The Growth of Merchant Banking in India

Formal merchant activity in India was originated in 1969 with the merchant banking division setup
by the Grindlays Bank, the largest foreign bank in the country. The main service offered at that
time to the corporate enterprises by the merchant banks included the management of public issues
and some aspects of financial consultancy. Following Grindlays Bank, Citibank set up its merchant
banking division in 1970.The division took up the task of assisting new entrepreneurs and existing
units in the evaluation of new projects and raising funds through borrowing and equity issues.
Management consultancy services were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. Consequent to the recommendations of
Banking Commission in 1972, that Indian banks should offer merchant banking services as part of
the multiple services they could provide their clients, State Bank of India started the Merchant
Banking Division in 1972. In the initial years the SBIs objective was to render corporate advice
and assistance to small and medium entrepreneurs.

The commercial banks that followed State Bank of India were Central Bank of India, Bank of India
and Syndicate Bank in 1977.Bank of Baroda, Standard Chartered Bank and Mercantile Bank in
1978 and United Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank
and Indian Overseas Bank in late 70s and early 80s. Among the development banks, ICICI started
merchant banking activities in 1973 followed by IFCI (1986) and IDBI (1991).


Scope for Merchant Banking in India

Scope for merchant banking depends upon size of the market, restriction-liberation, banking
policies, corporate culture, and corporate dynamics.

Size and dynamics of the market: Indian market is growing. In fact India is one of the largest
emerging markets. Obviously, public issues, FDI, debt raising are on rise. Lots of new and green
fried projects are happening. Merchant bankers have lots space to contribute.

Restrictions-liberalization: more liberal the market is, more the things left to be decided by the
corporate. Merchant bankers assist in decision making and hence their scope increases. With
significant market freedom, merchant bankers work has increased many folds.

Banking policies: RBI prefers that commercial banks do not indulge in merchant banking business
directly. They should setup a subsidiary for the purpose. This limits scope of commercial banks
and gives space to merchant bankers. This policy also results in fair business practices. Some
countries allow commercial bankers to get involved in IPOs, placement of debentures, etc. Indian
scenario is favorable to merchant bankers.

Corporate culture: corporate can do project appraisal, strategic restructuring in house as well. If
the corporate prefer third-party independent assessment, then only they will engage merchant
bankers. Otherwise merchant bankers role is only statutory as in issue management. India inc.
apparently prefers and is happy with merchant bankers work.

Corporate dynamics: more happening in business gives more opportunities to merchant bankers.
Mergers, takeover acquisition, new Greenfield projects, fund raising for government institutions,
active money market are all providing better business prospectus to merchant bankers.
Progress of Merchant Banking in India

Upto 1970, there were only two foreign banks which performed merchant banking operations in
the country. SBI was the first Indian commercial bank and ICICI the first financial institution
to take up the activities in 1972 and 1973 respectively. As a result of buoyancy in the capital
market in 1980s some commercial banks set up their subsidiaries to operate exclusively in
merchant banking industry. In addition, a number of large stock broking firms and financial
consultants also entered into business. Thus, by the end of the end of 1980s there were 33
merchant bankers belonging to three major segments viz., commercial banks, all India
financial institutions, and private firms. Merchant banking functions of these institutions was
related only to management of new capital issues.
Merchant banking industry which remained almost stagnant and stereotyped for over two decades,
witnessed an astonishing growth after the process of economic reforms and deregulation of Indian
economy in 1991. The number of merchant banks increased to 115 by the end of 1992-93 300 by
the end of 1993-94 and 501 by the end of August, 1994. all merchant bankers registered with SEBI
under four different categories include 50 commercial banks, 6 all Indian financial institutions
ICICI, IFCI, IDBI, IRBI, Tourism Finance corporation of India, infrastructure Leasing and
Financial Services Ltd. and private merchant bankers.
In addition to Indian Merchant Bankers, a large number of reputed international Merchant Bankers
like Merrill Lynch, Morgan Stanley, Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are
operating in India under authorization of SEBI. 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 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.

PNB aims profit of 7,500crore by 2013
The country's second largest public sector lender Punjab National Bank aims to double its profit
to Rs7,500 crore in the next four years.
"The bank has set a target to expand total business to Rs10crore and earn net profit of Rs7,500
crore by 2013," said PNB Chairman and Managing Director K C Chakrabarty, who is charge of
Deputy Governor of RBI.
The growth driver would be better asset liability management, thrust on recovery, focus on
customers and financial inclusion, he had said. Besides, the bank plans to open new line of
businesses in the current fiscal including merchant banking subsidiary.
PNB Investment Services aims to provide investment consultancy and merchant banking services
and would be operational in the next three months. Currently, these operations are run by a division
of the bank.

ICICI Bank to oversee mergers and acquisitions
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.

Birla Capital and Financial Services gets SEBI merchant banking license
Birla Capital & Financial Services Ltd has been granted a merchant-banking license by the
Securities and Exchange Board of India. The license will enable the company to offer a wide range
of on-shore investment banking advisory and underwriting services in the Indian market.
The company, which is a part of the Yash Birla conglomerate, will initially concentrate on
regulated services like initial public offerings, takeover, 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.
Primary market slowdown, affects merchant bankers wallet
The recent slowdown in the primary market has impacted not only investors but merchant bankers
as well, as there has been a significant decline of nearly 60 per cent in their percentage fees so far
this year.
"There is a clear drop in the merchant banking fees to Rs 216crore in comparison to Rs. 771crore
for the calendar year 2007, indicating a drop of 57.9 per cent on annualized basis," Nexgen
Capitals, the merchant-banking arm of brokerage firm SMC Global Securities.
Merchant bankers are those who advise the issuer about the public offer and manage the issue.
The average percentage fees has declined to 1.21 per cent so far this year from 2.24 per cent in
2007, the report added.
Reliance Power IPO of Rs 11,563 crore during this year with the merchant banking fee of Rs 50.6
crore, amounting to 0.44 per cent of the issue size had a great bearing on this trend.

Nomura launches its investing banking operations 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.
In October 2008, Nomura, a global investment bank, acquired the majority of Lehman Brothers'
employees in India, including the equities sales and trading, equity research, fixed income liquid
markets sales and trading, and investment banking teams.
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.



Problems and Hurdles
Not many but some problems are faced by Indian merchant bankers.

Industry compartmentalization: company which is in merchant banking business would
have expertise in underwriting, hire purchase, leasing, and portfolio management, money-
lending. But RBI does not permit merchant banking firms to get into these activities. So
the same promoters have to setup different companies for different purposes. Management
cost increases and expertise pooling i.e. multiple use of same talent is not possible.

Malafide practices: India corporate culture is bettering. But still many corporate have
excessively friendly approach. Favored allotment of shares, tampering with project
appraisal report to bankers is common. Corporate like to use merchant bankers for malafide
intentions. This gives growth to more boutique fly-by-day firms. Giant professional or
multinational merchant bankers are cautions in their approach to Indian market.

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.