Documente Academic
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SUBMITTED BY:
NAME : ABHINAV GOEL
PRN NUMBER : 12021021004
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MERCHANT BANKING
INDEX
SL. NO.
CONTENTS
PAGE NUMBER
1.)
2.)
INTRODUCTION
3.)
4.)
5.)
10
6.)
11
7.)
13
8.)
BIBLIOGRAPHY
16
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MERCHANT BANKING
merchant bank is a traditional term for an Investment Bank. It can also be used to describe the private
equity activities of banking. This article is about the history of banking as developed by merchants, from
the Middle Ages onwards.
History
Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle Ages
by Italian grain merchants. As the Lombardy merchants and bankers grew in stature based on the strength
of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the
trade. They brought with them ancient practices from the middle and far east silk routes. Originally
intended for the finance of long trading journeys, these methods were now utilized to finance the
production of grain.
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy,
alongside the local traders, and set up their benches to trade in crops. They had one great advantage over
the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand,
could lend to farmers against crops in the field, a high-risk loan at what would have been considered
usurious rates by the Church, but did not bind the Jews. In this way they could secure the grain sale rights
against the eventual harvest. They then began to advance against the delivery of grain shipped to distant
ports. In both cases they made their profit from the present discount against the future price. This twohanded trade was time consuming and soon there arose a class of merchants, who were trading grain debt
instead of grain.
It was a short step from financing trade on their own behalf to settling trades for others, and then to
holding deposits for settlement of "billete" or notes written by the people who were still brokering the
actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a
counter) in the great grain markets became centers for holding money against a bill (billette, a note, a
letter of formal exchange, later a bill of exchange, later still, a cheque).
These deposited funds were intended to be held for the settlement of grain trades, but often were used for
the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or
broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the
same connotation.
A sensible manner of discounting interest to the depositors against what could be earned by employing
their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific
trade, thus overcoming the usury objection. Once again this merely developed what was an ancient
method of financing long distance transport of goods.
Islamic banking has the same constraints against usury as Christianity.
The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature
of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the
great wheat growing areas of Germany and Poland. Many of these merchants were from the same families
who had been part of the development of the banking process in Italy. They also had links with family
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members who had, centuries before, fled Spain for both Italy and England.
This course of events set the stage for the rise of banking names which still resonate today: Schroders,
Warburgs, Rothschilds, even the ill-fated Barings, were all the product of the continental grain trade, and
indirectly, the early Iberian persecution of Jews. It may be defined as, an institution which covers a wide
range of activities such as management of customer services, portfolio management, credit syndication,
acceptance credit, counseling and insurance etc., The merchant banks are also known as accepting and
Issuing houses in UK and as Investment Banks in US. They offer a package of financial services for
fee mostly in new issues market.
Modern practices
The definition of merchant banking has changed greatly since the days of the Rothschilds. The great
merchant banking families dealt in everything from underwriting bonds to originating foreign loans.
Bullion trading and bond issuing were some of the specialties of the Rothschild family. The modern
merchant banks, however, tend to advise corporations and wealthy individuals on how to use their money.
The advice varies from counsel on Mergers and acquisitions to recommendation on the type of credit
needed. The job of generating loans and initiating other complex financial transactions has been taken
over by investment banks and private equity firms.
Today there are many different classes of merchant banks. One of the most common forms is primarily
utilized in America. This type initiates loans and then sells them to investors. Even though these
companies call themselves "Merchant banks," they have few if any of the characteristics of former
Merchant banks.
(A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies
and underwriting. Merchant banks do not provide regular banking services to the general public.)
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INTRODUCTION
Merchant Bankers act as a link between corporate bodies who intend on raising funds and investors who
are interested in investing in securities. It helps corporates establish new companies, expand, diversify,
merge, commission projects etc. Apart from that, merchant banking was the necessity of banks
themselves which were in need of non-fund based income so as to improve their profitability margins by
all means in the changed economic scenario.
Merchant Banking is known by different names in different places. In the USA, it is known as
Investment Banking. In the UK it is known as accepting and clearing houses.
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ordinates the activities of these agencies and institutions from the successful flotation of the issue. It
also helps in listing the securities in stock exchange, finalizing basis of allotment, arranging for
refund, handling investor complaints etc.
Merchant banks help companies raise funds by selling shares to the public by issuing prospectus,
Shares may be issued at par, premium or discount. SEBI guidelines for pricing of public issues are as
follows:
- New Co. set up by entrepreneurs without a track record = can issue shares only at par
- New Co. set up by an existing co with a 5-year track record of consistent profitability = is free to
price its issue provided promoting company takes at least 50% of the equity and the issue price is
offered to all new investors uniformly.
- An existing private/closely held co with 3-year track record of consistent profitability is allowed to
freely price the issue.
- Existing listed co. can freely price further issue.
Process of public issues:
- Vetting of prospectus (by SEBI)
- Appointment of underwriters, bankers, registrars and brokers
- Filing and prospectus with registrar of companies
- Printing and dispatch of prospectus and application forms
- Filing of initial listing application (within 10 days of filing prospectus with ROC: initial listing
application be made to concerned stock exchange)
- Promotion of issue
- Statutory announcement (opening and closing dates, announcement to be made atleast 10 days
before opening subscription list)
- Collection of application
- Processing of allocation (by registrar to the issue)
- Establishing liability of underwriters (if issue is undersubscribed)
- Allotment of shares (after formal approval by concerned stock exchange)
- Listing of issue (with concerned stock exchange)
(4) Underwriting of issues
In order to ensure full subscription or the stipulated minimum subscription of 90% of the issue,
companies enter into an agreement with financial institutions, banks, brokers and bankers to
underwrite the issue amount. Merchant bankers can underwrite issues and assist companies in tying
up with other underwriters
(5) Corporate Counseling
Rendering assistance to corporate clients on various aspects of business operations in the areas of
financial planning, performance budgeting, restructuring capital, and other aspects of financial
management and monitoring systems and operations.
(6) Bankers to the issue
Collection of subscription money/application money for an issue from the investors,
acknowledgement, proper accounting of the money received, sending reports/certificates, informing
collection details are the services provided in the banker to the issue role.
(7) Investment Counseling
This activity involved assisting firms, companies, trusts, funds and associations in the choice of
shares and stocks for investment depending upon the needs and the risk-return trade-off, as well as
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taxation and time considerations.
(8) Portfolio Management Services
A portfolio is a collection of different kinds of investments. Merchant bankers provide portfolio
management services.
(9) Registrar and Transfer Agent
Transfer agency work involves carrying out transfer work in respect of securities after complying
with stipulated formalities/procedures. Preparation and printing of dividend warrants and dispatching
them to share holders is also covered here. Other services include attending to complaints of
applicants/investors, coding and verification of applications, allotment, processing and dispatching
allotment letters, providing various documents and certificates etc.
(10) Mergers, amalgamations and Acquisitions
Some companies desire to restructure themselves in order to effectively meet competition. Merchant
bankers provide all requisite guidance and services for restructuring, to prepare due diligence,
necessary clearance from statutory bodies like SEBI, ROC etc as per the statutory stipulations, for the
process of mergers, acquisitions and amalgamations.
(11) Venture Capital
Merchant Bankers help co obtaining venture capital for financing their new and innovative strategies.
(add points from FSM chapter on venture capital)
(12) Leasing Finance
(elaborate by using points from the FSM chapter on Leasing)
(13) Non-resident investment
Merchant bankers provide investment advisory services to attract NRI investment in primary and
secondary markets, undertake buying and selling securities on their behalf, secure clearances from
RBI under FEMA for repatriation of interest and dividends etc.
(14) Joint ventures
Merchant Bankers help corporates with joint ventures in India and abroad.
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nationalized and public sector as well as in private sector including foreign banks in India have opened
their merchant banking windows and competing in this field.
Need for merchant banking is felt in the wake of huge public saving lying untapped. Merchant banker can
play highly significant role in mobilizing funds of savers to invisible channels assuring promising returns
on investment and thus can assist in meeting the widening demand for invisible funds for economic
activity. With growth of merchant banking profession corporate enterprises in both private sectors would
be able to raise required amount of funds annually from the capital market to meet the growing
requirement for funds for establishing new enterprises, undertaking expansion, modernization and
diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by
merchant banking.
In view of multitude of enactment, rules and regulation, gridlines and offshoot press release instructions
brought out the government from time to time imposing statutory obligations upon the corporate sector to
comply with those entire requirement prescribed there in the need of a skilled agency existed which could
provide counseling in these matters in a package form. A merchant banker with their skills updated
information and knowledge provide this service to the corporate units and advice them on such
requirement to be complied with for raising funds from the capital market under different enactment viz.
companies act, income tax act, foreign exchange regulation act, securities contracts corporate laws and
regulations. Merchant bank advice the investors of the incentives available in the form of tax relief, other
statutory relaxation, good return on investment and capital appreciation in such investment to motivate
them to invest their savings securities of the corporate sector. Thus merchant banks help industries and
trade to rise and the investors to invest their saved money in sound and healthy concern with confidence,
safety and expectation for higher yields. Finance is the backbone of business activities. Merchant banker
make available finance for business enterprises acting as intermediaries between them raising demand for
funds and the supplies of funds besides rendering various other services.
The following are some of the reasons why specialist merchant bank have a crucial role to play in India.
Growing complexity in rules and procedures of the government.
Growing industrialization and increase of technologically advanced industries.
Need for encouragement of small and medium industrialists, who require specialist services.
Need to develop backward areas and states which require different criteria.
Exploring the possibility of joint ventures abroad and foreign market.
Promoting the role of new issue market in mobilizing saving from.
Where merchant banks function as an independent wing or as subsidiary of various private/central
governments/ state government financial institution. Most of the financial institution in India is in
public sector and therefore such setup plays a role on the lines of governmental priorities and policies.
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5) The applicant must have at least two employees with prior experience in merchant banking.
6) Any associate company, group company, subsidiary or interconnected company of the applicant should
not have been a registered merchant banker
7) The applicant should not have been involved in any securities scam or proved guilt for any offence
8) The applicant should have a minimum net worth of Rs.5 Crores.
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(7) Disinvestment
The government of India has raised Rs. 2000 crores through disinvestment of equity shares of
selected pubic sector undertakings in 93-94. Merchant Bankers can help in the disinvestment process.
Code of conduct:
Every merchant banker has to abide by the code of conduct as specified below:
A merchant banker in the conduct of his business has to observe high standards of integrity and
fairness in all his dealings with his clients and other merchant bankers.
He ought to render at all times high standards of service, exercise due diligence, ensure proper
care and exercise independent professional judgment. He has to, wherever necessary, disclose to
the clients, possible sources of conflict of duties and interest, while providing services.
He cannot make any statement or become privy to any act, practice unfair competition, which is
likely to be harmful to the interest of other merchant bankers or is likely to place such other
merchant bankers in a disadvantageous position in relation to him, while competing for or
executing any assignments.
He should not make any exaggerated statement, whether oral or written, to the client either about
his qualification or his capability to render certain services or his achievements in regard to
services rendered to other clients.
A merchant banker has always to endeavor to
(1) render the best possible advice to the clients having regard to the clients needs and
the requirements and his own professional skill; and
(2) ensure that all professional dealings are effected in a prompt, efficient and cost
effective manner.
He should not
(1) divulge to other clients, press or any other party any confidential information about
his client which has come to his knowledge; and (2) deal in securities of any client
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company without making disclosure to the SEBI as required under the regulations and
also the board of directors of the client company.
He should endeavor to ensure that
(1) the investors are provided with true and adequate information without making any
misguided or exaggerated claims and are made aware of attendant risks before any
investment decision is taken by them:
(2) copies of prospectus, memorandum and related literature are made available to the
investors;
(3) adequate steps are taken for the fair allotment of share application and transfers,
listing of securities arrangement of underwriting/sub-underwriting, placing of issues,
selection of brokers, bankers to the issue, publicity and advertising agents, printers, etc.
In view of the overwhelming importance of merchant bankers in the process of capital
issues, it is now mandatory that all public issues should be managed by merchant
banker(s) functioning as the lead manager(s). In the case of right issues not exceeding Rs
50 lakh, such appointments may not be necessary. The salient features of the SEBI
framework of their operations are summarized in this article.
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5. Appointment of compliance officer- An issuer company shall appoint a compliance officer who
have direct link with the Board with regard to compliance with various laws, rules, regulations and other
directive sissued by the Board.
6. Mandatory Collection centers- The minimum number of collection centers for issue of capital
shall be (a) four metropolitan cities situated at Mumbai, Delhi, Calcutta and Chennai; (b) all such centres
where the stock exchanges are located in the region in which registered office of the company is situated.
7. Final offer document- The lead manager shall certify that all amendments, suggestions or
observation made by SEBI have been carried out. He has to furnish a new due diligence certificate. Final
prospectus is to be submitted with Registrar of Companies and the offer document with regional stock
exchange. A computer floppy of final prospectus offer shall be submitted to SEBI.
8. Application forms- Application form must be accompanied by abridged prospectus. Disclaimer
clause of SEBI should be printed in bold. Highlights and risk factor should be given same prominence.
The form shall contain provision for mentioning name and address of bank and account number of the
applicant.
9. Minimum application amount- Minimum application money to be paid along with application
shall not be less than 25% of issue price. Application for shares or debentures should be for such a
number that the total amount payable is not less than Rs.2000.
10. Listing of securities- The securities offered to public shall be listed in a stock exchange. In case
these are not listed, entire application money becomes refundable.
There are 135 Merchant bankers who are registered with SEBI now in India. There are publicsector,
Private sector and foreign players registered with SEBI. The below are the examples of few of the
Merchant bankers in each of the Public, private and foreign players.
Public sector Merchant Bankers:
SBI CAPITAL MARKETS LTD
PUNJAB NATIONAL BANK
BANK OF MAHARASHTRA
IFCI FINANCIAL SERVICES LTD
KARUR VYSYA BANK LTD,
STATE BANK OF BIKANER AND JAIPUR
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Canara bank
Canara bank is one of the leading merchant banks in India, offering specialized services to
banks, PSUs, state owned corporations, local statutory bodies and corporate sector. As leading
merchant banks in India, they have associated with issues ranging from Rs 1 crore to Rs 1500
crores, involving various types Of industries, banks, statutory bodies etc. and have an edge in
handling private placement issues both Retail and HNIs.
Services rendered by canara bank
1.) Equity issue (public/rights) management.
2.) Debt issue management.
3.) Project appraisals.
4.) IPO funding.
5.) Security trustee services.
6.) Mergers and Acquisitions.
7.) Share valuations.
8.) Capital structuring
9.) Formalities with SEBI/stock exchange etc
10.) Underwriting.
11.) Debenture trusteeship
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specialized Capital Market Service Branch at New Delhi for providing Merchant Banking Services
to the Corporate .
Services rendered by State bank of india
1.) Issue Management Services to act as Book Running Lead Manager/Lead
Manager for the IPOs /FPOs/Right issues/Debt issues
2.)Project appraisal
3.)Corporate Advisory Services
4.)Underwriting of equity issues
5.)Banker to the Issue/Paying Banker
6.)Refund Banker
7.)Monitoring Agency
8.)Debenture Trustee
9.)Marketing of the issue through a strong network of QIBs/HNIEs/ Corporate and
Retail investor. The Bank itself is one of the major investor in the market having a
treasury of 45000 crores.
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BIBILIOGRAPHY
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