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INTRODUCTION
Financial services are an important component of financial system. The
smooth functioning of financial system depends upon the range of financial
services extended by the providers. Financial services in India have
witnessed remarkable changes in the recent past after the implementation of
“Liberalization, privatization and globalization”.
Funds are tapped from the capital market to finance various mega industrial
projects. In attracting public savings, merchant bankers play a vital role as
specialized agencies. The resources raising functions remains to be the
primary business of a merchant banker. The primary market holds the key to
rapid capital formation, growth in industrial productions and exports. There
has to be accountability to the end use of funds raised from the market. The
increase in the number of issues and amount raised the number of merchant
bankers. Therefore, the field became highly competitive market where it
requires a specialized skill in handling the situation. The merchant bankers
have a social responsibility to in building an industrial structure in India.
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Merchant Banking in India
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Merchant Banking in India
DEFINITION:
In banking, a merchant bank is a financial institution primarily engaged in
offering financial services and advice to corporations and wealthy
individuals on how to use their money. The term can also be used to
describe the private equity activities of banking.
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Merchant Banking in India
ORIGIN
Merchant banking originated through the entering of London merchants in
foreign trade through acceptance of bill. Later, the merchants assisted the
Government of under developed countries in raising long – terms through
floatation of bonds in London money market. Over a period they extended
their activities to domestic business of syndication of long term and short
term finance, underwriting of new issues, acting as registrars and share
transfer agents, debenture trustees, portfolio managers, negotiating agents
for mergers, takeovers etc.
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Merchant Banking in India
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Merchant Banking in India
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.
As the British Empire expanded in the 18th and 19th Centuries, merchant
banks prospered in London. For instance, merchant bankers funded
Canada’s Hudson Bay Company. This period saw the rise of such merchant
banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from
the trade created by the Dutch East Indian Company. Since the 18th century,
the role of the merchant banker has been considerably broadened to include
a composite of modern day skills. Such skills are inherently entrepreneurial,
managerial, financial and transactional.
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.
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Merchant Banking in India
In 1967, RBI issued its first merchant banking license to grind lays started
with management of capital issues, production planning, system design and
also market research. It provides management consulting services as well.
Citibank setup its merchant banking division in 1970. its scope includes
assisting new entrepreneur, evaluating new projects, raising funds through
borrowing and issuing equity. Indian banks started banking services as a part
of multiple services they offered to clients from 1972. State bank of India
started the merchant banking division in 1972. In the initial years the
objective was to render corporate advice and assistance to small and
medium entrepreneurs. Merchant banking activities are organized and
undertaken in several forms. Commercial banks and foreign development
finance institutions have organized them through formation of division;
nationalized banks have formed subsidiaries companies and share brokers
and consultancies constituted themselves into public ltd. Co. or registered
themselves as private ltd. companies. Some of them have equity stake of
foreign merchant bankers.
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Merchant Banking in India
Merchant Bank
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.
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Merchant Banking in India
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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Merchant Banking in India
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Merchant Banking in India
help in meeting the widening demand for investible funds for economic
activity.
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Merchant Banking in India
relaxations, good return on investment and capital appreciation in such
investment to motivate them to invest their savings in securities of the
corporate sector.
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Merchant Banking in India
In the days ahead, merchant bankers have very significant role to play
tuning their activities to the requirements of the growth pattern of the
corporate sector, the industry and the economy as a whole which is, in
it, a challenging task and to meet these challenges merchant bankers
will have to be more vigorous and strategic in playing their role. They
will have also to adopt new ways and means in discharging their role.
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Merchant Banking in India
The commercial banks that followed State Bank of India were Central Bank
of India, Bank of India and Syndicate Bank in 1977.Bank of Baroda,
Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of
India, United Commercial Bank, Punjab National Bank, Canara Bank and
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Merchant Banking in India
Indian Overseas Bank in late ‘70s and early ‘80s. Among the development
banks, ICICI started merchant banking activities in 1973 followed by IFCI
(1986) and IDBI (1991).
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Merchant Banking in India
These merchant bankers function as division/subsidiary of banking
organization. The parent banks are either nationalized commercial bank or
the foreign banks operating in India. These organizations have brought
In the recent past there has been an inflow of qualified and professionally
skilled brokers in various stock exchanges of India. These brokers undertake
merchant banking related operations also like providing investment and
portfolio management services.
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Merchant Banking in India
SEBI act, 1992 does not prescribe any specific form of business
organization to carry on the activities as merchant banker. However, the
types of organizations are listed below:
a. Sole proprietorship
b. Partnership firm
c. Hindu Undivided Family (HUF)
d. Corporate Enterprises
e. Co-operative Society
All the basic tests required to find out whether the business to be undertaken
is viable or not are also applicable to a Merchant Banking setup. Capital
adequacy, profitability, growth opportunities and current market size are
some of the factors which need to be looked into.
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Merchant Banking in India
The application can be made for any one of the following categories of the
merchant banker namely:-
• Category I, that is –
(i) to carry on any activity of the issue management, which will inter-alia
consist of preparation of prospectus and other information relating to the
issue, determining financial structure, tie-up of financiers and final allotment
and refund of the subscription; and
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Merchant Banking in India
The application should conform to all the requirements under the SEBI
guidelines, otherwise it may be rejected.
d. Consideration of application
The Board shall take into account for considering the grant of a certificate,
all matters, which are relevant to the activities relating to merchant banker
and in particular the applicant complies with the following requirements,
namely: -
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Merchant Banking in India
• the applicant has the necessary infrastructure like adequate office
space, equipments, and manpower to effectively discharge his
activities
• the applicant has in his employment minimum of two persons who
have the experience to conduct the business of the merchant banker
The capital adequacy requirement should not be less than the net worth of
the person making the application for grant of registration. The networth
shall be as follows,
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Merchant Banking in India
• the applicant has the professional qualification from an institution
recognised by the Government in finance, law or business
management
• grant of certificate to the applicant is in the interest of investors.
The Board on being satisfied that the applicant is eligible shall grant a
certificate. On the grant of a certificate the applicant shall be liable to pay
the fees as prescribed.
Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
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Merchant Banking in India
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Merchant Banking in India
5. They render the services like foreign exchange dealer, money
exchange, and authorized dealer and to buy and sell foreign exchange
in all lawful ways in compliance with the relevant laws of India.
6. They will invest in buying and selling of transfers, hypothecate and
deal with dispose of shares, stocks, debentures, securities and
properties of any other company.
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5. Every merchant banker must disclose information to the SEBI when it
requires any information from them.
6. All merchant bankers must abide by the code of conduct prescribed
for them.
7. Every merchant banker who acts as lead manager must enter into an
agreement with the issuer setting out mutual rights, liabilities,
obligations, relating to such issues with particular reference to
disclosures allotment, refund etc.
Code of Conduct
a) The merchant banker must observe high integrity and fairness in all
his dealings.
b) He shall render at all times high standard of services, exercise due
diligence, exercise independent professional judgement.
c) If necessary, he must disclose to his clients the possible source of
conflict of duties and interests.
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Merchant Banking in India
d) The merchant banker should not indulge in unfair practice or unfair
competition with other merchant bankers.
e) He should not make any exaggerated statement about his capacity or
achievement.
f) He should always Endeavour to give the best possible advise and
prompt efficient and cost effective service.
g) He should maintain the secrecy of all the confidential information
received during the course of service to his client.
h) He should not engage in the creation of a false market or price rigging
or manipulation.
Guidelines of SEBI
After the obligations of the CCI, the place was occupied by a legal organ
called as “Securities and Exchange Board of India”. The issue of capital and
pricing of issues by companies has become free of prior approval. The SEBI
has issued guidelines for the issue of capital by the companies. The
guidelines broadly covers the requirement of the first issue by a new or the
first issue of a new company set up by the existing company, the first issue
by the existing private companies and public issues by the existing listing
companies. The SEBI is the most powerful organization to control and lead
both the primary market and secondary market.
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Merchant Banking in India
The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented
below:
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Merchant Banking in India
h) The Company should disclose the safety net scheme or buy back
arrangements of the shares proposed in public issue. This scheme is
applicable to a limited number of 500 shares per allottee and the offer
should be valid for a period of at least 6 months from the date of
dispatch of securities.
i) According to the guidelines, in case of the public issues, at least 30
mandatory collection centres should be established.
j) According to the SEBI guidelines regarding rights issue, the
Company should give advertisements in not less than two news-
papers about the dispatch of letters of offer. No preferential allotment
may be made along with any rights issue.
k) The Company should also disclose about the fee agreed between the
lead managers and the Company in the memorandum of
understanding.
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Merchant Banking in India
the field of securities underwriting, while many investment banks participate
in trade financing activities.
Traditionally, investment banks did not deal with the general public.
Some of the activities that a pure merchant bank is involved in may include
issuing letters of credit, transferring funds internationally, trade consulting
The current offering of investment banks and merchant banks varies by the
institution offering the services, but there are a few characteristics that
most companies that offer both investment and merchant banking share.
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Merchant Banking in India
and large public and private share offerings. Merchant banks tend to operate
on small-scale companies and offer creative equity financing, bridge
financing, mezzanine financing and a number of corporate credit products.
While investment banks tend to focus on larger companies, merchant banks
offer their services to companies that are too big for venture capital firms to
serve properly, but are still too small to make a compelling public share
offering on a large exchange. In order to bridge the gap between venture
capital and a public offering, larger merchant banks tend to privately place
equity with other financial institutions, often taking on large portions of
ownership in companies that are believed to have strong growth potential.
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Merchant Banking in India
Merchant banks Commercial banks
5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on proposal and cannot afford to be
risks shields i.e. mitigation measures grossly relationship based and
close to the customer.
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Merchant Banking in India
Business planning stage: 1)project feasibility study
2)advice on capital structuring
Equity raising: 3)preparation of prospectus and
liaison with SEBI
4)pricing decisions
5)marketing in the capacity of lead
managers
6)underwriters to the issue
7)post issue management
8)assistance in ADR/GDR
Debt raising: 9)management of debenture issue
10)preparation of bankable proposal
and syndication of loan
Working capital raising: 11)assistance in arranging optimal
capital finance
Strategic advice: 12)advice on mergers and
acquisitions
13)corporate structuring advice
The development activity through the country had exerted excess demand on
the sources of funds by the ever expanding industry and trade which could
not be met by the All India Financial Institutions. In these circumstances, the
corporate sector enterprises had the only alternative to avail themselves of
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Merchant Banking in India
the capital market services for meeting the long-term fund requirements
through capital issues of equity and debentures. The growing demand for
funds from capital market has enthusied many organizations to enter into the
field of merchant banking for managing the public issues.
The need of merchant banker is also felt in the wake of huge untapped
public savings as merchant bankers can play a highly significant role in
mobilizing funds from savers to invest in channels assuring promising return
on investments and thus narrow down the gap between demand for and
supply of investible funds.
1. Corporate Counseling
2. Project Counseling And Pre-Investment Studies
3. Credit Syndication And Project Finance
4. Issue Management
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Merchant Banking in India
5. Underwriting
6. Bankers
7. Portfolio Management
8. Venture Capital Financing
9. Leasing
10.Non-Resident Investment Counseling And Management
11.Acceptance Credit And Bill Discounting
12.Advising On Mergers, Amalgamations And Take-Over
13.Arranging Offshore Finance
14.Fixed Deposit Broking
15.Relief To Sick Industries
Corporate Counseling
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Merchant Banking in India
It includes a whole range of financial services provided by a merchant
banker to a corporate unit a view to ensure better performance, maintain
steady growth and create a better image among investors.
A merchant banker finds out the problems of enterprise, which shall include
organizational goals for the enterprise, size of the organization and
operational scales, choice of a product, pricing, etc, and suggests ways and
means to solve those problems.
Project Counseling
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Merchant Banking in India
Project counseling is an important merchant banking service which includes
preparation of project reports, deciding upon the financing pattern to finance
the cost of the project, appraising the project report with the financial
institutions/banks.
Merchant banker has to decide the financing mix of the internal and external
sources of funds keeping in view the rules, regulations and norms prescribed
by the government or followed by the term lending financial institutions.
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Merchant Banking in India
Credit Syndication
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom the funds
could be procured to implement the project.
Merchant banker has to locate the sources of funds and comply the
formalities required to procure the funds. This service rendered by the
merchant banker in arranging and procuring credit from financial
institutions, banks and other lending and investment organizations for
financing the clients' project cost or meeting working capital requirement is
referred to as loan syndication or credit syndication.
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Merchant Banking in India
Management of capital issues is a professional service rendered by the
skilled and experienced merchant bankers. Previously, the managing agents
for a particular corporate used to manage public issues. The abolition of the
managing agency system, the growth in the public limited companies in
number and size, the imposition of new rules and regulations regarding the
public issue of securities made it necessary for merchant bankers to play a
definite role in the management of public issues.
As a manager to the public issue, the merchant banker, before the public
issue has to obtain the consent of the stock exchanges to the memorandum
and articles of association, appoint other managers, bankers, underwriters,
brokers etc. ,advice the company to appoint auditors, solicitors and board of
directors, draft the prospectus and obtain consent from the companies legal
advisors, board of directors and other concerned parties, file the prospectus
with registrar, make an application for enlistment with stock exchanges and
finally advertise for the issue.
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Merchant Banking in India
A fully underwritten public issue spells confidence to the investing public,
which ensures a good response to the issue. Keeping this in view companies,
which float a public issue usually, desire a full underwriting of the issue.
Underwriting is only the guarantee given by the underwriter that in the event
of under subscription, the amount underwritten would be subscribed in
proportion by the underwriter. An underwriter of the issue gets the following
benefits:
The merchant banker can automatically become the banker to the issue in
the following cases:
Portfolio Management
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Merchant Banking in India
Portfolio refers to investment in different types of marketable securities or
investment papers like shared, debentures and debenture stocks, bonds etc.
from different companies or institutions held by individuals firm or
corporate units.
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Merchant Banking in India
A merger is defined as a combination of two or more companies into a
single company where one services and other looses their corporate
existence. A merger is also defied as an amalgamation wherein the
shareholders of the combining companies become substantially the
shareholders of the company formed.
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Merchant Banking in India
If the objective is diversification in production line or business activities,
then it will select a non-related company as a merger partner.
Once the merger partner is proposed the merchant banker has to appraise the
merger/takeover proposal with respect to financial viability and technical
feasibility. He has to negotiate with the parties and decide the purchase
consideration and mode of payment. He has to comply with the legal
formalities like getting approval from the Government/ RBI; drafting the
scheme of amalgamation; getting approval of company Board, financial
institution, high court if required; arranging for the meeting etc.
Leasing
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Merchant Banking in India
Non Resident Investment
Though merchant bankers world over specialize in acceptance credit and bill
discounting, these services are not currently provided by merchant bankers
in India the principal reasoning being the lack of an active market for
commercial bills.
The merchant bankers also help their clients in the following areas involving
foreign currency financing:
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Merchant Banking in India
Management of Fixed Deposits of Companies
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Merchant Banking in India
Qualities of merchant bankers:-
To be a successful merchant banker, following qualities are necessary:
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Merchant Banking in India
its customers. Merchants bankers should take utmost care that the
information is not leaked and also not consumed for the purpose other
than for which it was disclosed to the merchant banker.
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II. Malafide practices: India corporate culture is bettering. but still many
III. Regulations: though regulations are much better now, there is still scope
for further improvement. Merchant bankers can be made more accountable
and responsible. Professional qualification focused on merchant banking is
not available. Industry is not well organized and all the players do not play
the same tune. This is specifically evident in comparison with insurance
industry and mutual funds industry.
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Merchant Banking in India
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Merchant Banking in India
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Merchant Banking in India
Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in
India under authorization of SEBI. As a result of proliferation, Indian
Merchant
Bankers are faced with severe competition not only among themselves but
also with the well developed global players.
CURRENT AFFAIRS
RBI allows cash withdrawal from merchant banker terminals
Besides ATMs, customers can now also withdraw cash up to Rs1000 from
terminals at different merchant establishments, the Reserve Bank. As a
further step towards enhancing the customer convenience in using the plastic
money, it has been decided to permit cash withdrawals at POS (point of
sale) terminals. To start with, this facility will be available for all debit cards
issued in India, up to Rs1000 per day," RBI said in a statement issued here.
The use of debit cards at POS terminals at different merchant establishments
has been steadily increasing, it said. This facility is available only against
debit cards issued in India.
At present cash withdrawal facility using plastic cards is available only at
Automatic Teller Machines (ATMs) with the number of ATMs in the
country at 44,857. There are 4,70,237 POS terminals in the country.
This facility may be made available at any merchant establishment
designated by the bank and would be available whether the card holder
makes a purchase or not.
Morgan Stanley makes i-banking comeback
The joint venture between JM Financial and Morgan Stanley was inked in
1997 and formalized in 1999. The JV had investment banking operations
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Merchant Banking in India
other than equity broking, research, wealth management and advisory and
securities distribution operations. Post the split, JM Financial acquired the
investment banking company together with its subsidiaries, which were
engaged in fixed income, equity broking, wealth management, advisory and
distribution businesses of $ 20 million. The Indian partner sold its 49%
holding in JM Morgan Stanley Securities (JMSPL), the institutional equity
broking company to Morgan Stanley for $ 445 million.
Bulge bracket investment banking major, Morgan Stanley has re-entered
investment banking business on its own, after parting ways with JM
Financial — its former Indian partner.
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Merchant Banking in India
ICICI bank and its merchant banking arm, ICICI Securities (I-Sec), have
entered into an agreement, whereby all M&A deals will be done out of
ICICI Bank. The agreement goes on to define an M&A deal as one which
involves change in management control.
This arrangement replaces the earlier practice of both I-Sec and ICICI Bank
working together on M&A deals. “Since a predominant number of people,
who wish to be advised on M&A, also look for acquisition finance, it was
decided that the business should be housed in the bank,” I-Sec MD Madhabi
Puri Buch told ET. “Now, if a corporate is seeking a sell mandate or a buy
mandate, where the transfer of controlling interest takes place, the deal will
be done by ICICI Bank.”
ICICI Bank had initially entered the investment banking space in 2006. Over
the past couple of years, both the bank and its subsidiary have been vying
for deals. The new deal has taken into effect between both the entities from
April 1.
The company, which is a part of the Yash Birla conglomerate, will initially
concentrate on regulated services like initial public offerings, takeover,
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Merchant Banking in India
buybacks, delisting and valuations. It also offers non-regulated services like
PE Syndication, M&A Advisory and other corporate advisory.
Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash Birla
Group that has diversified interest in sectors like auto & engineering, textiles
& chemicals and power & electrical, education & IT.
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Merchant Banking in India
Nomura Financial Advisory and Securities (India) Private limited ('Nomura
India'), a wholly-owned subsidiary of Nomura Holdings, Inc. ('Nomura'),
has launched its equity sales and trading and investment banking operations
in India.
By integrating the former Lehman Brothers India franchise and obtaining its
merchant banking licence and stock exchange memberships, Nomura India
said in a statement it has significantly expanded its capabilities in India
through a wide range of onshore financial solutions spanning securities
brokerage, securities underwriting and advisory services.
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Merchant Banking in India
ARTICLES:-
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Merchant Banking in India
Exchange Board of India (SEBI) on its functioning as a self-regulatory
organization (SRO).
Recently the association was really piqued when SEBI asked one of its
members to stop taking up further assignments without so much as giving it
any notice. AMBI feels that the member should have been given a fair
hearing and also feels that AMBI as the SRO should have been informed
about the decision. A committee has subsequently been set up by AMBI to
go into the matter. Then there was the issue of asking all merchant bankers
to furnish details of employees to SEBI. This was also demanded without
consulting/informing AMBI.
The association has already made its disappointment clear to SEBI and the
proposed dialogue is reportedly being undertaken to clear all
misunderstandings.
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Merchant Banking in India
EXAMPLE:-
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Merchant Banking in India
“Capital Market" related assignments.
They undertake "project appraisals" with resource raising plans from Capital
Market/ Debt Markets and facilitate tie-ups with Banks / Financial
Institutions and Potential Investors.
1. Merchant Banking
2. Commercial Banking
3. Investments
5. Underwriting
6. Loan Syndication
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Merchant Banking in India
SPECTRUM OF SERVICES:-
3. Private Placements
4. Project Appraisals
6. IPO Funding
13. Syndication
1. Project Appraisal
2. Capital structuring
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Merchant Banking in India
3. Preparation of offer document
6. Underwriting
Investment Criteria:-
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Merchant Banking in India
4. Having established business partnerships that give it a major position in a
market space;
They provide the resources, convenience and services to meet your needs by
arranging Foreign Currency credits through:
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Merchant Banking in India
• Commercial loans
• Syndicated loans
• Lines of Credit from Foreign Banks and Financial Institutions
• FCNR loans
• Loans from Export Credit Agencies
• Financing of Imports.
They are internationally the most Preferred Bank by Export Credit Agencies
for Guarantees in case of the Indian Clients or Projects.
SBI being an Indian entity has no India exposure ceiling. Their Primary
focus is On Indian Clients. SBI’s seasoned Team of professionals provides
you with Insightful credit Information and helps you Maximize the Value
from the transaction.
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Merchant Banking in India
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Merchant Banking in India
The Bank is registered with SEBI as Category – I Merchant Banker for
providing all the major Merchant Banking services. Our gamut of Merchant
Banking services includes:
• Debenture Trustee
• Marketing of the issue through a strong network of
QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one of
the major investor in the market having a treasury of 45000 crores.
Their Software for handling the Refund Banker is one of the best systems in
the industry. Its unique features provides online payment of the instrument
by our 2470 branches in 733 centers, online status of paid instruments,
100% reconciliation at any point of time etc.
The Bank has an exclusive and specialized Capital Market Service Branch at
New Delhi for providing Merchant Banking Services to the Corporate
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Merchant Banking in India
CONCLUSION
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Merchant Banking in India
the growing awareness and interest into a committed, discerning and
growing awareness and interest into an essential to remove the trading
malpractice and structural inadequacies prevailing in the market, and
provide the investors an organized, well regulated market.
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