to market research
and Management Consultancy. In 1970 First
National Citi Bank also started extending the
same services followed by State Bank Of India
in 1972.
 WHAT IS MERCHANT BANKING ?
 Merchant Banking services are activities
pertaining to counseling corporate clients who
are in need of capital about the terms and
conditions of the issue to raise the capital,
underwriting of the issue, timing of the issue,
preparation of prospectus and publicity for
grooming the issue for the market. They may
also relate to the private placement of capital
and raising of long term loans either in foreign
exchange or in rupee from the national / state
financial institutions and short term working
capital from Commercial Banks.
 Importance of Merchant Bankers
 Merchant Bankers handle the activities relating
to the issue of fresh capital for a new company
setting up an enterprise or for the existing ones
which is in need of the finance for expansion and
for diversification to other businesses. Proposals
for merger and amalgamation may also be
handled under this activities. All these activities
are mainly stock exchange oriented activities.
 Functions of Merchant Banking:-
 1. Promotion, Financing and Syndication
of Indian projects.
 2. Investment advisory services
 3. Investment management
 4. Acceptance Credit
 PORTFOLIO MANAGEMENT
 Portfolio Management for Non Residents: MB
identifies suitable arrangement of investment suited
to each individual NR which include the following:-
 1.Guidance of purchase and sale of securities
 2.Handling of such transactions
 3.Advice on market conditions
 4.Safe custody of documents
 5.Collection of IWs, DWs.
 6.Services as a link between NR and RBI for
obtaining necessary permission.
 Underwriting of a Public Issue
 Controller of Capital Issue (CCI) stipulates that all the
public issues should be underwritten.
 The benefits of underwriting are as follows:-
 1.The Bank earns the commission on the commitment
given.
 2.The Banks get these commitments sub-underwritten
with the Brokers because of which the Bank’s liaison
with them improves.
 3.As a matter of right, the Bank is appointed the Banker to
the concerned Issue.
 Since, Banks do not wish to hold equity shares, they take
due care before underwriting any issue to safeguard from
devolvement.
 BANKER TO THE ISSUE
 Bank automatically gets the assignment as
“ Banker to the Issue” in following cases:-
 1. The Bank is a banker to the company.
 2. It has given the underwriting commitment.
 3. It is acting as Manager to the Issue.
 Bank gets zero cost or low cost deposit till the
allotment takes place.
Guidelines of SEBI (SECURITIES & EXCHANGE BOARD OF
INDIA) w.r.t. Merchant Bankers

 M.B.s are of four types:

 Category I merchant bankers : Can act as Issue managers
 Category II merchant bankers : can act only as co-managers
 Category III merchant bankers : can act as co-managers but
cannot undertake portfolio management
 Category IV merchant bankers :can merely act as consultant
or advisor to issue of capital

 CAPITAL ADEQUACY NORMS :

 Category I : Rs. 5 crores
 Category II : Rs.50 lakhs
 Category III : Rs.20 lakhs
 Category IV : Nil
GUIDELINES FOR MERCHANT BANKERS :

 MERCHANT BANKING REGULATIONS :

 - Certificate from SEBI is a must. i.e. SEBI’s authorization is a

must to act as merchant bankers.
– Authorisation criteria include
– Professional qualification in finance, law or business management
– Infrastructure like office space, equipment and man power
– Capital adequacy
– Past track of record, experience, general reputation and fairness in all
transactions
– Every merchant banker should maintain copies of balance sheet, Profit
and loss account, statement of financial position
– Half-yearly unaudited result should be submitted to SEBI
– Merchant bankers are prohibited from buying securities based on the
unpublished price sensitive information of their clients
GUIDELINES FOR MERCHANT BANKERS

(Contd.)

– SEBI has been vested with the power to suspend or cancel

the authorisation in case of violation of the guidelines
– Every merchant banker shall appoint a ‘Compliance Officer‘
to monitor compliance of the Act
– SEBI has the right to send inspecting authority to inspect
books of accounts, records etc… of merchant bankers
– Inspections will be conducted by SEBI to ensure that
provisions of the regulations are properly complied
– An initial authorisation fee, an annual fee and renewal fee
may be collected by SEBI
– A lead manager holding a certificate under category I shall
accept a minimum underwriting obligation of 5% of size of
issue or Rs.25 lakhs whichever is less
 CODE OF CONDUCT FOR MERCHANT BANKERS
 - Should make all efforts to protect the interest of investors.
 - Should maintain high standards of integrity, dignity and
fairness in conduct of business
-Should fulfill 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
 SOME PROBLEMS OF MERCHANT BANKERS

 SEBI stipulates high capital adequacy norms

for authorisation which prevents young,
specialised professionals into merchant
banking business Non co-operation of the
issuing companies in timely allotment of
securities and refund of application of money
etc. is another problem Yet merchant banking
is vast but should develop adequate expertise
to provide a full range of merchant banking
services
THANK YOU