PREPARED BY:

VIRENDRA JHA 16
KAMALESH KHARAT 21
SUSHANT GAIKWAD 07
GANESH MORE 34
VINAY KHANDAGLE 20
SURYAPRATAB SING 49




CLASS: T Y BBI

SUBJECT: F.S.M

SUBMITED TO: RAHUL SIR

SUBMITED DATE: 20-09-2010















INDEX

SR.NO. CONTENTS
1.
Introduction
2.
Definition & Meaning
3.
History of Merchant Banking
4.
Growth of Merchant Banking in India
5.
Registration Of Merchant Bankers
6.
Objectives Of Merchant banking in Prevailing Economy
7.
Need and Importance of Merchant Bankers
8.
Role of Merchant Banker
9.
Problems of Merchant Bankers
10.
Organizational setup of Merchant Banking in India
11.
Qualities of good Merchant Banker
12.
Responsibilities of Merchant Banker
13.
Services rendered by Merchant Bankers
14.
Merchant Banking-Future Development
15
Conclusion






Introduction

Merchant banking
The dictionary meaning of merchant bank refers to an organization that
underwrites corporate securities and advises such clients on issues like corporate
mergers, etc. involved in the ownership of commercial ventures. This organization
may be a bank, corporate body, firm or proprietary concern.
Merchant banking started with the management of public issues and loan
syndication and has been slowly and gradually covering activities like project
counseling, portfolio management, investment counseling and mergers and
amalgamation of the corporate firms. Although, merchant banking organizations
present a long list of services they contemplate to render to their clients but the
main services so far being rendered by them are those as authorized by the SEBI.









Definition

The first authoritative definition for the term Merchant Banker has been given in
the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, A
Merchant Banker means any person who is engaged in the business of Issue
Management either by making arrangements regarding selling, buying or
subscribing to Securities as Manager, Consultant, Adviser of rendering Corporate
Advisory Service in relation to such Issue Management.

Sec/5 (b) of the Banking Regulation Act, 1949 defines Banking as accepting, for
the purpose of lending or investment of deposits of money from the public,
repayable on demand or otherwise and withdraw able by cheque, draft, order or
otherwise.

The Notification of the Ministry of Finance defines a merchant banker as, any
person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as manager,
consult, adviser or rendering corporate advisory service in relation to such issue
management.
Meaning

Merchant banking is an activity that includes corporate finance activites, such as
advice in complex financing mergers and acquisition advice, and at times direct
equity investment in corporation by banks.
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 purchased securities. Merchant banking
is the financial intermediation that matches entities that need capital and those that
have capital for investment.
History of Merchant Banking
Origin of merchant banking
The origin of merchant banking can be traced back to the 13
th
century when the
development of international trade and finance took place. The early merchant
bankers were traders of commodities. These bankers also acted as bankers to the
kings of European States and financed continental wars and coastal trades. The
earlier merchant bankers used to lend their name to the lesser known traders by
accepting bills through which they guaranteed that the holder of the bill would
receive full value on the date of payment. Although merchant banking activity was
ushered in two decades ago, it was only in 1992 after the formation of Securities
and Exchange Board of India that it is defined and a set of rules and regulations in
place. Hence the name merchant was used because of its roots in merchant trade.
The Growth of merchant banking in India

In India prior to the enactment of Indian Companies Act, 1956,managing agents
acted as issue houses for securities, evaluated project reports, planned capital
structure and to some extent provided venture capital for new firms. Few share
broking firms also functioned as merchant bankers.

Formal merchant activity in India was originated in 1969 with the merchant
banking division setup by the Grind lays 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 Grind lays 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).
Registration of merchant bankers
Registration with SEBI is mandatory to carry out the business of merchant
Banking in India. An applicant should comply with the following norms:
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.
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.
Needs and Importance of Merchant Bankers
Followings are the needs and importance of merchant banking:
1. Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand on
the sources of funds for ever expanding industry and trade, thus, leaving a
widening gap unabridged between the supply and demand of inventible
funds.
2. All Indian financial institutions and experienced resources constraint to meet
the ever increasing demands for funds from the corporate sector enterprises.
In the circumstances corporate sector had the only alternative to avail of the
capital market services for meeting their long-term financial requirements
through capital issues of equity and debentures.
3. With the growing demand for funds there was pressure on capital market
that enthused the commercial banks, share brokers and financial consultant
firms to enter into the field of merchant banking and share the growing
capital markets.
4. With the result, all the commercial banks in nationalized and public sector as
well as in private sector including the foreign banks in India have opened
their merchant banking windows and are competing in this field.
5. There has been a mushroom growth of financial consultancy firms and
broker firms doing advisory functions as well as managing public issues in
syndication with other merchant bankers.
6. The need of merchant banking institutions is felt in the wake of huge public
savings lying still untapped.
7. Merchant banks can play highly significant role in mobilizing funds of
savers to investible channels assuring promising return on investments and
thus can help in meeting the widening demand for investible funds for
economic activity.
8. Merchant banks have been procuring impressive support from capital market
for the corporate sector for financing their projects. This is evidenced from
the increasing amount raised form the capital market by the corporate
enterprises year after year.
9. Merchant bankers, with their skills, updated information and knowledge,
provide this service to the corporate units and advise them on such
requirements to be complied with for raising funds from the capital market
under different enactments viz. Companies Act, Income-tax Act, Foreign
Exchange Regulation Act, Securities Contracts (Regulation) Act and various
other corporate laws and regulations.
10. Thus, the merchant bankers help the industry and trade to raise funds and
the investors to invest their saved money in sound and healthy concerns with
confidence, safety and expectation for higher yields.
Role of Merchant Banker
The role of merchant banker is dynamic in the wake of diverse nature of merchant
banking services.
1) Merchant bankers dynamism lies in promptly attending to the corporate
problems and suggests ways and means to solve it. The nature of merchant banking
services is development oriented and promotional to help the industry and trade to
grow and survive. Merchant banker is, therefore, dedicated to achieve this
objective through his dynamism. He is always awake to renew his skills, develop
expertise in new areas so as to equip himself with the knowledge and techniques to
deal with emerging new problems of corporate business world.
2) He has to keep pace with the changing environment where government rules,
regulations and politics affecting business conditions frequently change; where
science and technology create new innovations in production processes of
industries envisaging immediate renovations, diversifications, modernizations or
replacements of existing plant and machinery or other equipments putting new
demands for finances and necessitating overhauling of the capital structure of the
firms.
3) Merchant banker has to think and devise new instruments of financing industrial
projects. He has to guide the wider section of the community possessing surplus
money to invest in corporate securities and other productive investment channels.
4) He has to help the industry in different forms to ensure that it runs risk free and
devoid of uncertainty by assisting the promoters with his knowledge and skills to
resolve the problems being faced by them. He has to watch the interest and win
over the confidence of the government, its agencies, along with the entrepreneurs,
the investors and the whole community.
5) He must bridge the communication gap between different sections and resolve
the problem being faced in different areas concerned with the business world.
To discharge the above role, a merchant banker has to be dynamic. 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.
Problems of Merchant Bankers

1. SEBI guidelines have authorized merchant bankers to undertake issue related
activities only with an exception of portfolio management. These guidelines have
made the merchant bankers either to restrict their activities or think of separating
these activities from the present one and float new subsidiary and enlarge the scope
of its activities.

2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization
of merchant bankers. Small but professional and specialized merchant bankers who
do not have a net worth of Rs.1 crore may have to close down their business. The
entry is denied to young, specialized professionals into merchant banking business.

3. Non co-operation of the issuing companies in timely allotment of securities and
refund of application money is another problem of merchant bankers. The
guidelines have put the responsibility on the merchant bankers. They have to seek
the co-operation of the issuing company to shoulder the responsibility.
Organizational setup of merchant bankers in India
In India a common organizational setup of merchant bankers to operate is in the
form of divisions of Indian and foreign banks and financial institutions, subsidiary
companies established by bankers like SBI, Canara Bank, Punjab National Bank,
Bank of India, etc. Some firms are also organized by financial and technical
consultants and professionals. Securities and Exchange Board of India has divided
the merchant bankers into four categories based on their capital adequacy. Each
category is authorized to perform certain functions. From the point of
organizational setup Indias merchant banking organizations can be categorized
into four groups on the basis of their linkage with parent activity. They are:
(A) Institutional Base
Where merchant banks function as an independent wing or as subsidiary of various
private/Central Governments/State Governments financial institutions. Most of the
financial institutions in India are in public sector and therefore such setup plays a
role on the lines of government priorities and policies.
(B) Banker Base
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 professionalism in merchant
banking sector and they help their parent organization to make a presence in capital
market.
(C) Broker Base
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.
(D) Private Base
These merchant banking firms are originated in private sector. These organizations
are the outcome of opportunities and scope in merchant banking business and they
are providing skill-oriented specialized services to their clients. Some foreign
merchant bankers are also entering either independently or through some
collaboration with their Indian counterparts. Private sector merchant banking firms
have come up either as the sole proprietorship or public limited companies. Many
of these firms were in existence for quite some times before they added a new
activity in the form of merchant banking services by opening new divisions on the
lines of commercial banks and All India Financial Institutions.
Qualities of good merchant bankers
Merchant bankers are individual experts who organize and manage the merchant
banks. The operations of merchant banks are, therefore, influenced by the
personality trait of these individuals. For the success of merchant banks
operations, the qualities which merchant bankers should have are discussed
below:-
1. Leadership Merchant banker should posses all relevant skills, updated
knowledge to interact with the clients and effectively communicate.
Leadership is synonymous with followers who follow the one who leads.
2. Aggressive action Aggressiveness is a personality trait of a good leader
but in merchant banking it has a wider connotation. Aggressive merchant
bankers are always looking for new business. Once a business opportunity
has been located, the merchant banker has got to obtain the mandate for the
merchant banking assignment from the clients at once which will depend
upon his own communication skills, persuasiveness and the background of
the organization to which he belongs. A good merchant banker is one who
does not allow his client to think anything outside except what has been
advised. Therefore, promptness in grasping the clients problems and
providing better choice amongst alternative solutions evidence aggressive
approach in the profession to hold the clients interest in entirety for the
present as well as the future.
3. Co-operation and friendliness No doubt, these two characteristics are the
symbols of good leadership but it hardly needs to be stressed that
cooperation and friendliness coupled with persuasiveness are the main
instruments with which a merchant banker mixes with the people, gathers
information, obtains business mandate and renders satisfactory services to
the clients. Business of an honest merchant banker spreads with geometrical
propagation when he shares the thoughts of his clients with sympathetic
gestures and offers pragmatic suggestions without greed or favors. Very
often, rude, intemperate and indifferent disposition or blunt out burst
withdraw fortunate business opportunities forever. These are the vices
unbecoming of a merchant banker and should be eschewed. Friendliness and
cooperation must flow as natural traits in the merchant banker to win over
the trust of the clients like a doctor or lawyer who retain their clients
permanently.
4. Contacts Success of a merchant banker depends upon his sociable nature
and the richness of wider contacts. A merchant banker is supposed to be
acquainted deeply with all the constituents of merchant banking. The scope
of contact encompasses intimate contiguity and acquaintances within his
own organization, Central and State Government Offices where compliances
under various relevant enactments are to be reported, Indian and foreign
banks, financial institutions at Central and State levels,
promoters/directors/owners and chief executives of the private and public
enterprises which would be prospective beneficiaries of merchant banking
services, printers, advertising agencies, brokers and stock exchange dealers,
advocates and solicitors and members of the press whose services are
availed of in executing merchant banking assignments. Merchant banker
should widen contacts and references and continue to maintain them in
goodness, honour and humour by meeting people in person, through writing
and in special gatherings.
5. Attitude towards problem solving The most important personality trait
of a merchant banker is his attitude towards problem solving. Positive
approach to understand the view point of others, their difficulties and their
adverse circumstances is possible only when a person is skilled in human
relations particularly the inter-personal and intra-personal behavior.
Effective communication and proper feedback are the pre-requisites for
creating a positive attitude towards problem solving which could be gains
partly through learning process and partly as an in-born quality. This trait is
a subject matter of personality development but is so important that it must
be treated as a separate objective quality of a good merchant banker.
6. Inquisitiveness for acquiring new skills, information and knowledge
Merchant bankers live on the wits they earn by giving information to needy
clients. Therefore, they should keep abreast with latest information in the
area of the service product, they market. This is possible if merchant bankers
posses the quality of inquisitiveness.
The above qualities of a merchant banker are only illustrative. All good qualities in
merchant bankers are difficult to be defined so elaborately. Nevertheless, merchant
banker should possess super business acumen, managerial abilities, administrative
capacities and salesmanship so as to understand the problems of trade and industry,
devise ways and means to sort out and resolve those problems and sell the service
product to the needy clients.





Responsibility of Merchant Banker

To the Investors
Investor protection is fundamental to a healthy growth of the Capital Market.
Protection is not to be conceived as that of compensating for the losses suffered.
The responsibility of the Merchant Banker in ensuring the completeness of the
disclosures is of paramount importance in view of the fact that entire reliance is
based on offer Document either Prospectus or Letter of Offer because an
independent agency like a Merchant Banker has done the scrutiny.

Capital structuring
The Merchant Bankers while designing the capital structure take into account
the various factors such as Leverage effect on earnings per share, the project
cost and the gestation period, cash flow ability of the company, the cost of
capital, the considerations of management control, size of the company, and
general economic factors. These exercise are done mainly in order to meet the
fund requirement of the company taking due cognizance of the investors
preference.

Project Evaluation and due Diligence
Due diligence and project evaluation is another major responsibility of the
Merchant Banker. Where the project has already been appraised by a
bank/financial institution, the Merchant Banker relies on the said appraisal
before accepting an assignment. However, where the project has not been
appraised by as bank/financial institution, the Merchant Bank undertakes a
detailed evaluation of the project before taking up an assignment for issue
management.

Legal aspect
The factors that are looked into in case of the legal aspects are:
a) Compliance with the SEBI guidelines and the various guidelines issued by
the Ministry of Finance and Department of Company Affairs.
b) Pending litigations towards tax liabilities or any criminal/civil prosecution
any of the directors for any offenses.
c) Fair and adequate disclosures in the prospectus.

Pricing of the Issue
The Merchant Banker looks into the various factors while pricing the issue.
Some of the factors are past financial performance of the company, Book value
per share, stock market performance of the shares. The Merchant Banker has a
vital role to play in pricing of the instrument.

Marketing of the Issue
Marketing of the issue is a vital responsibility of the Merchant Banker. The
first stage is Pre-issue marketing for placement of the issue with the financial
institutions, banks, mutual funds, FIIs and NRIs. The second stage is the
marketing of the issue to the general public through various vehicles such as
press, brokers, etc.

Bought out Deals
The concept of wholesale but out of public offerings by the Merchant Bankers
started off with over the Counter Exchange of India where a Merchant banker
acts also as a sponsor and either takes up the entire issue to be offered wholly of
jointly with other co-investors and off-loads the same to the public at a later
date by an offer for sale. Major amendments were made to the SEBI regulations
regarding Merchant Bankers. The duration of this transaction period has not
officially been announced.

Services Rendered By Merchant Bankers

Among the important financial intermediaries are the merchant bankers. The
services of Merchant bankers have been identified in India with just issue
management. It is quite common to come across reference to merchant banking
and financial services as though they are distinct categories. The services provided
by merchant banks depend on their inclination and resources - technical and
financial. Merchant bankers (Category 1) are mandated by SEBI to manage public
issues (as lead managers) and open offers in take-overs. These two activities have
major implications for the integrity of the market. They affect investors' interest
and, therefore, transparency has to be ensured. These are also areas where
compliance can be monitored and enforced.
Merchant banks are rendering diverse services and functions, which are as
follows:-
1. Issue Management
2. Corporate Advisory Services Relating To Issue
3. Underwritings
4. Dealing In Mergers & Acquisition Activity
5. Project counseling
6. Loan Syndication
7. Restructuring services
8. Capital assistance
9. Corporate advisory Services
10. Factoring service
11. Asset Securitization
12. Forex Services
13. Hire-Purchase Service
14. Lease Finance Companies
15. Venture capital


Role of Merchant Banker

Merchant Bankers assist ventures proposals of technocrats, with high
technology, which are new, and high risk. To seek assistance from venture
capital funds or companies.
They also provide technical, financial & managerial services & help the
company to set up a track record.
The assistance should mainly be for equity support; through loan support to
supplement this may be extended.
Merchant Banking-Future Development
Time and again the Merchant banking Industry in India witnessed experienced and
underwent significant changes. The very purpose for which these firms are
commences their services should be taken care of and they should mould their
policy decision and activities to move in tune with the main objectives of
Investors protection and to create healthy environment in capital markets. No
doubt, Merchant Banking firms are subject to a host of control measures,
regulations and rules framed and guided by SEBI. To some extent, frequent
changes and /or amendments to policies and control measures, though needed for
smooth working of the securities Industry, proves to be detrimental to the very
existence of the Merchant Banking system in the country. The SEBIs Act 1992
confers power upon SEBI to supervise and control the affairs of the Merchant
Banking firms in India.
The various studies which had been undertaken in India for evaluating the
performance of Merchant Banking firms and the implications of these on securities
industry. No single study has been emerged so far pertaining to the evaluation of
Merchant Banking firms and in-depth study on their activities as well as
operational and financial performance in the light of changing regulatory
environment.
In recent past, the small investor has turned his back on the primary capital market.
Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and
reinforce his faith. He has lost all hopes of appreciation of his investment. And this
when all these years millions have though capital market, ate capital market and
dreamt capital market. It needed an extraordinary effort and skill the drive the
small investor away! High premiums, false premiums and gray market operations.
The professed protector of his interests first laid down the dictum of proportionate
allotment, then of minimum subscription, all working against his interests. This
would make an observant student of the stock market infer that there is some game
plan afoot to dethrone the small investor from his prominent; he was believed to be
the king.
With the coming to SEBI, an organization that was ostensibly brought into
existence to guard the interest of the small investor, hopes ran high that the small
investor would now have a safe playing field. But these hopes were soon belied.
Far from guarding the interests of the investing public, SEBI embarked on a course
of action, which has positively hurt them. The latest fiat of EBI bans corporate
advertising after the receipt of acknowledgement card by a company wanting to go
public. SEBIs this action has caused the closure of an information window. Now
50 million potential investors are deprived of official and authentic information
given by the Issuer. It is hard to understand reasons for this drastic and totally
uncalled for action. While there has been no official explanation for this fiat, there
is reason to believe that it may be based on a wrong perception of the role for
corporate advertising.
All this has been done perhaps because the corporate and intermediaries is to
follow the practices of Western capital markets here, oblivious of the fact that our
capital markets are altogether different in structure, in systems and in the number
of participants Freedom of commercial expression could be exploited by some to
serve their own ends, just a s freedom of speech and expression could be abused
but this has not led our Government to put arbitrary restrictions on our freedom.
Merchant Bankers have reason to believe they will be handicapped without the
marketing support. But the worst sufferer would be the investor, especially the
small investor it is this class, which forms the backbone of the capital market. As a
result of the ban, the small investor would be deprived of the opportunity to study
the corporate profile of the Issuer. In the absence of adequate information, they
will have to depend on manipulated facts and information fed by unreliable
sources.
The Indian primary capital market is basically a retail market. It consists of
innumerable investors who take own individual investment decisions. Whatever,
the system, it is this market that will bring in the funds. If these markets
destabilized, the investors will look for alternative avenues to invest their funds.
SEBI in its one of the first documents on SEBI and Investor Protection,
Development and Regulation of Securities Market clearly specifies significance
of regulating capital market and its future plans for fulfilling the twin objectives
viz., Development of capital market and investor protection are explained in
introductory paragraphs. It speak out that, The decade of the 1980 witnessed a
phenomenal growth and development of the securities market, demonstrated its
potential not only to mobilize the savings of the household sector but also to
allocate it with some degree of efficiency for industrial development. The dilution
of the holdings of the multinational companies at affordable prices in the latter part
of the 1970s had generated considerable interest, which was, carries well into the
next decade. Several companies came in the early part of the 1980s and
successfully raised large resources from the market especially through debt
instruments, which further sustained investor interest. There were several changes
in Government policy, which significantly influenced industry and aided the
market. India was then entering the phase of liberalization and decontrol which
was to accelerate and gather momentum in the 1980s.
By the end of the decade, the securities market in India came to be firmly
integrated with the financial system of the country. With the corporate sector
increasingly relying on the securities market for meeting their long-term
requirement of funds, the securities market their long-term requirement of funds;
the securities market competed on equal terms with the Development Financial
Institutions, which were the traditional purveyors of long-term capital. The
emergence of the securities markets into the main stream of the financial system of
the country was thus one of the major economic processes of the 1980s an
inevitable outcome of the maturing process of the financial system. They brought
about notable changes in the capital structure of the companies across industries,
gave birth to new intermediaries and institutions in the securities market and
created a new awareness and interest in investment opportunities in the securities
market among investor. In spite market, its quality lagged far behind and there
was absence of adequate professionalism and fair competition among the various
players in the market. Besides, the regulatory framework then prevailing was
fragmented difficult, if not effective.

















CONCLUSION
The merchant banker plays a vital role in channelizing the financial surplus of the
society into productive investment avenues. Hence before selecting a merchant
banker, one must decide what the services for which he is being approached are.
Selecting the right intermediary who has the necessary skills to meet the
requirements of the client will ensure success.

It can be said that this project helped me to understand every details about
Merchant Banking and in future how its going to get emerged in the Indian
economy. Hence, Merchant Banking can be considered as essential financial body
in Indian financial system.

Market development is predicated on a sound, fair and transparent regulatory
framework. To sustain the growth of the market and crystallize 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 place in future.